Having gained an understanding of the current landscape and the potential impact of Labor’s super policy settings, the other key driver in 2019 will be the outcomes and recommendations from both the:
- Productivity Commission (PC); and
- Financial Services Royal Commission (FSRC)
With the Productivity Commission already having released its final report and recommendations into the efficiency and competitiveness of Australia’s Superannuation System, and the recent release of the final report by Commissioner Hayne into the Financial Services’ Royal Commission, we can also add to this the reforms around increased education standards with FASEA, and you can begin to see why the landscape will look a lot different in 12 months’ time.
The Productivity Commission’s focus on SMSFs
Whilst not a key focus on the enquiry in the efficiency and effectiveness of Australia’s super system, the Productivity Commission did make some very pointed remarks about the SMSF sector and its growing role of a $2+ trillion-dollar super industry.
Some of these key findings and recommendations included:
- The SMSF segment has delivered broadly comparable investment performance to the APRA-regulated segment, but many smaller SMSFs (those with balances under $500k) have delivered materially lower returns on average than larger SMSFs (Finding 2.6);
- About 42% of all SMSFs (some 200,000 in 2016, with an est. 380k members) have been under $500,000 in size for at least two years and appear to persist with higher average cost ratios and low average returns. Nevertheless, the proportion of new SMSFs with very low balances (<$100k) has fallen from 35% of new establishments in 2010 to 23% in 2016 (Finding 3.8);
- The quality of financial advice provided to some members – including those with SMSFs – is questionable, and often conflicted. The need for information and affordable, credible and impartial financial advice for retirees will increase as retirement balances grow with a maturing system, and given the rising diversity and complexity of retirement products (Finding 5.4);
- The relatively small number of SMSFs with some form of limited-recourse borrowing arrangement (about 7% of SMSFs representing 5% of SMSF assets) means such borrowing does not currently pose a material systemic risk. However, active monitoring (along with public reporting and discussion by the Council of Financial Regulators) is warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future.
- Concerns about SMSF borrowing arrangements being utilised by members that lack the requisite financial literacy to properly understand the risks associated with them (or for whom such arrangements are unsuitable for other reasons) are best dealt with through measures to improve the quality of SMSF-related advice.
- When an individual is being advised to setup a SMSF, increased responsibility on the adviser to provide a document that raises ‘red flags’ in the decision process – i.e. things they need to consider in determining that it is right for them. Advisers should be required to provide prospective SMSF trustees with this document and obtain the client’s signature to confirm they have seen the document and considered it.
- ASIC should undertake a thematic review in 2021 to assess whether the quality of advice provided to SMSF members has improved relative to the 2018 study (Finding 10.4);
From these findings, the Productivity Commission has made some important recommendations in building strong safeguards on SMSF advice, including:
- requiring specialist training for persons providing advice to set up an SMSF;
- require persons providing advice to setup an SMSF to give prospective SMSF trustees a document outlining ASIC’s ‘red flags’ prior to establishment; and
- extend the proposed product design and distribution obligations to SMSF establishment
- ASIC should focus more on the conduct of superannuation trustees and financial advisers, and on the appropriateness of products (including for particular target markets) and disclosure. It should:
- undertake recurring thematic reviews on financial advice in superannuation, including advice in relation to choice platform products and SMSFs.
The quality of advice has clearly been a strong theme within the FSRC, with several examples of poor SMSF advice having been highlighted, in particular around the ‘best interest’ duty and one-stop shop operators investing in property through limited recourse borrowing arrangements (LRBAs). It will be very interesting to read the outcomes of this final report and recommendations when released by the Government on Monday, 4 February
Expect a greater focus on specialist training for SMSF Advisers
With ASIC having indicated that it would engage ‘in discussions with FASEA about a specific SMSF qualification for advice providers wishing to provide SMSF advice’ (ASIC 2018, p. 98), FASEA have proposed that specialist SMSF training be considered a non-formal education component within its annual continuing professional development (CPD) requirements (FASEA 2018b, 2018a). Some other options raised through the Productivity Commission’s final report included:
- involving incorporating an SMSF indicator within ASIC’s existing Financial Advisers Register; or
- the ATO establishing an SMSF adviser register similar to its SMSF auditor register.
It has been indicated though that the success of any of these initiatives, however, rests heavily on the delivery of such advice in an unconflicted environment.
With a greater focus on the need to acknowledge SMSFs as a specialisation, it provides a genuine opportunity across all facets of the sector to create a true profession.
Productivity Commission Final Report:
Financial Services’ Royal Commission Report:
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