The Trio Capital collapse and the losses suffered by self-managed super fund (SMSF) trustees has sparked a call by the broader industry for a compensation scheme for SMSF trustees, similar to the one accessible to APRA-regulated super fund members, for coverage of theft or fraud.
We recognise and accept SMSF members are also trustees, which means they have responsibility and control over their super fund investments in a way that large super fund members do not. And we have accepted that SMSFs are excluded from the current compensation arrangements on the basis that members, who are also their own trustees, would be exposed to “moral hazard” if they were protected from the results of their own conduct. It’s also been highlighted that in cases of fraud or theft, SMSF trustees can sue a SMSF provider/adviser who provided negligent advice. And, where the claim relates to a licensed adviser, trustees may be able to access external dispute resolution processes (such as the Financial Ombudsman Service).
Section 55(3) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) also enables an individual, including a super fund trustee, who suffers loss or damage as a result of conduct of another person who was engaged in a contravention of a SIS covenant, to recover the amount of the loss or damage by action against that other person. Furthermore, in both civil and criminal proceedings, a court may make a compensation order against a person who contravenes a civil penalty provision for the loss or damage suffered by the fund.
It is fair to say SPAA’s own membership has been divided on the idea of a SMSF compensation scheme, including whether there’s a need for one, how it would operate and who should fund it.
However, the bottom line is SMSF members, having already lost money in the case of theft or fraud, through no fault of their own, may be forced to turn to a court process to seek redress. This represents a form of discrimination when it is considered how much more straightforward the process is for APRA-regulated super funds for the same set of circumstances.
The Cooper Review panel considered that current compensation arrangements were appropriate, as the cost would outweigh the benefit for SMSFs, particularly where only minimal levels of fraud and theft had been determined in superannuation in the past.
In SPAA’s submission, we said there should be a consultation process to determine whether or not a compensation mechanism for SMSFs, similar to that of APRA-regulated super funds, should be considered or introduced.
Currently, APRA-regulated funds pay a retrospective levy to fund the financial assistance they receive as a result of fraud or theft, and if SMSFs are going to participate, then they would need to participate in an appropriate funding arrangement. We are open to considered proposals on how a SMSF compensation scheme might work, including whether it should be separate or part of an existing superannuation compensation scheme.
A key issue is whether such a compensation scheme should be compulsory for all SMSFs, or just for those with particular types of investments, or optional for all. After all, some detractors would say, why should a large and disparate group of SMSFs, all managing their own individual funds, have to bail out a few caught up in a fraud? However, for such a scheme to work, our preliminary research suggests that it is likely all funds would need to participate, otherwise the cost of the levy could be crippling for individual funds.
If a compensation mechanism for SMSFs is developed which involves a levy on all SMSFs, a major issue would be the need for the scheme to be designed intelligently so SMSF trustees/members who choose to invest directly and not in products that could be subject to fraudulent activities, are not unfairly burdened by the levy.
The issue of compensation schemes is currently being considered as part of the Future of Financial Advice (FoFA) reforms process, and we look forward to including the SMSF sector in the debate. In particular, SPAA is preparing a submission in response to the consultation paper by financial services and corporate governance expert Richard St John, Review of compensation arrangements for consumers of financial services, and will be in a position to comment further later in May.
Andrea Slattery is the CEO of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
