Regulation overkill

ASIC’s SMSF taskforce issues a class order and regulatory guidance on new SMSF disclosure requirements.

This month, ASIC’s SMSF taskforce is expected to issue a class order and regulatory guidance on new SMSF disclosure requirements. But after a period of consultation, the industry believes a more considered approach to the proposals and cost guidance must be taken, Krystine Lumanta writes.

“Consultation Paper 216: Advice on self-managed superannuation funds: Specific disclosure requirements and SMSF costs” (CP 216) was released on 16 September, after the Australian Securities and Investments Commission (ASIC) highlighted the need to improve the quality of advice given to clients when establishing or switching to an SMSF.

CP 216 proposed to modify part 7.7 of the Corporations Act by way of class order, although the items proposed were not final policy.

The corporate regulator believes clearer disclosure benchmarks will help to reduce the risks for retail investors considering an SMSF, following the Parliamentary Joint Committee inquiry into the collapse of Trio, which found most SMSF investors were unaware of the risks associated with SMSFs.

ASIC also considered its own review of the quality of advice provided for SMSFs.

In October 2013, various stakeholders attended face-to-face roundtables with the regulator, with formal submissions for CP 216 due by 11 November. Industry stakeholders involved in the process have not been contacted by ASIC since providing their comments.

CPA Australia financial planning policy adviser Keddie Waller believes that in the first instance ASIC should consider non-regulatory mechanisms. “We believe the consultation paper does not provide clear evidence of an existing systemic issue, does little to address the identified concerns and if implemented, will unnecessarily add to the compliance burden faced by financial planners,” Waller says.

“It appears that in this consultation paper, ASIC is exploring imposing additional regulation rather than exploring other options, such as issuing best practice guidance for licensed financial advisers providing personal advice to clients on establishing or switching to an SMSF, which may in fact better address the apparent mischief.

“Further, it will have limited benefit given only a minority of individuals who set up an SMSF first seek the advice of a licensed financial adviser, noting a consumer can set up an SMSF online and may not seek any professional advice.”

AMP SMSF head of policy and technical Peter Burgess agrees with Waller and suggests rather than modifying the law to require mandatory disclosure of the items listed in CP 216, a regulatory guide is a more appropriate regulatory response.

“We support moves by ASIC to raise the bar in regard to the quality of advice in the SMSF sector,” Burgess says.

“The point we were making in our submission is that we think there may be a more effective way in which some of those disclosures can be made.”

SMSF Professionals’ Association of Australia (SPAA) also provided a formal submission and attended the roundtable with ASIC.

“They were held to give ASIC an understanding of what’s happening and maybe give us [an idea] of some of their thoughts,” SPAA director of technical and professional standards Graeme Colley says.

“It seemed to have gone pretty well.

“I think they’ll take the submissions into consideration, but whether it’s got an impact on the final determination, I don’t know.”

Lack of compensation disclosure

CP 216 proposed that new SMSF clients should be asked to sign a document acknowledging they understand SMSFs are not entitled to receive compensation under part 23 of the Superannuation Industry (Supervision) Act.

Waller says she is concerned, given the government’s focus on reducing unnecessary regulation, that this proposal duplicates existing information and requirements from the Australian Taxation Office (ATO).

“The ATO website and several of its publications produced specifically for potential and existing SMSF trustees clearly state that SMSFs do not have access to the government’s financial assistance program that is available to trustees of APRA (Australian Prudential Regulation Authority)-regulated funds in the case of financial loss due to fraudulent conduct or theft,” she says.

“Importantly, this information is already included as the final point in the trustee declaration that all new trustees and directors of corporate trustees of an SMSF are required to sign.”

CPA Australia acknowledges the ATO is the regulator of SMSFs and that the declaration is a requirement of the ATO, not ASIC.

“However, in an environment where there is growing regulatory overlap, we believe it is imperative for regulators to work together to ensure efficient and effective outcomes for both the industry and consumers,” Waller says.

Furthermore, if disclosure is to be made about compensation arrangements for SMSFs, larger superannuation funds then should have to disclose compensation may be available, Colley says. “But that won’t occur in all cases and we’ve seen that in a number of things coming out of the Trio matter, where some super funds received compensation from the government but other large equivalent super funds did not, and nor did the mums and dads or SMSFs coming out of that,” he says.

“We would want disclosure by the larger super funds in a similar vein to SMSFs.”

Additional disclosure in SOAs

CP 216 recommends that advisers explain the role, responsibilities and obligations of an SMSF trustee in running their own fund, with the level of detail about a matter such as a client would reasonably require to decide whether it’s appropriate in their circumstances to establish or switch to an SMSF.

This includes insurance issues, additional risks depending on investors’ individual circumstances, setting up and following through with the investment strategy, time commitment and financial experience or skills to make the best investment decisions for the fund, associated costs, possible exit strategies and SMSF laws and compliance obligations, which are subject to change.

In addition ASIC suggested recording the information about the additional risks for clients as a permanent feature in a statement of advice (SOA).

Waller says the proposal is unnecessary as it fails to consider the new regulatory environment in which licensed financial advisers now operate since the commencement of the Future of Financial Advice (FOFA) reforms on 1 July 2013.

“This measure essentially replicates existing obligations that licensed financial advisers now have when providing advice, given the introduction of the best interests duty and related obligations,” she says.

“It must also be remembered ASIC targeted files that look more likely to contain problems … further, the report reviewed advice that was provided before the commencement of the FOFA reforms.”

Burgess adds it would be more effective to keep generic information out of the SOAs and reserve SOA content for disclosures that are specific to a client’s circumstances.

“You run the risk of SOAs being too long, too lengthy, too detailed and we think that any generic information can be provided to the client as a separate document,” he says.

“The industry can work together along with the regulators to determine what the standard document would look like. In practice, a lot of advisers work that way now where they will provide ATO publications on the roles and responsibilities of the trustee. They provide that to the client along with their SOA.”

Institute of Chartered Accountants in Australia head of superannuation Liz Westover cautions that much of the disclosure requirements require rewording to appropriately deliver the objectives ASIC is endeavouring to achieve. “We are concerned that the current wording implies a negative connotation rather than simply providing education for trustees about some of the specific requirements of running an SMSF and the relative merits in comparison with larger Australian Prudential Regulation Authority-regulated funds,” Westover says.

“It is not appropriate to treat these disclosures as warnings about SMSFs, particularly when there are also risks and considerations for all types of funds.”

SMSF costs vs other funds

Using Rice Warner research, ASIC’s publication of minimum cost-effective balances for SMSFs compared to APRA-regulated super funds is considered highly dangerous and has been met with strong opposition from industry professionals.

Burgess believes it is extremely misleading to provide break-even points. “That can be a very subjective measure and it really does require the advice provider to make a case-by-case assessment because with SMSFs the fees and costs being incurred can vary greatly between different administrators,” he says.

“We need to keep this discussion in perspective because in some cases clients may be prepared, and it may be still in their best interest, to pay some additional fees if it results in a higher return for them.”

The Australian SMSF Members’ Association (ASMA) attended a separate CP 216 roundtable discussion representing the interests of its members, alongside representatives from consumer groups, and advised against ASIC’s proposed cost guidance. “We’ve warned them of the risk of this because our members do not make a decision to enter an SMSF based on cost alone,” ASMA director Simon Makeham says.

“Cost is always a consideration, but the first thing they establish is whether or not they have a need or desire to run an SMSF because most members we speak to, particularly members of our association, are disenchanted with the ability of industry funds and retail funds to deliver appropriate investment returns.”

He adds the current law is set out quite well and quite clearly in respect to the provision of advice. “Our members feel that the law as it stands in relation to what’s expected of a financial adviser more than adequately caters for the delivery of advice,” he says.

“You cannot define or provide a framework for good advice. Good advice comes down to an adviser having the ability to listen and understand exactly what it is that their client is looking for and then having the technical skills and ability to be able to deliver that solution to their client.”

Furthermore, he says ASMA members feel there is not enough evidence to suggest SMSFs are not complying with legislation.

“The process we go through of auditing individual funds every single year, where every fund is required to be audited and examined, is working because it’s picking up these compliance issues,” he says.

“Let’s face it, there’s significantly higher SMSF numbers versus the number of APRA-regulated funds, so you expect higher compliance because you’ve just got more funds out there.

“SMSFs are not higher risk. It’s actually showing the current process of auditing the funds and the current regulation from the ATO is working.”

With the release of a class order and regulatory guide in February, ASIC says a transitional period of six months, ending in August, will allow Australian financial services licensees and their authorised representatives to implement the proposed disclosure requirements.

Westover cautions should ASIC proceed with introducing requirements for the proposed disclosures, adequate time must be given and that a period longer than six months may be required. “We would encourage a 1 July 2015 start date as most advisers are familiar with it as a start date for legislative changes and use the period in the lead-up to this date to turn their minds to impending changes and educating themselves on all changes affecting their industry,” she says.

“Early adoption by advisers and licensees should not be discouraged.”

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