Spruikers, not LRBAs the problem - Round table

Borrowing within superannuation to buy residential property has attracted a lot of negative publicity but the roots of the problem may actually lie deeper than LRBAs.

MT: Of course the SMSF sector does take a bit of a hammering when it suits other parties. And one of the things that they seem to be particularly rejoicing in at the moment is LRBAs and property spruiking and the regulator has given them a bit of a helping hand. Andrea how big a problem is it? I mean it's not a good look, but how big a problem is it?

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AS: No well it's definitely not a good look, but the thing about it is that the statistics bear out that there are 11,500 funds out of 560,000 funds that actually have borrowing at the moment in them. Most of those have property.

The total market value of the assets is 1.2 per cent and that's all borrowings in SMSFs. It's including other forms of assets as well. So that the level of borrowing after seven and a half years and after all of the publicity and after everybody thinking that something is happening is minimal.

I think if we raise our minds a little bit to what the borrowing issue is, we need to understand what's been asked here. So the Cooper Review looked at borrowing in SMSFs and said there should be a review for two years to see whether or not it's an issue moving forward. That hasn't occurred. The FSI looked at a range of things and came out with a philosophical position about borrowing in super, borrowing directly in super. That's not specific to SMSFs.

Borrowing in super is across the board, it was for all funds. And there is borrowing LRBAs within APRA-regulated funds and APRA is looking at that as well. And there's borrowing in SMSFs and the ATO have been looking at that, so there's been quite a lot of oversight into those particular areas.

The problem with implementation is that the most likely outcome is that the smaller funds, due to the size of the assets held, are the most likely ones to lose the borrowing and then that creates an inequitable situation if borrowing is still able to occur in one part of the sector and not in another. So regardless of whether or not the investment is philosophically considered to be an appropriate one or not, there should not be an inequity between the different sectors of super. It should be one measure for all of them. So there's been a lot of blow up around the spruiking and ASIC as they said yesterday are taking a lot of those to task. But because they are unregulated in relation to a license and regime, that spruiking is actually something that needs to be licensed we believe. So then it comes under the jurisdiction and it can't occur.

AG: Can I just add a comment to that? I think there's a couple of ways one can respond to any potential concerns in the limited recourse borrowing area. The vast majority of it is being done in a responsible fashion. And again what's attracting the heat and noise is where it's happening at the fringe. And we believe there are issues which do need to be tackled.

One of the things that we've done through the SMSF Association is actually to develop a voluntary code of practise, code of conduct in both the areas of lending and the giving of advice. So there's actually a voluntary practise guideline. So we think if, for example, all the banks signed up to the voluntary guidelines in terms of what's the process you should go through in approving LRBAs and, likewise, when one's giving advice in that space, the steps that you should go through.

If what is currently a voluntary set of guidelines were followed throughout the industry and especially in the banking sector, then that would also address anything happening in the property spruiking sector, because following those guidelines you would actually weed out any of the potential areas for practise.

AS: And that's already been adopted and approved within a couple of the banks within the sector, both in the large and the small.

PL: I think there's two elements I suppose that I would raise. The issue here I guess again is about consumer protection at the end of the day. And I actually also have a problem where we're sort of saying well we need to put consumer protection around this sort of structure if it's in super, but we don't care if it's outside super. You know we're sort of saying well let's put in some form of criteria around that. So and this goes back...

AS: Our criteria actually affects both in and out. But the whole thing is all about super.

PL: Exactly, but this is the thing, the commentary is always about super. But these property spruikers don't just sell to super funds. They sell to the general public, so if the issue is that there are inappropriate transactions being put in place, that's what needs to be remedied, rather than just saying oh it's a super, an SMSF problem.

I think Andrea you probably remember, this whole question goes back a long way. I think I can remember an old Australian Law Reform Commission back in the 90s on the whole issue of property and licensing. It just has never gone away, because the whole issue is how do we appropriately licence and deal with agents acting for the seller versus who acts for the buyer and where does the credit facility come in?

AS: Who owns it and the whole problem has always been who owns that practise?

PL: That practise and that advice or is there advice? Or is there advice, so that's been where this whole issue has come. And super has been focused because of this but it is actually much broader. And we all remember this happening in the late 90s and one of the reasons we had the geared trust issues, was because I remember there was a big fuss down here [in Victoria]. That was property spruiking. And that wasn't just the super, so it's that issue that really needs to be addressed and addressing that on a global level will actually get you the same outcome that you want here. And I think it's actually a wider thing, so it doesn't just focus on super, if this is a problem it's not a super problem, it's actually a broader industry problem about property investment that needs to be addressed.

MH: The examples we've come across in practise of I suppose inappropriate borrowing have been whether in structures you buy the land and then you construct a house with a separate entity. So it falls down on that respective issue, you're not buying a completed house, you're buying land, then you enter in a construction contract. That finance was done by a non-high street bank, so the banking agreements probably won't capture those smaller lenders who will go for these sorts of loans, because I suppose they're reasonably profitable and people do desire to invest in real estate. And that's also a reflection of the fact that there's a fair amount of dissatisfaction with the funds management industry and their lack of performance. But Phil does make a very good point, spruiking is the problem and it's not spruiking in super, it's spruiking per se. And you can't say it's a problem in super, where it's a problem elsewhere as well.

PH: I think Phil makes an excellent point. And one of my advisers has a client who is 70 years old and still working, because he followed the spruiker's advice, he owns 14 properties and he has to continue to earn a full time salary to support the interest on the loans, because he can't sell the houses for enough to repay the debt. So his long looked for retirement...

PL: And it has nothing to do with super.

PH: And it had nothing to do with super, all of those 14 homes are outside super. The super was being managed in fact by a very good financial planner and accountant.

AS: I think it's a very good point that both of you make there and I think it would be very interesting to find out, because the issue of spruiking and the issue of people providing those services, particularly those pooled services around a conference where people can come in and get full service, the accounting, the loan, the credit, sorry the credit the property all of that.

For more from this round table meeting, see part one - Reinterpreting the cost of tax concessions - Round Table - part two - Is policy stability achievable? - Round table - and part three - Speaking with one voice - Round table.