ASIC winds up SMSF financial services business operating without a licence

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

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Facts

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.

Findings of the Court

The Court found that:

• Secure Investments could not afford to progress the property developments and that most of the investor funds were transferred to a cash management account of Secure Investments and thereafter to other related entities for no identifiable corporate or investment purpose. Those funds were never returned to investors.
• Secure Investments issued financial products for the purposes of carrying on a business and did so without an AFSL in breach of section 911 of the Corporations Act 2001 (Cth) (Act).
• The court found that the affairs of Aqulia replicated the affairs of Secure Investments and said:
• "That is to say that, whilst Mr Naseeruddin and Aqulia received funds from investors for investing in building developments, those investments did not materialise. The funds were used for other purposes and dispersed without any proper recording of the transactions which justified such payments."
• Secure Investments and Aqulia kept improper books and records.

Did the companies require an AFSL?

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.

SMSFs should only deal with licenced operators

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.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

• New ATO guidance on downsizer contributions
• Can you request a COVID-19 early release of super from a TRIS?
• Your SMSF Investment Strategy and COVID
• SMSF Trustee disqualified after transferring money as part of 'emergency payment'

Order related document packages

• SMSF Pension Commutation
• SMSF Pension Pack
• Superannuation Trust (SMSF)
• Update to SMSF

1. Australian Securities and Investments Commission v Secure Investments Pty Ltd (No 2) [2020] FCA 1463
2. Australian Securities and Investments Commission v Secure Investments Pty Ltd (No 2) [2020] FCA 1463
3. S 761E(4) of the Act.
4. Credit facilities are not financial products under regulation 7.1.06 of the Corporations Regulations 2001 (Cth).
5. A facility through which financial investments are made are considered financial products under section 763B of the Act.