SMSFs and financial services regulation

David Court delves into the reasons why a SMSF is a financial product, and the licensing implications that flow from having that status. A later article will examine the disclosure and conduct requirements that apply to SMSFs under the Corporations Act.

The financial services provisions of the Corporations Act regulate those persons engaged in the business of advising on, or dealing with, financial products.

It also imposes a number of disclosure and conduct requirements on the issuers of financial products.

Are SMSFs financial products?

Crucial to the application of the legislation is the concept of a financial product. The legislation defines a financial product by means of a generic definition, a list of specific inclusions and a list of specific exclusions.

There is no particular need to consider the generic definition because a superannuation interest is specifically included as a financial product.

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A superannuation interest is defined in the Superannuation Industry (Supervision) Act 1993 as a 'beneficial interest in a superannuation entity'.

A superannuation entity is further defined as including a 'regulated superannuation fund'.

A self-managed superannuation fund (SMSF) must be a 'regulated superannuation fund' in order for it to be a complying superannuation fund.

As there are no specific exclusions that are applicable, a complying SMSF will be a financial product for the purposes of the financial services laws. The various implications of this result are discussed below.

Providing trustee services in relation to an SMSF

A person who carries on a financial services business is generally required to hold an Australian financial services licence (AFSL).

However, SMSF trustees have been specifically exempted from the need to hold an AFSL for any service provided in that capacity.

Providing financial advice in relation to an SMSF

Providing advice in relation to an SMSF will constitute a financial service.

Financial product advice is defined, essentially, as being a recommendation or statement of opinion that is (or could reasonably be regarded as being) intended to influence a person in making a decision in relation to an interest in a financial product.

Financial product advice can be either personal or general. The type of advice provided will impact on the disclosure obligations of the advisor and the product issuer.

Although the legislation draws a distinction between retail and wholesale clients, members of superannuation funds are always required to be treated as retail clients.

A person in the business of providing financial product advice in relation to SMSFs will, therefore, need to obtain an AFSL, or appointment as an authorised representative of an AFSL holder.

However, this obligation is subject to an important exclusion.

The accountant's exemption

A person is taken not to be providing financial product advice if:

•  the advice is provided in the course of conducting an exempt service;
•  it is reasonably necessary to provide the advice in order to conduct the exempt service; and
•  the advice is provided as an integral part of the exempt service.

There are a number of exempt services. Of present relevance, advice is an exempt service if:

It is provided in relation to the establishment, operation, structuring or valuation of a superannuation fund (other than advice to be included in a disclosure document);

 The person advised is, or is likely to become, a trustee, trustee director, employer sponsor, or to control the management, of the superannuation fund;

 With the exception of advice given for the sole purpose of ensuring compliance with the superannuation regulatory rules (except in relation to investment strategies) or the superannuation guarantee rules, the advice does not:

• Relate to the acquisition or disposal by the superannuation fund of financial products;
• Include a recommendation that a person acquire or dispose of a superannuation product (except for such advice in relation to an SMSF by an accountant who is a member of the CPA, ICAA or NIA);
• Include a recommendation in relation to a person's existing holding in a superannuation product to modify an investment strategy or a contribution level;

 The advice includes a written statement that the advisor is not licensed to provide advice and the client should consider taking advice from someone who is.

While this exemption is commonly referred to as the 'accountant's exemption' it is, theoretically, available to any unlicensed advisor and applies to all types of superannuation funds.

The only unique advantage for accountants is that they may recommend that a person acquire or dispose of an SMSF without being licensed.

Taxation Advice in relation to an SMSF

Persons providing advice in relation to an SMSF should also be aware of the restrictions on the provision of taxation advice.

To the extent that such advice would constitute financial product advice, it is generally exempted in similar terms to the accountant's exemption.

However, the provision of advice in relation to a taxation law is considered to be a tax agent service for the purposes of the tax agent legislation, and registration under that legislation may also be required - although a conditional exemption for AFSL holders and authorised representatives applies until 30 June 2012.

Dealing in relation to an SMSF

Dealing in an SMSF will also constitute a financial service. So far as is relevant to an SMSF the following conduct (whether engaged in as principal or as an agent) constitutes dealing:

•  Applying for or acquiring a financial product;
•  Issuing a financial product;
•  Varying a financial product; or
•  Disposing of a financial product.

The trustee of an SMSF will engage in some or all of the above activities. However, SMSF trustees are not required to be licensed for the reasons discussed earlier.  

Employer sponsors of superannuation funds are also not considered to be dealing where they pay contributions to the fund on behalf of an employee, or arrange for an employee to become a member of a fund.

Where someone is in the business of acting as agent for a person in relation to their membership of an SMSF (such as a financial adviser), then it is likely that they will be treated as dealing in the SMSF and need to either hold an AFSL or be appointed as an authorised representative.  

In summary

While an SMSF is a financial product, SMSF trustees do not need to be licensed under the financial services laws.

However, those in the business of advising on, or dealing in, SMSFs will need to be licensed under the financial services (and tax agents' services) legislation, unless they come within an applicable exemption.

Note, however, that the existence of exemptions for accountants (from financial services licensing) and financial advisers (from tax agents' licensing) have been controversial and are presently under review by the Government (with the strong likelihood that they will be removed).

David Court is a lawyer at Holley Nethercote Commercial Lawyers.