The unwanted sector collision

SMSFs are a wonderful and effective vehicle allowing many people to grow their retirement savings, but unfortunately they can also be used as a tool for financial abuse. Penny Pryor examines the situation and the steps being taken to address it.

Late last year, the Parliamentary Joint Committee (PJC) on Corporations and Financial Services released the report from its inquiry into the Financial Services Regulatory Framework in Relation to Financial Abuse.

That report, entitled “Financial abuse: an insidious form of domestic violence”, made a total of 61 recommendations the government is currently considering. Included in them was a call out to financial advisers and an acknowledgement of how superannuation, and SMSFs specifically, can be used to inflict financial abuse on a partner.

“It’s a positive development that both sides of politics were focused on financial abuse during the election campaign. We’re hopeful this means that any measures rolled out in this term of government will have bipartisan support,” Chartered Accountants Australia and New Zealand chief executive Ainslie van Onselen says.

“We look forward to working with the next government to implement changes in this important area because it’s clear a holistic approach is needed.”

What is financial abuse?

Acknowledging there were many definitions of financial abuse, the PJC noted: “Financial abuse generally refers to actions aimed at controlling access to money or finances, however, for the purposes of this report, the term financial abuse will include economic abuse, which more broadly refers to controlling economic resources (for example, employment, education, housing, transport and food) beyond money and finances.”

The Australian Bureau of Statistics (ABS) classifies economic abuse into three broad categories: economic restriction behaviours, economic exploitation and economic sabotage behaviours.

Economic exploitation includes pressuring or forcing a partner to sign financial documents and manipulating or forcing them to cash in, sell or sign over any financial assets they own. Economic restriction includes controlling or trying to control them from knowing about, having access to, or making decisions about household money and their income or assets.

The most recent ABS Personal Safety Survey found 16 per cent, or 1.6 million women, had experienced partner economic abuse compared to 7.8 per cent, or 745,000, for men. Of those 1.6 million women, 173,900 have experienced economic abuse at the hands of a current partner, while 1.5 million have experienced economic abuse perpetrated by a former partner. For those who experienced economic abuse by a current partner, economic exploitation was the most common type, with 75 per cent reporting that was the case. And for situations where the abuse came from a former partner, economic sabotage, such as damaging or destroying property, was the most common type at 78 per cent.

The role of SMSFs

“Financial abuse is a complex and sector-wide issue that requires a holistic approach from various stakeholders,” van Onselen acknowledges.

“Like all other financial products and services, SMSFs can be subject to financial abuse through either coercive or deceptive means.”

The “Financial abuse: an insidious form of domestic violence” report used a case study provided in a submission to highlight how SMSFs can be used to inflict financial abuse. In that example, a young single mother, who had considered herself financially savvy, was charmed by a new partner who convinced her over time she wasn’t good with money.

He began restricting how she spent money. He also told her he had extensive investment experience and convinced her to set up an SMSF. Although she believed the account was in her name and she controlled the investments, when she left the family home and tried to access the fund’s benefits, she realised her partner had transferred funds into an account only he could access.

SMSF Association head of policy and advocacy Tracey Scotchbrook points out abuse can happen at the point of establishment of an SMSF or sometime later and it can take a good period of time before the victim becomes aware of it as per the above example.

“It could be something that happens later, well after the fund has been established. The coercive control and the types of behaviours that have been exhibited by perpetrators often have a long tail. It’s something that builds over time as they erode the confidence of their partner and gradually take control away from them, so much so the victim doesn’t realise it’s happening until circumstances change and they find they are corralled or stuck and don’t have access to certain bank accounts or have control of different aspects of their financial life,” Scotchbrook explains.

Institute of Financial Professionals Australia head of technical services Natasha Panagis notes most of the harm via SMSFs occurs in relationships when the person causing the harm has the position of power in the fund either as a trustee or the director of the corporate trustee.

“They use that role to do a couple of things, such as controlling the spouse or the family member’s retirement savings, or it could be by way of pressuring a partner or a relative to join an SMSF and subsequently make decisions that aren’t in the new member’s best interests. It could also take the form of shutting someone out of the decision-making process by withholding information from them, or changing fund structures. In some extreme cases it may even involve forging documents,” Panagis says.

There are other insidious ways an abuser can use an SMSF. For example, if a trustee refuses to agree to the wind-up of an SMSF, the only recourse left for the other trustees is to take them to court.

“SMSFs don’t have access to a body like AFCA (Australian Financial Complaints Authority) because they are a privately held vehicle. It means AFCA doesn’t have any ability to act as an arbitrator where there’s a dispute between the trustees,” Scotchbrook states.

“So the only avenue available to aggrieved parties in any SMSF dispute, whether it’s a financial abuse situation or something else, is to take the matter to court if it can’t be resolved among themselves. That action, of course, is not accessible to someone who’s been cut off from their financial lifelines.”

This was an issue also recognised by PJC chair Labor Senator Deborah O’Neill, who said: “The Public Trustees of Australia pointed out that victims of financial abuse within self-managed superannuation funds face severe disadvantages, as these funds are not covered by the Australian Financial Complaints Authority ... Something is very wrong when the perpetrators of economic abuse receive their victim’s superannuation earnings.”

The recommendations

The committee was so concerned about the use of SMSFs in financial abuse that it has recommended a further review “into the intersection between financial abuse and the superannuation system, particularly in relation to SMSFs”.

It put on the record: “The committee is concerned that SMSFs represent a significant pool of funds that are vulnerable and attractive to would-be perpetrators of financial abuse. The committee notes that financial abuse perpetrated through SMSFs has the potential for devastating impacts on victim-survivors’ financial and retirement prospects.”

Scotchbrook agrees a further review into the use of SMSFs is probably necessary and occurrences of financial abuse using these types of super funds need to be brought into the light.

“As we saw, the power of some of the lived experiences of the victim-survivors, or indeed where they’re unable to have a voice themselves through their families or other representatives, really highlighted some of the hidden issues in this space,” she points out.

“So I think it’s really important that, once again, those with the lived experience have an opportunity to have a voice and that those voices can help effect important positive change to protect victims of this abuse.”

Another recommendation highlighted the role of financial professionals in the space, including financial advisers, and proposed a review of their ethical obligations. It also proposed penalties “for members who actively enable or facilitate financial abuse on behalf of their clients where there is no other reasonable basis underlying the instructions given by the client”.

There was also a call for professional and victim-survivor advocate bodies to “co-design education resources for service providers to enable increased identification of financial abuse and timely reporting of suspected abuse to financial institutions and law enforcement bodies.”

What can the sector do?

Before they issue their own guidelines, most professional organisations that deal with SMSFs are waiting to see what the government does with regard to the many recommendations of the report and potentially the outcome of a second inquiry specifically into superannuation.

However, many are already having discussions with their members around how to identify financial abuse.

“Education is key. Chartered accountants are in a unique position to identify when financial abuse could be occurring, which is why we are stepping up our efforts and resources to educate our members on this important matter,” van Onselen reveals.

“If professionals who interact with our financial systems are alive to the issue and know what to look for, then that is an important step in the right direction.”

Like any recognised profession, advisers and accountants already have legal and ethical obligations, as well as fiduciary duties and professional standards to which they need to adhere.

“Ideally this should all be already part of what good practitioners are doing. So we just hope that this doesn’t become an extra layer of red tape as opposed to reinforcement of the professional responsibilities that they take seriously. We’ll certainly look to help members spot these types of things, but we might just wait to see how this pans out before we go full steam ahead,” Panagis admits.

There is also an industry call for a complaints mechanism or channel a professional dealing with SMSF clients suspected of suffering from financial abuse could use.

“We’re looking to what other mechanisms could be put in place to assist victims in this situation to get some sort of action or redress simply and cost effectively, but, importantly, timely,” Scotchbrook reveals.

It is accepted education regarding financial abuse is very important, but particularly so in the SMSF context so more people can be aware of what it is and not fall victim to the abuse in the first place.

“We need sustained public campaigns and practical resources to help people understand that SMSFs are serious financial structures, not something to enter into lightly. These funds rely on trust, cooperation and independent decision-making, so people should always get proper advice before joining one,” Panagis suggests.

She also highlights the need for financial professionals in this space to continue to act as strong gatekeepers, which may mean gently asking new members about family dynamics or potential risks.

“They should make sure that their clients know they have rights, like the right to challenge decisions or leave a fund if things aren’t right, and, I think, more importantly, we can’t fall into the trap of making assumptions about who’s at risk here,” she advises.

One of the many misconceptions people have is that financially savvy individuals do not fall victim to financial abuse, however, the inquiry heard many stories of highly educated professionals who were victims of this behaviour.

“There was one person who gave evidence to the inquiry who was a financial services executive. She had many, many years in the industry and were well educated, so was very knowledgeable of the system. But she herself had not recognised that, over time, her partner had been abusing her. It had started in a very, very small way,” Scotchbrook notes.

“That is a typical scenario where the abuse gradually increased over time until the day the victim realised she was actually trapped.”

To this end, her message is clear: that while the professional bodies wait for the government’s next steps, it is vitally important for anyone working with SMSFs to expel any preconceptions around who is or isn’t vulnerable.

“All practitioners need to ensure they’re really looking at what’s happening with their clients and make sure the relationships are strong. Any changes need to be carefully observed and a conscious effort to protect and act in the best interest of both members in an SMSF is vital, rather than just giving attention to the more dominant or controlling individual,” she points out.