The SMSF Association believes an outright ban on limited recourse borrowing arrangements (LRBAs) can be avoided by “mitigating” any risks relating to this self-managed super fund (SMSF) asset class.
Responding to The Council of Financial Regulators (CFR) Report into LRBAs, Association CEO John Maroney says that the Council’s finding that LRBAs do not create a systemic risk for the financial system was expected by the Association. The CFR was tasked by the Government to monitor leverage and risk in the superannuation system and report back to it in the wake of the Financial System Inquiry.
“The Association has long held the view that the total size of geared investment by SMSFs, especially regarding property, does not create a systemic risk to the financial system when it is sensibly viewed in the context of the overall Australian property and mortgage markets.
“That said, we note that the CFR Report cites regulator concerns that LRBAs ‘can represent a significant risk to some individuals’ retirement savings, particularly where they have low-balance SMSFs with high asset concentration and/or personal guarantees and that their preferred position is to ban SMSFs from using LRBAs as an investment tool.
“The SMSFA has consistently noted the importance of LRBA strategies for small business people investing in business real property and the flexibility they bring when used appropriately and, accordingly, has not supported a total ban of LRBAs.
“However, we have recognised risks pertaining to LRBAs, such as those raised by the CFR, and believe a better approach is to mitigate the risks cited in the Report before considering a ban, and to this end we have recommended two key measures to ensure LRBAs are used appropriately – banning the use of personal guarantees supporting LRBAs and increasing SMSF education requirements for advisers.”
Maroney says limiting the use of personal guarantees by SMSF members is a policy measure that could reduce the incidence of smaller balance SMSFs investing via a LRBA and having a poorly diversified fund. Interestingly, the CFR also sees this as a potential reform.
“Stopping the use of personal guarantees by SMSFs would mean that LRBAs are only used by funds that have a fund balance that allows them to achieve better diversification and a broader investment strategy not focused around a highly leveraged single asset.
“Lenders would also need to be certain that the SMSF is able to adequately service the loan based on the financial circumstances of the SMSF members instead of looking at circumstances and assets outside superannuation.
“The Association also believes that advisers who provide advice to individuals about SMSFs should have specific SMSF education and qualifications that underpin their advice, a notion that was reflected in ASIC’s Report 575 about raising education and a specific SMSF qualification for advisers wanting to provide SMSF advice. The Productivity Commission has also recommended that advisers who set up SMSFs should be required to have specialist SMSF education.
“Ensuring that SMSF trustees who seek advice about using LRBAs receive high-quality, specialist advice will also ensure that LRBAs are being used appropriately and without excessive risk.”
Maroney adds that the measures being considered as part of the Government’s response to the Hayne Royal Commission will help ensure the integrity of LRBAS.
“These include prohibiting the hawking of superannuation products, extending the product intervention powers and design and distribution obligations to all credit products, and to review the measures to improve the quality of advice in three years’ time.”