These “important” differences mean the level of systemic risk posed by direct SMSF leverage is not the same as the level of systemic risk posed by direct leverage outside of superannuation, Cavendish said.

The submission pointed out that the SIS Act imposes several restrictions on super funds that borrow to invest, which are designed to alleviate the risks associated with losses from assets purchased using a loan.

For example, while the frequent use of personal guarantees to protect lenders against the possibility of large losses can reduce the effectiveness of the SIS restrictions, this is unlikely to be the case in many scenarios involving LRBAs, Cavendish said.

“The Final Report refers to a scenario where there has been a significant reduction in the valuation of an asset that was purchased using a loan, requiring the trustees to sell other assets of the fund to repay a lender, particularly if a personal guarantee is involved. As a result, the LRBA has been ineffective in limiting losses from one asset from flowing through to other assets, either inside or outside the fund,” Cavendish stated.

“The SIS Act prohibits any legal right of recourse against the assets of the fund should the trustees default on the loan. The rights of the lender against the fund as a result of default on the borrowing are limited to rights relating to the acquirable asset. The acquirable asset also must not be subject to any charge - including a mortgage, lien or other encumbrance.”

Cavendish also disputed the FSI’s finding that the use of LRBAs by superannuation funds is likely to result in lower levels of asset diversification and higher levels of investment risk, suggesting that the opposite may be true.

“The use of LRBAs are enabling SMSF investors to reduce their exposure to asset classes which historically SMSFs have held over exposed positions, such as listed securities and cash.”

An alternative measure to repealing the LRBA provisions could be introducing further consumer protection measures and licensing LRBA advice, Cavendish suggested.

“We believe a decision to repeal the LRBA provisions should not be made in the face of reported inappropriate and unlicensed overselling, without first implementing these proposed regulations and then, sometime after, assessing their effectiveness,” Cavendish stated.

Related-party borrowing should also be prohibited as part of an LRBA, Cavendish argued, as the ability of related parties to lend money to their SMSF on non-commercial terms is an “overly generous” concession which can ultimately erode confidence in the SMSF sector.