22 March 2019

CFR & ATO report on SMSF borrowing arrangements


Joint media release with
The Hon Josh Frydenberg MP

A report by the Council of Financial Regulators (CFR) and the Australian Taxation Office (ATO) has found that assets held by self-managed superannuation funds (SMSFs) under 'limited recourse borrowing arrangements' (LRBAs) are unlikely to pose systemic risk to the financial system at this time.

A LRBA involves a SMSF taking out a loan from a third party lender and then using that loan to purchase an asset(s) to be held in a separate trust. Any investment returns earned from the asset go to the SMSF. If the loan defaults, the lender's rights are limited to the asset(s) held in the separate trust.

The Government commissioned this report as part of our response to the Financial System Inquiry to ensure that the Government had advice based on data to inform any change to borrowing arrangements by superannuation funds.

The report, released by the Government today, also found that LRBAs form a relatively low proportion of SMSF assets overall. Only around 8.9 per cent of SMSFs now have a LRBA, holding 5.2 per cent of total SMSF assets or 1.4 per cent of total superannuation assets.

In light of this, the Coalition Government will not be making any changes to LRBAs and will instead request that the CFR and the ATO continue to monitor LRBAs in the superannuation system and report back again in three years.

This is consistent with the Productivity Commission's recent report on superannuation which also found that LRBAs do not "currently pose a material systemic risk", but that "active monitoring is warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future".

Importantly, the Coalition Government and regulators have already taken a number of steps to tighten regulation to reduce the risks of LRBAs, including by strengthening the Australian Prudential Regulation Authority's lending standards and increasing the Australian Securities and Investments Commission's scrutiny of responsible lending compliance.

The Government also established the Financial Adviser Standards and Ethics Authority (FASEA) in April 2017 to improve professionalism and ethical standards for financial advisers. FASEA has now set out educational requirements, a Code of Ethics, requirements for continuing professional development and an examination standard for financial advisers including SMSF advisers. This will help improve the quality of financial advice including in relation to LRBAs.

The Government is also extending the design and distribution obligations, currently before Parliament, to all credit products. These obligations will require lenders to determine an appropriate target market for a loan product and take steps to ensure the product is distributed only to consumers within that target market. This will ensure that borrowers are better protected, whether they borrow from banks or from other lenders.

These reforms, together with our response to the Royal Commission, will ensure that consumers are better protected without limiting the investment choices available to SMSFs.

The CFR and the ATO's report is available on the Council of Financial Regulators website.