Are you ready for the end of the SMSF exemption?

And do you understand how much of a game changer this is going to be?

You may know that at the end of this financial year the accountants’ exemption that’s allowed you to establish self-managed superannuation funds (SMSFs) without having an Australian Financial Services (AFS) licence is being phased out. But do you understand how much of a game changer this is going to be?

No more accountants’ exemption

“Most accountants are aware of the Future of Financial Advice (FOFA) changes and are probably thinking they should do something. Yet the large majority have done very little. The Australian Securities and Investments Commission (ASIC) has only issued a small number of AFS licences for accountants since the introduction of transitional arrangements in mid-2013,” notes Rob Hayward, Head of Client Solutions, Macquarie Virtual Adviser Network.

“Currently, someone like me can quickly set up a SMSF with minimal paperwork and still make a profit charging the client $2500-$3000. It’s essentially a matter of just finding out what the client wants to do then opening a file. What will doing the same thing after June 30 involve?

Firstly, I’ll need my own licence or to have been authorised by a licence holder.

Once I’ve deemed an SMSF is appropriate for the client, I’ll then issue a financial services guide, do a fact find and write a Statement of Advice with a product replacement table. The client will have to review and sign off on all that, which will mean several visits. I’m not sure many accountants yet realise how time-consuming the process is about to become.”

What comes next?

The large bulk of accountants remain unlicensed. For instance, only 15% of CPA Australia’s 150,000 members are licensed to provide financial advice1. Very shortly, any unlicensed members who currently provide SMSF advice will have three options:

  1. stop setting up and advising on SMSFs
  2. obtain a full or limited AFS licence
  3. operate under an institution’s AFS licence as its authorised representative

The first option is probably the most feasible for those who don’t set up many SMSFs. But if you want to stay in the SMSF game, you’ll need to act quickly.

The transitional arrangements that allow a recognised accountant who holds a public practice certificate to apply for a limited AFS licence will end on 30 June 2016. After that, accountants will need to meet the standard requirement of having three years’ experience as a licenced financial planner in the past five years if they want to become the Responsible Manager of their own licence.

As well as providing fairer and more consistent regulation, the FOFA reforms are about improving consumer protections. Accountants who do become licensed will go on the Financial Advisers Register. That allows anybody to check, among other things, their qualifications, experience, employment history, what associations they are a member of, and whether they’ve been the subject of disciplinary action by ASIC.

Licencing pros and cons

The limited AFS licence was created for accountants who were no longer going to be covered by the accountants’ exemption. You can see a comprehensive comparison between a limited and full licence here.

The most pertinent one is that an accountant operating under a limited AFS licence can only provide limited advice. Most accountants won’t have the necessary qualifications to be granted a full licence but they can always acquire them, then make an application. This option will be of most interest to accountants with clients who want them to take a more hands-on role, providing advice about buying and selling specific shares and properties.

Applying for either category of AFS licence will cost $883 for an individual or $1588 for corporate, partnership or trustee2. However, that’s just the start of the outgoings.

Once you factor in costs such as providing submissions to ASIC to obtain the licence, developing a compliance plan, changing the compliance plan if the business changes, paying for professional indemnity insurance and lodging an annual auditor’s report or compliance certificate the price of obtaining and maintaining a license could run into the tens of thousands of dollars.

What that money buys is autonomy. Those with their own licence have more scope to customise advice and financial products to suit their clients’ needs. They can also authorise others (usually for a fee) to operate under their licence.

Of course, operating under another institution’s licence does have some advantages, even if it means using their Approved Products List. The not insignificant amounts of time and money that would otherwise be devoted to acquiring and maintaining an AFS licence can be used to grow the business. And the licence holder may provide both leads and a brand that can be leveraged off. In mid-2015, CPA Australia launched a financial planning subsidiary, CPA Australia Advice, with the intention of allowing CPA members to operate under its AFS licence3.

Given recent changes to the structure of the industry, the impact of the upcoming round of FOFA reforms will be significant. As Hayward notes, “with the decline of the independent dealer groups over the last five years most accountants will have to get their own licence or become authorised under a big institution. There won’t be many options in between.”