Banks to impose restrictions on SMSF borrowing

The SMSF Professionals’ Association of Australia has developed best practice guidelines for self-managed super fund limited recourse borrowing arrangements (LRBA).

This morning SPAA announced NAB has agreed to adhere to the two separate guidelines.  

NAB is the first lender to sign up to the guidelines for LRBA with the SPAA saying sign up from the other major banks is in progress.   

Andrea Slattery, chief executive of the SPAA, said in a statement the association has been “very conscious” of concerns expressed about LRBAs and in particular about a “tiny rogue minority” spruiking this borrowing facility.

“We believe that by publishing these guidelines, and with NAB signing on and other major lenders in the pipeline (the major banks are estimated to have more than 85% of this market), the government and regulators can have a high degree of confidence that LRBAs are being used appropriately and that the industry has best practice guidelines for lending and advice in place,” she says. 

The two guidelines are LRBA lenders’ best practice guidelines and LRBA advice best practice guidelines.

Slattery says adherence to the guidelines by the banking and financial advice industry will ensure LRBAs are being used appropriately by SMSF trustees, and encourages self-regulation in the SMSF lending sector by lenders and advisers.

Jeff Bresnahan, chairman of SuperRatings, told SmartCompany there is a need for restrictions like this in the SMSF sector. 

“If SMSFs are going to come under scrutiny and there is going to be failures, there is a high chance it will be in the property area. There will always be the temptation for unscrupulous behavior in that sector,” he says.   

“The property spruikers are back and are targeting SMSF members so these guidelines can offer protection.”

Bresnahan says he is not concerned that some SMSFs may miss out on loans under the guidelines. 

“If the guidelines are well thought out then there should be an appropriate level of gearing, if people miss out because they were going to do something highly leveraged then that is not a bad thing,” he says.

“That is a positive move to protect people.”

Bresnahan warns the industry, valued at half a trillion dollars, has its risks.

“SMSFs are great for a lot of Australians, but there are a lot of SMSFs out there that have been sold probably inappropriately to people who should not have them and they have to be protected from their own greed and lack of financial literacy,” he says.    

Bresnahan says in mainstream super funds investors are protected by the Australian Prudential Regulation Authority in the event of default but SMSFs don’t have that protection.

“The more restrictions that are put in place the better I believe,” he says.