The SMSF sector has experienced phenomenal growth in the last decade. There are now over one million SMSF members controlling over $550 billion of Australia’s retirement assets.
There are a variety of reasons Australians are looking to manage their own superannuation – flexibility and control are often cited as key drivers of SMSF growth.
In 2007, limited recourse borrowing arrangements (LRBAs) became permissible for SMSFs, adding significantly to the appeal and growth of self-managed funds.
An LRBA can only be used to purchase a single asset for the sole purpose of providing retirement benefits to an SMSF’s members. Unsurprisingly, property has been a popular choice of purchase.
LRBAs provide an open door to brokers looking to capitalise on the ever-growing pool of SMSF money. But there are strict limitations that are costly and potentially catastrophic if ignored.
First and foremost, it’s critical to understand that SMSFs are financial products. Therefore, any advice that relates to the assets they hold or the investments they make constitutes financial product advice. This kind of advice can only be provided by someone who holds or is authorised by an Australian Financial Services Licence (AFSL.)
What this means for brokers is they can’t recommend their clients set up an SMSF to purchase property, and they can’t recommend an LRBA as an investment strategy.
If brokers overstep the mark in any capacity, they will be in breach of the Corporations Act. This is a major concern and focus for the corporate regulator, ASIC, and the regulator of SMSFs, the ATO.
ASIC in particular has made unlicensed SMSF advice a principal focus of its regulatory activity within financial services.
“Let me be very clear: a person requires an AFS licence if they recommend that a member of an SMSF purchase a property through their SMSF,” said ASIC commissioner Greg Tanzer. “Where we see examples of unlicensed SMSF advice we will be taking regulatory action.”
In fact, ASIC has previously cancelled a credit licence and banned a firm's director from engaging in credit or financial services due to a number of concerns, including the provision of unlicensed SMSF advice.
Another consequence of providing unlicensed SMSF advice relates to a mortgage broker's professional indemnity (PI) insurance. Mortgage brokers would disclose to their insurer that they are providing advice on credit products – not advice on financial products – which is highly problematic if a claim arises out of unlicensed advice.
“The broker’s professional indemnity insurance is unlikely to respond to a claim that’s made, because obviously they would’ve told the PI insurers that they are a mortgage broker not a financial adviser, and that won’t be within the scope of the cover that’s provided by the PI insurance,” said Lesley Thorne, senior lawyer at The Fold Legal.
It’s also important that brokers disclose to their insurer the extent to which they’ll be dealing with SMSFs, to ensure they are covered for any credit-related advice they are providing.
“Brokers need to bear in mind is it’s a very technical and specialised area; there is quite a significant risk of claims if they get things wrong,” Ms Thorne said.
However, it’s not all bad news. Chair of the Property Investment Professionals of Australia, Ben Kingsley, is confident the line between authorised and unauthorised SMSF advice is becoming clearer for brokers as SMSF loans become a more mainstream offering and through ASIC’s enforcement work.
Further, while there are significant risks to be aware of, for those who get it right, there are significant rewards.
“If you can acquire experience and accreditation, then you’re setting yourself up,” Ms Thorne said.
“You’re in a position where you can advertise yourself as being a specialist in this area and there are great opportunities for referral relationships with, for example, the specialised lenders and also other professionals like financial advisers, accountants and lawyers.
“Those referral arrangements can work in favour of the mortgage broker themselves but also in favour of the advisers as well, and the clients. The clients can then have one more person they can go to, which is a great service to be able to offer.”
Katarina Taurian is the editor of The Adviser’s sister publication, SMSF Adviser.