The problems with limited recourse borrowing arrangements (LRBA) related to residential property have been overstated and could be managed by enforcing existing legislation, removing the need to ban the arrangements, according to a specialist lender.
Thinktank chief executive Jonathan Street said a recent Council of Financial Regulators report, which found the arrangements did not pose any systemic risk to the financial system, was being used by opponents of LRBAs to justify their complete removal.
Street said the distinction between LRBAs being used for business real property (BRP) and residential property within an SMSF was not being made clear and the removal of the arrangements for BRP investors would be detrimental to some SMSF trustees.
“The statistics in the report and our own observations over several years in working with hundreds of LRBAs is that business owner-occupied premises make up a large part of this demand for strategically structured finance and that the SIS (Superannuation Industry (Supervision)) Act regulations were specifically designed to allow for them,” he said.
The report made limited mention of the use of BRPs, “while the ‘one-stop-shop’ marketing of LRBAs for small residential units and ‘off-the-plan’ pre-sales, while far less common, are mentioned far more frequently”, he said.
He highlighted that potentially conflicted residential property acquisitions were recognised as “undesirable” by the industry, but little had been done to deal with the issue at a regulatory level.
“Even when notably targeted by ASIC in its recent report on financial advice, little action seems to have been taken to remedy the situation, such as implementing mechanisms to ensure statements of advice meet expected standards and all parties to the transaction are impartial,” he noted.
“Thinktank’s view is that the glaring solution lies very much in the prudent enforcement of the existing legislation regarding the LRBAs – precisely what the financial services royal commission advocated.
“By doing so it could clean up that element of the market where LRBAs may be an ill-advised investment and allow the market to continue operating for those small business owners who clearly benefit from this debt instrument being available to them.”
Late last week, Street called on the federal opposition to review its proposal to ban all LRBAs and to retain them for use with commercial property assets, claiming that property sector had very few problems with borrowing arrangements compared to the residential property sector.
Continuing in that vein, he said plans to ban LRBAs were counter to the CFR report’s findings that the arrangements did not pose a systemic risk to the property or superannuation sectors.
“For the report to conclude that the regulators preferred option is to abolish LRBAs and, if this is not accepted, to abolish the use of personal guarantees, does, in our opinion, fly in the face of its own evidence and certainly fails the many advisers, lenders and investors who abide by the rules and make sound investment choices regarding LRBAs.”
