29/03/2012

There are a number of issues when a Bank's lawyers prepare documents for an SMSF client.

Do the Bank's Lawyers have to prepare the documentation?

One client contacted us to confirm whether our firm is able to prepare documentation for the transaction if the SMSF is borrowing from a particular Bank.  This client was under the impression that when borrowing from a particular Bank, their SMSF was obligated to use the Bank’s lawyers to prepare the holding trust deed and other Limited Recourse Borrowing ("LRB") documentation for the Fund.  Clearly, this is not the case; it is of vital importance to have independent legal advice.

Lawyers acting for more than one party

If the Bank's lawyers were to act for the Bank and your SMSF for the same transaction it is generally accepted practice (Rule 9 of the NSW Solicitors Rules 1995) that the lawyer must make both parties aware of the fact that they are representing both parties and seek both parties' consent. 

If you are not asked to consent, this means the Bank’s lawyers are not acting for you.

We are told that when the Bank’s lawyers have prepared these documents, if a Trustee seeks clarification or advice on the documents, the Trustee is advised to engage a different firm to provide legal advice to it on the documents.  The Bank's lawyers cannot advise you on the documents they have prepared if they are not acting for you.  These additional legal costs for engaging the different law firm appear to negate any perceived reduction of fees by the Bank’s lawyers.

The importance of independent legal advice

Much like the importance of your clients obtaining informed and well-constructed financial advice from you, it is important that the Trustees of an SMSF seek legal guidance and assistance from a lawyer who is acting on their behalf, with the compliance of their fund being of paramount importance.  If documents are prepared by a party who is not engaged to act on behalf of the Fund, how will your clients navigate the pitfalls of compliance?

Professional indemnity insurance

One of the protections that clients of an independent law firm obtain is access to that firm's professional indemnity insurance if something goes wrong.  You won't have access to that if the Bank's lawyers are not acting for you.  Any mistakes that are made could leave you high and dry.

Extra advice on the process

Your own SMSF lawyer can help you not only with the LRB documents but with ancillary advice that can be so important in understanding how to process your fund's LRB.  Often this advice can be by way of a simple phone call.  You won't get that from the Bank's lawyers, who will tell you it is not part of their brief.

We regularly talk to new SMSF clients who seek our help because the standard LRB documents they purchased from an online document provider came with no other assistance or 'after sales service' of any kind.  It is the same when you deal with the Bank's lawyers.

The use of a Bank's lawyers to provide these services to you can be a false economy that comes with more risk.  In the end it will likely cost you more as you pay those lawyers for the documents and your own lawyers for the other services you need.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.