Derivatives licence inappropriate

Need to ensure servicing of loan

By Karin Derkley
Wed 04 Aug 2010

Concerns have emerged regarding new proposed rules on the derivatives licensing of advisers and instalment warrants.

Proposed new rules that require advisers to have a derivatives licence in order to advise on instalment warrants used to buy property within self-managed superannuation funds (SMSFs) have been greeted with concern by some in the SMSF industry.

Multiport technical services director Phil La Greca said while he agrees with the proposal to regard an instalment warrant used to borrow within super as a financial product, it was not beneficial to regard it as a derivative product.

"A derivative takes its value from an underlying asset, which may be relevant in the case of a share warrant, but is not really the case when you are talking about an instalment warrant over, say, a residential property," he said.

It was probably more appropriate to compare this kind of instalment warrant to a margin loan than a derivative, La Greca added.

"The important issues here are the borrowing arrangements, ensuring the facility is set up correctly and ensuring the client can properly service the loan."

Advising on derivatives requires a completely different skill set to advising on super borrowings, DBA Lawyers senior associate Bryce Figot said.

In order to advise on super borrowings, advisers need a strong understanding of the Superannuation Industry (Supervision) Act 1993 - including the implications of trustees being required to hold the property in an appointed trust, he said.

"If people don't understand how this works they could, for instance, end up having to pay stamp duty three times - when they buy a property in their name, when they transfer it into the trust and then when they transfer it back into their own names further down the track."

Figot believes that rather than holding a derivatives licence, those advising on super borrowings should hold a RGS146 licence with an SMSF component, as proposed by the Cooper review.

"What they need is SMSF-specific knowledge, rather than knowledge about derivatives," he said.

La Greca said few SMSF advisers currently hold derivative licences, and applying for one requires advisers to show proof that they have expertise in this area.

"Given that super borrowings have only been around since 2007, there's not likely to be many that can do that."

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