Legal protection for SMSFs
Legal protection for SMSFs
Self-managed super fund (SMSF) trustees have fewer avenues of recourse against fraud and theft compared with trustees of the Australian Prudential Regulation Authority (APRA) regulated super funds.
Prudential supervision
APRA-regulated super funds are subject to prudential regulation.
SMSFs are not prudentially regulated but are subject to compliance-based regulation by us, with the focus on compliance with super laws. This approach recognises that members of SMSFs must be trustees and are in a position to protect their own interests. Under super laws, SMSFs must have an investment strategy and make investments in accordance with that strategy. We do not review or provide specific guidance on the investment risk of that strategy or how trustees manage that risk.
The trustee of an SMSF is not required to be registered or licensed by APRA under super laws. SMSFs pay an annual levy to cover the cost of their regulation.
No statutory compensation for SMSFs
Under existing super laws, no government or industry compensation is available for members of super funds operating outside the regulation of APRA. The trustee of an APRA-regulated fund that incurs a loss as a result of fraudulent conduct or theft can apply to the minister for a grant of financial assistance.
Compensation payments are made from consolidated revenue and a levy may be imposed on APRA-regulated funds to help fund the government's financial assistance program. The effect is that a loss in one super fund is borne by the members of all funds that pay the levy.
SMSFs are excluded from applying for financial assistance under the super laws unless the fund was an APRA regulated fund at the time when the loss occurred. As a result, the financial assistance levy is not imposed on SMSFs.
A key characteristic of an SMSF is that all members are involved in the decision-making process and control the management of the fund. SMSF members generally have more control over, and choice in, their investment strategy and portfolio than members of APRA-regulated funds. A consequence of exercising this control means accepting responsibility for all investment decisions regardless of the outcomes.
SMSFs that want their super to be covered by the financial assistance program can choose to join an APRA-regulated fund or appoint a registrable super entity licensee as trustee (that is, become a small APRA fund).
Options available if an SMSF suffers loss
SMSF trustees do have certain rights and options available to them if their fund suffers a financial loss due to fraudulent conduct or theft. For example, SMSF trustees can choose to take legal recovery action against a person or persons who engaged in the fraudulent conduct or theft. Under Corporations Law, if the trustees received advice or services from an Australian Financial Services Licensee who was involved in the fraudulent conduct or theft, legal options are available. SMSF trustees may also approach the Financial Ombudsman Service (FOS) if the trustee's adviser, or other service provider involved in the fraudulent conduct, is a member of FOS.
However, access to these legal options gives no guarantee that the fund will be compensated for fraudulent conduct or theft. Depending on the circumstances the fund may receive no compensation or limited compensation.
SMSF trustees need to take preventative steps to avoid this situation from occurring.
Superannuation Complaints Tribunal
SMSF trustees and members do not have access to the Superannuation Complaints Tribunal (SCT) to resolve complaints.
The SCT was established under the Superannuation (Resolution of Complaints) Act 1993 to deal with complaints about the decisions and conduct of trustees and other decision makers in relation to super. However, the Act does not apply to SMSFs, and the SCT has no jurisdiction to deal with complaints about SMSFs.
Last Modified: Monday, 30 July 2012
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