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SMSF accountants and the unexploded grenade

There is something more interesting in the SMSF market than speculation about what super changes in the Budget will see the light of day, especially for many accountants. Perhaps a hand grenade ready to explode is the best analogy for the change in the rules regarding how accountants can give SMSF advice from 1 July 2017.

Accountants who want to advise on SMSFs are currently subject to regulation that is significantly different from normal accounting practice. Specifically, they have to follow the rules that financial planners use when advising, though they supposedly have reduced obligations if the advice is limited to SMSFs.

Broadly, following the miss-selling in the financial planning community, the rules for giving financial planning advice are pretty onerous. They now obligate someone to, in effect, do a financial risk and needs due diligence on their client, make recommendations that are consistent with what they found in that investigation and formally document that they have done both those things (the ubiquitous Statement of Advice).

What happened to ‘financial planning lite’?

So did accountants get the ‘financial planning lite’ regulation they were promised? Probably not. I’ve scoured the ASIC rulings to see if those client due diligence obligations are less onerous if they are just talking to them about an SMSF as opposed to full financial service advice. I’m blowed if I can see it.

ASIC makes some observations about ‘scaled’ (read limited) advice, but even when you are operating in a scaled environment you still have to tell the client that their other financial risks and needs, death and disability insurance for example, are not being advised on.

Now, I’m not the smartest person it the room but it seems to me that if you have to tell them that you are not advising on their other financial risks and needs you have to know what those other financial risks and needs are.

In that case, you, in effect, have to do a full financial risk and needs due diligence to be able to tell them you won’t be advising on all those financial risks and needs, just on SMSFs.

So, these financial planning lite rules limit your workload, right? No. They limit your regulatory risk, right? Well, no again. Tick tick tick. Is that an unexploded hand grenade I hear ticking away in the background?

Oh, and finally, there is the hostility of the accounting profession having to now practice in this way. I will admit I’m pretty close to the accounting profession, having worked with them on SMSFs for the last four years, but I do have some sympathy for their predicament.

The fact is that there is virtually no significant evidence of malpractice by accountants in the SMSF space. OK, there were some recommendations about setting up a SMSF when the indicators were that it wasn’t in the clients’ interest but benefitted the accountant. However, Jeremy Cooper’s Panel’s view of the SMSF sector was that it was well managed.

Regulatory overreach on accounting profession

It seems to me that the accounting profession has been sold a pup with these rules. Indeed, it can even be said that what we have here is regulatory overreach. All very interesting, but these rules, if breached, have serious consequences; the grenade exploding perhaps.

 

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, University of New South Wales.

8 Comments
David O'Donnell
July 28, 2016

Do you think the 'promise' was easier regulation or easier licensing? Would easier regulation be appropriate?

David Lunn
July 24, 2016

All this regulatory burden drives massive costs into an already expensive process further pushing good, and unconflicted advice, further from middle Australia. This is not in the countries long term best interests.

Yes there was malfeasance by the accounting profession and more so in financial planning planning. But thanks to the lobbying of vested interests it is vertical integration, esp by the banks, which is the root of evil in this space, was not touched. Good planners were brought to their knees with regulatory overreach and the accountants are starting to see the ridiculousness of the current regulatory framework.

Murder has been illegal for thousands of years but it still happens. Rules don't fix everything, I just wish ASIC would see that.

All that is needed is a professional framework with a professional ethics board that has the power to revoke, suspend licenses.

The current framework provides that you can have nothing but the the best intent for he client, they get good outcomes and they are thrilled with the advice but you can still break the law. This makes no logical sense.

Liam
July 22, 2016

"The fact is that there is virtually no significant evidence of malpractice by accountants in the SMSF space."

Gordon, write down this name GUVERA as in the next 18 months you are going to see a lot about Accountants and malpractice with this as company as the subject.

Baz
July 22, 2016

My accountant tempted me to buy into an new company recently - he got his commission but the company is now in administration and I've lost my investment. Full compliance with planning regs can't come soon enough.

BB
July 22, 2016

Nope...

- They are simply being asked to comply with the same requirements as anyone else who wishes to provide advice on SMSF's or any financial product for that matter?

- The requirement to outline what exactly you are providing advice on and what you are not is pretty straight forward, perhaps a re-read of ASIC RGs is required. It does however require you to consider if excluding some areas of advice is actually appropriate for the client and not simply convenient to ignore.

- Any view contesting that those in the accounting profession who also engage in financial advice activities (SMSFs, property investment etc.) are somehow more ethical or trustworthy than the broader advice industry is going to be strenuously (and rightly) contested. Simply assuming that your average tax accountant was the bastion of all ethical financial services didn't play out well when the accounting profession was handed a license to sell MIS Forestry Schemes now did it?

Bottom Line: Consumers were sold a pup when Accountants were allow to play by different rules to the rest of financial services providers based purely on an unproven (and in my long experience, deeply misplaced) assumption of competency and ethics in those areas.

Hilda
July 22, 2016

This is nothing short of a boo hoo accountants puff piece. Scrutiny of their advice is long overdue.

Jimmy
July 21, 2016

Gordon, It's so easy to throw around negative comments about financial planners but then so blithely exonerate accountants for the poor advice and at times blatant self-interest in establishing SMSFs for their clients. Jeremy Cooper said it was fine, so it must be ok.

No mention of rolling over substandard balances into an SMSF, no mention of the loss of insurance coverage when rolling over the funds "because we don't advise on that sales stuff, were accountants". No mention that clients sitting in cash is to their detriment nor that the standard non-advice to invest in blue chips isn't always in the clients best interests either. No mention that accountants were by and large the primary sellers of tax-effective MIS products in trees, almonds, wine, etc. All done because the client "had a tax problem". Many were licensed only to sell the MIS product of one of the issuers.

Superannuation for right or wrong has been deemed to be a financial product. Therefore it shouldn't matter what type of superannuation product you are dealing with - group, retail, union super or SMSF - the rules around advice should be the same.

Paul
July 21, 2016

Accountants have been guilty of encouraging the establishment of hundreds of SMSFs that have no merit other than to generate fees for the accountant.
When the members find that they have not fulfilled their obligations as trustees the accountants' argument is " that's nothing to do we me, I only did as the client directed".

Regulation and external oversight of accountants is long overdue.

The biggest promoters of all the failed forestry schemes were accountants.

 

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