LRBAs judged to be low risk

LRBAs risk

A group of government regulators has found LRBAs do not pose any significant risk to the superannuation sector, but measures could be introduced to reduce risks for individuals.

Limited recourse borrowing arrangements (LRBA) do not pose any significant risk to the superannuation sector or the broader financial system, but further policy changes may be necessary to reduce the risks for individuals who use them in inappropriate ways, according to a review by the Council of Financial Regulators (CFR).

The CFR made the assertion in a report, “Leverage and Risk in the Superannuation System”, which also noted there had been no high level LRBA-related risks in the superannuation system since they were first permitted in 2007.

The report, commissioned by the previous government in 2019 following the release of a similar report in that year, was provided to the Treasurer in late September and made publicly available in the past few days.

The latest report also referenced its predecessor in noting the absence of risks created by LRBAs.

“This report and the previous 2019 report on leverage and risk in the superannuation system establish a clear baseline for monitoring risks relating to LRBAs in the superannuation system,” the report stated.

“They demonstrate that borrowing by SMSFs through LRBAs has not posed a material risk to the superannuation system or broader financial system since it was first permitted in 2007.

“This is notwithstanding evidence LRBAs are used in inappropriate ways by some individuals and can be a high risk to their retirement savings and, by extension, increase the risk of higher fiscal outlays through the age pension.”

As a result of these findings, the CFR added that rather than conduct another scheduled review, the use of LRBAs should be observed and action taken when applicable.

“The CFR considers that continued monitoring and reporting to government on an as-needed basis would be prudent to ensuring appropriate oversight of risks relating to financial stability from the use of LRBAs,” it said.

The CFR is comprised of the Australian Prudential Regulation Authority, Australian Securities and Investments Commission, Reserve Bank of Australia and Department of the Treasury.

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