Financial abuse the hidden problem with self managed super funds

In cases like divorce, the less active trustee can be left vulnerable to financial abuse

A recent parliamentary joint committee found that SMSF members are vulnerable to financial manipulation due to their lack of regulatory oversight and, more broadly, there are failings within the wider superannuation and financial system when it comes to financial abuse.

With most SMSFs being run by a couple, the issue comes down to one member behaving badly – financially – towards another.

The committee, composed of 10 politicians from the Coalition, Labor and the Greens, unanimously agreed upon 61 recommendations, which is a statement in itself given the usually divisive views held by each of these political parties.

Financial abuse is not a fringe issue. A Deloitte-Commonwealth Bank report estimates that the financial toll on victims is estimated to be $5.7bn a year, which is higher than the estimated $3bn lost to scammers.

The committee said: “Financial abuse undermines the economic independence of the victim, often trapping them in cycles of financial hardship and dependency that can span decades, extending well beyond separation or divorce.”

If you ask a group of self-managed super fund trustees why they decided to establish their fund, most will say they wanted to have increased control, ownership and flexibility over their retirement funds. And although it is true that SMSFs enjoy these benefits, it can also be a double-edged sword when misused.

In a submission to the committee, Future Group, which has 385,000 members under five super fund brands, said: “For SMSFs the threat arises because the members of the super fund are its trustees. In circumstances of family violence involving the trustees of a SMSF, there is greater potential for one partner or family member to coerce another into making decisions or managing the SMSF in a certain way, and less external regulatory involvement or oversight to prevent that from occurring.”

Here’s an example: A 37-year-old single mother met a partner who convinced her to open a SMSF and let him invest for her due to his extensive prior investment experience. But when the relationship dissolved, she realised her now former partner had transferred the SMSF funds into an account that only he could control. From here, the process to try to reclaim the super money is complex and involves engaging lawyers and accountants at a substantial cost and there are doubts about how much money will actually be returned.

Upon reflection the victim said: “Unless you personally really know what you are doing and deeply want a SMSF, keep your superannuation in a regulated environment – and don’t allow a partner, accountant or any other person convince you otherwise.”

And unfortunately this is not an isolated case. Timothy Ricardo, chartered accountant with Sydney-based Accounting Advisor Group, says: “In the accounting industry, we often deal with a primary trustee of an SMSF who dictates decisions and the other trustees are more passive and just sign when asked to. Unfortunately, in cases like divorce, the less active trustee can be left vulnerable to financial abuse. My advice is that all SMSF ­trustees should have an active ­relationship with their SMSF ­accountant and financial adviser in addition to having continuous access to all linked bank accounts and investment logins.”

Another area of concern in the superannuation sector involves the payment of death benefits and the lack of recognition of domestic violence in superannuation death benefits. Advocacy firm Super Consumers Australia said in its submission that rigid definitions of financial dependence regarding who can be paid a super death benefit is an issue: “A victim-survivor may not meet the standard of financial dependence due to a temporary separation, while a perpetrator of financial abuse may meet the standard simply because they lived with the deceased or met the definition of a spouse.”

The committee heard of a woman who died with $353,000 in super that was initially paid to her five daughters. However, a man who claimed to be the woman’s spouse told the Australian Financial Complaints Authority he should have been entitled to the super account. The daughters provided evidence in the form of statutory declarations and police reports to show that the relationship was over and that their mother was the victim of domestic violence from the man.

However, AFCA ruled that based on the governing legislation on superannuation, the complainant was deemed to be the sole financial dependent of the deceased despite evidence they were not living together in a genuine domestic partnership. AFCA overturned the super fund’s decision, awarding the full death benefit to the partner.

One of the recommendations from the parliamentary committee is that: “The Superannuation Industry (Supervision) Act 1993 be amended to provide a mechanism so that a beneficiary who has perpetrated domestic or family abuse, including financial abuse, and domestic violence related suicide, against the superannuation account holder can be declared an invalid beneficiary of the account holder’s superannuation death benefits.”

The recommendations from the committee are likely to be widely accepted by the public as it fills the gap in legislation where victims of financial abuse fall through the cracks and injustice caused to them and their families.

James Gerrard is principal and director of financial planning firm Financial advisor.com.au