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Wednesday 6 November 2013

13-304MR ASIC warns real estate industry about recommending property investment through SMSFs

ASIC has warned the real estate industry that agents recommending investors use a self-managed superannuation fund (SMSF) to invest in property must ensure they are appropriately licensed to provide the advice. ASIC is working with the Real Estate Institute of Australia (REIA) to ensure that real estate agents understand their legal obligations.

ASIC has written to the REIA, the state and territory real estate institutes and property investment associations (real estate bodies), setting out ASIC's concerns and asking the real estate bodies to communicate these to its members.

ASIC is concerned that with the increased popularity of SMSFs and property investment, real estate agents may not realise they are providing financial product advice and need an Australian financial services (AFS) licence when making recommendations or statements of opinion to a person to use an SMSF to invest in property. If providing this advice, agents must ensure they comply with legal obligations under the Corporations Act 2001.

ASIC’s letters to the REIA and the real estate bodies warn that:

  • If a person does not hold an AFS licence or is not authorised by an AFS licensee, they can only provide factual information to consumers in relation to SMSFs.

  • Where an AFS licence is required, real estate agents must immediately cease offering and providing financial services or advertising the provision of financial services until such time as an AFS licence is obtained or they become a representative of an AFS licence holder.

  • A person convicted of carrying on an unlicensed financial services business may be subject to a fine of up to $34,000 or imprisonment for 2 years or both. If a company is convicted it may also be liable to penalties, including a fine of up to $170,000.

ASIC Commissioner Greg Tanzer said ASIC’s role in relation to SMSFs is to regulate the gatekeepers – the advice providers, SMSF auditors, and providers of products and services to SMSFs.

‘We want to ensure the SMSF sector remains healthy and vibrant so investors can be confident that, if they are receiving advice about investing through an SMSF, their adviser holds an Australian financial services licence and is aware of its obligations’, Mr Tanzer said.

ASIC is aware some real estate agents are offering commissions or benefits to financial advisers for recommending that investors use an SMSF to purchase the real estate agents' properties. Such commissions or benefits may be conflicted remuneration and financial advisers may be banned from receiving them under the Future of Financial Advice (FOFA) reforms. This is because the commissions or benefits could reasonably be expected to influence the financial product advice given to retail clients.

Read content of ASIC’s letter to the REIA

Background

ASIC reported on the quality of advice given to SMSF investors (refer: 13-081MR).

Further information on the FOFA reforms is available on ASIC’s FOFA webpage.

Further information on conflicted remuneration is available in ASIC's Regulatory Guide 246 Conflicted remuneration (RG 246).


Attachment to 13-204MR: ASIC's letter to the REIA – content

ASIC is writing to the REIA with some important information for real estate agents. Would you please consider the best way to convey this information to real estate agents. We will contact you soon to discuss how this information should be further communicated.

ASIC has also written to your member organisations individually. We will continue to work with the REIA to ensure that real estate agents understand their legal obligations.

Unlicensed financial services businesses

ASIC is aware that there has been a sharp rise in promoters recommending investors either set up or use an existing self-managed superannuation fund (SMSF) to invest in real property. These promoters may not be complying with the law.

Section 911A of the Corporations Act 2001 (Corporations Act) requires any person carrying on a financial services business in Australia to hold an Australian financial services (AFS) licence or be a representative of an AFS licensee.

A person provides a financial service if they provide financial product advice. Under s766B of the Corporations Act, financial product advice is defined as a recommendation, a statement of opinion or a report of either of those things that is, or could reasonably be regarded as being, intended to influence a person's decision in relation to a financial product.

Providing financial product advice includes making a recommendation or a statement of opinion to a person to set up an SMSF or use an existing SMSF to purchase real property through that SMSF. This is because the vehicle through which the underlying investment is made is an SMSF and an interest in an SMSF is a financial product. That is, a person who makes such a recommendation or statement of opinion provides financial product advice even where the underlying investment (i.e. real property in this case) is not a financial product.

ASIC is concerned that, with the increased popularity of SMSFs and property investment, real estate agents may not realise that they may be carrying on a business of providing financial product advice and may need an AFS licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property.

If a person does not hold an AFS licence or is not authorised by an AFS licensee, they can only provide factual information to consumers in relation to SMSFs. We have published Regulatory Guide 244 Giving information, general advice and scaled advice which explains the difference between factual information and financial product advice. This guide is available on ASIC's website www.asic.gov.au. If real estate agents are providing advice rather than factual information, they may be carrying on an unlicensed financial services business in contravention of the Corporations Act.

Penalties

The Corporations Act provides that a person convicted of carrying on an unlicensed financial services business may be subject to a fine of up to $34,000 or imprisonment for 2 years or both. If a company is convicted it may be liable to penalties, including a fine of up to $170,000.

At this time, ASIC is taking the opportunity to draw these issues to real estate agents' attention and expects that they will consider the legal requirements of the Corporations Act in the context of their conduct, ensuring ongoing compliance now and into the future.

In the event that real estate agents are operating in circumstances where an AFS licence is required, they must immediately cease offering and providing financial services until such time as an AFS licence is obtained or they become a representative of an AFS licensee. Real estate agents must also immediately cease any advertising, including any representation on a website or at presentations, that indicates that they are providing financial services. In continuing to provide financial services real estate agents may be committing an offence and consequently be liable to prosecution.

If real estate agents have any difficulty in understanding the law or how it applies to their operations, we suggest they seek legal advice.

Benefits and commissions

Real estate agents may also not be aware that there are now provisions under the Corporations Act that ban conflicted remuneration. Under s963A of the Corporations Act, conflicted remuneration is any benefit (monetary or non-monetary) given to an AFS licensee, or its representative, who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence:

(a) the choice of financial product recommended to retail clients by the AFS licensee or representative; or

(b) the financial product advice given to retail clients by the AFS licensee or representative.

ASIC is aware that there are some real estate agents who are offering commissions or benefits to financial advisers for recommending investors use an SMSF to purchase property. Such commissions or benefits may be conflicted remuneration and financial advisers may be banned from receiving them. This is because the commissions or benefits could reasonably be expected to influence the financial product advice given to retail clients. For more information, see ASIC Regulatory Guide 246 Conflicted Remuneration on our website.

Where the REIA or its members see examples of real estate agents paying commissions or benefits to financial advisers or financial advisers accepting such commissions or benefits, please let us know by visiting 'About ASIC / How to complain' on ASIC's website.

ASIC’s role

ASIC’s role in relation to SMSFs is to regulate the gatekeepers – the advice providers, SMSF auditors, and providers of products and services to SMSFs.

ASIC can give general information regarding the law and ASIC's policies and procedures, but we cannot provide legal advice. Extensive information is available on ASIC's website at www.asic.gov.au.

ASIC's role includes the enforcement of the requirements of the Corporations Act. ASIC is more likely to take stronger enforcement action where people knowingly breach the Corporations Act and/or continue to breach the Corporations Act once the requirements have been brought to their attention.

Last updated: 06/11/2013 12:00