SMSFs facing regulatory upheaval

Self-managed superannuation was the clear winner of 2011, with healthy sector growth and satisfactory investment returns. However, as 2012 kicks off, SMSFs must turn their attention to policy changes. Damon Taylor reports.

Between solid investment returns, good overall sector growth and some wins around the policy table, 2011 was a year of quiet achievement for self-managed superannuation.

But while self-managed super funds (SMSFs) made some irrefutable steps forward, that activity was underlined by significant legislation and policy debate and for Philip La Greca, technical services director for Multiport, it is that debate, and more particularly policy implementation, that the sector must turn its attention to in 2012.

“So what we’re focused on are those things that are supposed to happen by 1 July,” he said. “Auditor competency is first on the list because we still don't know what that entails, or whether it’s going to cause some service delivery issues if people need to find an auditor who's up to speed.

“But this whole competency question is definitely one that’s going to be more important going forward,” La Greca continued.

“And apart from auditor competency, we've got adviser competency, we've got what was the provision of RG146 (Regulatory Guide 146), and this whole idea of advisers having to do some sort of apprenticeship with a planner with some experience.

“And the question is how that’s going to flow through into the whole process, where that mechanism resides and whether it has some incremental effect on where advisers actually come from?”

Similarly, Aaron Dunn, managing director of the SMSF Academy, said that if SMSF professionals were feeling “reformed out” now, they hadn’t seen anything yet.

“When we look back in 12 months, and assuming everything goes ahead from 1 July, there’s going to be a very large component of the industry that will fall under the auspices of ASIC [the Australian Securities and Investments Commission],” he said.

“So we’re going to have not only financial planners, but also an increase through accountants, who are potentially going to have to become licensed in some way, shape or form, and you can add ASIC’s auditor registration requirements on top of that as well.

“It’s this whole SMSF professional space where service providers need to think very carefully about what it is they’re doing and how they’re doing it – and that’s going to be an enormous issue,” Dunn added.

“There’s not going to be many people outside the scope of those changes, and it will mean some pretty hard decisions around how service providers plan to respond.”

However, Dunn was quick to add that, in some respects, having SMSF professionals make those hard decisions was a good thing.

“You need to have people working in the area of SMSFs who are serious about it,” he said.

“They have to be competent in what they do and how they do it, and that applies regardless of whether you’re a planner, an accountant or an auditor.”

Yet the substance of proposed legislative changes is only half of the story. With 1 July rapidly approaching, La Greca pointed out that the timeframe expected for these changes was a very real concern as well.

“With many questions still to be answered, the timeframes around these various reforms are definitely a major concern,” he said. “We're nowhere near where we should be if it’s going to happen when they've proposed.

“And the risk with that kind of situation is that it is all too easy to get unintended consequences.”

Yet Dunn believes there are two sides to the coin when it comes to the timing of SMSF reform and its subsequent implementation.

“Take the accountants, for example,” he said. “There has been zero information available with respect to what could be this conditional licence that’s going to turn up.

“So is it fair to just drop it on them and away we go – and then they’ve got to make a decision or else they can’t work in certain areas of SMSFs going forward?” asked Dunn.

“Or is the counter argument to say that there has been a great deal of discussion and debate around it, so surely you haven’t had your head buried in the sand so much as to not know that this is an issue and that you need to be on top of it?

“And I think that’s what’s coming out of some of the FOFA [Future of Financial Advice] stuff at the moment, this question of ‘do we defer it, do we defer it?’”

However, the answer, according to Dunn, is that while deferral might make a level of sense practically, the decision to do so is both unlikely and, hopefully, unnecessary.

“We all know it’s happening, we’ve all known about this requirement to think about how an SMSF business needs to be rewired,” he said.

“And I think most people have already started setting their business practices up to be able to deal with it moving forward.

“So, realistically, I think the more likely outcome will be implementation with a transitional phase to assist professionals, with some leniency in the first 12 months,” Dunn continued.

“Because if the Government did choose to delay it, the longer it delays, the more it looks like a cave-in and something that the Coalition can jump on, saying that they don’t know what they’re doing, they’re incompetent and so on.

“So given that most within the sector will already have made appropriate preparation, I think the most likely outcome is that the Government will get it locked in and underway, but have some flexibility to assist those that need it.”

Of course, with the all the legislative reform that is set to flow not only through self-managed superannuation but through the superannuation industry as a whole, the key question is what remains left to be done?

Are these changes plugging any and all holes that exist within the current SMSF framework, or is there still more work to be done?

But the answer, according to Graeme Colley, Superannuation Strategy manager for ING Australia, is that there is always room for improvement, particularly around compliance.

“From a compliance point of view, the ATO [Australian Taxation Office] has certainly pointed out areas where trustees can pick up their game,” he said.

“They mainly look at the investment side of things and their main concern is money going missing from the superannuation fund.

“And we’ve seen that over the last year or two where there’s been a number of cases where, for one reason or another, money’s gone missing from the superannuation funds and those trustees have been penalised quite heavily as a consequence.”

For Dunn, the current round of changes has been restricted to what he called the “bookends” of the self-managed superannuation sector.

“So they’ve been about the requirement to look at the provision of financial advice upfront, but also to ensure that a robust audit process is in place to manage and provide information back to the ATO as the sector’s regulator,” he said.

“But there hasn’t been a great deal of focus on what’s in the middle, in the accountant space, and I think that’s where there’s going to be a real jousting for what I call the ‘key adviser seat’ between the planner and the accountant.

“That will be a real emerging issue this year because what I’ve been seeing over the last few years is advisers getting into the SMSF space and really connecting up with accountants as the gatekeepers of the SMSF client,” Dunn continued.

“But what’s happened is that as self-managed super funds and their strategies have grown, a lot of planners have become increasingly frustrated because they start talking about transitions to retirement, pensions and all these other different bits and pieces and yet, if the accountant only does one, two, three funds a year, they don’t understand what’s required at their end to actually get this stuff done.

“So what ends up happening is a big blow-up because this hasn’t been done, that hasn’t been done, who’s responsible for this, who is responsible for that – and the adviser ultimately doesn’t want to refer the work.”

But with an increasing number of specialist administrators now servicing the self-managed superannuation market, Dunn said that the status quo had changed.

“Specialist administrators are now going straight to the planning market and saying, ‘you don’t need an accountant anymore, you’re the one who’s targeting the clients so you pick up the client, we do all the back-office and you sit in the key adviser’s seat,’” he said.

“Now, obviously that’s cutting off the accountant’s livelihood in some respects, but what I think we’ll see is: those accountants who do want to be in this space, those who do have 25 or 30 funds and want to grow that, they’ll be able to use their self-directed clients, those who want to do property or invest themselves through a broker or CommSec, to do exactly that.

“So those two ends of the spectrum are going to meet in the middle somewhere, but there’ll be a bit of jousting around until they do.”

Taking a longer-term view on the issue, La Greca said that while the current raft of changes were meaningful and appropriate now, the self-managed superannuation sector’s future growth would dictate how long they remained so.

“Realistically, I'm not 100 per cent sure that the compliance mechanisms that we're talking about putting in place, both in terms of the adviser and the auditor, are necessarily going to work longer term,” he said.

“If you think about it, they're attacking the controls from two ends. They're saying that we've got to make sure those people who are telling clients what to do know what they're doing on the one hand, and then that those people checking clients have done what they're supposed to do, know what they’re doing on the other.

“The problem, however, is that whilst you've got the compliance at the end always having to happen, you don't always have the advice element at the front,” La Greca added.

“So there is a weakness in that process and I'm not sure that the idea of picking up issues in six or nine months’ time if something goes wrong – because that is the current model – will be adequate if the number of funds continues to grow at the current rate.

“It’s all very well to say that it’s only 700,000 people’s money that’s exposed, but that’s one third of all superannuation assets.”

The question, according to La Greca, is what happens if the industry suddenly goes from 500,000 SMSFs to 1 million SMSFs.

“If that were to occur, I think the compliance regime and the monitoring that you require for such a significant part of the industry, not only in terms of the money but in terms of the tax concessions, could be quite different,” he continued.

“For instance, I think the budget numbers said that the value of its tax concessions last year was around $23 billion.

“So if you think about it, conceptually we might have a situation where 700,000 people are getting $11 billion worth of tax concessions,” La Greca pointed out.

“And that means that the rest of us are getting a bit more than $11 billion, but there's also 10.3 million more of us.

“And that’s probably the issue. If the sector is going to stay where it is, maybe these mechanisms will work but, realistically, I don't think this sector is going to get any smaller.”

Of course, individual self-managed super funds and their service providers have more than SMSF-specific change to be thinking about. As a series of reforms applicable to the super industry as a whole, SuperStream has produced significant discussion within industry and retail funds but, for Colley, it is no less relevant for SMSFs.

“With the changes to be brought about by Stronger Super, if SMSFs want to be a part of that, they will certainly have to have much more automated systems than they’ve got now,” he said.

“That’s a given but it’s also something that this sector is well aware of.

“There are a number of software providers out there now who are looking at how they’re going to be able to fit their products and services into SuperStream, not just in terms of the automation of the rollover process but also in terms of what efficiencies can be gained from the use of tax file numbers as the central linking identifier for particular members of funds.

“These are efficiency gains that are as relevant for SMSFs as they are for the larger industry and retail funds.”

Dunn said that his prediction was that, irrespective of the superannuation sector, technology would continue to drive the administration piece down significantly.

“So the fact that we can obtain information from a variety of sources, can get bank statements, get managed fund data, get share data and so forth, that’s all relevant here,” he said.

“And I think we’ll continue to see technology play a big role in making the ongoing administration piece highly competitive.

“The member verification service that’s in place for the registration of funds and then enabling rollovers is obviously going to be streamlined further as well,” Dunn continued.

“We’re going to get to the point where everything from the SMSF bank account to the 100-point check, it will all tuck into this requirement which will speed up the rollover processes between ATO funds and APRA [Australian Prudential Regulation Authority] funds and, ultimately, the SMSF bank account significantly.

“The admin piece is a big one but I guess we will continue to see a whole range of stuff that these sorts of technologies and initiatives will ultimately play a role in.”

In outlining the aspects of SuperStream that would be applicable to SMSFs, La Greca said that where any sort of data transfer took place, SuperStream was relevant and would have a role to play.

“So electronic contribution issues are going to have to be dealt with at an SMSF level as well, for example,” he said. “It won’t only be about the processing of the contribution by bank transfer, it’s also the data about that contribution that’s going to come electronically.

“So there’s clearly a question about efficiency and scale here, but it’s not going to be at the self-managed fund level so much as it’s going to be at the service provider level,” La Greca continued.

“And that’s because, at a fund level, there's 450,000 of these individual things and the only way they can be, for want of a better term, ‘pooled’ is in the services that they utilise.

“And that’s where I think we will see some of these SuperStream-type efficiencies.”

And according to La Greca, the SMSF auditor provides a perfect example.

“There'll be specialisation in that space that will get economies of scale at that level,” he said. “So there will be people out there and all they'll do is SMSF audit.

“Now obviously, if you're talking about administration like we do, you're starting to see scale and, again, efficiencies, so that data is provided electronically from fund managers and from brokers to people who collect the data and then give that information to the client and their service providers, be they advisers or accountants,” La Greca continued.

“But to build all that, you've got to build infrastructure.

“And these are the same issues that the big funds are facing: which is to say that SMSF service providers outside of the auditor and the adviser will have to think very carefully about scale and what scale they can get at.”

Taken as a whole, it seems clear that Australia’s superannuation industry, irrespective of sector, is now firmly set on a path towards providing members with more information and better service.

Clearer still is the fact that, prepared or not, self-managed super fund members, trustees and service providers still have a number of challenges before them, but according to Dunn, the sector is well placed to meet them.

“The way the world works now, everything is at your fingertips, and in some areas you don’t even need to search for stuff – it actually finds you,” he said.

“So the fact that there’s more information will only mean that as a community we become more understanding of the options available to us.

“The more we become literate in terms of the financial decisions that we have, the greater engagement that people will have as well,” added Dunn.

“And I think one of the powers SMSFs have is that level of engagement, where people will look to take that control and want to get engaged in their retirement savings, get engaged in where they ultimately want to head and get engaged in the choices they have available.”

Alternatively, La Greca’s view was that the industry’s push towards the greater availability of information put SMSF service providers in the box seat.

“The client who’s doing it him or herself, the true ‘do-it-yourselfer’, they have the information at their fingertips anyway,” he said.

“They’re all over it. But the ones who are using service providers, whether that’s an admin service or an accountant or whatever, they’re the ones who are going to realise that they need to know more and they need to know more quickly and, for me, that’s what this is all about.

“I mean, we talk about the markets so often nowadays, and if we think about the last four or five years, the issues have been about how quickly people know what’s going on and, more importantly, how quickly they can react to it,” La Greca continued.

“The first question is obviously whether they want to react to it but, even if they don’t, if they don’t know what’s going on, then they don’t have the opportunity in the first place.”

Reiterating his view that self-managed super funds would benefit from a superannuation environment newly focused on the availability of information, Dunn said that the key issue lay not in promoting the benefits of SMSFs but in demystifying them as being potentially complex.

“So the SMSF sector has to continue to break down the barriers of education for trustees in terms of saying that yes, they have responsibilities and yes, they have obligations but it’s no different to the complexities that you have if you’re running your own business or if you’ve got your own share portfolio,” he said.

“In my view, they have complexities but they’re not a complex beast.

“But, more generally, I think the superannuation industry as a whole has to repaint a positive picture on superannuation,” Dunn added.

“With people continually having to put money in, markets going backwards, the fact that the Government keeps changing the caps and the rules, there really needs to be a conscious effort by the entire industry to really build confidence and trust back into the industry.

“And that holds true regardless of whether we’re talking about SMSFs, industry funds or retail master trusts.”