Judi Moylan (Pearce, Liberal Party) Share this | Hansard source

The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 is a really important piece of legislation—an amendment to existing legislation. It is targeted. It is important because, I suppose, there is nothing like a major shakeout in the financial markets to highlight the need for targeted reforms to the financial system. Sadly, during the unprecedented—at least in our contemporary history—worldwide financial collapse we have witnessed, many Australians have been attracted by the potential to increase their wealth through various schemes and have lost not only their savings but also their homes.

For those who are retired and unable to return to the workplace, or for whom it is difficult to return to the workplace, despite their best intentions to replace their lost wealth, their adventure into the financial marketplace has taken a heavy toll. We have heard evidence on this in the Parliamentary Joint Committee on Corporations and Financial Services, and there are some are absolutely heart-wrenching stories. It might be instructive to relate a couple of those in this place.

One of the people giving evidence to the inquiry said:

Our first contact regarding margin loans came from CGI with a demand for $55 000 within 48 hours.

I will talk about margin loans in a moment in a little more detail. In the past some of these financial products have been well known by the business and commercial sector, but many average Australians out there are not fully aware of the complex nature of these kinds of investment packages. For big corporations that may not seem like a lot of money, but to have a demand to pay $55,000 within 48 hours might be a very difficult thing for many Australians.

They went on to say:

Our portfolio has been sold down completely—

and, again, I will explain this in a moment—

with proceeds being deposited into a CBA accelerator account, but we had a shortfall of $55 000 in our margin loan. We contacted our advisor and he then realised—

‘he then realised’: even the advisers did not fully understand what they were getting their clients into—

our financial situation—self-funded retirees with no portfolio, no jobs, no income and a $300 000 debt on our home. When our final statement arrived, our LVR—

that is the loan-to-value ratio, and I will say a word about that in a moment—

had reached 110% before our portfolio was sold down. We decided to pay out our margin loan, rather than continue paying interest on $1.5million. This cost us a break fee—

so, to get out of this before more damage was done and more debt was accrued, they paid a fee—

of approx. $44 000. We had pre-paid interest on the loan in June 2008.

They go on to talk about the things they have had to do, as retirees, to try and recover their position, to put a roof over their heads and just to afford the weekly groceries. This is a heart-wrenching story indeed, and I will relate a couple of others as we go along. The stark reality of the parlous financial circumstances many Australians found themselves in on the back of this collapse is abundantly clear from the many witness statements to the Financial Products and Services in Australia inquiry.

The committee is currently examining a number of issues. I think they are important enough, again, to relate here. The terms of reference say the committee is to examine:

1.

the role of financial advisers;

2.

the general regulatory environment for these products and services;

3.

the role played by commission arrangements relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers;

I am just going to pause there; there are actually nine references.

These arrangements between financial advisers, bankers and other investment companies present problems in a number of areas. This has become apparent to me in my electorate, with people coming to me, on the back of this worldwide financial collapse, with terrible problems because there has been a conflict between the people advising them and the organisation selling the product, whether that is superannuation or these kinds of margin loans or other products. It is very apparent that there are deep conflicts of interest. It is also very apparent to me, from discussions with constituents, that, quite often, they believe their financial advisers did not fully understand what the implications of some of these products were. So I think that reference No. 3 of the committee is a very important one and, in some ways, this amendment that we are debating today is also endeavouring to address that.

The fourth reference is:

4.

the role played by marketing and advertising campaigns;

Again, today, many products are sold online, on computer. You can sit at your desk at home and you can get yourself into some awful trouble with online products without fully understanding what the intricacies of those packages or products are.

The fifth reference is:

5.

the adequacy of licensing arrangements for those who sold the products and services;

and the sixth is:

6.

the appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served;

I will pause again there on No. 6 to speak of one of the cases I had—a very sad case. This case was of a very elderly gentleman in my electorate who got himself into a reverse mortgage. Reverse mortgages can be fantastic products for some people, if they fully understand what the full package is about. And there is an obligation, to be fair, on people selling reverse mortgage products to get a signed statement that a consumer entering into those kinds of packages has got independent advice from their accountant and a solicitor. Nevertheless, some elderly people still do not fully understand the implications of the product. And you do not have to be elderly not to fully understand—some of them would, I think, probably perplex a Rhodes scholar, they are so intricate and difficult.

But, with a reverse mortgage, what a lot of people do not realise is that there is a break fee, which was talked about also in regard to the margin loans situation. A reverse mortgage is a handy product for older people who want to stay in their home but have got all their money tied up in it. It is their only asset. So they can unlock some cash from an institution prepared to give them a reverse mortgage. But if they want to break that arrangement anywhere in the time frame of the contract then they are up for very substantial fees.

Just the other day I had a letter from someone else who had encountered this product and had a break fee of $85,000. My constituent had a very substantial break fee but, fortunately, when I contacted the organisation they reduced the break fee. But these fees are not well understood. I am not in any way suggesting that we should not have these packages and products available because, as I say, they suit some people, and they are quite good. But if people do not fully understand what they are getting into then they can get a terrible shock when it comes to having to break the contractual arrangement. Sometimes that happens because of emergency situations. In this case, somebody was not well; they needed to move closer to their family and sell their home. And those things can happen to any of us. But we need to be aware that these products have clauses in them which can be very, very costly indeed.

So consumers do need to understand the products they are getting into, and the inquiry’s terms of reference point No. 7 is:

7.

consumer education and understanding of these financial products and services;

and the final two are:

8.

the adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers; and

9.

the need for any legislative or regulatory change.

The committee also agreed to look at another matter—to:

… investigate the involvement of the banking and finance industry in providing finance for investors in and through Storm Financial, Opes Prime and other similar businesses, and the practices of banks and other financial institutions in relation to margin lending associated with those businesses.

I doubt that too many reasonable people would argue that there is not a need for targeted reform to the financial system, and considerable media attention has made it very clear that there are issues, as I said, about the linkages between advisers and lenders, and their individual responsibility to the borrowers or the users of these products. As our shadow minister, the member for Aston, expressed in his speech here a short while ago, there is a need for suitably targeted reforms. We do not have to throw the baby out with the bathwater. We do have a good financial regulatory system in Australia, and I think that has been evidenced by the fact that we have certainly had fewer difficulties than many other countries. It has shown that we have a fairly robust system here.

Nevertheless, there are these gaps. For instance, this bill also deals with promissory notes. I remember, as a young person working in a law firm when I left school, coming across promissory notes. They have been around for centuries. But we have no consistent, national laws that really lay out any regulation or legislation in regard to how this product is dealt with. So it amazed me when I saw promissory notes there, because I know they have been around for a very, very long time, and yet I was surprised to learn that they are not covered by any of the current laws or regulations of state, territory or Commonwealth jurisdictions.

I understand, though, that the matter of regulating margin lending was agreed to between the states and the Commonwealth at a COAG meeting in March of this year. It was resolved that the Commonwealth would undertake to ensure that there was a robust national regulatory framework governing the operation of margin lending. I know that not everybody is familiar with the term ‘margin lending’, though we hear these words bandied about. For those who are unfamiliar with the term, basically it is about using money that has been borrowed to invest in the stock market or in financial products. Existing investments can be used for this purpose, and they might include real property—that is, your house or your investment property if you have one—and these are generally used as collateral or as a guarantee against the money that is being borrowed.

They use what they call ‘gearing’. It has been used a lot. I have been around the property and financial markets for a long time, and gearing was used a lot in the property boom back in the seventies. Having bought their property years ago and having now, with inflation, seen an increase in the equity in that asset, people would unlock that equity without selling the property. They might still have a small loan as a first mortgage on their home. The home might now be worth another $200,000 or $300,000 more than when they bought it and their mortgage might be relatively small, so they could unlock that equity in their existing asset to use as a start to get into further investments, whether they be property or shares, as we are talking about in this case. That is how gearing is used. It is a common practice, as I said, in the property market. In a boom, it becomes a very attractive option because usually the value of properties is going up and it provides an attractive equity in property for investing in shares and financial products—particularly in the boom that we have seen where the share market was the flavour of the month.

While there can be considerable benefits from the financial gains available from employing these methods, they can also significantly multiply the losses when things go bad. Just to illustrate, again, some of the problems that have come out in the testimony, there was a letter of appeal on behalf of a number of unit holders to the inquiry. In their testimony, they said:

As a direct consequence of the loss of distributions, there are now thousands of previously self-funded retirees and part-pensioners requiring additional pensions and struggling to make ends meet. In addition, there are many who do not qualify for any Centrelink benefits and have been forced back into the workforce or are having to sell other assets just to live. I know of previously comfortable elderly people having to sell their family homes and live in caravans … an eighty year old lady taking in ironing, another renting her own home and living with her daughter and others selling treasured personal possessions.

Sad stories indeed.

In this day and age, when so much business, as I said before, is conducted online on the computer, sometimes these options look very attractive indeed. There are many traps for the unwary, especially as the margin lender takes a mortgage over the shares on a loan-to-value basis. If the share value falls, the margin lender can sell, just like that, to recover their loan, to cover their exposure, so they are in the No. 1 position, but this can leave the investor with considerable exposure to the shortfall or the margin. That is what margin lending does. Just to further illustrate some of the problems that arose, another of the testimonies to the inquiry said:

We have not received any disbursements and have been told we will be lucky to recoup any of our life savings, the $1 units now being valued at 12 cents). I have had to return to full-time work and we have been struggling financially ever since. We have no savings. We are not eligible for Centrelink benefits. Our weekly wages barely cover our mortgage and modest living expenses. We use our credit card to cover basic bills, electricity, gas, body corp, rates. We do not smoke or live lavishly. We have always been frugal and conservative in our expenditure.

We simply ask for justice and real help from anyone in government.

It is our responsibility to make sure that, as we see these anomalies and these gaps occur, we tighten up legislation to make sure that the worst of these abuses, in some cases, do not occur again.

Interestingly, according to the Treasury, in the June 2008 green paper on financial services and credit reform, margin lending grew from a less than $5 billion industry in 1999 to a $32.6 billion industry in March 2008. In normal circumstances that might be very welcome, but it is not welcome when the system collapses and when vulnerable people who do not fully understand the complexities of what they are getting into are left in financial ruin. It has been a largely unregulated industry both at state and at Commonwealth levels. The green paper provided an opportunity for consultations with a view to reform, including on a number of points which I do not have time to go into. All I can say is that I welcome the opportunity to participate in this debate and to join in a bipartisan way to see far better legislation to protect investors in the financial services sector. (Time expired)

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