The SMSF Association is calling for Limited Recourse Borrowing Arrangements (LRBAs) to be made actually limited recourse.
LRBAs have been under pressure, with the big four banks and AMP having stepped away from lending to SMSFs. ASIC recently suggested LRBAs be banned, which was also a recommendation of the Financial System Inquiry.
The Association is opposed to LRBAs being banned, and isn’t convinced they pose a systemic threat, but do recommend two policy changes – banning personal guarantees and raising education levels for advisers.
Though the recourse of lenders under an LRBA are limited when it comes to the asset of the fund, there can still be personal guarantees. The SMSF Association says banning personal guarantees for LRBAs would minimise the build-up of system risk and increase the integrity of the loans – by limiting Loan to Value Ratios (LVR).
SMSF Association CEO John Maroney said: “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 found 61% supported limiting the use of guarantees, despite their use in 52% of LRBAs.
The Association also wants specific SMSF education for advisers giving advice around SMSFs.
“Advisers who provide advice to individuals about SMSFs should have specific SMSF education and qualifications that underpin their advice,” said Maroney.
“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.”
The Council of Financial Regulators is conducting an inquiry into LRBAs, which is to be given to Government by the end of the year according to ASIC. This was a response to the recommendations of the Financial System Inquiry, which recommended that LRBAs be banned. Instead the Government tasked the ATO and the Council, in late 2015, to monitor leverage and risk in the super system and report back after three years.
Maroney said: “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.”