SMSFs have for years been a booming segment of the financial services landscape, particularly since the introduction of limited recourse borrowing in 2007. The flow of retirement money into these vehicles also attracts a variety of investment advisors, not all of whom are appropriately licensed.
A recent Federal Court case1 found an SMSF advisory business required, but was operating without, an Australian financial services licence (AFSL). The case demonstrates the consequences of SMSFs investing with unlicensed providers. The case is a timely reminder that advisors must not stray into the area of providing financial services, and also the importance of SMSFs dealing with licensed providers in order to protect their hard earned retirement moneys.Melissa Ramov, Maddocks Lawyers
ASIC recently brought proceedings against two financial services businesses, Secure Investments Pty Ltd (Secure Investments) and Aqulia Group Pty Ltd (Aqulia), and its director Mr Naseeruddin.2
Secure Investments offered its clients the opportunity to invest in property developments using the clients' SMSFs. As part of the arrangement, Secure Investments advised clients that they should roll over their super from their existing superannuation funds into an SMSF. The SMSFs were set up by associates of Secure Investments. Once the SMSFs were established, the arrangement required the SMSFs to enter into a loan agreement with Secure Investments and to lend moneys to Secure Investments who would in turn invest the money it borrowed in property developments within Victoria.
Secure Investments received approximately $2.4 million in funds from 28 different SMSFs between 2017 and 2019. In effect, it carried on a financial services business by issuing financial products3 to its clients on numerous occasions in return for payment.
ASIC initiated proceedings against Secure Investments in November 2019. After it did so, Aqulia (a related entity of Secure Investments) raised a further $250,000 from investors.
The Court found that:
One of the issues which the Court was required to consider was whether Secure Investments and Aqulia were carrying on a financial services business and therefore required to hold an AFSL. This required consideration of whether the loans entered into by the SMSF and Secure Investments/Aqulia constituted a 'financial product' under the Act. The Court found that the loans were more than 'credit facilities'4 but were a financial investment which amounted to a 'financial product'5 and therefore required an AFSL: effectively Secure Investments were issuing a financial product to each of the SMSFs.
The Federal Court then determined that the companies breached the requirements of the Act by operating the businesses without an AFSL and ordered the winding up of Secure Investments and Aqulia.
The consequences for the SMSFs investing with Secure Investments and Aqulia are such that their investments will not be recovered. Given that the companies are insolvent the winding up will mean that the investors will not recover all of their investment.
It is difficult to see, on the facts set out above, how the trustees of the SMSFs discharged their statutory duties to act prudently in the operation of their funds.
It is important that Trustees ensure they are dealing with licenced providers when making investments and when seeking advice. Without making the relevant enquiries, Trustees may find that their investments result in a tragic outcome for the SMSF and its members.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
Alisha Wright is an Associate in Maddocks’ Commercial Team.
Alisha advises extensively in a range of matters including:
Alisha has recently assisted with providing advice to SMSFs in relation to their compliance obligations and the drafting of bespoke shareholders agreements.
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