ASIC findings reveal problems with SMSF compliance and ‘one stop shops’ - Legalwise Seminars

Tracey Scotchbrook, SMSF Specialist Advisor, discusses how recent ASIC findings into the SMSF system show widespread non-compliance with the Corporations Act’s “best interests’ duty, among other concerns. 

Red Flags Arising from ASIC Review of SMSF Advice

On the 28th June 2018, ASIC released two reports into SMSF advice. The findings are concerning however the reports are essential reading for SMSF advisors.

Whilst no one wants to read a bad news story, the reports provide an opportunity to continue to improve the quality of SMSF advice and the integrity of the SMSF sector. It is also an opportunity for SMSF advisors to undertake a health check of their advice processes and delivery to ensure that the relevant requirements are met.

The ASIC research reported was undertaken on two fronts, one directly engaging with SMSF trustees via interviews and surveys and the second from the review of 250 randomly selected client files across 102 AFS licensees.

The results of the online survey of trustees showed:

• 38% of respondents found running an SMSF more time consuming than expected;
• 32% found it to more expensive than expected;
• 33% did not know the law required an SMSF to have an investment strategy;
• 29% mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud; and
• 28% reported that neither they or their advisor considered their insurance needs when they setup their SMSF.

More concerning were the results of the ASIC file reviews in which the following findings were reported:

• 91% of the files did not comply with the Corporations Act ‘best interests’ duty
• Failures in record keeping and process failures were identified
• 10% of the files reviewed showed clients were likely to be significantly worse off in retirement
• 19% of cases clients were at an increased risk of financial detriment due to lack of diversification

One particular area of concern highlighted by ASIC was the concept of the ‘one stop shops’. Many in the SMSF industry have held concerns on some segments particularly where property spruikers are concerned. I know of one case where a lady was sold a SMSF, a limited recourse borrowing and an apartment from a shopping centre pop up shop.

Often a SMSF is not appropriate for people acquiring a SMSF in this manner and the risks on the lack of diversification, inability to pay benefits due to a lack of liquidity are not addressed. In my experience, the costs of liquidating and winding up these funds result in significant losses on what were often modest superannuation savings to begin with.

What does this all mean?

The SMSF system is not broken however poor advice and the ‘spruiking’ or ‘one stop shop’ element needs to be removed to ensure the reputation and integrity of the sector is preserved. As is often the case the spotlight is cast on the few that do the wrong thing and not necessarily representative of the wider industry.

ASIC has stated that it “will be taking follow up regulatory action, in particular where consumers have suffered detriment“. This also highlights the importance of education standards specific to SMSF. Not surprisingly ASIC have undertaken to engage with FASEA to discuss specific SMSF qualifications for those wishing to provide SMSF advice.

Sources:
ASIC

• Report 575: SMSFs: Improving the quality of advice and member experiences
• Report 576: Member experiences with self-managed superannuation funds
• Media Release: 18-19MR SMSF advice needs significant improvement

Tracey Scotchbrook is a SMSF Specialist Advisor™ and consultant with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member.

Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at tscotchbrook@iprimus.com.au