Earlier this month, the Council of Financial Regulators (CFR) — made up of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and Treasury — released findings from its review of ‘Leverage and Risk in the Superannuation System’.
The CFR examined supposed risks associated with limited recourse borrowing arrangements (LRBA), which enable a superannuation fund to obtain credit for the purchase of an asset while confining the lender’s rights to that asset if the loan defaults.
The 2014 Financial System Inquiry recommended a ban on LBRAs, referencing risks to financial stability and the potential for the practice to put upward pressure on property prices.
However, after conducting its review — involving consultation with industry stakeholders — the CFR has determined that LBRAs are “unlikely to pose a material risk to the superannuation system or broader financial system”.
Instead, the CFR recommended “continued monitoring and reporting” on an “as needed” basis to ensure appropriate oversight.
The SMSF Association has welcomed the CFR’s determination, with CEO John Maroney claiming a ban on LBRAs would have been “overkill”.
He noted that LBRAs, which “remain a small percentage of total SMSF assets”, enable many small businesses to “meet their retirement income goals”.
According to Mr Maroney, LBRA standards have been preserved by integrity measures introduced in 2018, which included reforms to the total superannuation balance and non-arm’s length income rules (NALI).
“In our opinion, these measures have greatly improved the system, helping ensure LRBAs are used responsibly,” he said.
“That said, it is important for SMSF trustees considering an LRBA to get specialist advice as they can be complex arrangements which require careful assessment of the risks, benefits and costs.”
However, in handing down its findings, the CFR acknowledged that LRBAs “continue to be a significant risk to some individuals’ retirement savings”, adding that the government could consider changes to current policy settings.
Mr Maroney has noted concern over “one-stop property shops” advocating LRBAs and providing “unlicensed personal advice”.
“We have long supported a crackdown on their activities and believe ASIC has done much to curtail their nefarious activities,” he said.
“But the fact they still operate highlights the need for the entire sector to remain vigilant to ensure this debt instrument remains available to the vast majority who use it responsibly.”
Mr Maroney said he expects Michelle Levy’s Quality of Advice Review to provide greater clarity on the matter.
