Bernie Ripoll (Oxley, Australian Labor Party) Share this | Hansard source

I take pleasure in speaking on the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009, and I acknowledge the contributions of the previous speaker, the member for Aston, other speakers on this bill. This bill is quite important. It reflects a range of changes that the Rudd government is making to ensure not only that the financial services sector and the Corporations Act work in unison but also that there is a uniform consumer credit model across this country—across all the states and territories. One principle that underpins this good work is that of consumer protection in ensuring that we have a robust system. We heard from the previous speaker about the twin peaks model, and I concur with him that it is a very important benchmark for how we manage the financial services and products in this country. It is very welcomed that we have this legislation before us, because it bridges a gap that currently exists and that has caused some problems in the past—or, if it not has directly caused the problems, it has certainly been used as an excuse for people not to apply the sort of regulatory rigour that they might otherwise have applied if it had applied directly to them.

This bill does two basic things. One is in relation to margin lending and the other relates to trustee corporations. Margin lending, as we have heard in the media over recent times, has been the source of a lot of problems for consumers. People have lost a great deal of money—their life-savings, their superannuation retirement incomes—and, for many, even their homes through margin lending facilities and practices. It is important that we separate out the issues and the regulatory issues for how margin lending is covered by law. As it stood, margin lending was not covered specifically by responsible lending regulation and banks, lenders and other issues did not have to adhere to principles. We do not believe this was an acceptable position. We believe that margin lending as a facility should be included. It was specifically excluded from the licensing regime that existed for those people who operated under an Australian financial services licence, an AFSL, because it did not meet the definition of who a licensee was. This bill will bridge that gap, include it and cover issuers of financial products, including issuers of margin-lending facilities. So we are removing from the licensing regime the exemption that they enjoyed.

As we will hear from other speakers, and as we just heard, a whole range of issues have arisen in recent times where the matter of responsible lending has been of great concern—and certainly of great concern to me as Chairman of the Parliamentary Joint Committee on Corporations and Financial Services, which is currently embarking on an inquiry into financial products and services, with a particular focus on the collapse of Storm Financial and Opes Prime. The problems that arose were quite simple. People were encouraged to take out margin loans that were often in vastly greater quantities than they were capable of repaying. They involved large loans. When markets are rising there only appears to be an upside. A margin loan gives you the capacity to multiply or leverage up your winnings, as it were, on the way up but, of course, the tragedy is that on the way down, when the markets and shares and stocks fall, the losses are also multiplied. That is managed through a loan-to-value ratio. It is managed through a buffer or a margin. Normally, issuers of margin-lending facilities will set a maximum of up to 70 per cent. What we saw in the heady days of a rampant bull market was that those principles that were applied were set to one side, and people were encouraged into much larger margin loans that were far beyond what their incomes could support. They were based on the income generated out of the shares that they purchased. That is how margin lending normally works. The collateral that is used is normally offset against the portfolio itself and the portfolio generates the income, which meets the repayments and the interest.

The problem for the people who got into trouble was not just the quantum of the margin loan but also their ability to meet the repayments. If it is set at, say, 70 per cent, you need to meet the 30 per cent funding through your own sources. You are meant to have the cash. It is as simple as that. People often did not have that cash, depending on the size of the loan. People used a double-gear method, which means that you either mortgage your home or use the equity in your home. It is quite a dangerous practice when the market begins to fall. A margin call means that you either have to top up your loan to keep it in balance in terms of, let’s say, the 70/30, or the issuer can sell down and sell the shares to meet that call. Of course, the larger the portfolio the more critical that balance is. We heard many sad and tragic stories of ordinary people who were loaned very large amounts of money that they obviously had no income to support. We have seen some tragic outcomes where people did lose their homes or are in the process of losing their homes.

The Rudd government believe in an efficient, free market. We believe in markets, as does the former government, the current opposition. In fact, on many of those issues we share similar views because it is about providing the freedom for people to invest and to make money, or to lose money for that matter. We have provided the tools and the benchmarks for regulation through the twin peaks system—through ASIC and APRA. APRA is the prudential regulator and ASIC is the securities investment commission—the watchdog, as it were, or the policeman on the beat. And there is the Corporations Act to take out the worst effects of the market. If it were left to run rampant, to run on its own, the ordinary person would have no protection at all from those who would act in an unscrupulous manner. That is really the nub of it.

This legislation is about pulling into line and making sure that those who have the capacity and the power, the issuers, adhere to a set of principles and rules. Those rules are contained in this legislation. We are bridging that gap and ensuring that the responsible lending processes and principles that normally apply to other lending also apply to margin lending. It is not just good enough to loan people very large amounts secured against their home where they have no capacity to repay. It is reckless behaviour. It is reckless to lend people far beyond their capacity. It is all okay while markets are rising but, as we have just learnt once again, when markets begin to fall you still have to pay back the loans and the debt.

It is important that we put in place mechanisms to measure the market, check the market and balance the market to ensure that while people have the freedom to do as they will with their own money they also understand that when they borrow money it is done responsibly and in a fair manner. I am very pleased that we have moved ahead of the joint standing committee’s report which will be handed down on the 23 November. This is an issue that needed to be addressed and this government, as in other areas, will be moving as quickly as it possibly can to bridge any gaps, fix loopholes and provide more efficient markets and better systems and protections for ordinary people.

In this bill the term ‘provider’ has also been clarified in relation to margin lending facilities to make sure that there is no ambiguity or confusion as to who provides what. The consequence of this regulation power is that the issuer, or lender, of a margin facility will be required to be licensed. It is probably fair to say that most people who provided them were licensed anyway, but they were not licensed specifically for this type of loan.

I know that out of the changes we are putting forward there will be a change in behaviour. Not merely from the legislative changes we have made but from what has happened in the markets there ought to be changed behaviour in how banks provide margin loans, debt facilities and other types of financial arrangements so that they do it in a more responsible manner. In the end, they are responsible. In the end, they are the ones who are to be held to account, because they provide the finance, the means by which people can get into a lot of trouble. I support the idea that people have a free market to go to in order to borrow funds to invest, but it has to be done in a responsible manner. Laws such as these exist in other forums; they just did not exist specifically in relation to margin loans.

We have made absolutely the right move and it is about time. Sometimes it is the case that markets need to fail before you can see the structural problems that exist. It is a difficult and painful lesson to learn, but the response from a good government is to act upon it when in happens. That is what we have done and I am very proud of that. I know that this will in the future prevent many people from getting into the sorts of financial difficulties that wipe out their retirement incomes or their home equity. Perhaps even worse, they not only lose their home but continue to carry a debt into their retirement. It is abhorrent that somebody who, regardless of their status in life, has worked hard all their life to own a home and have some meagre savings, perhaps some superannuation, has it wiped out by the reckless lending practices of a third party—which, by their own standards, guidelines and policies, the banks are not allowed to do. They are not allowed to do it because it is bad for people and bad for them; they stand to lose money as well. Of course, they can absorb losses much more easily than an ordinary person can. While it might not have a personal impact on the bank, for ordinary people it is catastrophic; it is a position from which they cannot come back. I reiterate the importance of this bill and acknowledge that the opposition is supporting it because it is good legislation.

I will touch briefly on trustee corporations. ASIC has requested that a number of amendments be made to ensure that certain existing ASIC powers under the Australian Securities and Investments Commission Act 2001 are available in relation to trust property held by a trustee company. This is something we also support. Currently, the relevant ASIC powers apply only to financial products, and trustee companies may provide services that do not fall within that definition. It is important to include this provision to make sure that ASIC has the correct amount of power in the right places to deal with issues that arise out of trustee corporations and the holding of property.

Our amendments will replicate relevant parts of sections 71 and 73 of the ASIC Act and will allow ASIC to make certain orders, such as preventing the disposal of certain property due to noncompliance with a requirement made under other parts of the act. I am sure people involved in this area will understand the gravity of giving ASIC the power to prevent the sale or disposal of property, in particular if there is a dispute or we are talking about a particular estate. While these are minor amendments, they are very important amendments.

This government is committed to a range of very important changes and amendments in terms of financial services and products right across this country—not least the Uniform Consumer Credit Code, which will, for the first time in Australian history, bring together all of the different jurisdictions in this country, the states and territories, into a uniform single platform while maintaining the legislative platforms they hold in each state. I think that is very important given the vastness of our country and our population of only 20-odd million people. I think it is important that, as we trade and move not only capital but people between state borders and territory borders, we have uniform, consistent and robust laws for financial services and products. I welcome all of those changes and the principles that we have applied in these areas. I commend them to the House.

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