Chris Ketter (Queensland, Australian Labor Party) Share this | Link to this | Hansard source

by leave—I move:

That the Senate take note of the report.

The committee's inquiry into land-banking was prompted by growing concerns about disreputable practices associated with the marketing and selling of such schemes. The committee undertook this work as part of its broader inquiry into the scrutiny of financial advice and decided that because of the importance of its findings it should table a separate, stand-alone report that highlights some troubling trends in the property investment market.

The committee found that a number of Australians have lost, or are at risk of losing, their investments at the hands of unscrupulous companies securing funds for highly speculative land-banking schemes. It appears that many unsophisticated investors, often with only the equity in their home to put up as security, were convinced through high-pressure selling techniques to invest in very speculative land investments they did not properly understand and had little or no likelihood of success. At worst, the promoters of some land-banking schemes may have intentionally misled mum-and-dad investors about the prospects of the scheme.

The committee investigated two examples of property investment companies which misled investors into thinking that land zoned for rural activities had a high probability of being developed as urban land within five to 10 years. Further investigation of the two schemes relating to 21st Century Group and Market First revealed that specific property investments offered by these companies were highly unlikely to be developed for several decades, if ever.

The promotion of options to purchase an interest in property is one of the more recent and concerning manifestations of wider problems in the property investment advice industry. Option schemes are property investment arrangements which centre on selling options to retail investors and to purchase future land packages for farmland that has not yet gained residential development approval but is located near regional towns or on the outskirts of capital cities. Investors were promised luxury housing estates with architect designed homes, helipads, walking paths and BBQ areas that were detailed in innovative conceptual drawings and marketing material. However, none of the land-banking schemes discussed in this report has been developed into residential housing developments. Many sites are still farmland, while some have had limited earthmoving work done so that they now have a few mounds of rubble.

While the fate of a number of land-banking schemes remains uncertain, the committee's main concern is the way in which such schemes were marketed to retail investors who did not understand the arrangements they were entering into and the lack of consumer protection, which left them exposed to unscrupulous practices. Some of these disturbing practices involved the payment of high commissions of between 17 per cent and 20 per cent—some suggested they could be even higher—to the promoters with the inducement to sell the product irrespective of the investor's interests. As long as commissions remain an important source of remuneration for the promoters of land-banking schemes, particularly the payment of high commissions and other inducements to sell the product which override the interests of the investor, the potential for poor investment advice in this industry will persist.

The committee was concerned with the way in which spruikers took advantage of retail investors with poor levels of financial literacy and often limited funds by persuading them to invest in high-risk, inappropriate schemes, especially during so-called wealth education seminars. They did this by: making investors feel special—offering so-called exclusive deals and privileged access to opportunities 'too good to be missed'; providing promotional material that wilfully underplayed risk and deceptively overstated the anticipated benefits and commercial robustness of the scheme they were promoting; using endorsements from celebrities and testimonials from self-made millionaires who purportedly became wealthy using the tips and tricks taught at seminars; associating their development with reputable companies, regardless of how tenuous that connection may be; and employing high pressure marketing techniques at investment seminars intended to rush investors into a decision without first seeking independent advice.

Spruikers ignored the risk profile of clients and advised them to invest in products unlikely to deliver the promised returns. Their advice ran contrary to the fundamentals of sound investment. The committee was particularly concerned about the use of self-managed superannuation funds to invest in land-banking schemes especially where a substantial proportion of the funds were invested in risky property schemes. Much greater publicity should be given to the injudicious use of self-managed superannuation funds, and all gatekeepers in the financial industry—financial planners, accountants, lawyers, media commentators and regulators—should make a concerted effort to educate investors on the pitfalls of doing so. They should also promptly report any dangerous practices emerging in this area to relevant regulators.

The committee found that, even though investing in such schemes was not in consumers' financial interest, they sometimes succumbed to the hype generated by investment seminars with their celebrity endorsements, offers of special exclusive deals and high-pressure sales tactics. The complexity of the schemes and these methods of marketing them to mostly unsophisticated retail investors meant that many of them did not realise that their investments may not be maturing as expected. Because of the medium- to long-term nature of land-banking schemes, it appears that many investors are not yet in a position to determine whether they will ever receive a return on their investment as promised. Indeed, many investors may have not yet realised that what they thought they were buying is not what is to be delivered.

The overriding message coming out of the evidence is that consumers must be wary of trusting documents and material provided by spruikers. The importance of resisting the pressure to sign up to a deal without first seeking independent advice cannot be overemphasised. A critically important aim of this report is to alert investors to the need to exercise care and diligence with any venture involving land-banking and property investment more generally.

The scandalous conduct of self-interested spruikers and their associates must also be addressed. Concerns about property investment schemes are not new, and there is some evidence that part of the problem associated with such schemes can be attributed to rogue traders, often with links to shady operators from the past. A number of people who were involved in property investment scams in the early 2000s during the last property boom are also allegedly involved in some of the schemes, including notorious rogue trader Mr Henry Kaye and his sister, Ms Julia Feldman.

The leadership and ownership structures around the less reputable land-banking schemes are often opaque, so it is difficult to determine who is involved—often behind the scenes—in the companies that develop or promote the schemes. It is particularly worrying to find that spruikers whose integrity had been compromised were able to resurface in the industry under another guise, even after being exposed for unscrupulous conduct. A common thread running through the land-banking schemes investigated by the committee was that the promoters of the schemes referred investors to lawyers, accountants and lenders with whom they had a potential conflict of interest because of their pre-existing and often intertwined business relationships.

Many of the behaviours exhibited by the promoters of land-banking schemes outlined in this report, such as high-pressure selling techniques and referrals to conflicted lawyers and other services, are also found in schemes operated by other spruikers, including through so-called financial education programs. The committee recognised that the land-banking schemes emerged within the context of an unregulated property investment advice industry that has long been plagued by questionable practices.

The committee is strongly of the view that, with the great strides made in the regulation of other financial services over the last 15 years, governments and regulators must turn their attention to fringe activities, such as property spruiking, which for legacy reasons have been left outside the financial services laws. The problems associated with the marketing of property investment, evident in recent land-banking schemes, have plagued the industry for decades. These schemes have highlighted the urgent need for reform and a much improved regulatory regime for the provision of advice on property investment.

The committee identified two ways to implement this regime: the Commonwealth assuming responsibility for property investment advisers; or strengthening provisions in the Australian Consumer Law that would see the introduction of protections for retail investors mirror those for retail investors in financial products. The committee prefers the first option. Given the established obligations and penalty regime under the Corporations Act, consumers would arguably be better protected if land-banking schemes, and advice on property investment generally, came under the Corporations Act.

Should the Australian and state and territory governments decide that investment property advice should remain under the Australian Consumer Law then reforms are necessary to strengthen that regulatory regime as it relates to investment property and investment property schemes. The FoFA reforms to the Corporations Act provide a sound model on which to base changes to the Australian Consumer Law.

In closing, I just want to thank the hardworking members of the economics committee secretariat for putting this report together and all of those associated with the work of the committee in relation to the land-banking report.

Question agreed to.