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Compliance & Regulation

FSI proposes banning of LRBAs

Graeme Colley

SPAA director of technical and professional standards Graeme Colley

Limited recourse borrowing arrangements (LRBA) used to acquire assets within superannuation will be scrapped if the recommendations of the Financial System Inquiry (FSI) report are followed.

The David Murray-led panel proposed the elimination of LRBA use within super funds on the grounds that doing so would ““prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly”.

In its report, the panel also stated that course of action would provide greater focus on superannuation as being a vehicle for retirement savings rather than a means to achieve broader wealth management goals.

It also said it was alarmed over the increase in assets acquired via that type of gearing jumping from $497 million in June 2009 to $8.7 billion in June 2014.

Specific angst towards the use of LRBAs was the potential scenario where super funds might sell off other assets to finance gearing of that nature.

In turn, the FSI panel said it was worried that would lessen the diversification element of superannuation portfolios.

Furthermore, it expressed its apprehension LRBAs would increase risk levels in super funds as “lenders can charge higher interest rates and require personal guarantees from trustees”.

The SMSF Professionals’ Association of Australia (SPAA) disagreed with the recommendation, but said it was unsurprised it was one of the main superannuation items contained in the panel’s findings as the FSI’s attitude to the subject had already been expressed in its early interim observations.

“SPAA remains firmly of the view that there is scant evidence of abuse of LRBAs to date, but can appreciate the FSI’s position if leverage in superannuation did grow to a level where it could be a threat to people’s retirement savings,” SPAA director of technical and professional standards Graeme Colley said.

DBA Lawyers director Bryce Figot was quick to point out the FSI report contained recommendations only and the banning of LRBAs was not a certainty as yet.

“The Financial System Inquiry is not a law-making body and its recommendations do not constitute law,” Figot said.

“However, the Financial System Inquiry was essentially commissioned by the government. Accordingly, there is a fair chance the government will take it seriously and pass an act that implements at least some of its recommendations.

“The government has previously acted on similar reports and which recommendations eventually become reflected in law depend on numerous factors.”

In regard to the rest of the report on superannuation, Colley said the SMSF sector could be considered to have achieved a general endorsement for a variety of reasons.

“Like the Cooper inquiry [in 2010] it has given the SMSF sector a clean bill of health with no moves to limit the setting up of SMSFs, whether it be minimum balances, educational qualifications or any other impediments. This was the position SPAA strongly advocated to the inquiry and it’s pleasing to see that it saw the merit in our arguments,” he said.

“The fact SMSFs are barely mentioned in the report, and then it’s only about not requiring them to meet CIPRs (comprehensive income products for retirement) and a recommendation that they not be prudentially supervised, is evidence of this.”

SPAA also expressed its support for the panel’s recommendations around better education and competency standards for financial advisers and the push for more information to be included on the adviser register.

“The report recommends a tertiary degree that is relevant, competence in specialised areas such as superannuation where it is relevant and ongoing CPD requirements. SPAA is well placed to assist those advisers who wish to gain expertise in SMSFs,” Colley said.

“It also proposes that ASIC should complete the establishment of an enhanced public register of all financial advisers, which includes those who are employees. The inquiry considers that the register should include licence status, work history, education, qualifications and credentials, areas of advice, employer, business structure and years of experience – a position that SPAA totally endorses.”

SPAA, however, did not endorse the panel’s observation to potentially reduce the non-concessional contributions cap.

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