Independent financial planner Claire Mackay and the Financial Services Inquiry Chair David Murray discusses Limited Recourse Borrowing Arrangements on ABC TV.

Transcript of interview
Ticky Fullerton: The federal government almost made it a clean sweep on the Mari Report announcing it’s accepting 30 of the 31 recommendations made by the financial system inquiry. It’s being interpreted as a big sign that the Turnbull government is determined to make the financial system safer. Despite that, a recommendation to ban borrowing by self-managed superannuation funds was rejected and with the spectre of rising rates in a cooling property market, there are fears super borrowers could be left dangerously exposed. Andrew Robertson reports.

Andrew Robertson: Graham Botrel is one of the one million Australians in a Self Managed Superannuation Fund (SMSF). He’s also a member of the Australian investors association, had lacked the financial system inquiry. He has big reservations about superannuation funds borrowing.

Graham Botrel: I just worry that people will go into that without considering all the pitfalls and the traps and without adequate advice and get themselves into trouble.

Andrew Robertson: Since the Howard government allowed superannuation funds to borrow again in 2007, Self Managed Super Funds Funds (SMSF) have racked up loans against property worth $14 billion evenly split between commercial and residential. That’s out of a total of $88 billion of property held by self managed super funds.

Independent financial planner Claire Mackay: If the property value is 60% borrowed, then that’s okay but if it’s 100% or even a little bit more than 100% to cover the legal and other costs associated with borrowing, then that’s highly risky.

Andrew Robertson: Unfortunately, the tax office which regulates Self Managed Superannuation Funds doesn’t release figures on borrowing against individual properties, which Claire McKay thinks is a big weakness.

Independent financial planner Claire Mackay: We need to be confident that the risks people are taking with their retirement savings and, at the moment, we don’t have a clear understanding of the true risk in the system.

Andrew Robertson: It’s one reason why the man who chaired the financial system inquiry remains adamant that borrowing by superannuation funds should not be allowed.

David Murray: Leverage magnifies risk on the upside and downside and, therefore, it’s not appropriate to add that other liar of risk also in the superannuation sector.

Andrew Robertson: And two big risks facing leverage superannuation funds are that record low interest rates will rise and that the over-heated property market will fall. While David Murray is disappointed with the government’s rejection of his recommendation on borrowing, he remains encouraged by its plans to closely monitor that decision over the next three years.

David Murray: Our view about direct borrowing in superannuation funds across the superannuation system was about risk and systemic concerns. So, it wasn’t specifically targeted at Self Managed Super Funds.

Andrew Robertson: But it’s Self Managed Superannuation Funds where debt is the biggest issue, particularly with spruikers out in force encouraging people into property, often at inflated prices with very high commissions. Two years ago, we highlighted New South Wales based Park Trent properties which has advised nearly 900 people to set up super funds to buy home units and town houses. Back then, Park Trent boss Ronald Cross strongly defended his position.

Reginald Cross: We’re an icon. We do a great deal for Australians and to call us anything other than a business enterprise, I think that’s a cheap shot.

Andrew Robertson: Not according to the supreme court of new South Wales. On the day the government released its response to the financial system inquiry, the court put a stop to Park Trent’s business because it had been giving advice without holding a financial services license.

Andrea Slattery: We need to make sure that anybody who is providing that kind of advice is actually forwarded on to the appropriate regulator, such as ASIC and the ASIC can deal with them.

Andrew Robertson: Having said that, though, Andrea Slattery thinks the government was right not to ban borrowing by super funds.

Andrea Slattery: It’s so small and that if it’s controlled with the appropriate guidelines and the appropriate licensing arrangements, then people should be able to get the appropriate advice if it’s in the best interest of that client.

Andrew Robertson: As he enjoys his hobbies in retirement, Graham Botrel says the bottom line is retirees have to protect themselves.

Graham Botrel: You need to get some education and work out how you’re actually gonna do that for the next 20 or 30 years.

Andrew Robertson: The alternative is your retirement running right off the rails.