Mitigate risks to avoid LRBA ban says SMSFA
When it comes to limited recourse borrowing arrangements (LRBAs), the SMSF Association’s chief executive, John Maroney says the good outweighs the bad, and an outright ban on such strategies could be avoided by simply mitigating risk factors.
Maroney agreed with the Council of Financial Regulators’ (CFR’s) report into LRBAs, which found that they do not create a systemic risk for the financial system.
“The Association has long held the view that the total size of geared investment by SMSFs, especially regarding property, does not create a systemic risk to the financial system when it is sensibly viewed in the context of the overall Australian property and mortgage markets,” he said.
He noted the CFR’s report cited regulator concerns that LRBAs could represent a significant risk to some individuals’ retirement savings, but stressed the Association did not support a total ban given these strategies were important to small business owners investing in business real property.
“However, we have recognised risks pertaining to LRBAs, such as those raised by the CFR, and believe a better approach is to mitigate the risks cited in the Report before considering a ban, and to this end we have recommended two key measures to ensure LRBAs are used appropriately – banning the use of personal guarantees supporting LRBAs and increasing SMSF education requirements for advisers,” said Maroney.
The CEO said limiting the use of personal guarantees by SMSF members was a potential policy measure that could reduce the incidence of smaller balance SMSFs investing via a LRBA, and having a poorly diversified fund.
Lenders would also need to be certain that the SMSF was able to service the loan based on the financial circumstances of the members.
Maroney also stressed the SMSFA’s views on adviser qualifications, saying advisers who provide advice to individuals about SMSFs should have specific SMSF education and qualifications.
“Ensuring that SMSF trustees who seek advice about using LRBAs receive high-quality, specialist advice will also ensure that LRBAs are being used appropriately and without excessive risk.”
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