More consumer safeguards for LRBAs urged

SMSF Association Media Release

31 January 2019

The SMSF Association remains steadfast in its opposition to any “outright ban” of Limited Recourse Borrowings Arrangements (LRBAs).

In its nine-page submission to Treasury for the Council of Financial Regulators’ review of LRBAs, the Association says it does not believe “LRBAs are creating systemic risk in the SMSF sector or broader superannuation sector and that their use in allowing small business owners to transfer business real property is crucial to their retirement savings plans”.

SMSF Association CEO John Maroney says instead of an outright ban on LBRAs, a more appropriate course of action would be to increase consumer protection for this debt instrument.

“If the Government is concerned by risks associated with LRBAs, we believe that these can be mitigated by banning the use of personal guarantees supporting LRBAs and increasing SMSF education requirements for advisers.
“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.

“Personal guarantees given by SMSF trustees do allow the SMSF to undertake larger borrowings with higher LVR ratios. So, although the Association is comfortable that most SMSF borrowing is being made within sensible LVR limits, prohibiting SMSF members from providing a personal guarantee for their borrowings would make it more difficult for lenders to make risky, high LVR borrowings to SMSFs.

“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.

“This would also limit the ability of property spruikers to use SMSF LRBAs as an investment vehicle for promoting speculative property investments and reduce their ability to encourage individuals to establish an SMSF with a small balance simply to buy a property.”

Maroney says raising the specific SMSF education level for licensed SMSF advisers is another policy measure that could mitigate against ill-advised use of LRBAs.

The Association 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.

“We believe this policy measure would further limit the ability for property spruikers to establish SMSFs and sell properties. Tightening licensing requirements around LRBA advice and increased scrutiny of this type of advice could assist in ensuring the integrity of LRBAs.”