The SMSF Association is calling for a two-pronged policy change to ensure Limited Recourse Borrowing Arrangements (LRBAs) remain a legitimate retirement savings strategy, especially for small business owners.
SMSF Association CEO John Maroney says the Association is aware of the “heightened scrutiny” of LRBAs but remains convinced this borrowing instrument has an appropriate role to play in many SMSFs’ investment strategies.
“We have specific concerns regarding the unscrupulous provision of LRBA and SMSF advice through one-stop property shops. This was highlighted as a concern in the Australian Securities and Investment Commission’s (ASIC) Report 575, ‘SMSFs: Improving the quality of advice and member experiences’.
“So, while we remain opposed to LRBAs being banned outright and are not convinced they pose a systemic threat, we do recommend that this borrowing instrument is afforded further consumer protections by removing personal guarantees and raising the SMSF educational level for licensed SMSF advisers.
“In the Association’s recent submission to Treasury as part of the Council of Financial Regulators’ Review of LRBAs, we maintain our policy position that LRBAs, used appropriately, are a genuine retirement savings strategy that can help build savings and allow small business owners to utilise their business real property as a superannuation investment.
“But we also acknowledge the risks involved such as their use by property spruikers and lack of diversification for some SMSFs.”
Maroney says the Association believes greater regulatory scrutiny is required for one-stop property shops that spruik inappropriate properties to susceptible individuals and fully supports ASIC’s efforts to stamp out any unlicensed and unethical marketing behaviour.
The Association argues that limiting the use of personal guarantees by SMSF members is a policy measure that could minimise any build-up of systemic risk arising from LRBAs. It will ensure that LRBAs in fact remain “limited recourse” and increase the integrity of the loans.
Maroney says: “Personal guarantees given by SMSF trustees allow the SMSF to undertake larger borrowings with higher loan to value ratios (LVR). While the Association is comfortable that the vast majority of SMSF borrowing is being made within sensible LVR limits, prohibiting SMSF members from providing a personal guarantee for their SMSF’s borrowings would make it more difficult for lenders to make risky, high LVR loans to SMSFs with low balances.
“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 within the superannuation system instead of looking at circumstances and assets outside superannuation.”
A survey of SMSF Association members (158 responses) found that while 52% of LRBAs used a personal guarantee, 61% of those who responded supported limiting the use of these guarantees.
The second policy measure that would assist limit any risks associated with LRBAs is to raise the specific SMSF educational level for licensed SMSF advisers.
Maroney says: “Advisers who provide advice to individuals about SMSFs should have specific SMSF education and qualifications that underpin their advice. This notion was also reflected in ASIC’s Report 575 about raising education and a specific SMSF qualification for advice providers wishing to provide SMSF advice.
“We believe this policy measure would further limit the ability for property spruikers to establish SMSFs and sell properties by providing a barrier to entry and increasing specific financial SMSF knowledge. Tightening licensing requirements around LRBA advice and increased scrutiny of this type of advice should assist in ensuring the integrity of LRBAs.”