SMSF sector now too big for the regulators to ignore – or let fail

Mike Taylor writes that recent actions on the part of both ASIC and APRA suggest that the SMSF sector has become too large for any of the regulators to ignore.

The regulatory boundaries around the self-managed superannuation funds (SMSF) sector appear likely to become further blurred as a result of changes directly related to borrowing within superannuation funds and the aggressiveness of some property spruikers. 

While the SMSF sector has sat comfortably under the regulatory jurisdiction of the Australian Taxation Office (ATO), the Australian Investments and Securities Commission (ASIC) has signaled it may be playing a greater role because of increasing levels of direct property investment generated, in turn, by the easing of the guidelines with respect to borrowing in super. 

The extent to which ASIC will adopt a higher profile with respect to SMSFs is expected to become clearer next month with the release of a report by the so-called SMSF taskforce. 

However it appears likely that accountants and advisers delivering SMSF-related advice will go largely unaffected, with ASIC having recently signaled to a Senate Estimates Committee meeting that it is not targeting the provision of legitimate advice with respect to direct property investment, but rather the activity of so-called “property spruikers”. 

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ASIC commissioner Peter Kell acknowledged to the Senate committee that while SMSFs did not come under the regulator’s normal jurisdiction, ASIC was looking closely at the powers it actually had. 

Answering a question from the Shadow Assistant Treasurer, Senator Mathias Cormann, Kell said: “ASIC does not have a direct regulatory responsibility for direct property investments.

However, given that it is becoming an increasingly popular investment choice in the self-managed super fund space, we are looking closely at what regulatory powers we would have in relation to that sort of investment through SMSFs”. 

“We do have concerns that less reputable property spruikers are targeting SMSFs to encourage them to invest, perhaps inappropriately, in direct property,” he said.

“That is one of the issues that we are currently considering as part of an SMSF task force that we have established, and we will be coming out with a report in April that will set out how we are going to approach that issue.” 

Kell said that ASIC was currently warning investors “about some of the more aggressive spruiking that we are seeing in this area, because it would cause us a lot of concern if this became the preferred vehicle for dodgy property spruikers to get back on the radar”. 

ASIC’s acknowledgement that it is reviewing what powers it might possess capable of allowing it to deal with direct property investment by SMSFs has come only weeks after the Australian Prudential Regulation Authority (APRA) used its jurisdiction over banks and building societies to apply its own influence on the SMSF sector by suggesting loans to SMSFs should be treated differently to conventional retail mortgages because they are more complex. 

As reported in Money Management at the time, APRA’s general manager for policy Charles Littrell justified the regulator’s approach by claiming the complexity of such loans gave rise to “potentially higher loss profile” for banks in such situations. 

Reports at the time suggested that borrowing by SMSFs to buy residential real estate currently represented less than 5 per cent of SMSF assets in Australia, but referred to concerns previously raised by ASIC that real estate promoters might push investors into SMSFs with the specific aim of getting them to gear up and invest in property that might not be appropriate for their retirement strategy. 

Littrell’s letter referenced the fact that an SMSF borrower could not own the asset directly but only under a trust structure, and that lenders would therefore not have recourse rights to any of an SMSF’s other assets if there was any problem with the loan being repaid. 

It said there was not enough evidence yet available “on the relative strength of the pledging arrangement or the ultimate enforceabilty of the personal guarantees in comparison to more traditional arrangements”, which meant that banks should model their credit risk estimates for SMSF loans in a separate way, “reflecting the different loss characteristics of these loans”. 

He said it was the banks’ responsibility to make sure they have given “detailed consideration to the particular risks of lending to a superannuation fund”. 

What should be obvious from Littrell’s January letter, ASIC’s concerns about property spruiking and Kell’s explanation to Senate Estimates last month is that all three regulators are recognising the scale of the SMSF sector – and that there are considerable risks if they fail to step over jurisdictional boundaries when circumstances dictate that they should do so.