Limited recourse borrowing arrangements (LRBA) should be removed from the superannuation landscape. Failing that another review of the potential risks they create should be undertaking by key industry regulators, according to an industry fund advocacy body.
The Australian Institute of Superannuation Trustees (AIST) made the call to remove the exception to the general prohibition on direct borrowing for LRBAs by superannuation funds in a pre-budget submission ahead of the proposed October budget.
Returning to a position first adopted in 2015 following the release of recommendations from the Financial System Inquiry (FSI), AIST stated “direct borrowing for LRBAs for superannuation funds creates the potential for systemic risk and should be addressed in the budget before the risk is realised”.
Referencing the final report of the FSI, AIST said market, credit, manager and liquidity risks “are magnified across the financial system by leverage” and “these have increased at both an investor level, as well as a macroeconomic level”.
“The interconnectedness of our financial system means that should failure in the form of defaults by borrowers become widespread, the spill-over effect may be unable to be contained by ordinary provisioning. This type of risk was noted by the FSI, and we submit falls within the definition of systemic risk.”
AIST noted the government did not agree with the FSI’s recommendation in 2015 and commissioned the Council of Financial Regulators (CFR) and the ATO to monitor the situation and report back in early 2019.
“The 2019 CFR/ATO report and the 2018 Productivity Commission’s report both noted that the relatively small number of super funds using LRBAs means that such borrowing did not pose a material systemic risk at that time,” AIST acknowledged.
Responding to the CRF/ATO report, then Treasurer Josh Frydenberg and Assistant Minister Stuart Robert said, given the low levels of risk, the government would take no further action but continue to review the use of LRBAs.
“The regulators agree that the presence of leverage in SMSFs through LRBAs has significant implications for the security of individuals’ retirement savings. Other than the regulators’ preferred option of removing the exception to allow SMSFs access to LRBAs, some potential policy interventions could address these concerns,” they explained.
“These range from truly limiting the recourse of the lender over the asset by prohibiting the use of personal guarantees, to reducing high leverage and concentration risk within the fund by creating prudential responsibilities for the regulator.
“Where the regulators’ preferred option to remove the exception to allow LRBAs is not accepted, further monitoring to track the future growth of leverage and identified risks within the SMSF environment is recommended.
“A further report to Government in three years would provide further analysis of the ATO’s enhanced SMSF Annual Return data collection and the impact of major banks’ withdrawing from lending to SMSFs.”
