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Speaking at an AMP Capital-sponsored event, Mr Costello said banning LRBAs within SMSFs will not prevent SMSF trustees taking on more debt outside their super fund which could potentially be riskier for them.
“Inside the fund the debt can be non-recourse but outside the fund it can be over-recourse,” said Mr Costello.
Trustees, he said, may also gear at over 100 per cent if they take on debt outside their fund.
“So if you put that rule [banning LRBAs in SMSFs] in place, you may just be shifting the gearing. You may even be shifting it into more risky areas,” said Mr Costello.
While the recommendation to ban LRBAs in SMSFs in the Financial System Inquiry was a valid recommendation and worth further discussion, there was currently no evidence to suggest that it posed a risk to the financial system, Mr Costello said.
“The people that go into SMSFs by and large are people who know how to run businesses; they’ve gathered a few assets together and like to manage them on their own,” he said.
“They think they can manage their own assets as well as anybody in the public offer funds or an industry fund and taking on some debt would not be unusual for these kinds of people.”
Michael Hallinan, Townsends Business & Corporate Lawyers special counsel for superannuation, has a similar view on the issue.
Mr Hallinan said that if a bank is likely to be far more stringent in lending to a super fund through an LRBA then it will be for a full recourse loan outside super.
“So in one sense, banning in super will just result in people investing elsewhere,” he said.
Mr Hallinan said a better solution for the government might be to implement other regulation around borrowing rather than a complete ban.
“The simplest way to get rid of the worst features would be to impose some sort of minimum requirement that the interest rate must be a commercial rate and some sort of upper ceiling in terms of the LVR,” he said.