Stockbrokers' charge clauses cause problems for Australian SMSFs

The principles in this article also apply to institutions providing forex trading and contracts for differences
current
situation

Introduction

In the recent past, some online stockbrokers' accounts (even some extremely well known and Australian based ones) required funds to charge or pledge assets deposited with them or held by them as security for the payment of any debt owed to the stockbroker. Since SMSFs are not permittedATO Interpretive Decision:
ID 2007/58
to open margin stockbroker's accounts, inevitably SMSFs will deposit funds with stockbrokers and such a clause will render the fund in breach of superannuation law.

The law which applies is Regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 which (subject to exceptions which do not apply) sets an "operating standard" that the trustee of an SMSF must "not give a charge over, or in relation to, an asset of the fund". In Regulation 13.11 a charge is widely defined as "including a mortgage, lien or other encumbrance".

By section 34(1) of the Superannuation Industry (Supervision) Act 1993 an "operating standard" must be complied with. Rather alarmingly, if a trustee intentionally or recklessly fails to ensure that an operating standard is complied with, this is a criminal offence. In almost every case however, a breach of the regulation arising from a stockbroker's charge clause will be accidental, since such clauses are buried in a mass of fine print. In such circumstances no offence will be committed.

And in practice the ATO is likely to give the fund a chance to correct the problem before issuing a notice of non-compliance.

Since I started this page, online stockbrokers have become much better aware of the problem for SMSFs arising from a charge or pledge of the fund's assets and there has been a real improvement in the fine print. However I would still advise my clients to check their stockbroker's terms carefully for an offending clause of this type.

What you may need to do

Looking for the offending clauses

You need to look carefully at the stockbroker's terms and conditions. Usually the offending clauses are to be found in the "trading agreement", but sometimes they are found in the general terms. For stockbrokers based in Australia the terms will either appear or be explained in the "product disclosure" information.

Since I want to keep a close eye on these matters I am happy to look at your own terms for you at no charge and on an "at your own risk" basis. You can just send the terms to me by email at or by mail at PO Box 354 Corinda QLD 4075. If I am overwhelmed I will have to withdraw this offer!

New agreements

If you want to start a new stockbroker's account for your SMSF and find an offending clause, you will need to contact the stockbroker for a solution before agreeing to the terms. Almost all online stockbrokers will have someone you can contact for assistance in opening an account and that person will either have authority to negotiate the terms or will be able to pass the query on to the appropriate department. By all means refer the person to this page if necessary.

Existing agreements

If you find an offending clause in an existing agreement, you will need to make every effort to have it amended or removed. Once this is done, you will no longer be in breach. There is no need to close the account and open another one, because the existing terms can be varied by agreement in this way. As mentioned above, as long as you missed this accidentally and as long as it is dealt with as quickly as possible it is very unlikely that the ATO would serve your fund with a notice of non-compliance or take any other action. If the stockbroker refuses to change the terms you will have no alternative but to close the account.

How to deal with any offending clauses

Stockbrokers have dealt with the problem in different ways. As can be seen from the table below, some have varied their standard clauses for SMSFs, others have removed them altogether. Some have added a proviso clause to the terms and conditions.

Such a proviso clause might read:-

"To the extent that any provision in this agreement is in breach of regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994, that provision shall not apply between the parties to this agreement."

Current situation with the online stockbrokers and institutions providing forex trading

I update this section from time to time but the terms and conditions are constantly changing and it is difficult to keep up. I would be grateful for your reports by email at to enable me to do so.

Stockbrokers
Broker Situation on the date given below
ANZ Share Investing Clauses 7.2 and 7.3 automatically pledge money provided by the fund in the Settlement Account to pay for trades. This would mean that such money is, for the short time between an order and settlement of that order, charged with the payment of the order. Whether this entirely unnecessary provision would breach Reg 13.14 would seem to depend on exactly how this operates in practice. For example it might turn on whether it can be argued that once the order is made by the fund, the fund ceases to own the settlement monies it has placed with the broker (normally this would not be the case however). [26 January 2017]
Bell Direct Lien applied (in clause 3.11). Bell Direct have agreed that the above proviso clause can be inserted on request. [22 October 2013]
Commsec No charge clause when I looked recently (you will need to check that this has not changed). [10 January 2016]
CMC Markets No charge clause in the March 2014 version of the terms and conditions (you will need to check that this has not changed). [2 June 2015]
DirectShares (St George) These terms contain a pledge in the same terms as ANZ Share Investing (see above). [26 January 2017]
Ebroking (CMC Markets) No charge clause when I looked recently (you will need to check that this has not changed). [22 October 2013]
E*Trade Australia
closed: see ANZ Share Investing
The previous lien which was applied in clause 12.6 of the terms and conditions has now disappeared. Instead there is a contractual right to set-off in clause 11.3 which is not automatic and therefore is not of the nature of a charge. So these terms now get the go ahead, but of course you will need to check that this has not changed. [22 October 2013]
IG Markets In the Share Trading Agreement of June 2016, clause 15(8) the broker has a power to sell the fund's investments which it holds (which is a feature of a charge), and in clause 15(9) the broker has a power to retain possession of the fund's investments which it holds. This is described in the clause as a "lien". Although under these clauses, these powers may only be exercised where the fund is indebted to the broker, the problem is that in agreeing these terms an immediate charge is created (it does not depend on another step by the broker). Also it is clear that the broker intends these powers to be security interests over the fund's investments which it holds - clause 12(11) expressly says so. I recommend a side letter or proviso be agreed. This should clearly state that it overrides the "entire agreement" clause in 18(2) and will survive any amendment to the terms notwithstanding clause 25(2). [12 February 2017]
Interactive Brokers Charge clauses apply (in clauses 14 and 15 of the usual agreement, but sometimes found in different clauses). IB had agreed that there was a problem and were willing to remove or amend the offending clauses for Australian SMSFs on request. However due to a change of personnel, there may currently be a problem in pursuading them to do this. You will need to ask them to remove the offending clauses or to agree to the proviso. Clause 1 of the service agreement provides that such amendments must be made in writing by an IB Officer and not a customer service employee. [22 October 2013]
Macquerie Prime In Clause 2.1 of the General Conditions there is a contractual right to use the fund's money in the prime account to pay a debt owed to Macquarie or one of the other contracting parties. This would not normally be a problem. However Clauses 2.5 and 9(s) describe this right as a "security interest". A side letter or proviso is advisable. [22 October 2013]
NAB Trade From February 2013 NAB added a proviso clause in clause 2.1(b) of the broking terms and conditions, so these terms get the go ahead (you will need to check that this has not changed). [22 October 2013]
OpenMarkets Clause 11.25 in the June 2015 conditions refers to "collateral" lodged with the broker by the client, which can be disposed of by the broker. This is probably a reference to security provided under clause 11.4, which permits the broker to call for security from the client and which the client is obliged to give. Apart from these provisions the conditions do not attempt to charge any funds owned by the fund. A fund should refuse to provide any security if asked to do so under clause 11.4.
PhillipCapital Australia The 7 March 2016 terms and conditions of trading in equities on the Australian share market can be given the go ahead, but these are not currently downloadable from the website (you have to request them specifically). The broker says that you will be given the terms and conditions on joining up, which is not a good idea! You will need to be careful that no additional terms and conditions are applied. [26 January 2017]
Saxo Capital Markets Saxo have introduced a special application form called the "SMSF Account Application Form" which, together with recent amendments to the General Business Terms, have addressed previous charge clause problems for SMSFs. Make sure you use the correct application form and it is wise to continue to check the fine print. [22 October 2013]
SelfWealth SelfWealth Trading terms and conditions are careful to avoid a charge in the case of superannuation funds and so these terms get the go ahead (you will need to check that this has not changed). [23 July 2016]
Westpac Securities From 11 July 2013, Westpac added my proviso clause to clause 7.9 of the terms and conditions for online trading, so these terms get the go ahead (you will need to check that this has not changed). [22 October 2013]

Institutions providing forex trading
Institution Current situation
Go Markets There is a contractual right to use deposited monies which is probably not a problem. However a side letter or proviso is advisable. [22 October 2013]
Pepperstone There is a contractual right to use deposited monies which is probably not a problem. However a side letter or proviso is advisable. [22 October 2013]

Jeremy Gordon

Copyright © Jeremy Gordon
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This article only applies to Australian self-managed superannuation schemes regulated by the Australian Tax Office.

Disclaimer
This article does not arise from any instructions from you and it is not legal advice given to you. You should check for yourself about the matter contained in this article. If you follow the information on this page, you do so at your own risk.

Sources:
For the Superannuation Industry (Supervision) Regulations 1994 and the Superannuation Industry (Supervision) Act 1993 go to Comlaw and search for the relevant statute or regulation. Comlaw contains up to date versions of the legislation which can be viewed or downloaded.
There is some ATO material, in particular ATO Interpretive Decision 2007/57 where it was decided that a trustee of a SMSF contravened the regulations by depositing fund assets with a CFD provider as security in relation to the fund's obligations to pay margins.
You can search for this using a search engine or go directly to the ATO site.

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Jeremy Gordon is an Australian barrister. He can be contacted by email using
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