SMSFs can be regarded as “misfits” when addressing where they fit into the current legal framework governing the provision of financial services, according to the Australian Law Reform Commission (ALRC), which noted they do not easily fit into the advice or product categories within the Corporations Act.
The statutory body, in a newly released background paper, “Superannuation and the Legislative Framework for Financial Services”, pointed out the difficulties in defining financial products or services for SMSFs under the Corporations Act.
“What constitutes a ‘financial product’ in the SMSF context has been the source of intense disagreement for many years,” the ALRC noted in the paper.
“For instance, it is unclear whether an SMSF investment strategy constitutes a financial product. This affects the determination of whether advice given in respect of the SMSF is financial product advice and, accordingly, whether a financial service is being provided and whether an Australian financial services licence (AFSL) must be obtained.”
Concerns were also raised about how to classify specialist financial advice for SMSFs and whether a licence is required to dispense such advice.
“Strategic advice plays a significant role in the SMSF industry. Many SMSF trustees demand strategic advice from advisers as opposed to advice on specific financial products,” the report stated.
“However, it is currently unclear whether such advice is financial product advice or taxation advice and therefore whether an AFSL is required.”
These challenges largely stem from the uncertainty about whether SMSFs should be classified as wholesale or retail clients under the Corporations Act 2001.
The act categorises clients based on their financial expertise, with wholesale clients having more knowledge and fewer regulations, while retail clients receive extra protections.
To that end, the report cited an SMSF Association submission that emphasised the confusion surrounding the classification of SMSFs as wholesale or retail clients.
“The current framework is complex and requires the review of several sections of the Corporations Act 2001 and multiple regulations. As noted in the interim report, how the rules apply in the context of a self-managed superannuation fund are unclear,” the association’s submission stated.
“Appropriate guidance is severely lacking. Indeed, there are differing legal opinions on the operation of these rules where an SMSF is involved.”