SMSF should not have been established.
Directors of a corporate trustee of a self-managed superannuation fund (SMSF) lodged a dispute with FOS against a financial services provider (FSP) alleging inappropriate advice.
There were two issues to this dispute: the appropriateness of the initial advice by an authorised representative of the FSP to establish the SMSF, and the appropriateness of the advice to borrow to invest in a growth trust.
FOS determined that the advice to establish the SMSF with a corporate trustee was inappropriate because of the:
- applicants’ relatively small superannuation balances
- high costs of establishing the SMSF
- no consideration of applicants’ experience or ability to undertake trustee role.
FOS found that on the available information, it should have been clear to the authorised representative that the applicants had a relatively small amount of retirement savings across a number of retail superannuation funds (about $100,000), had no investment experience or knowledge (their only investment assets were their superannuation accounts and some shares) and were not equipped to take up the responsibilities of being trustees (or directors of a corporate trustee) of any proposed SMSF.
FOS noted that the costs of setting up the SMSF and corporate trustee totaled about 14% of the applicants’ retirement savings. This should have alerted the adviser that an SMSF arrangement may not be suitable or in the clients’ best interests.
Regarding the investment in the growth trust, FOS found that the authorised representative failed to provide a Statement of Advice, did not disclose the basis of his advice and the risks associated with it.
FOS found that the authorised representative failed to provide these financial services with due care and skill.
FOS determined that the authorised representative’s breaches caused the applicants’ losses: if the authorised representative had appropriately advised the applicants about the establishment of the SMSF, they would not have incurred the costs associated with the poor advice, and had the authorised representative made adequate disclosures about the risks associated with the growth trust, they would not have made the investment.
A FOS industry expert calculated the applicants’ compensation by comparing their actual position (as represented by the SMSF’s cash management account balance) with the position they would have been in if they had received appropriate advice.
FOS determined that the FSP must pay the applicants a total of more than $70,000 as compensation for their losses (plus interest). This amount included costs of auditing and preparing tax returns, SMSF wind-up costs plus or minus any profits or losses from the investment on maturity.
The FSP said that it should not be responsible for the administrative costs of the SMSF because it did not provide administration services. The FOS Ombudsman did not accept this view.
‘If the FSP had provided appropriate advice the SMSF would not have been established and there would have been no need for administrative services,’ FOS said.
‘The applicants did not have the experience or knowledge to administer the SMSF themselves. The FSP was aware of this. It was therefore reasonably foreseeable that the applicants would require administrative services to operate an SMSF and incur the cost of those services.’
FOS found that the FSP was not responsible for penalties incurred by the SMSF for late lodgement of taxation and annual returns. As trustees of the SMSF, the applicants were accountable for the prudential management and investment of the SMSF. The applicants were therefore responsible for breaches of legislation such as the failure to lodge taxation or annual returns.
‘In the circumstances, I do not consider it fair that the FSP is made accountable for the failure of a third party to lodge taxation and annual returns,’ FOS said. ‘Accordingly the FSP is not responsible for the penalties incurred by the SMSF for the late lodgement of returns.’