During the recent hearings of the Parliamentary Joint Committee on Corporations and Financial Services into ASIC’s oversight functions, the regulator responded to a range of questions regarding SMSF advice and provided policy solutions to be considered by the Committee around reforms to the SMSF sector.
According to ASIC report 575 (SMSFs: Improving the quality of advice and member experiences) and 576 (Member experiences with self-managed superannuation funds), many SMSF members lack a basic understanding of their SMSF and their legal obligations as SMSF trustees. The reports also highlighted that a large number of advice providers were not complying with best interests duty and related obligations when providing personal advice to retail clients in setting up an SMSF.
In particular, the reports indicated that SMSF advice providers could not demonstrate that they had sufficiently researched and considered the client’s existing financial products and/or based all judgements on their client’s relevant circumstances. Of the total files reviewed by ASIC, around 10% risked being significantly worse off in retirement as a result of the advice, a further 19% were at increased risk of suffering financial detriment.
ASIC’s concerns were based on balance size of the SMSF, members ages, gearing level, lack of diversification (ie. assets of the fund invested in a single asset class) and a combination of the above-mentioned factors. In a further indictment of the lack of understanding by SMSF trustees, a survey conducted by ASIC showed around 33% of members did not know that an SMSF must have an investment strategy, around the same number of members (30%) had no arrangements in place for the SMSF if something happened to them. To counter these findings, ASIC recommended the following policy solutions to the Committee:
• consumers would be required to undertake SMSF trustee education prior to setting up an SMSF (currently, training is available but not compulsory);
• new training and education standards to be set up by Financial Adviser Standards and Ethics Authority (FASEA) should improve the quality of financial advice provided, but ASIC has further suggested it may be appropriate to require specialist training for persons providing advice to set up an SMSF;
• consideration could be given to prohibiting limited recourse borrowing arrangements (LRBAs) and/or mandating a minimum SMSF balance;
• consideration could be given to extending the proposed design and distribution obligations regime to the establishment of SMSFs by imposing an obligation on SMSF promoters to consider the type of consumer and the channel best suited to distribution.
In the meantime, ASIC said it’s continuing to focus on poor quality SMSF advice and is investigating a number of SMSF one-stop-shops with a view to taking enforcement action. It is also working with the ATO to enhance communication material to encourage individuals to undertake SMSF trustee education