Caution on debt to fund super
It was only a small mention in the Reserve Bank's minutes of its interest rate policy meeting, but it shows that concerns have reached the top table of our financial system.
The minutes show that the bank believes some households could be starting to take some risks with their finances.
The benefits of self-managed super funds are being advertised heavily on prime-time television and on radio and on the internet.
These self-managed fund "administrators", many of which are owned by the big financial services players, are appealing to investors who want to take control of their retirement savings.
There are many legitimate reasons for the growth in number of self-managed funds to almost 500,000 from less than half that number 10 years ago. But they are not for everyone.
The advertising blitz is increasing awareness of self-managed funds among the general populace. And it is making the ground much more fertile for the property spruikers. While issuing warnings about holding geared property in self-managed funds, the Australian Securities and Investments Commission has also been keeping an eye on advice-giving in relation to self-managed funds generally.
When the regulator released its report in April on the quality of self-managed fund advice, it found 28 per cent of advice was "poor" and there was room for improvement in the quality of advice that clients received.
The report targeted the quality of advice provided by financial planners and accountants of lower-balance self-managed funds; those with balances of $150,000 or less. On Monday, as part of its follow-up to that report, ASIC released proposed guidelines to help improve the quality of advice given by planners and accountants.
They would have to make clear to investors the costs of running a self-managed fund and how those costs compare with the cost of large superannuation funds.
The regulator also wants advisers to warn investors that they may be worse off if they discontinue the life insurance they have with a large super fund.
That is because large funds usually have automatic acceptance for life insurance without the need for a medical exam or medical history.
Planners and accountants would also have to point out that self-managed super funds are outside the government's compensation scheme should there be theft or fraud.
The regulator will discuss its proposals to increase the disclosures required by planners and accountants with the financial services industry and investors before deciding on the final approach. There is an argument that says this extra guidance from the regulator should not be needed.
The principal of Townsends Business & Corporate Lawyers, Peter Townsend, says licence holders' obligations under the Corporations Act are fairly general, but "much of this type of disclosure probably does fit within the general description". He says ASIC is probably trying to make it clear so that it is not open to interpretation by a court in the future. Advisers are now under a legal obligation to act in the best interests of the investor. The regulator's hand is now stronger than ever.
SMSF regulation call
— Money, inside today
Frequently Asked Questions about this Article…
Borrowing to invest in super refers to taking out loans inside a self-managed super fund (SMSF) to buy assets such as property. The Reserve Bank is watching the trend because it has flagged concerns that some households may be taking on extra financial risk by gearing property inside SMSFs, which could have broader implications for the financial system if problems emerge.
SMSFs have grown substantially — the article notes there are almost 500,000 SMSFs now, up from less than half that number about 10 years ago. Their benefits are being heavily advertised on prime-time television, radio and online, and many SMSF administrators are owned by large financial services players.
Holding geared (borrowed) property in an SMSF carries risks such as higher exposure to market or interest-rate movements and the potential for loss if property values fall. Regulators like ASIC have warned about property "spruikers" promoting geared property to SMSF members, and the Reserve Bank has said it will closely monitor the practice because it can increase household financial vulnerability.
ASIC’s report found that about 28% of SMSF advice reviewed was rated as "poor," especially advice for lower-balance funds (defined in the article as $150,000 or less). The regulator concluded there is room for improvement in the quality of advice given to SMSF clients.
ASIC has released proposed guidelines that would require planners and accountants to clearly disclose the costs of running an SMSF and compare those costs with large super funds. Advisers would also need to warn clients about other factors such as insurance implications and the fact SMSFs are not covered by the government's compensation scheme.
Large super funds often offer automatic acceptance for life insurance without requiring a medical exam or full medical history. If you withdraw from a large fund to set up an SMSF, you may lose that automatic cover and could be worse off or face medical underwriting if you try to obtain similar insurance through an SMSF.
No — the article notes that SMSFs are outside the government’s compensation scheme. ASIC wants advisers to make this clear to investors so they understand the difference in protections compared with large retail or industry super funds.
Advisers already have a legal obligation under the Corporations Act to act in the best interests of investors. ASIC is proposing clearer, more specific disclosure rules so those obligations aren’t open to different interpretations in future legal cases. The regulator aims to strengthen protections and improve the standard of advice given to SMSF members.
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