Banksia hints at another SMSF disaster

Is ASIC rushing to slam yet another stable door after the horse has bolted, setting up an internal task-force to review regulation of the debenture industry?

Having seen the financial and social devastation caused by the collapse of past financial institutions such as Pyramid Building Society, the collapse of Banksia had a depressingly familiar ring to it. The combination of retail depositors and commercial property lending by regional or non-bank financial institutions is often deadly.

The really shocking statistic was that of the 15 riskiest debenture issuers identified by ASIC in 2007, eight have since collapsed. Perhaps we need all 15 to go before the Government and its regulators finally get to grips with deposit collection by non-banks.

Banksia owes investors ~$650m, whom apart from no longer receiving interest income, will almost certainly take substantial losses, facing long waits until recoveries are actually received.

While every story of investor loss is tragic, a particularly interesting question is how much SMSF money is caught up in the collapse. The short answer is that only the receivers know the answer to that one, and they generally are not very forthcoming (we have asked in relation to past collapses).

As much as we hate to express opinion vs facts, in the absence of hard data we can probably assume that SMSF involvement is material. We had a look at the Banksia website before the receivers pulled most of it down, and noted that they had specific products and offers targeting SMSFs.

Here we see another example of the problems which are tied to the benefits of control sought by SMSF members (or, as is often the case in reality, promoted by those selling SMSFs to collective fund members).

The reality – long predicted and obvious – is that SMSFs have become a honey pot which is irresistible to capital gatherers of every type, from major banks to property developers. We have also noted increasing awareness of the segment overseas, from asset managers through to fraudsters. I get periodic calls from what is clearly an offshore boiler room trying to get me to set up an SMSF so I can trade stocks with them.

There are three underlying problems here:

– The risks to retail investors from regional and non-bank financial institutions, which are not regulated by APRA and get a light touch from ASIC. Forget better financial literacy. After 20 years in this industry I am convinced that most retail investors do not understand credit risk and never will.

– The dramatically increased probability of investment losses arising from high risks, leverage, incompetency, or fraud when members leave the safety of collective super funds for SMSFs. We are not persuaded by arguments that such losses affect only a small percentage of SMSFs, or that SMSF members which take such losses have significant assets elsewhere. SMSFs should carry graphic financial health warnings – perhaps a picture of a great white shark – to highlight the risks of “swimming outside the super flags”.

– The tendency for the SMSF segment to demand to be rescued from its own mistakes. Too often control comes with a refusal to take accountability, or a need to blame others, when SMSFs take losses or are defrauded. We saw this after Trio (yet another disaster in which SMSFs involved took huge losses), where SMSF members are lobbying for compensation by Government. There is a severe moral hazard here if Government ever weakens to such demands from the SMSF lobby.

Keep in mind this is not just about the losses that SMSF members take in these situations. Taxpayers lose too, something we will explore on another occasion. This needs to be the basis of a much needed re-regulation of SMSFs, before we have a really major disaster.