SMSF advice: drawing a line

There is a degree of confusion among some practitioners in the financial planning and accountancy fields as to the ability of an accountant to give advice to a client of the accountancy practice in relation to self-managed superannuation funds (SMSF). The confusion has been heightened in part by a focus on the concession given to accountants under reg 7.1.29 of the Corporations Act, without regard to the overall intent and application of the licensing and disclosure requirements introduced by the Financial Services Reform Act (FSRA).

The law

The Corporations Act states that an accountant (with the designated qualifications) can give financial product advice, without worrying about the licensing and disclosure requirements that planners are subject to, which is the natural result and integral part of giving advice in relation to the establishment, operation, structure or valuation of a superannuation fund.

This advice could be given to a trustee, director of a trustee, employer sponsor or any other person controlling the management of a superannuation fund (or a person likely to take up any of these positions).

Where an accountant has been asked to address a client’s super arrangements, they can recommend an SMSF per se. However, there are practical limitations on the extent to which accountants can give this advice.

Establishing a fund

An accountant can only advise on areas that relate to how the SMSF is actually set up. It would include a range of advice explaining the creation of the trust, the rules of the trust deed, the role of the Australian Taxation Office (ATO), the appointment of an auditor and the delegation of administrative functions, and who can be the trustees.

Fund operation

Advice relating to the operation of the fund can address:

contributions;

trustee duties;

administration requirements;

lodging of documents with the ATO;

allocations to member accounts;

dealing with the members; and

payment of benefits.

In other words, the advice here can only relate to the ongoing tasks of running the fund.

Fund structure and valuation

Advice on the structure will relate only to the framework of the superannuation trust, such as an explanation of how the SMSF is different in structure to other types of funds, what the purpose of the trust deed is, and the role of the trustees.

Giving advice on fund valuation only relates to issues such as how the accounting of the member’s interests is to be undertaken, and the valuation of types of assets.

Advice not permitted

Therefore, unless licensed or authorised as a representative of a licensee, advice cannot be given in circumstances such as:

a person becoming a member of a super fund, or an existing member of the fund joining another sub-plan in that same fund;

a change from the growth phase to the retirement income phase, or the commencement of a pension;

transferring benefits between investment options;

making additional and voluntary contributions to the fund;

deciding what financial products should be held;

the buying, retaining or selling of a specific investment as part of formulating or giving effect to an investment strategy;

the buying or selling of business assets, which include shares or units in other entities; or

acting on a financial plan prepared by a financial planner.

The rules should not be interpreted as meaning that an accountant can advise a particular client that an SMSF is the appropriate super vehicle for that client.

To say what is appropriate implies a comparison or selection to other superannuation vehicles, and that is certainly how a client would view any statement in favour of an SMSF.

An accountant could only direct a client to setting up an SMSF if it were a preferable option to, for example, a small Australian Prudential Regulation Authority fund, or a wrap product.

But since the accountant cannot comment on or draw comparisons to these types of funds, as they would be wandering into the general territory of giving financial product advice, it means in effect that what the accountant can say to the client is very limited indeed.

Intent of the law

The requirements of the FSRA are intended to ensure that people receiving advice are fully informed of their options, and that such advice comes from those who are required to be familiar with, and educated upon, the ranges of options within the areas in which they give advice.

Higher expectations are imposed upon any information or advice given in relation to superannuation, because this is where consumers are most confused and vulnerable to inappropriate choice. The quality of super advice is a hot topic throughout the industry, made more so by the introduction of choice.

Another important consideration is that the exemption does not apply to the provisions of the Australian Securities and Investments Commission (ASIC) Act, and ASIC relies on this act quite frequently in enforcement actions. The broad provision on which they frequently rely is s 12DF which states that “a person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, and the suitability for their purpose or the quantity of any financial services”.

ASIC would rely on this to say that an accountant had misled a client if they did not address the other super products available and which might be equally suitable, or cost effective.

Similarly, s 12ED will often be relied upon by ASIC. This states that in every contract for the supply of financial services to a consumer in the course of a business, there is an implied warranty that the services will be rendered with due care and skill, and will be reasonably fit for the purpose.

It goes on to say at sub-ss (2) that if a person supplies financial services to a consumer in the course of a business, and the consumer makes known to the person the particular purpose and result that they desire to achieve, then there is an implied warranty that the services will be reasonably expected to achieve that result.

The provisions in this act are an additional way of saying that advice given has to be totally appropriate for that client.

Advice in reality

Even if we left these legal interpretations aside, it is inconceivable that anyone could advise any client on superannuation without explaining what the choices were.

Whether a person is a client of a lawyer, doctor, or accountant, it is expected that any professional will inform their client of any choices, what they are, what they cost, and what the consequences of each choice will be.

The expectations are the same here. Moreover, the expectation of advice in relation to super, whether in legislation, the industry or ASIC, is that the advice will place the consumer in the position of making an informed choice.

Therefore, a Statement of Advice (SOA) is required, and only authorised representatives are able to provide this form of communication, thereby effectively excluding accountants (where they do not have the required authorisation) from giving this type of advice

Even if the accountant’s client is self-employed, and has no existing super arrangements, a comparison of other super products besides an SMSF would be required via an SOA.

Accounting and financial advice

There are special implications for advisers who are part of a firm that provides both accounting and financial planning services.

It is not permissible that the accounting business provide the recommendation to a client to establish an SMSF, for the reasons that have just been stated. That advice should come from an authorised representative of a licensee who is adequately trained and educated in relation to all types of superannuation structures and products currently on offer.

However, the financial adviser who allows the accountants within the firm to provide that advice, and then simply steps in to provide advice on setting the investment strategy, can be held responsible.

Under the ASIC Act referred to earlier, a person who in any way is knowingly concerned in a contravention, is also liable to action by ASIC.

Those operating a financial planning business within an accounting environment are vulnerable if operating on the assumption that an accountant’s SMSF advice to a client is always exempt from licensing.

What it signifies is that SMSF advice is clearly the domain of those authorised via an Australian Financial Services licensee, regardless of the experience that an accountant may have in the SMSF sector. Such advice must therefore be accompanied by an SOA and Financial Services Guide, in the usual way.

Professional indemnity insurers are also unlikely to accept claims against this type of advice if provided by unauthorised persons.

The underlying message is don’t provide advice as an unauthorised person. The ramifications are very serious, and will jeopardise you and your business.

Lucille Bennetto is head of compliance at Lonsdale Financial Group .