Kelvin Thomson (Wills, Australian Labor Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

The background to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 is that debt agreements were introduced in 1996 with the intention of providing consumer debtors with an option to enter into a formal arrangement with creditors as an alternative to bankruptcy. The number of these debt agreements has grown significantly in recent years. I understand that there were over 7½ thousand proposals in 2005-06, and just under 5,000 of those proposals resulted in debt agreements being made. Debt agreement administrators received over $55 million from debtors in 2005-06, of which approximately $38 million was paid to creditors. Over the course of the 10 years since 1996, administrators have been largely unregulated. There are no entry requirements. People can, however, be declared ineligible to be administrators on the basis that they have failed to properly perform their duties. Those duties are restricted to putting the agreement into effect and do not cover information and advice that they provide to the debtor before the agreement is made.

There has been, however, what could be described as a pretty high failure rate in relation to these debt agreements; I understand that it is more than one-third. The reasons given for that are, firstly, that the proposals from debtors are unsustainable, particularly where they are not fully informed about all their options, so the debt agreement that they enter into may not be a suitable one; secondly, that there is little allowance made in proposals for changes in circumstances—debtors are not always advised properly on budgeting and planning before committing to an agreement which typically lasts for at least three years; and, thirdly, that debt agreement administrators have been able to take their fees in priority to creditors, which can result in proposals being developed that might be attractive to creditors—and, naturally, creditors want the large settlement of 70c in the dollar or whatever—but which are unsustainable over the longer term.

So you can end up with a situation in which administrators get paid and creditors do not and the debtor may be worse off than before commencing the agreement. Finally, creditors can focus on the rate of return rather than on what the debtor can afford. That contributes to a high number of unsustainable offers and consequently to the high failure rate. It is my understanding that this proposal has been the subject of significant consultation and that creditors, debt agreement administrators and financial counsellors—that is to say, key stakeholders who have an interest in debt agreements—generally support the proposals before the House. The intention is to bring these changes in from 1 July this year. Creditors and administrators are now investing in the systems, making procedural changes and engaging in the training necessary to respond to this legislation.

What we will have from here on in is a formal registration system for debt agreement administrators based on their ability to properly perform their duties. There will be mandatory qualifications to ensure a minimum level of knowledge for all administrators. Their duties will cover pre-agreement work such as informing the debtor about alternatives, ensuring that the proposal is affordable over the promised term and ensuring that the debtor makes proper disclosure to creditors. It is hoped that this regulatory regime will add to the professional standing of administrators, provide clear guidance about what is expected of them and assist in addressing some of the concerns about the ability and conduct of some administrators.

It requires debt agreement administrators to be paid proportionately over the life of the agreement rather than in priority to creditors. The idea behind this is to provide an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of the agreement. It requires creditors to be paid proportionately based on their respective debts rather than negotiating different rates of return within an agreement. The idea behind this is to encourage creditors to focus on what the debtor can afford to pay rather than on the rate of return that they might prefer to receive. A debt agreement ought to be seen as a simple one-off offer to creditors which they can accept or reject rather than a series of individual offers which aim to meet the different demands of all the creditors involved.

The new regulatory regime also seeks to provide more effective mechanisms for dealing with default and meeting creditors’ expectations that the administrator be actively managing defaults and keeping creditors informed. The amendments require the administrator to notify creditors when a debtor defaults and has not rectified it within three months. An agreement will be automatically terminated if no payments are made for six months or the agreement is not completed within six months of the agreed term. It also applies the realisations charge and interest charge in a manner that is in accordance with the government’s cost recovery policy and the intention of recovering the cost of regulating the system.

It has been suggested that there are some concerns amongst debt agreement administrators about not being paid in priority to creditors and that this could affect their cash flow. The response to this is that the value of the amendment is that it provides an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of their agreement. Some creditors have expressed concerns about the requirement to be paid proportionately based on the size of their debts. These creditors are concerned that they will become involved in debt agreements which do not meet their expectations in terms of acceptable rates of return.

It ought to be noted in response to these concerns that debt agreements can currently provide for different rates of return to creditors and payments to creditors at different times. This complicates the system. It adds costs by requiring significant negotiation prior to developing proposals in order to try to meet creditors’ different demands. It excludes many debtors from the system who could afford to make payments which are greater than creditors might otherwise receive and it suggests or is based on the principle that debt agreement should be seen as a simple one-off offer to creditors representing the best offer the debtor can make and creditors then decide whether to accept that offer—and it is probably fair to say that this amendment is fundamental to the success of the overall reform package.

It is also the case that some creditors may be concerned that the government has not proceeded with the amendment that it was talking about back in July last year, which would have required administrators to defer payment of at least 15 per cent of their remuneration until the end of the agreement. The idea behind this amendment was to provide an additional incentive for administrators to focus on sustainability and to assist debtors to complete their agreements. However, it would have penalised administrators who are doing the right thing and in situations where a debtor’s failure to complete an agreement was outside the administrator’s control. The government’s case for the amendment is that a greater incentive will result from an amendment that requires administrators to be paid proportionately over the life of the agreement rather than in priority to creditors and that we do not want to see an additional compliance burden for creditors which would be difficult to monitor, could have outweighed the marginal benefits provided and indeed had the outcome that administrators increased their fees by 15 per cent to overcome its effect.

There has been some consultation and a process behind the legislation. The Attorney originally announced amendments in March 2006. There were amendments announced in July 2006. Further consultation and revised proposals occurred after July 2006 and we now have the legislation before the House.

The objects of this legislation—providing for enhanced regulation of debt agreement administrators, specifying the duties of a debt agreement administrator, encouraging creditors to make decisions based on the debtor’s capacity to pay, providing more effective means of dealing with defaults and seeking to streamline some of the provisions—I think are all things that we can support.

Schedule 1 contains provisions relating to the registration of debt agreement administrators. They will commence on the date of royal assent so that existing and prospective administrators can be registered prior to 1 July this year with the idea of administering debt agreements which will be subject to the new rules from that date and the official receiver will not be able to accept debt agreement proposals nominating an unregistered debt agreement administrator from that date unless the administrator is administering no more than five active debt agreements. Schedule 2 contains amendments which apply in relation to debt agreement proposals and resulting debt agreements from 1 July this year. This schedule contains all the amendments apart from those which deal with the registration of administrators.

We have got the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 and also the Bankruptcy (Estate Charges) Amendment Bill 2007. The companion bill extends the application of the realisations charge and interest charge to money received by debt agreement administrators under debt agreements under part IX of the Bankruptcy Act. The state charges cover the cost of regulating the system and what this bill is going to do is spread the cost recovery over a broader range of realisations. It is my understanding that the amount recovered will be the same and that it is essentially the same group of creditors who end up paying the charges, so I do not see this as a particularly controversial change. It is designed to give effect to the government’s cost recovery policy, the basic principle of which is that users of services provided by the government should generally pay for those services and that the price they pay should reflect the actual cost of providing the services.

In this case, the realisations charge and the interest charge recover the cost of regulating the personal insolvency system. The cost of regulating debt agreement administrators within that system is currently recovered through the realisations charge and interest charge as they apply to bankruptcies and personal insolvency agreements. The present situation means that the cost of regulating debt agreement administrators is effectively borne by creditors in bankruptcy and personal insolvency agreements. This is no longer considered appropriate as debt agreements make up a significant proportion of insolvencies in Australia and the cost of regulating the system should now be reflected by imposing these charges on money received from debt agreements. In practice, it is largely the same creditors paying the realisations charges in bankruptcies and personal insolvency agreements who cover the cost of regulating debt agreement administrators. Applying the charge to debt agreements will broadly result in the same creditors paying the same amount of money but over a larger range of administrations. This means that the rate of the realisations charge will be reduced following these amendments.

I note there was some media commentary on the legislation which we are debating. The Financial Review back on 16 February reported on a disagreement between the regulator, Insolvency and Trustee Service Australia, and debt administrators. The Financial Review reported that the regulator had blamed the way in which debt agreement administrators charged fees for the high failure rate of insolvency agreements. But the administrators of debt agreements rejected those claims about the impact of up-front fees. For example, one of the directors at Fox Symes, one of Australia’s biggest providers of debt agreements, expressed the view that:

... administrators put in an enormous amount of effort upfront and should be allowed to draw down fees as and when work is performed.

The Attorney responded to this article with a letter to the Financial Review, stating that the requirement in the bill:

... is that fees be taken over the life of the agreement rather than as a priority before creditors are paid ...

He made the point that the reforms:

... do not require that 15 per cent of fees be paid only once the creditors have been paid in full.

The Attorney has expressed the view that the reforms do not prevent administrators from charging up-front fees but:

... seek to regulate fees to administer a debt agreement that has been entered into. Administrators are still able to impose ‘upfront’ fees for services provided to the debtor before entering into the debt agreement.

I should not close a discussion about these issues without expressing concern about issues to do with insolvency and repossessions in Australia. In September last year figures were released which indicated that there has been a quite substantial jump in mortgage repossessions. Mortgage repossessions have been rapidly rising since around May 2002 for each of the various states and territories for which data has been collected. The data released in September last year indicated that mortgage repossession orders in New South Wales are now higher under this government than they were under Prime Minister Keating, who gets pilloried on these matters, back in 1990.

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

And rightly so!

Kelvin Thomson (Wills, Australian Labor Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

If you are concerned about Prime Minister Keating, why are you not concerned about the fact that mortgage repossession orders are now higher?

Mrs Bronwyn Bishop (Mackellar, Liberal Party) Share this | Link to this | Hansard source

Order! We are discussing bankruptcy here, so I will ask you to come back to the subject matter of the bill.

Kelvin Thomson (Wills, Australian Labor Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

Indeed, and that is exactly what I am referring to. The increase in mortgage repossessions reflects the fact that many households are under more financial pressure than at the peak of high interest rates in 1990. The data from the Supreme Court of New South Wales shows a rapid and, from my point of view, concerning acceleration of mortgage repossessions in New South Wales since 2002. The figures from the Supreme Court of New South Wales show that the number of repossession actions increased from 2,189 in 2002 to 5,368 last year. I am concerned about the impact of that on the individuals concerned. I am concerned about the fact that a Macquarie Bank survey shows that almost two-thirds of mortgage referrers expect to see an increase in the incidence of mortgage distress and defaulting over the next year and that that is almost twice the level reported in last year’s survey.

We now have a situation where the OECD Economic Outlook No. 80, released just before Christmas, found that Australia’s household debt, as a proportion of household income, experienced the second fastest growth in the OECD over the last decade. Clearly, if you have that situation going on and you have Australians seeking to repay a mortgage at much greater levels of payment than is occurring in other countries around the world and you have increasing mortgage repossessions as a result, then we ought to be concerned about the impact on housing affordability, bankruptcies and insolvencies of the now eight interest rate rises since 2002. The figures that have been released for administrations under the Bankruptcy Act show that bankruptcies increased from 20,051 in 2005-06 to 22,300 in 2004-05. That was an increase of well over eight per cent. Debt agreements also increased, from 4,738 in 2004-05 to 4,866 in 2005-06.

These things are a direct consequence of increased household debt, an increased proportion of income going into repayments and people being unable to pay. We see this happening in the area of mortgages and we see it happening in the area of credit cards. Debt accrued on credit cards reached $39 billion at the end of last year, 14 per cent higher than a year earlier, which has prompted concerns about household debt levels. Reserve Bank of Australia figures show that total household debt in Australia was $962 billion as at 31 December. Reserve Bank figures on credit card debt are also matched by comments made by key people in our largest banks talking about the perils of credit card debt. For example, the Commonwealth Bank of Australia chief executive, Ralph Norris, said that he was ‘worried about predatory pricing in the credit card business’, saying that smaller lenders had taken on risks that the CBA had rejected.

Household debt is very important to the health of the economy and also to the individuals concerned—those people who end up on the sharp end of this and who are unable to repay their debts. The main source is mortgages, as I mentioned, but credit card debt is also skyrocketing. According to the chief economist at AMP Capital Investors, the ratio of household debt to annual income is about 160 per cent, and that ratio was 102 per cent five years ago and 69 per cent 10 years ago.

After a series of interest rate rises, we have had an increase in calls from Australians in financial distress. It has apparently risen by 35 per cent from last year. We have also had an increase in bankruptcies—6,016 in the December quarter, which was 20 per cent more than in the same period in 2005. The Wesley Mission, Debt Helpline and the like, who have surveyed these things and measured these things, say that households are finding it increasingly difficult to make ends meet. There are more Australians in financial distress than there used to be. The managing director of Debt Helpline said:

These days, there is no discretionary spending in the suburbs. After accommodation, food, education and fuel, there is nothing left over.

When you put these things together, there is a disturbing picture of rising household debt and problems with housing affordability in this country which the government has failed to understand. When we have tackled the Prime Minister with questions about interest rate rises and so on, he says: ‘It is fine. Asset prices are going up, house prices are going up, and this is a fine thing.’ But the sharp end of this is mortgage repossessions going up, people finding it impossible to get into the housing market and, in some cases, finding it impossible to stay there once they have entered and arrived. I hope the government will be less smug and less complacent about these issues and turn its attention to them so that we do not get the insolvencies, the debt agreements and the things of this character that we are presently being required to deal with.

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

The question is that this bill be now read a second time. I remind the chamber that this is in fact a cognate debate.

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

I am pleased to be able to join the debate in the Main Committee on the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 and the Bankruptcy (Estate Charges) Amendment Bill 2007. As you mentioned, Madam Deputy Speaker, this is a cognate debate. The honourable member opposite referred to household debt. Obviously when people are falling into financial difficulty that is a matter of concern. I think we have to recognise, however, that we are a free society and people do have the opportunity, if they wish, to buy things. If they want to borrow to acquire possessions then that is a matter for them. You cannot have a situation where the government regulates everyone from the cradle to the grave. We do have free choice and we do have assistance for those who need guidance with respect to whether or not they should undertake certain debts, but it is wrong to say that it is the fault of the government that we have rising debt levels. The member opposite also mentioned home loan affordability. He referred to repossessions by mortgage companies—

Jill Hall (Shortland, Australian Labor Party) Share this | Link to this | Hansard source

Madam Deputy Speaker, I seek to intervene.

Mrs Bronwyn Bishop (Mackellar, Liberal Party) Share this | Link to this | Hansard source

Is the member for Fisher willing to give way?

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

Yes.

Jill Hall (Shortland, Australian Labor Party) Share this | Link to this | Hansard source

I was listening to the contribution of the honourable member opposite and I noticed that when he was referring to household debt he stated it was purely and simply the role of the individual. My question to the honourable member is: does he believe that government has a role to ensure—

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

It has to be a quick question.

Jill Hall (Shortland, Australian Labor Party) Share this | Link to this | Hansard source

It is a quick question. Does he believe that government has a role to ensure that the proper checks and balances are in place to see that people do not access finance when they cannot afford to repay their debts?

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

I am pleased that the honourable member has been listening to what I have been saying. Obviously in a free society everyone should have an opportunity of free choice. Everyone must make decisions in life. We make good decisions and bad decisions, and we stand by bad decisions. Clearly there would be in place certain provisions to stop predatory lending practices. Indeed, government has a role in this particular area. However, you cannot have a situation where before someone undertakes a debt it has to be run past the Attorney-General so he can personally tick it off and approve it. That is an absolutely ridiculous proposition. But we do have a situation where lending institutions do not lend more than a certain proportion of the value of a property.

One other reason that we have higher home prices is the failure by the Labor states in this country to give access to land. Land is not being released at anywhere near the rate it should be and prices have gone up because of shortage of supply.

Bankruptcy historically has been around for probably hundreds of years as a mechanism to take someone out of the market when that person becomes insolvent. In 1996, an important initiative was introduced whereby debt agreements could be used as an alternative to bankruptcy. I do not think we should look at bankruptcy as a penalty. Bankruptcy or a situation of insolvency ought to be a chance for someone to remove debts and then possibly go on to be once again a productive member of the community. That is why these debt agreements, as an alternative to the draconian measure of bankruptcy, really have been a good idea. I think they are broadly supported in the community and they have become increasingly popular as the years have gone on.

However, at times it is necessary to finetune legislation, particularly when the legislation is not necessarily delivering the outcomes that it was intended to deliver. The amendments made by these bills are designed to improve the operation of debt agreements under part 10 of the Bankruptcy Act to ensure that they remain a viable means of dealing with unmanageable debts.

It is important to look at both the interests of the creditor and the interests of the debtor and to achieve a balanced situation. The amendments to these bills currently before the chamber are appropriate and I believe they achieve the balance that we seek to achieve. There has regrettably been, with respect to part 10 agreements, a reasonably high failure rate and one of the aims of the amendments currently before the Main Committee is to reduce the failure rate of these agreements.

The member for Wills has conceded that the Attorney-General, as is his practice, has consulted widely in the community. The Attorney-General does not bring in half-baked proposals to the parliament. There has been a period of consultation. These bills are very important. They are broadly supported in the community and this is very important.

The amendments address key concerns that have led to a lack of confidence on the part of creditors in the effectiveness of the debt agreement system. In particular, the amendments are designed to ensure that debt agreements are used only by debtors for whom they are suitable and who can afford them. Where a debt agreement is the correct option, the return to creditors is significantly better than bankruptcy. I think this indicates that a successful debt agreement should be a win-win situation. It should be a win for the debtor and also it should be a win for the creditors insofar as receiving so many cents in the dollar from a debt can be considered a win.

The objects of the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 are to provide for enhanced regulation of debt agreement administrators, specify the duties of a debt agreement administrator, encourage creditors to make decisions based on the debtor’s capacity to pay, provide a more effective means of dealing with default by the debtor and simplify, streamline and clarify a range of provisions to improve the operation of the legislation.

The other bill, the Bankruptcy (Estate Charges) Amendment Bill 2007, has as its purpose to extend the application of the realisations charge and interest charge to money received by debt agreement administrators pursuant to debt agreements. These charges are in accordance with the government’s cost recovery policy and will enable the cost of regulating the debt agreement system to be recovered from those who benefit from it—that is certainly an appropriate way to go.

The government accepts that some people will inevitably become formally bankrupt. However, we do wish to prevent as many people as possible from going down that road because if you can have successful debt agreements, it means that the creditors benefit, it means that the debtors benefit and it means that the debtors are able to make an ongoing positive contribution to the Australian community. These two pieces of legislation are thoroughly worthy of our support. I am pleased to commend them to the chamber.

Laurie Ferguson (Reid, Australian Labor Party, Shadow Minister for Multicultural Affairs, Urban Development and Consumer Affairs) Share this | Link to this | Hansard source

The opposition is supporting the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007. The parliament is essentially regulating industry developments which have emerged due to factors not envisaged by the initial drafters of the debt agreement provisions in 1996. The amendments to be made by this bill are designed to improve the operation of debt agreements under part 9 of the Bankruptcy Act 1966. The objects of this bill, as detailed by the speakers, include the provision for enhanced regulation of debt agreement administrators, specification of the duties of debt agreement administrators, encouragement of creditors to make decisions based on the debtor’s capacity to pay et cetera.

Schedule 1 contains provisions relating to the registration of debt agreement administrators. These amendments will commence from royal assent to enable existing and prospective administrators to be registered prior to 1 July 2007. This will ensure that they are able to administer debt agreements which will be subject to the new rules from that date. Most importantly, the official receiver will not be able to accept debt agreement proposals nominating an unregistered debt agreement administrator from that date unless the administrator is administering no more than five active debt agreements.

Schedule 2 contains amendments which apply in relation to debt agreement proposals and resulting debt agreements from 1 July. This schedule contains all the amendments other than those relating to registration of administrators. In their submissions to the Insolvency and Trustee Service Australia—ITSA—inquiry into amendments of the debt agreement provisions of the act, the Consumer Law Centre of Victoria submitted that debt agreements were introduced in 1996 as a low-cost, informal, flexible alternative to bankruptcy for low-income earners. Since their inception, the number of accepted agreements has increased significantly, from 48 in 1996-97 to 4,739 in 2004-05. According to an ITSA profile of debtors for 2003, the majority of those who entered the agreements had a gross income of less than $30,000 in the year prior to the debt agreement with 61 per cent owing unsecured creditors less than $20,000 and with 25 per cent of them owing less than $10,000. Unemployment followed by excessive use of credit were the main attributed causes of insolvency. Sixty-three per cent of debtors who entered into debt agreements were under 34 years of age.

Since the inception of debt agreements, concerns have arisen regarding the operation of part 9. In particular, debtors and creditors have indicated concerns regarding the conduct of some administrators of debt agreements, the lack of knowledge of administrators in relation to the alternatives to debt agreements, the lack of frank information provided to debtors as to the consequences of entering a debt agreement, the payment of excessive fees for the setting up and administration of agreements and the drawing up of unsuitable debt agreements by commercial debt agreement administrators. These concerns have been responsible for diminishing the benefits that were expected from debt agreements. Problems include excessive fees charged by administrators, which add to the debts of the debtor and are payable irrespective of the outcome of the agreement. Hence, even failed attempts incur fees. Another issue is that the administrator may, once the agreement is accepted, pay his or her fees first. If the agreement becomes unsuitable and the creditor requests a termination of the agreement, the debtor may be in no better position than if he or she had not pursued a debt agreement.

Due to the imposed limits on income, debt and assets, debt agreements are undertaken by people who have low incomes and are otherwise disadvantaged. A large proportion of debtors who enter into debt agreements are young people who often display financial naivety. Fees are being extracted by administrators from a section of the population that is least able to seek lower cost alternatives or negotiate a better deal.

In the groundbreaking research report Do the poor pay more?, Anna Stewart wrote:

The lack of knowledge amongst administrators/agents and brokers as to the alternatives to debt agreements and the lack of frank admissions as to the consequences of entering a debt agreement, means that a debtor entering a debt agreement may unwittingly place himself or herself in a similar position to bankruptcy when it comes to securing credit in the future. Debtors who enter debt agreements are permanently recorded on the National Personal Insolvency Index (NPII) and the agreement also appears on his or her credit report. These events effectively exclude the debtor from mainstream lenders, place the debtor at the mercy of high cost fringe lenders and thereby works to entrench financial exclusion, as research undertaken by CLCV demonstrates.

The commonly expressed view of consumer advocates working at the coalface of financial counselling is that the debt administration industry has been formed in a highly opportunistic and ad hoc manner. It is a relatively new industry and this bill represents the first efforts to regulate it. A key concern emanating from financial counsellors is that consumers who enter into debt agreements tend to be highly vulnerable. That was obviously indicated by the earlier figures. Many of those consumers also find it difficult to understand the implications of entering into these agreements.

Whilst the opposition is supporting the bill, I would point out that this support is in the context that the bill does not represent a comprehensive examination of all the issues which should have been assessed. This is especially the case given that the introduction of debt agreements happens to coincide with the coming to power of the Howard government. We have seen a massive increase in personal debt—and some of the figures in relation to that have been alluded to earlier.

According to the Parliamentary Library statistics on monthly economic and social indicators, Australian household debt has seen a massive hike while the coalition has been in government. Accordingly, in the 1995-96 financial year, total household liabilities as a proportion of annual household gross disposable income averaged about 70 per cent. That already too high figure—and the member for Fisher agreed that it was too high back then—has during the past 10 years ballooned to a staggering 157.3 per cent for the current quarter. So when the government is trumpeting the economic fortunes of this nation, it must be reminded that it has also presided over historically massive increases in household debt. ‘Relaxed and comfortable’ is a fantasy perpetuated by the Howard-Costello government. Our reality is that we are in debt up to our eyeballs.

I return to the Consumer Credit Legal Centre. In their outstanding submission to ITSA, they argue that the review of the provisions is disappointing due to its limited scope. Given the huge growth in debt agreements, the review should have asked the following fundamental questions: whether debt agreements are in fact a viable low-cost alternative to bankruptcy; whether debt agreements are serving the needs of debtors who are in financial difficulty and yet wish to avoid bankruptcy and make some payments to their creditors; whether the rise of commercial debt agreement administrators has furthered the objectives of the part IX regime or has had negative consequences for debtors and/or creditors; and, finally, could the debt agreement regime be amended and regulated to achieve its objectives or should alternative options be explored.

It goes without saying that debtors experiencing financial difficulty are an especially vulnerable group. They are characterised by a desperation to find any solution to stop creditors from ringing them, harassing them and demanding money that they simply do not have. The CCLC argued:

In our experience, many commercial Debt Agreement Administrators take advantage of this vulnerability to convince debtors, either by active misrepresentation or by omission, that a Debt Agreement is the best option for the debtor, without adequate explanation of the other options available, or of the consequences of the path recommended.

In our view—

that is, the organisation’s view—

Part IX debt agreements are currently failing many debtors. What was intended as a low-cost alternative to bankruptcy has now turned into an expensive alternative to bankruptcy. Indeed, for many callers to our service, it is not an alternative to bankruptcy at all, but a long and expensive path to eventual bankruptcy.

The following case studies taken from their advice line demonstrate the point:

Caller has a Part IX that she cannot service. She was referred to a financial counsellor by ITSA. Caller is interested in bankruptcy information.

Client has had a Part IX disbanded and owes the creditors $25,000. Wants to know what she can do and also wants to know about bankruptcy.

Caller has a Part IX that is ready to be terminated as he cannot make the payments. He wants to file for bankruptcy or to know whether there are any other options—

et cetera. The CCLC go on to say:

In many of these cases clients have paid fees to Debt Agreement Administrators that would have been better spent on living expenses to avoid the accumulation of more debt or distributed to their creditors. Their inevitable bankruptcy occurs later than it would have done were it not for the intervention of the debt agreement, meaning that more years have passed by the time they are discharged from bankruptcy and they have less time in which to re-establish themselves financially. Some remain in limbo for indefinite periods as creditors refuse applications to terminate or vary agreements and yet payments are not being met.

The bill before us is a step forward. However, I fear it is also an opportunity missed to provide a more fastidious consumer protection mechanism. Consumers of financial services become accustomed to the certainties and high levels of transparency provided by the Financial Services Reform Act. The CCLC argues that, as debt agreement administrators are only regulated in a minimal way, the debtors accessing their services do not have the protection enjoyed by consumers of financial services. For example, it is compulsory for banks and credit unions to become members of the ASIC approved industry external debt dispute resolution scheme, but the same obligation does not exist for debt agreement administrators and their agents.

Some of the key licensee obligations under FSR include: doing all things necessary to ensure that relevant services are provided; acting honestly and fairly; managing conflicts of interest; complying with conditions of the licence—or vary or revoke existing licence conditions—having adequate resources to provide relevant services; maintaining the competence to provide those financial services; ensuring representatives are adequately trained and are competent to provide services; and having a dispute resolution system that includes internal dispute resolution and membership of an ASIC approved industry dispute resolution scheme.

In summing up, I again stress that the opposition will be supporting the bill. However, we are disappointed that the voice of consumer groups has been ignored once more. This is despite the fact that numerous submissions were made by all of the key consumer groups around the country. I am indebted to the interest and work of the Consumer Action Law Centre and the Consumer Credit Legal Centre. I commend the bill to the House.

Philip Ruddock (Berowra, Liberal Party, Attorney-General) Share this | Link to this | Hansard source

in reply—I do intend to respond to those members who have participated in the debate. I hope they will read it later, now having left, because some of the points made indicate a degree of misunderstanding on their part and sometimes advice from only one quarter rather than a balanced view. I thank the member for Wills, the member for Reid and the member for Fisher for their comments, and I welcome the fact that these two measures will be supported by the opposition. I think they have come to a view that these measures, being the subject of very wide consultation, represent a balanced approach to dealing with the issues in relation to debt administration and the regime that we operate for debt agreements. It is important that the debt agreement arrangements continue as a viable means of dealing with unmanageable debt. Society will inevitably always have some people who have not been able to manage their affairs in a way that addresses their dealing adequately with obligations that they may have incurred.

These particular measures are designed to address the lack of confidence on the part of creditors in the effectiveness of the system and to protect debtors by assisting them to assess whether a debt agreement is the right option in all the circumstances. That is, of course, the issue that financial counsellors are interested in. They are also aimed at addressing the high failure rate which has resulted from a significant number of unsustainable agreements being made where debtors are not properly informed or creditors cannot rely on the quality or accuracy of the information given to them.

The amendments will ensure that debt agreement administrators operate at high standards by introducing a registration system based on ability, knowledge and qualification. It will also ensure that administrators are paid for results rather than activity by requiring them to be paid proportionally over the life of an agreement rather than in priority to creditors. They will provide an incentive for administrators to see that agreements are completed and encourage them to focus on proposals that are likely to succeed rather than those that are likely to be accepted by creditors. To encourage creditors to a view that a debt agreement is a simple one-off offer to creditors which represents the best offer a debtor can make, the amendments will require creditors to receive payments proportionately rather than trying to do better than other creditors. The Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 will also include a number of other amendments which improve, clarify and streamline the operation of the act and reduce uncertainty.

The separate measure, the Bankruptcy (Estate Charges) Amendment Bill 2007, which has not been the subject of any expensive debate, extends the realisations charge and the interest charge to debt agreements and ensures that the cost of regulating the scheme is properly recovered from creditors, as it would be if they were in bankruptcy. At the moment, those in bankruptcy arrangements are subsidising the debt agreements. That is essentially what is happening. This will ensure that it operates across the totality of the scheme. As I said, there was extensive consultation in relation to these matters. I assure the member for Reid that financial counsellors were actively involved in those consultations, but the sorts of comments he was making reflect something of a more narrow view that financial counsellors come to because they tend to deal with the cases that fail rather than the cases where the debt administrations work. It ought to be seen that they are only seeing a proportion—sometimes a small proportion—of the client load.

We saw it as being important to get the balance right—to get creditors, debtors, debt administrators and financial counsellors all on board in supporting these measures. The member for Wills read from the Financial Review some comments by Fox Symes. My understanding is that the comments had been floated in the Financial Review earlier, before the consultations had concluded, and that Fox Symes have made it publicly known that they are happy with the result—that is, the compromises that have been made.

The interesting debate is the one that is off the measures. I hope you will not call me to order, Madam Deputy Speaker, for dealing with matters that have already been allowed to proceed. There are some clear distortions in the views that have been put, particularly the comment that insolvency has allegedly increased. It is important to recognise that this is an area, like many areas of economic activity, where there are fluctuations. Bankruptcies are not at record levels. If new bankruptcies continue at the current rate, we may see a return to the levels of 1997-98 or 2001-02, but the figures are still well below the historical peak, which was experienced in 1998-99. So you do see fluctuations, but the current bankruptcy figures are not at record levels and it is expected that the figures will still be well below the historic peak.

Total personal insolvency activity under the Bankruptcy Act—that is, comprising bankruptcies and debt agreements and personal insolvency agreements—did see an increase in the last December quarter as compared with the December quarter 2005. However, the insolvency activity decreased slightly compared to the September quarter. So again you see fluctuations rather than trends. The latest figures reflect the fact that only a small proportion of Australians become insolvent. We are dealing with a figure of 0.14 per cent of the Australian population. Bankruptcy activity is usually indicative of personal circumstances rather than general economic conditions—for example, individuals overextending themselves financially, relationship breakdowns, changes in individual employment circumstances. They typically relate to credit cards and other unsecured forms of debt, rather than secured debt on housing. I note that Treasury advised that bankruptcy figures should be considered in the context of the strength of the Australian economy and household balance sheets generally. Despite the severe drought, the Australian economy is still expected to grow by 2½ per cent in 2006-07, before accelerating to 3.75 per cent in 2007-08.

Reference was made by the member for Reid to unemployment as being a contributing factor to debt agreements, yet the unemployment rate is at a 30-year low of 0.4 per cent, and real wages have grown by 17.9 per cent since this government first came to office. For every dollar of debt, households have over $6 in total assets and almost $2 in financial assets. The unemployment figures that were cited today by the member for Reid were in the context of New South Wales and a financial organisation in New South Wales. When the member for Wills spoke about housing repossession rates, again he was speaking about New South Wales.

I ask myself: why New South Wales? I can tell you why it is New South Wales. It is because New South Wales is the one part of the Australian economy that is holding Australia back. If you want to look at where the unemployment levels are out of kilter with the rest of Australia, it is in New South Wales. A higher proportion of people in New South Wales are unemployed these days than in Victoria and South Australia. The comment may be, ‘Well, maybe it is with Queensland and Western Australia that these comparisons are being made, and they have got a resource boom, so you cannot really look at those.’ But the other states have also been outperforming New South Wales. On the issue of repossessions in relation to housing, I despair for those young people trying to buy housing in New South Wales, where something like $150,000 of the cost for which they are going to have to go out and borrow money is being paid to the state government and state instrumentalities. It is $150,000 of the cost, and we expect young people to be able to go out and saddle themselves up with debt to be able to meet those rapacious charges that are being made by the New South Wales government? They are out of sync with what is happening everywhere else in Australia.

It is particularly instructive that members come in and make these sorts of allegations and use data in relation to New South Wales, because it demonstrates the point that I have been making around New South Wales lately. The way in which the state government in New South Wales is administering its responsibilities has been dragging the Australian economy back. It is the one state where the data suggests that it could even go into technical recession. It is a pity that the members who use this data did not wait to hear the response.

I commend the bill. I welcome the support for it. It is obviously quite unexceptional; otherwise they would have tried to find a way around berating me even for this. Often you have to go to these other sorts of issues and use distortions and the like to try and get your arguments across. Let it be understood that these measures are unexceptional, they have been the subject of very extensive consultation and are very appropriate reforms to ensure that a system that has served us reasonably well to date will serve us better into the future.

Mrs Bronwyn Bishop (Mackellar, Liberal Party) Share this | Link to this | Hansard source

I did allow wide-ranging response from the Attorney-General as I allowed a wide-ranging debate from other participants in the debate. The question now is that the bill be read a second time.

Question agreed to.

Bill read a second time.

Ordered that the bill be reported to the House without amendment.