Westpac Banking Group has come out in support of an appropriate model for the oversight or analysis of the systemic implications of SMSFs for the stability of the superannuation and financial system.
The group made the recommendation for the sector as part of its initial submission to the Financial System Inquiry.
With over 500,000 funds made up of a total of more than 1 million members holding in excess of $500 billion in assets, the SMSF sector was now systemically relevant within the financial system and in terms of the government revenue implications of any widespread failure, Westpac said.
“From a policy perspective, the key questions in relation to the sector include: are the right individuals establishing an SMSF, is the financial or other advice provided to these individuals in their best interest, and do trustees and members of SMSFs understand the added responsibilities and differences in consumer protection relative to Australian Prudential Regulation Authority-regulated funds?” the submission said.
“[In addition], are relevant investment and preservation rules being complied with and what are the economic and financial system implications of the continued growth of the SMSF sector?”
Westpac said it believed the current regulatory regime addressed only some of those elements satisfactorily.
“Oversight of SMSFs is primarily achieved through annual auditing requirements and Australian Taxation Office compliance data suggests that the SMSF sector is, overall, highly compliant with only around 2 per cent of funds lodging contravention reports each year,” the submission said.
“Additionally, recent Future of Financial Advice and related reforms, including the removal of the accountants’ exemption and the introduction of the best interests duty, have strengthened the regulation of SMSF gatekeepers.”
However, there remained no oversight or analysis of the systemic implications of the sector, Westpac said.
“This poses important issues for the government and SMSF members, including risk of shortfalls in retirement savings due to poor management and/or mismanagement, calls to compensate SMSF members in the event of a failure and poor understanding of the economic and financial system implications of the sector,” the submission said.
“At present, the quality and depth of data in relation to SMSFs is also inadequate given the size of the sector.
“Official data is reported with a significant lag and there is little analysis of trends and underlying investments.”
In order to address the supervisory gap, Westpac said it supported a financial regulator being given oversight of the sector as a whole.
“This would not involve the financial regulator directly regulating individual SMSFs, rather they would more closely examine investment portfolios within the SMSF sector in order to better advise government on the ongoing systemic implications of the sector,” the bank said.
“Granting a financial regulator macro oversight would allow for more informed commentary and policy development.”
