Fears of an emerging systemic risk in the self-managed super funds sector — home for more than $530 billion in Australian retirement savings and the ­nation’s fastest-growing nest egg — have promoted a call for a radical overhaul of the supervision of the SMSF sector.

In a submission from the Fin­ancial Services Council — the peak umbrella body representing most commercial fund management and life insurance business in Australia — the FSC recommends that the existing rules in which the Australian Taxation Office has total oversight of the SMSF sector should be changed to give the Australian Prudential Regulation Authority the chance to address systemic risks as well.

In that way APRA would work together with the ATO to assess any emerging risks in the SMSF sector.

The FSC proposal, obtained exclusively by The Weekend Australian, to the financial system inquiry comes as the number of SMSFs in Australia approaches 500,000, covering more than one million Australians who are members or trustees.

Deakin University lecturer Adrian Raftery said this week that there were 995,878 trustees in Australian SMSFs as at December 31 and the numbers had been growing at about 10,000 a quarter.

This represents huge growth in the sector.

The submission says that the ATO should retain its responsibility for oversight of SMSFs, which have to file returns to the tax office, but that APRA should also get involved in the macro oversight process.

For instance, the SMSF sector has come under significant criticism in recent months over the risks that are implied by members borrowing inside their SMSFs to buy investment properties.

Under present regulations, it is not for the ATO to assess that risk.

Late last year Steve Harker, chief executive of Morgan Stanley Australia, said that “the single biggest economic wreck that will occur in this country in the next five to 10 years will be in the SMSF space”.

APRA’s remit is to monitor prudential risks in Australia’s banks, building societies, credit unions, insurers and superannuation funds.

“APRA should be responsible for prudential regulation first and foremost to protect the fin­ancial promises held out to deposit-holders of Australian deposit-taking institutions ... and members of superannuation funds in Australia,’’ the FSC said, making no distinction between the APRA regulated pooled funds and ATO-regulated SMSFs.

APRA has stayed out of monitoring SMSFs because there is no “promise’’ involved, given that SMSF trustees are mostly individuals investing on their own account.

And Treasury’s own submission to the inquiry stated that “SMSFs support consumer choice and should not be prudentially regulated’’.

The FSC also sharply criticised the haphazard way that superannuation statistics are currently assembled.

“SMSF data should be collected by the ATO and analysed by APRA for systemic assessment,’’ the paper said, with the Australian Bureau of Statistics being tasked to produce statistical reports on the entire superannuation sector.

Duncan Fairweather, executive director of the SMSF Owners’ Association of Australia, said that any prudential regulation of SMSFs was an unnecessary expense.

“SMSF performance often exceeds that of professionally managed superannuation funds and the sector is in very good shape,’’ he said.

This article was first published in The Australian and can be found here.