Industry bodies clash over SMSF lending

The FBAA has taken issue with the MFAA’s support of SMSF lending following the Financial System Inquiry's (FSI's) recommendation to scrap limited recourse borrowing arrangements (LRBAs).

Earlier this week, MFAA chief executive Siobhan Hayden told Mortgage Business that she would defend SMSF borrowing in a submission to the FSI before March next year.

“Initially I was disappointed because I do think SMSF borrowing can be implemented safely, with consumers being protected,” Ms Hayden said.

“We will mention that in our submission by March next year back to the inquiry. I will be advocating the benefits of it in a submission.”

However, FBAA chief executive Peter White took issue with the MFAA's stance on the matter.

Mr White pointed to the impact of non-recourse borrowing in the United States during the financial crises, when homeowners simply handed their keys back to the lender when they could no longer afford to make the mortgage payments.

“On limited recourse, like we currently have in the SMSF lending space, you have potentially a similar issue,” he told Mortgage Business.

“What the FSI has recognised is that there is an increase in this area.

“You just can’t go out guns blazing saying this is wrong and trying to fight it. There is a lot more to this than just a change in lending practices.”

From a financial planning point of view, structuring an SMSF means that there must be liquidity, diversity and flexibility within the fund to ensure it meets the objectives of providing retirement benefits to the trustee, Mr White said.

“It is there for retirement benefits, not to be leveraged in other ways,” he said. “If you’ve got an increase in lending under limited recourse borrowing within SMSFs, you are promoting gearing that is not diversified and not flexible.

“It doesn’t deliver what the financial planning structure of SMSFs is actually there to achieve. It can take you too far in one direction,” Mr White said.

The biggest worry about SMSF lending concerns what happens when rates start to rise or there is a correction in the housing market, he said.

“If there is a correction and interest rates go up and prices come down, all of a sudden who wears the loss? The lender, because it is limited recourse,” he said.

“That’s not the way responsible lending in this country is done.”

If the proposed SMSF borrowing changes are implemented, SMSF lenders would withdraw their products and broker training courses would cease, Ms Hayden said.

The MFAA is currently running an SMSF lending course that has been well received by brokers looking to enter the space.

In an official response to the FSI yesterday, the MFAA expressed its disappointment with the recommended ban on SMSF borrowing, which it claims "was not supported by any evidence of problems in this area".  

The MFAA argued, and will continue to argue, that this type of borrowing is "a healthy component of the competitive market, provided that involved practitioners are appropriately educated and accredited, for example, under the MFAA SMSF Lending Accreditation", the response stated.

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