On 16 September 2013, ASIC released ASIC Consultation Paper 216: Advice on self- managed superannuation funds: Specific disclosure requirements and SMSF costs (CP 216).

We recommend that all those who work in the APRA-regulated superannuation fund industry read and consider ASIC’s CP 216 proposals (as summarised below) and consider whether submissions should be made to ASIC in order to support or provide further input into its recommendations in respect of the regulation of SMSF-adviser disclosure.

ASIC’s Disclosure proposals

ASIC proposes to modify the relevant law so that Australian Financial Services Licensees and their authorised representatives who provide personal advice to clients on establishing or switching to an SMSF will need to:

  1. warn clients that SMSFs do not have access to the compensation arrangements under Part 23 of the Superannuation Industry (Supervision) Act 1993 in the event of fraud or theft;
  2. give clients the above warning at the same time, and by the same means, as the relevant advice is provided; and
  3. disclose to clients the following matters with a level of detail that clients would reasonably require to decide whether it is appropriate in their circumstances to establish or switch to an SMSF:
  1. responsibilities and obligations for SMSF trustees associated with running an SMSF;
  2. risks associated with SMSFs (including the lack of insurance options that may be available and other associated risks, depending upon a client’s circumstances);
  3. the need to develop and implement an appropriate investment strategy for an SMSF (including reviewing the fund’s investment strategy on a regular basis);
  4. the time commitment and skills needed to run an SMSF effectively;
  5. the costs of managing an SMSF (including providing clients with an estimate of these costs);
  6. the need to consider and develop an exit strategy for an SMSF; and
  7. the laws and policies that affect SMSFs are subject to change (advisers must explain to clients that it is the responsibility of SMSF trustees to update their knowledge on any changes to the law and their compliance obligations).

ASIC’s guidance on SMSF costs proposals

ASIC also proposes to provide guidance, in respect of the following, that advisers must consider and be able to demonstrate that they have informed clients of:

  1. the costs associated with establishing an SMSF (including unavoidable costs such as preparing a trust deed and optional costs such as incorporating trustees);
  2. the ongoing costs associated with running an SMSF (there are a number of ongoing costs associated with the running of an SMSF including annual audits and fees for professional investment advice, if provided);
  3. the costs associated with winding up an SMSF;
  4. the point at which an SMSF becomes cost-effective compared with an APRA- regulated fund;
  5. the time cost associated with managing an SMSF; and
  6. insurance costs (including the fact that SMSF members may not be able to access the same premium reduction advantages that an APRA-regulated fund may be able to provide).

ASIC is seeking comments by 11 November 2013.

Herbert Geer comment

The loss of superannuation fund members to the SMSF sector is a major concerning issue for large funds, and the costs expended by large funds in seeking to retain members (whether it be by marketing or in providing new investment options) only provides a partial solution to mitigating member loss. A strong regulatory framework is also required to ensure that financial advisers provide full and frank information to departing superannuation fund members.

It is arguable that disclosure should also include statements confirming that a SMSF member will have ultimate responsibility for the performance and compliance of his or her SMSF, both to the regulator (the ATO) and to members and that recourse to indemnification by any third party (including the SMSF trustee’s advisers) may be severely limited. Further, disclosure could also include statements as to how the ATO’s penalty provisions apply (including the fact that SMSF trustees may find themselves personally liable for rectifying any breaches and the potential loss of complying fund status and associated tax penalties), as these issues may not otherwise be raised until such time as a new SMSF trustee signs the ATO’s Trustee Declaration form, after a new SMSF has been established.

In respect of the guidance, it is arguable that a comparisons of both industry and retail superannuation fund costs should be included, for the obvious reason that an adviser should not be able to cherry-pick the more expensive cost option of the two to use as a cost comparison.