Charterhill collapse prompts warning for SMSF property promoters: ASIC

Property promoters recommending self-managed super funds (SMSFs) borrow and invest in property must be careful not to break the law, the Australian Securities and Investment Commission commissioner, Greg ­Tanzer has warned.

ASIC said it was investigating ­SMSF seminars for evidence of misleading and deceptive conduct.

ASIC was also warning of unlicensed ­financial services conduct following a rise in promoters urging investors set up or use an existing fund to invest in property.

“These promoters may not be ­complying with the law,” Greg Tanzer said in a speech to the annual CPA Australia Self-Managed Super Fund Conference entitled,The regulator’s perspective on the regulation of SMSFs.

He referred to ASIC’s SMSF task force which is examining "high-risk" SMSF issues making specific note of the Charterhill group collapse earlier this year.

"It operated as a ‘one-stop shop’, providing advice to clients on the establishment of SMSFs, rollover of existing superannuation funds into an SMSF, sourcing and purchase of investment properties, property management, insurance and taxation services.

"This raised a number of questions about operators using this business model," Greg Tanzer advised.

He said the ASIC taskforce appointed a small project team to explore the trend of ‘one-stop shop’ operators offering a range of services to SMSFs.

"The purpose of the project team is to investigate the (often complex) business model structures of these operators and the risks to investors that this trend poses.

"So far the project team have identified that a feature of these business models is a ‘one size fits all’ approach where all investors who use their multiple services receive the same suite of products and services – that is, they end up with an SMSF, a property investment and a limited-recourse borrowing arrangement."

The project team is also exploring whether commissions are being paid within these business models and whether these commissions are consistent with the restrictions on payment of commissions for advice under the FOFA reforms.

Under the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 introduced on 19 March 2014, some forms of commission that were originally banned under FOFA will be reintroduced.

Tanzer added it was worth noting that where commissions are permitted, they must still be clearly disclosed to retail clients. 

The Association of Superannuation Funds of Australia supported moves to stop any risky borrowing by funds.

Recent figures from the Tax Office show funds with borrowings had tripled over the past four years.

The average loan size has doubled to $357,000 with commercial and residential property holdings now comprising more than 15% of total assets held by the $1.6 trillion self-managed super sector.

Property ranks as the third-largest allocation after cash and listed shares.

Greg Tanzer noted section 911A of the Corporations Act requires any person carrying on a financial services business in Australia to hold an AFS licence or be a representative of an AFS licensee.

A person provides a financial service if they provide financial product advice.

Financial product advice is defined as a recommendation, a statement of opinion or a report of either of those things that is, or could reasonably be regarded as being, intended to influence a person’s decision in relation to a financial product.

Providing financial product advice includes making a recommendation or a statement of opinion to a person to set up an SMSF or use an existing SMSF to purchase property through that SMSF.

ASIC is concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise that they may be carrying on a business of providing financial product advice and may need an AFS licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property.

Where an AFS licence is required, unlicensed entities must immediately cease offering and providing financial services or advertising the provision of financial services until such time as an AFS licence is obtained or they become a representative of an AFS licence holder.

A person convicted of carrying on an unlicensed financial services business may be subject to a fine of up to $34,000 or imprisonment for two years or both. If a company is convicted it may also be liable to penalties, including a fine of up to $170,000.