The fast-growing self-managed superannuation sector is under-regulated and at risk of a “diabolical” backlog of investor complaints unless an external dispute resolution system and compensation regime is established for trustees, according to Michael Chaaya, partner at Corrs Chambers Westgarth Lawyers.
Speaking at the Financial Services Council conference in Brisbane on Thursday, Chaaya commended the federal Labor government for introducing strict new audit requirements for SMSFs but said the regulators and government needed to be proactive in creating a compensation scheme for SMSF trustees.
He urged the Australian Taxation Office, which governs SMSFs, and the Australian Prudential Regulation Authority, which oversees retail and industry superannuation funds, to work together to tackle the mammoth task.
“It needs to be debated why members of retail and industry super funds can seek redress from the Superannuation Complaints Tribunal but SMSF trustees are limited to private legal action,” he said.
“Retail funds pay a levy to APRA and part of that goes towards a fidelity fund, which members can draw upon should anything go wrong such as fraud. The ATO seems to have an audit-and-penalise approach to disciplinary action, while APRA is more hands-on, but APRA is already struggling with the large number of funds it monitors. Adding SMSFs to its load would be alarming.”
Chaaya acknowledged that SMSF trustees could seek compensation through the Financial Ombudsman Service, but said that mum-and-dad investors, many of whom had set up a self-managed superannuation fund for the “wrong reasons or because they were inappropriately advised”, needed greater assistance from the regulators.
“It’s too easy for mum-and-dad investors to set up a self-managed superannuation fund, and there needs to be clear guidelines around when an SMSF is appropriate,” he said.
“Although an external dispute resolution system is vital, it would be tackling the issue at the wrong end. The exponential growth of SMSFs can partly be explained by some poor advice given by promoters of SMSFs, and while the removal of the accountants’ exemption is a step in the right direction, there needs to be steps to ensure this segment doesn’t continue growing out of control.”