Consumer protection answer to LRBA risk
The SMSF Association has reiterated its opposition to any outright ban on limited recourse borrowing arrangements (LRBAs), saying that they benefit small business owners and calling instead for an increase in consumer protection for the debt instrument.
In a submission to Treasury for the Council of Financial Regulators’ review of LRBAs, the Association said that rather than creating “systemic risk” for the superannuation sector, LRBAs allowed small business owners to transfer business real property which was crucial to their retirement plans.
SMSF Association chief executive, John Maroney, said that banning the use of personal guarantees supporting LRBAs would help mitigate the risks associated with them and also limit the ability of property spruikers to use the instruments as a vehicle for promoting speculative property investments.
“Personal guarantees given by SMSF trustees do allow the SMSF to undertake larger borrowings with higher LVR ratios. So … prohibiting SMSF members from providing a personal guarantee for their borrowings would make it more difficult for lenders to make risky, high LVR borrowings to SMSFs,” he said.
“Lenders would also need to be certain that the SMSF is able to adequately service the loan based on the financial circumstances of the SMSF members within the superannuation system instead of looking at circumstances and assets outside superannuation.”
Maroney believed that this measure would also reduce LRBAs encouraging individuals to establish SMSFs with a small balance just to buy property.
Another consumer protection that could help manage the risks of LRBAs could be the introduction of a mandatory specialist qualification for giving advice on SMSFs, a call echoing similar ones by the Australian Securities and Investments Commission (ASIC) and Productivity Commission.
“Tightening licensing requirements around LRBA advice and increased scrutiny of this type of advice could assist in ensuring the integrity of LRBAs,” Maroney said.
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