A Little Bit Of Knowledge Can Be A Super Asset
Sydney Morning Herald
Saturday May 17, 2008
Self-managed superannuation funds tend to be run by people who are not as familiar with financial issues as they could be, writes Simon Hoyle.
In February this year the Minister for Superannuation and Corporate Law, Senator Nick Sherry, announced a review of the governance of self-managed superannuation funds (SMSFs). Since then, there has been a flood of people rushing to tell the trustees of such funds what they should be doing, how competent they should be, who they should be allowed to get advice from and so on.A super fund is defined as self-managed if, among other things, it has four or fewer members, and each of the members is also a trustee. That means the members of self-managed superannuation funds - who are also the trustees - have far more responsibility in the running of their fund than do members of other types of funds.But not all self-managed superannuation fund trustees are equally competent. Recent surveys (including one by the Australian Taxation Office) suggest a worrying proportion of trustees are not fully aware of the restrictions and rules they operate under.The situation has been made more urgent by rule changes in 2007 that made it simpler for super funds to use borrowed money to acquire investment assets - including property. Although the rules do impose some safeguards, there is concern that unscrupulous salespeople may target self-managed superannuation fund trustees, and that the use of debt, or gearing - even outside the fund itself - could cause longer-term problems. And when it comes to self-managed funds, we are talking about quite a lot of money.The Australian Prudential Regulation Authority (APRA) says that at the end of December last year there were about 372,600 self-managed superannuation funds, with total assets worth $300 billion. Self-managed superannuation funds therefore account for more than 98 per cent of all super funds by number, and for more than a quarter of all superannuation assets. They are, in other words, economically extremely significant. But by their nature they tend to be run by people who may not be as familiar with legal and investment issues as they could be.That is Nick Sherry's main concern. The minister is keen to ensure that all trustees understand their obligations and responsibilities, and that all trustees are up to the task. While few argue with the need to review governance, at least one expert has warned about the danger of regulatory overkill.David Shirlow, head of technical services at Macquarie MASTech, says the "regulatory settings for SMSFs are broadly appropriate"."The Superannuation Industry Supervision Act was quite deliberately designed in a manner which differentiated between fund types on the basis of the extent to which the trustee was responsible for 'other people's money'," Shirlow says. "The settings recognise the validity of minimising administrative burdens for those who want to operate their own arrangements, while nevertheless imposing a comprehensive gamut of responsibilities which come with trusteeship."A more heavy-handed approach in relation to SMSF trustees themselves, such as the imposition of compulsory formal educational requirements on them, has the potential to very quickly shrink the SMSF sector and eliminate what is a valid and competitive alternative to large super funds," Shirlow says. "It is worth noting that the Tax Office has only recently developed - and is still developing - a more sophisticated approach to compliance enforcement and acquired key additional regulatory powers. The outworking of the Tax Office's approach in coming years will improve the practices and offerings of service providers to SMSFs in ways which ensure greater awareness of trustee responsibilities and facilitate efficient administrative compliance," he says.The key submissions address the regulatory issue on several fronts: improving the standards and qualifications of those who provide services to self-managed superannuation funds; improving the education and competence of fund trustees themselves; and improving the reporting and disclosure by funds to the regulator - principally the Tax Office.Naturally, almost all submissions push a particular barrow in one direction or another. They represent a maze of conflicting views, self-interest and acronyms. But they are all being thrown into the mix, and the minister will take them into consideration before deciding how, or if, the governance of self-managed funds needs to be altered.The Australian Institute of Superannuation Trustees represents "trustee directors of industry, public sector and corporate superannuation funds who operate with a representative trustee board of directors". Self-managed superannuation fund trustees are not eligible to join the institute , but the association has raised "concerns with a number of practices in the sector".Top of the institute's submission is the need for trustees of self-managed funds to be properly educated. It recommends to the review that trustees be "subject to some form of minimum knowledge and/or experience requirements"."The fact that SMSFs are individually small pools [of assets] cannot be accepted as a reason to allow risks arising from poor knowledge and understanding," it says.The Australian Institute of Superannuation Trustees says "trustees of large APRA-regulated superannuation funds are required under law to be 'fit and proper'."Part of the fitness requirement is that trustees have a training program in place, which is documented by the fund, and can demonstrate to the regulator that this training plan has been executed," it says."Presently there are no requirements for training of self-managed fund trustees. While it might be argued that the risk arising from a lack of training in the SMSF sector is ameliorated because each fund has at most four members, SMSFs collectively represent around one-third of all superannuation fund assets."The Association of Superannuation funds of Australia (ASFA) likewise believes trustees must meet some minimum knowledge and competence standards. In its submission the association says: "These thresholds should be embodied in a special licence/registration or certificate and should cover minimum financial literacy, investment, and legal obligations." The threshold would be achieved by completing and passing a relevant course provided by a Registered Training Organisation, or the trustee's eligibility may be certified by an independent assessor. This would be a prospective requirement and would apply to all new trustees from a certain date." Shirlow warns against any such requirements on trustees becoming too onerous or cumbersome."There is no doubt certain large fund providers are encouraging the Government to close the SMSF sector down, via regulatory overkill," he says. "Ideas like mandatory education are a surefire way to do it. Service providers to SMSFs had better wake up now or they'll get a rude shock. If the Government were to heed these large providers' calls, before long the industry would be bereft of the healthy and competitive alternative to large funds which SMSFs provide."The industry body that represents financial planners, the Financial Planning Association of Australia, refers to "recent Tax Office research that indicates that a significant percentage of the trustee population lack the knowledge and skills to fully understand their responsibilities and [lack] the ability to perform their roles to an appropriate level of compliance"."This is a key issue that undermines the ability of the SMSF sector to deliver its fundamental objectives of retirement income provision," the association says."Some compulsory training or minimum level of competency, as applied under Regulatory Guide 146 [the minimum training level of financial planners, as set out by Australian Securities and Investments Commission], of future SMSF trustees, of a limited and targeted nature, would be appropriate."Further, ongoing training should also be encouraged because, as we know, the rules and operating environment change constantly," the association says."The [process of auditing self-managed funds] could include a compliance component that ensures a minimum level of educational competency is achieved, and maintained."The Financial Planning Association also wants uniform standards to apply to all professionals who advise on the setting up and running of self-managed superannuation funds. As things stand, an accountant or tax agent can advise someone to set up a self-managed fund, but unless they are properly qualified to do so, cannot give advice on investments.The association says the same standards that apply to financial planners should also be applied to accountants who advise on self-managed superannuation funds, so regardless of where an individual goes for advice they will get a service that covers all aspects of the fund's operations.The Association of Superannuation Funds of Australia agrees, suggesting in its submission that "the regulatory framework for any person providing a recommendation in relation to the establishment of an SMSF or becoming a member of an SMSF be subject to Australian Financial Services Licence (AFSL) requirements".The association says 85 per cent of self-managed superannuation funds are set up with the assistance of accountants or tax agents.The Institute of Chartered Accountants in Australia says there is "no doubt that much has been made of the accountant's exemption and its practical application"."The institute recognises that there is need to resolve this issue for the betterment of its members, the public and industry as a whole," it says."The institute will be working closely with government to review this issue."The institute believes that any review of the accountant's exemption should only be undertaken after careful consideration. The range of exempt services is quite far-reaching, and these services are specific to the accounting sector."The institute says it is also important to understand the precise role played by accountants in setting up self-managed superannuation funds. "Clarification is required of research which indicates that the accountant was the adviser for a client, when in fact the accountant may well have been the first point of contact, but as more accounting practices incorporate financial planning, the accountant actually refers the client to the in-house planner," it says. "When a client is asked, 'How were you advised on establishing a SMSF?', the client states, "By my accountant", when in fact it was a financial planner, but the services are all under the umbrella of [an] accountant's office/practice."Self-managed super fund trustees themselves agree that all trustees should be aware of their responsibilities, and be competent to discharge them. The Self-Managed Superannuation Members Association argues that self-managed fund trustees should be treated differently from trustees of larger corporate, public sector, industry and retail super funds.The chief executive of the association, Peter Bishell, says the way the review of self-managed superannuation fund governance ultimately proceeds will depend on how trustees are viewed - whether they're "considered as 'clients' of professional service providers", such as financial planners, accountants, auditors and actuaries, or whether they're considered as "providers of superannuation 'products'.""If SMSF trustees are to be considered 'clients' of professional service advisers, changes to governance issues will focus on the standards of education and knowledge among the service providers," Bishell says."This is the position of the Self Managed Superannuation Professionals Association of Australia. They argue for higher educational standards to be applied to service providers to protect SMSF trustees from poor advice."On the other hand the submission from the Association of Superannuation Funds of Australia suggests that SMSF trustees should be required to obtain a special licence before being allowed to operate an SMSF."Acquiring a licence would require potential SMSF trustees to prove they have sufficient knowledge in both superannuation law and investment matters. This approach puts SMSF trustees in the same bucket as trustees of large public offer superannuation funds."Our submission takes a middle-ground approach."
© 2008 Sydney Morning Herald
