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What the Hayne report means for SMSFs

Anthony Fensom  |  19 Feb 2019Text size  Decrease  Increase  |  
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The Hayne royal commission's final report has landed and Australia's financial services industry may never be the same again. Yet while self-managed super funds received little attention—SMSFs were explicitly excluded from the commission's terms of reference—there are still implications for the sector.

With the federal government pledging action on all 76 recommendations and the Labor party likewise, here is a look at the key recommendations affecting SMSFs.

 

 a man calculating his tax

SMSFs were explicitly excluded from the commission's terms of reference

 

Recommendation 2.1 – Annual renewal and payment

The commission recommended that ongoing fee arrangements must be renewed annually by the client; must record in writing each year the services the client is entitled to receive and total fees to be charged; and require the client's written authority for any payment of fees from a client account.

"This is a lot easier for SMSF advisers and trustees as they are more engaged and meet usually two to three times a year to discuss the management and compliance of the fund," says SMSF specialist adviser, Liam Shorte.

"Fees are discussed as part of reviewing the fund’s annual financials and performance. This may also affect SMSF advisers who receive a commission or percentage of the fee from administration and service providers for recommending their services".

Recommendation 2.2 – Disclosure of lack of independence

Under this recommendation, financial advisers would be required to give retail clients a written statement prior to providing personal advice, explaining why the adviser is not independent, impartial and unbiased.

"This is a common-sense measure and will just clarify to clients what licence option the adviser has taken and why," says Shorte, director, Verante Financial Planning.

"I feel this is best practice and something I already disclose in conversations with clients when I run through my FSG [financial services guide] with them. I take time to explain why I chose my current licensee and my past experiences that drove that action".

Recommendation 2.4 – Grandfathered commissions

The commission recommended that grandfathering provisions for conflicted remuneration "should be repealed as soon as is reasonably practicable”.

"This was expected and with the rise in ETFs [exchange-traded funds], managed funds and LICs [listed investment companies], more and more SMSFs are exiting older funds, especially as the landscape is changing for many historic blue-chip investments,” Shorte says.

"The main factor keeping many investors in old funds with inbuilt commissions was the CGT [capital gains tax] cost of exiting, but in SMSF pension phase, CGT isn’t a factor and this is when we have been taking the opportunity to move. In the last six months, many of those older fund providers have given advisers the ability to switch off those trailing commissions, which has aided the move to fee for service”.

Shorte says those that have not addressed this issue need to terminate any grandfathered commissions by January 2021, as well as identify any grandfathered commission arrangements that cannot be terminated and rebate to SMSFs these fees from January 2021.

Recommendation 3.3 – Limitations on deducting advice fees from choice accounts

The commission recommended prohibiting the deduction of any advice fee (other than for intra-fund advice) from super accounts other than MySuper, unless the requirements regarding annual renewal, prior written identification of service and provision of the client’s express authority (as per Recommendation 2.1) are upheld regarding ongoing fees.

"For SMSFs, this means advisers will not be allowed to deduct their advice fees from a client’s SMSF unless they have written consent to the annual fee renewal on file,” Shorte says.

"Most advisers already have a two-year ongoing service agreement covering fee arrangements and we are already using this annually as best practice, so I’m sure this won’t be a big issue”.

Recommendation 3.4 – No hawking

The commission recommended prohibiting hawking of any super products, except to non-retail clients and offers made under an eligible employee share scheme.

"Hopefully the government and regulators may also use this measure to clamp down on the widely reported issue of SMSF spruiking by one-stop property shops, real estate agents and cold-calling centres," Shorte says.

"It may also address such promotions as the AustralianSuper incentive for new members to set up a super account in return for 20,000 Qantas frequent flyer points, which is not a good look".

Recommendation 3.7 – Civil penalties for breach of covenants and like obligations

The commission called for civil penalties for any breach of trustee and director covenants.

"SMSF trustees already have an obligation in fiduciary duty to act in the best interests of fund members by virtue of trustee law and the SMSF trust deed. This change may however give ASIC some additional powers to stop abuses by one trustee who has an essential hold on the fund’s assets and fails to act in the best interests of all members,” Shorte says.

"An example could include where a trustee who controls the fund’s banking and passwords refuses to allow another member to roll over the account balance out of the fund, which in the past has been notoriously difficult to resolve”.

On 15 February, the government passed legislation through the Senate enacting this recommendation.

Recommendation 7.1 – Compensation scheme of last resort

The commission urged previous government recommendations to establish a compensation scheme of last resort be enacted.

"This may finally provide a solution for SMSF members who aren’t eligible for government financial assistance in the event of fraud or theft as members of APRA-regulated funds," Shorte says.

"The scheme likely will be established as part of the new Australian Financial Complaints Authority and will address disputes involving financial advice failures which result in unpaid external dispute resolution determinations, court judgements and tribunal awards. Of course, this will most likely mean another annual fee for SMSFs to fund such a scheme, as it won't be paid from government coffers".

Overall, Shorte considers the commission "won't have a big impact on SMSFs as most trustees are highly engaged in the process and more likely to have an active ongoing arrangement with their advisers".

The spotlight on financial misconduct should lay the groundwork for a more professional and trusted financial advice sector, according to the SMSF Association.

"By making recommendations to ensure the 'fees for no service' scandal will not occur again, remove conflicts of interest in the financial advice industry, and ensure a credible and coherent system of professional discipline, the final report has gone a long way to placing the advice industry on a far sounder footing that will deliver better consumer outcomes," says SMSF Association chief executive John Maroney.

Yet more changes lie ahead for SMSFs in 2019, with the Coalition government planning to address the reforms from the Productivity Commission’s recent report and Labor vowing a raft of changes to the sector.

is a Morningstar contributor.

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