While the provision of documents from non-qualified suppliers may appear to be a simple and low-cost approach, there are numerous risks involved for advisers and end-users.
Most SMSF deeds are now probably supplied via non-qualified suppliers, with minimal lawyer input (eg the deed template may have had some input by a lawyer). This is despite the fact that only lawyers are legally qualified and authorised to prepare SMSF deeds.
This article explains the key risks and differences that should be considered by an adviser when obtaining an SMSF deed directly from a law firm compared to a non-qualified supplier.
Over the past 10 years, there has been an increasing transition towards documents being prepared via automated technology platforms, largely aimed at minimising cost and human input (especially adviser and lawyer input). Perhaps the biggest change in the supply chain in the past five years has been the ability for advisers, such as accountants and financial planners, to obtain the use of SMSF and related legal documents so that the adviser can prepare documents from the supplier’s platform. Typically, the adviser pays a licence fee that permits them to prepare a certain number of documents over a specified period (as compared to, for example, paying a law firm to prepare an SMSF deed for a particular client).
Typically, non-qualified suppliers do not have any significant technical or legal expertise in respect of drafting legal documents such as SMSF deeds and related legal documents. Some of the documents that they supply may have at one stage in the past been reviewed by a lawyer. As superannuation and tax laws are constantly changing, SMSF deeds should be reviewed on at least an annual basis and revised as needed, preferably by lawyers who are SMSF experts.
What does lawyer sign-off involve?
Many non-qualified suppliers claim that their documents are signed-off by a lawyer.
While a reference to “lawyer sign-off” does not have a fixed or “normative” meaning, it conjures up the impression to many that the document has been prepared and reviewed by a lawyer who has approved that document. Thus, care is required when dealing with claims that documents have been signed-off by a lawyer.
The position is likely to be clearer where the SMSF deed is supplied directly from a law firm (and not from an entity that is associated or linked to that law firm). For example, at DBA Lawyers, a lawyer reviews the instructions for each SMSF order and then drafts documents that are appropriate to those instructions (based on an SMSF deed and related legal documents that have been prepared by our lawyers, including the covering letter, completion checklist, trustee resolutions, product disclosure statements, SMSF memos, and related documents).
Unpacking some of the claims on what “lawyer sign-off” covers, you might seek to drill down on:
- whether any of the documents were ever prepared or reviewed by a lawyer and, if so, by whom and when, and whether that person had any relevant SMSF or related expertise; and
- in the event that the original precedents, such as the SMSF deed and related documents, were prepared by a law firm, it would be misleading to claim that completed documents, prepared from those precedents to satisfy specific client orders where the adviser inputs relevant details and chooses the various options for each client, have been signed-off by a lawyer.
Some document supply systems produce documents almost immediately after the data has been entered into the supplier’s platform. Naturally, if documents are produced immediately, that is a likely indicator that there is no review taking place.
What happens when something does go wrong?
One simple example of where an SMSF deed may not be valid is where it is not varied in accordance with the variation power in the prior deed. Our experience has shown over many years that many documents from non-qualified suppliers do not stand up to legal scrutiny and may be challenged on various grounds, thus leaving clients “skating on thin ice” when it comes to relying on, for example, a binding death benefit nomination (BDBN) where the SMSF deed has not been varied in accordance with the prior documentation trail. For instance, if each relevant person/entity that must consent to the variation is not made a party to that deed, the deed may be at risk of being challenged. We often find shortcomings in prior variations, missing documents etc.
As discussed below, there is unlikely to be professional indemnity insurance available to an adviser who prepares an invalid deed, as a non-qualified person is not legally authorised to prepare a legal document for a client for a fee.
A client who is supplied a faulty SMSF deed could claim against their adviser. The adviser, in turn, may seek to claim against their supplier. Their supplier may, in turn, seek to claim against the person who prepared the faulty document or system (which may be a law firm that has licensed the document to the supplier). However, where does the negligence or mistake lie, and what are the terms and conditions of the supplier’s platform? Most suppliers disclaim liability to the maximum extent possible at law.
Most professional indemnity insurance for advisers (other than lawyers) excludes cover for services that a lawyer must perform. Advisers and end-users should therefore not assume that professional indemnity insurance is available. Further, some non-qualified suppliers may have no insurance cover at all.
Non-qualified suppliers may appear cheaper, but are they?
A recent check on the terms and conditions of use (or disclaimers) issued by a number of non-qualified suppliers revealed that they claim to provide information only and not advice, seek to expressly exclude the fact that they provide legal advice or documents, and recommend that legal sign-off be obtained from a qualified lawyer that the user engages before any document supplied is executed.
These claims are interesting as many non-qualified suppliers provide documents for a fee, disclaim liability and request the user to obtain their own legal advice. Thus, these suppliers are, in essence, merely offering document templates or information but not a document signed off by a lawyer. One wonders whether advisers who use these suppliers are aware of what service they are procuring or have reviewed the detailed terms and conditions, as there appears to be no significant advantage if an adviser then has to seek separate legal advice.
Despite the above issues, many users are typically driven by low costs and not quality or value. Indeed, as the saying goes, “self-interest” generally wins out, especially if an adviser can increase their profit and charge their client a higher price. As noted below, there are significant penalties that can be imposed on non-qualified persons undertaking legal work.
An SMSF deed supplied from a law firm may therefore represent better value, in view of the fact that the deed is drafted and signed-off by a lawyer and is backed by professional indemnity insurance (which is compulsory for lawyers to have). This is one key factor that points towards obtaining legal documents from a law firm.
Broadly, this leads to the analogy that the supply of SMSF deeds is, in certain respects, like comparing someone getting their tooth fixed by a backyard mechanic. While not many people would ever consider getting their teeth worked on by a backyard mechanic, they are likely to be cheaper in extracting a tooth with a pair of plyers than a dentist.
Does updating an SMSF deed constitute legal work?
Most would agree that a BDBN is a simple and straightforward document. However, the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA93) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR94) that introduced express legislative BDBN provisions from 1 July 1999 have now been in practice and tested via numerous court decisions for over 22 years. The recent Supreme Court of Western Australia appeal decision in Hill v Zuda Pty Ltd1 broadly confirmed that the SISA93/SISR94 BDBN provisions do not apply to SMSFs, and therefore a BDBN for a member of an SMSF can be drafted to be non-lapsing and that this is the position in all Australian jurisdictions.
Indeed, we are concerned with the complexity of an increasing number SMSF deeds that offer all sorts of complicated and novel approaches to estate and succession planning, and indeed that they remain largely untested as a matter of case law.
Where an adviser uses a non-qualified supplier, enters client data into the supplier’s website, and then produces the necessary documents (deeds, resolutions etc), the adviser generally has to make numerous decisions regarding how to comply with, for example, the variation clause, what parties need to be bound by the deed and, invariably these days, a range of other options that they may be faced with, including:
- Is a BDBN or non-binding nomination required?
- Is an SMSF will, death benefit rule or some other novel document relevant for the client?
- Does the SMSF deed update preserve any reversionary pension directions, BDBNs, SMSF wills, death benefit rules or some other strategy?
In short, an adviser who prepares an SMSF deed update is likely to be undertaking legal work. If the document supplier purports to have any legal sign-off, at best that would typically only relate to the original or master precedent (before any changes by the particular adviser are made); the supplier is not involved in any of the decisions to ensure that the deed update is valid and legally effective. (Note the difference between this example and where an adviser merely places an order online with a supplier who then produces the documents using their own staff and resources. This reduces the adviser’s risks as the adviser does not directly undertake legal work in respect of the documents supplied. Where an adviser places the instructions with a law firm which produces the document, the adviser’s risks are minimised.)
While non-qualified suppliers may initially appear attractive, care must be taken as such services carry a number of significant risks. Advisers who are not legally qualified are therefore taking risks. Such advisers could also be placing their clients at risk and in breach of the law.
What constitutes legal work?
A person can only undertake legal work for reward if they are an Australian legal practitioner. The penalties for breach of this prohibition are substantial. While there are similarities, the legislation regulating legal work differs from one jurisdiction to the next. We examine several provisions from the Victorian legislation which has been adopted in the New South Wales equivalent (uniform) legislation. Extracts from Pt 2.1, Ch 2 of Sch 1 to the Legal Profession Uniform Law Application Act 2014 (Vic) follow:
The objectives of this Part are —
to ensure, in the interests of the administration of justice, that legal work is carried out only by those who are properly qualified to do so; and to protect clients of law practices by ensuring that persons carrying out legal work are entitled to do so.
10 Prohibition on engaging in legal practice by unqualified entities
An entity must not engage in legal practice in this jurisdiction [Vic], unless it is a qualified entity.
Penalty: 250 penalty units or imprisonment for 2 years, or both.
An entity is not entitled to recover any amount, and must repay any amount received, in respect of anything the entity did in contravention of subsection (1). Any amount so received may be recovered as a debt by the person who paid it. …”
The two offences above carry a maximum $45,435 penalty (250 x $181.74), as one penalty unit under the Monetary Units Act 2004 (Vic) is $181.74 for FY2021-22. Also, a non-qualified entity or person engaging in legal practice could serve up to two years’ imprisonment.
Legal work includes the preparation of a document which affects legal rights and that is tailored to the particular needs of another person. The preparation of an SMSF deed update (as outlined above) would satisfy this definition. An SMSF deed update imposes duties on the trustees, and regulates the rights of members and possibly other parties. Furthermore, the deed defines the relationship between the trustees and members, and therefore affects their legal rights. Under many web portals, the entity or person preparing the SMSF documents is the adviser who enters the data and makes the legal decisions as to which parties need to be added etc. The preparation and tailoring of an SMSF deed for a particular SMSF is substantially different to the insertion of the names of the parties in a standard legal form.
The case of Legal Practice Board v Computer Accounting and Tax Pty Ltd2 involved an accountant who inserted the names of the trustees of the fund and some other basic details in the SMSF deed to establish a new fund. It was not a defence that the pro forma deed had itself been drafted by a lawyer, as the adviser’s insertion of the parties and other details in broad terms constituted legal work.
Adviser limits under rules of relevant professional bodies
The various professional bodies in Australia have attempted to address the issue of members engaging in legal services, and the associated consequences. Their responses have been as follows:
Accountants who are members of the two major Australian accounting bodies (ie Chartered Accountants Australia and New Zealand, and CPA Australia) are prohibited from preparing legal documents under CR 3 – Public Practice Regulations, which states:
“3.11 Preparation of Legal Documents
Members must not carry out work which is required by law to be performed by legal practitioners.
Legislation in various jurisdictions prohibits unqualified persons from preparing legal documents and Members should ensure that they do not contravene these laws. If in doubt, refer the client to their solicitor or, if appropriate, obtain the client’s approval to instruct a solicitor.”
The Accounting Professional & Ethical Standards Board APES 110 Code of Ethics for Professional Accountants (including Independence Standards) also requires accountants (including chartered accountants and CPA accountants) to act professionally and with integrity.
A member of the Financial Planning Association commits an offence if the member “is found guilty of any breach of the law punishable by imprisonment of more than six months”.
From 1 January 2020, compliance with the Financial Planners and Advisers Code of Ethics 2019 (the Code), currently administered by the Financial Adviser Standards and Ethics Authority, became mandatory for relevant advisers who provide advice to retail clients in relation to relevant financial products. Advisers who are covered by the Code are precluded from the following (among other things):
You must act in accordance with all applicable laws, including this Code, and not try to avoid or circumvent their intent.
The intent of Standard 1 is to require advisers to not only comply with the letter of the law in meeting their legal obligations (including the Code of Ethics), but also to comply with the intent of those laws and not seek to avoid or circumvent them. This is a minimum ethical obligation.”
Members of other professional bodies should carefully inspect and abide by their rules of conduct. There are sound reasons why these professional bodies seek to limit the services that their members undertake.
Should advisers have the documents they choose to supply checked by a lawyer?
An adviser’s choice of document supplier is an implicit recommendation that the document they supply to a client is fit and legally sound for its intended purpose. Thus, advisers who do not obtain their legal documents from a lawyer, and instead choose a non-qualified supplier, are at risk of being sued and of contravening the various rules prohibiting non-qualified persons from undertaking legal work for a fee.
In negligence actions against advisers, the adviser will be measured against the service that a competent and qualified lawyer would provide. It is therefore recommended that an adviser obtain appropriate legal input to the decision of which legal documents they should obtain if they do not deal directly with a law firm. This is also recommended in the disclaimers by numerous non-qualified suppliers.
While the provision of documents from non-qualified suppliers may initially appear to be a simple, low cost and straightforward approach, there are numerous risks involved. This could expose advisers and end-users to risks that may have long-lasting consequences.
Non-qualified suppliers should be required to disclose these risks to users (typically, advisers and SMSF trustees/directors). This disclosure would assist users in making an informed decision on the advantages and disadvantages of obtaining a document from a lawyer or non-qualified supplier.
- Advantages of the DBA Lawyers SMSF deed (2021-22)
- SMSF deeds – which supplier should you use: a law firm or a non-qualified supplier?
1  WASCA 59.
2  WASC 184.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Note: DBA Network Pty Ltd hold a range of SMSF CPD training online. For more details or to register, visit www.dbanetwork.com.au or call Natasha on 03 9092 9400.
By Daniel Butler, Director ([email protected]), DBA Lawyers
19 July 2021