90% of SMSF set up advice doesn’t comply with best interest duty, ASIC finds

Around 90% of advice to establish an SMSF doesn’t comply with the best interest duty, ASIC has told the banking Royal Commission based on a yet to be published investigation.

Deputy Chair of ASIC Peter Kell told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that the regulator had been undertaking reviews into the best interest duty and superannuation advice, including a survey of SMSF establishment advice.

“We’ve found there, unfortunately, an even higher rate of advice that doesn’t comply with the best interest duty when assessed by looking at the files of around nine in 10 pieces of advice,” Mr Kell told the Commission.

An earlier ASIC investigation of super fund switching advice by the big four banks and AMP found that 75% of such advice did not demonstrate compliance with the best interest duty. In 10% of advice files sampled ASIC had “significant concerns” about the impact of the advice on the customer’s financial situation.

ASIC’s investigation into SMSF establishment advice has yet to be published, but looked at far more firms than the switching investigation – some 137 according according to a submission to the Royal Commission.

Mr Kell said the 90% figure of files not demonstrating compliance with the best interest duty was “very disappointing”.

“I should note that for the majority of those files there is no necessary indication that that immediately signals consumer detriment. There’s a smaller percentage where we think consumer detriment is apparent,” he said, as was the case for the super switching advice review.

“But what we have found across large 5 and small licensees in our reviews of recent times is that the industry as a whole is struggling to get to grips with how best to implement the key best interests duty requirements, including how they are documented in the advice files,” said Mr Kell.

He emphasised to the Commission that it’s not simply a matter of record keeping – its “critical” that advice is documented if there is later a dispute.

“And ASIC has certainly been signalling for some time now that licensees need to improve their record keeping and their documentation,” he said.

Asked what types of inappropriate financial advice ASIC regards as most prevalent, Mr Kell nominated switching products without a reasonable basis – often involving superannuation – establishing an SMSF where the client has a low balance or doesn’t understand the obligations of an SMSF trustee, switching insurance that would “substantially erode the superannuation balance if it’s paid for out of super” or cause pre-existing condition issues, ‘one size fits all’ advice models, and advising using SMSFs to borrow to acquire property.

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