The Financial Planning Association of Australia (FPA) says the Government should conduct a review of SMSF borrowing, rather than follow the recommendation of the Financial System Inquiry and ban superannuation funds from borrowing.
The FPA does not support the recommendation of the Financial System Inquiry (FSI) final report to ban most forms of direct leverage by superannuation funds, including SMSF Limited Recourse Borrowing Arrangements (LRBAs).
“We acknowledge that there are risks associated with leverage in superannuation, and that these risks are connected to each other and can be exacerbated by each other. However, to justify an outright ban on direct leverage through Limited Recourse Borrowing Arrangements, we believe that more evidence is required,” said the FPA submission in response to the FSI final report.
Instead the FPA recommends the Government follow through on a recommendation of the Cooper Review and conduct a review of SMSF borrowing, to be completed by 2017.
“On the basis of this review, targeted measures should be proposed, considered, and adopted where appropriate to address the specific risks identified by that review and by the FSI Final Report.”
“A ban on direct leverage in superannuation through LRBAs should only be adopted if these strategies and arrangements pose a significant consumer risk and systemic risk that cannot be mitigated through other methods.”
There are a number of such ‘other methods’ the review could recommend, according to the FPA, including:
- Prudential regulation of SMSF LRBAs, including over LVRs and diversification,
- “Suitability regulation,” such as legislation to “prevent retail investors from commencing an SMSF without professional advice from a lawyer, accountant, or a financial planner.”
- Making real estate investment a ‘financial product’
“Serious and considered policy-making initiatives ought to be initiated in this space, while the regulators in this space (ASIC and the ATO) should adopt a regulatory strategy that responds to the consumer risk in the interim.”
The FPA also recommends several reforms the Government should implement before the completion of the review:
- Make LRBAs a financial product
- Consider removing the Single Acquirable Asset rule
- Review the consistency of personal guarantees with the SIS Act, in terms of limited-recourse borrowing
- Ban related party LRBAs
The FPA notes that self-regulatory arrangements applying to lending don’t apply to related-party LRBAs. “The ATO has released data which shows that compliance breaches in relation to LRBAs commonly (if not exclusively) arise from related party loans to SMSFs. As such, related party lending in the SMSF space poses a significant risk to retail investors and, to a lesser extent, a systemic risk.”
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