The Financial System Inquiry has been accused of surrendering to political lobbyists after urging the government to prohibit certain SMSF borrowing arrangements.
Following months of speculation, the inquiry recommended a removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements (LRBAs) by superannuation funds.
An exception for temporary borrowing by superannuation funds for short-term liquidity management purposes should remain, according to the inquiry’s final report.
Michael Pinn, director of the Association of Independently Owned Financial Professionals, said the recommendation to ban direct borrowing by SMSFs is the result of the push by the banks to have greater control over investment choice, to the detriment of retail investors.
“Lobbying by institutions and vested interests continue to impact policy recommendations,” said Mr Pinn, who also heads up a Sydney-based financial advice and accounting firm.
“SMSFs were barred from using margin loans and other debt finance to purchase equities [and] now the same vested interests want to ban properly structured debt finance in direct property,” Mr Pinn told Mortgage Business’ sister publication, ifa.
He said institutions and other vested interests are opposed to LRBAs because they have an underlying agenda to direct funds into “buying instalment warrants, investing in geared equities where someone else controls the money or some other more costly structure”, all of which generate revenue for these interests.
Omniwealth managing director Matthew Kidd holds a similar view, and believes the abolishment of gearing in SMSFs would be a “foolhardy reaction” to any of the issues associated with LRBAs.
“I think it would be a knee-jerk reaction to one man’s report and requests by the industry super funds and the larger retail super funds that are losing inflows to self-managed super,” he said.
“I believe there may be a need for more legislation but you don’t swing the pendulum completely to the other side; there needs to be a happy balance.”
The mortgage broking industry’s main association, the MFAA, reacted to the Financial System Inquiry’s final report by telling Mortgage Business it would defend SMSF borrowing in a fresh submission to the inquiry.
This move was criticised by the other industry association, the FBAA, which accused its rival of not properly understanding the issue.