Self-managed superannuation funds have fewer avenues for compensation, and those investing without a financial adviser can find themselves on their own.
Superannuation comes with many rules and regulations, but despite everything, things can go wrong.
In cases of fraud, theft or even just incompetence, if a member suffers a financial loss, they will want to be compensated.
Rather than relying solely on the courts (which is expensive), our super system incorporates some compensation mechanisms.
These have been in the news a lot recently – mainly because Treasury has floated the idea that SMSFs be specifically invited to opt in or out of one such scheme known as the Compensation Scheme of Last Resort (CSLR).
Funds opting in would be entitled to protection but would be subject to “special levies” (which apply only sometimes). Funds opting out would avoid special levies but lose the protection.
What compensation is currently available for SMSFs?
A key player (and often first port of call) is the Australian Financial Complaints Authority.
AFCA is not a government department, regulator or consumer advocacy group. It’s an independent organisation set up to hear disputes relating to the financial services industry and hand out compensation.
It doesn’t represent either party in the dispute but will ultimately make a ruling (that’s binding on the financial firm) if the parties cannot reach an agreement.
AFCA can hear complaints about public super funds. So, someone who feels their super fund is taking an unreasonably long time to pay benefits or make investment changes would start with AFCA.
This is where SMSFs are immediately different – and, arguably, with good reason.
Members of SMSFs cannot take complaints about the behaviour of the trustee to AFCA because they would essentially be complaining about themselves.
It does mean, though, that SMSF members also cannot take complaints about other trustees to AFCA. They’d have to resolve that via the legal system without access to an inexpensive dispute resolution system via AFCA.
That doesn’t mean AFCA is irrelevant to SMSFs.
AFCA can hear complaints about financial advice given to retail clients, including SMSF trustees. Again, this makes sense. SMSF trustees are like any other private investor in that they could receive bad advice and should be able to take a complaint to the dispute service.
AFCA can also hear complaints about investments held by your SMSF if the investment provider is an AFCA member.
It cannot deal with situations where you’re just dissatisfied with the returns, but it could hear other complaints, such as if you are being charged fees you have not agreed to, or the disclosures provided upfront say you can liquidate your investment at any time, but the provider will not allow it when it comes to the crunch.
If AFCA finds in favour of the complainant, it will order compensation, and the financial firm (or its professional indemnity insurer) will have to pay up.
If it cannot pay, Australia also has the CSLR to pick up the tab, although there is an upper limit of $150,000 on claims relating to advice, which are the main ones made by SMSFs.
So here’s the rub – where something terrible has happened (such as what we saw with Shield Master Trust and First Guardian), members of large super funds can go to AFCA on the basis that their super fund trustee should never have allowed those products to be available in the fund in the first place.
SMSFs could go to AFCA only if they had an adviser who was an AFCA member who had recommended the product. And even then, if the adviser cannot pay, the SMSF will be able to extract only $150,000 from the CSLR.
What else is available?
Under superannuation law, there are special rules allowing the relevant government minister to grant compensation directly from the government.
This would apply only when there’s fraud or theft that causes the fund to suffer a serious loss, and it cannot pay benefits. SMSFs are specifically excluded from this. It should be noted, though, that these rules are very rarely used; Trio Capital, which collapsed in 2009, is one example, but that was more than a decade ago.
There is no doubt SMSFs have fewer avenues for compensation, and such funds investing without a financial adviser in investment products outside AFCA’s remit are on their own.
But there are still some protections for those who have relied on the regulatory system in place to keep people safe, such as licensed financial advisers and regulated investment products.
Private investors operating within those safeguards have the same protections for their SMSF as they would with their private investments.
The current fuss about Treasury’s “opt in or lose the protection” idea for SMSFs is that this would change the playing field.
Paradoxically, if that idea went ahead, individuals putting money in the same products would have less protection if they invested via an SMSF rather than personally, unless they specifically opted in to pay more in the form of special levies. That does seem strange.
To learn more about the pros and cons of SMSFs, read Meg's article within Heffron's Knowledge Centre here.