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

I present the report of the Economics References Committee on forestry managed investment schemes together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

I move:

That the Senate take note of the report.

The Economic References Committee inquiry into managed investment schemes in the agribusiness sector was referred to the committee in June 2014. I commend individual members of the committee for their hard work over a long period of time on what was a major inquiry investigating agribusiness investment schemes.

This is a substantial and detailed report into what is a very complex matter.

Over the 20 months, the committee heard the harrowing experiences of individuals and their families, and the alarming extent of financial hardship that has been inflicted on a large number of people, many of whom did not have the means to absorb the risks that they were being exposed to but were encouraged to do so.

Agribusiness investment schemes were devised to increase financing available to large-scale agricultural operations by pooling funds from small-scale investors. These were encouraged under the Managed Investments Act 1998, which was introduced to facilitate investment into agribusiness developments.

Managed investment schemes operate under the principle that, over a typical 20-year life cycle of a MIS, investors would pay fees in the early years to fund planting of crops and would receive a share of profits in later years when the crop was harvested. Sadly, many of these ventures failed to materialise, but it was clearly apparent that many investors did not understand the exact nature of their commitments and what they might be required to pay if the scheme failed.

The committee has decided to call this final report Agribusiness managed investment schemes: bitter harvest. This inquiry showed that despite the assertion that Australia avoided the GFC, in fact, many thousands of hard-working Australians who unwittingly invested in agribusiness ventures were devastated when credit dried up rapidly during the GFC. This is yet another sector of the investment industry that has failed ordinary Australians, and I wish to commend the hard work of the committee in reporting on the systemic failures of our regulatory environment that allowed this to occur.

Sadly, it is yet another example of the gung-ho days of fickle investment schemes launched prior to the global financial crisis that were 'too good to fail'.

Since FMIS schemes collapsed during the GFC, there have been significant changes to laws governing both financial advisers and lending practices. While it will be of little consolation to the victims of the schemes that were examined in this report, we in this place do hope that Australians will have a heightened awareness of investment risk, and this does not absolve government from putting in place regulations that will prevent unwitting investors from being misled in the future.

The committee learned that, when many of these agribusiness schemes collapsed, many investors not only lost their initial investment and expectations of income in the future but also were saddled with the burden of repaying the loans and interest on a valueless asset. Investors found themselves with full recourse loans that they did not know they had. We heard from people who thought they were simply buying shares but, when the schemes collapsed, discovered they were facing the possibility of losing their homes. Sadly, this remains a risk facing many victims.

There is no doubt that some agribusiness MIS victims have been devastated not just by the collapsed schemes but also by their financial advisers, accountants and lawyers who offered what can only be described as poor advice in encouraging them to make the investments and then, later on, in how to proceed when the schemes failed.

Further, in what can only be described as a travesty, we learned that lawyers advised investors to cease making their repayment obligations to creditors while class actions were proceeding through the courts. It was the committee's view that investors who followed this advice are now in even great hardship than those who continued to service their debts.

The committee found that MIS was yet another example of unwary investors being persuaded by trusted professionals to make investments in high-risk schemes with little understanding of the risks and the costs of failure. The committee notes that this inquiry builds on the conclusions of its previous inquiries into the performance of ASIC and also the Financial System Inquiry, which recommended increased powers for ASIC to intervene in the marketing of financial products. While improving the financial literacy of all Australians is necessary and desirable, these inquiries demonstrate that there is a need for improved regulation to ensure ordinary Australians do not enter into financial commitments which are not appropriate to their financial circumstances.

In seeking to address the systemic issues that allowed these investments to proceed, the report includes 24 recommendations for consideration by both the government and opposition parties. These recommendations seek to strengthen the regulatory environment to ensure that both the Australian Taxation Office and the Australian Securities and Investment Commission bring MIS retail investments fully within their oversight and make the financial advice industry fully accountable for its behaviour.

The committee was concerned that investors perceived that the tax deductible status of managed investment schemes indicated that they were endorsed by the ATO and has suggested that the ATO address this perception once and for all. The committee recommends that ASIC's powers be strengthened for enforcement, banning orders and improving product disclosures.

The committee recommends that the federal government introduce legislation to ensure that loans for investment are subject to responsible lending laws to address the existing anomaly in federal and state laws. This is a recommendation that we urge everyone in this place to support. The committee recommends that the Victorian Legal Services Board investigate the lawyers responsible for advising victims to stop servicing their loans and consider whether compensation is warranted. For victims of the Great Southern collapse, the committee recommends that Bendigo Bank introduce a hardship program for the victims. Additionally, the committee has recommended the strengthening of financial literacy through ASIC's MoneySmart program in schools and adding it as a standing item on the COAG agenda.

During the course of this inquiry—June 2014 to March 2016—compensation for failed financial schemes was considered by the FSI, and the FMIS inquiry specifically considered the 2012 recommendations of Richard St John on compensation. The committee shares the conclusions of both of these, and also those of the Wallis inquiry before them, that increasing ASIC powers and improving product disclosure standards is more appropriate than introducing a compensation scheme. Some submitters favoured establishment of a royal commission to further investigate the collapse of FMIS schemes.

The chair's report does not recommend a royal commission to further investigate the collapse of FMIS schemes. It is evident that there were loopholes in the law that allowed retail investors to be exposed to risks significantly above their capacity to absorb what have become devastating losses. Since FMIS schemes collapsed during the GFC, there have been significant changes to laws governing both financial advisers and lending practices. I commend this report to the Senate.

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

I instigated this inquiry by the Senate Economics References Committee into forestry managed investment schemes. I cannot think of a bigger financial catastrophe in this country than these schemes. Four billion dollars was lost on investment in forestry managed investment schemes, billions of dollars of tax was avoided, and hundreds of thousands of Australians have lost their life savings. An industry that was supposed to be set up for self-reliance, that used these incentives to invest in trees, was decimated. Those trees were sold at a few cents to the dollar to foreign interests.

Looking back at it, this was Australia's GFC moment. We had a complex, toxic product that blew up in the face of investors and a few people made a lot of money out of it. Whether they were financial planners, accountants, the promotors of these schemes, the forestry managed investment scheme companies themselves or listed stock market companies, a few people made a lot of money but lots of Australians lost not only their life savings but also their homes. Almost no-one has been brought to account on what I think is probably the largest financial scandal in this country's history.

I have seen the effects in my community in Tasmania: farmers with hundreds of thousands of hectares of trees they cannot touch, that are essentially valueless. What have we done to learn the lessons of history? The Senate did a good job looking at this. Unfortunately, it did not go far enough. The only way to prevent the same kind of catastrophe from occurring again is to remove the up-front tax deductions on these schemes which led to the rorts. We need a royal commission to get to the bottom of this. There are so many institutions and people involved in this—let alone CommInsure, Commonwealth Bank, National Australia Bank, Macquarie Bank and all the other scandals we have heard about in this chamber that the economics committee have examined.

The financial services industry in this country has a culture problem. The only way we are going to get to the bottom of that culture problem and make sure that we have the right laws in place—as you know, Mr Acting Deputy President Williams—is a royal commission, because it has the investigative powers and the resources to call the witnesses that this economics committee, unfortunately, was either unable or unwilling to call. That includes the accountants, the financial planners, the CEOs of companies and the former ministers who sat on their hands when the bells were being rung, that led to this catastrophe. If we do not learn the lessons of history, we are bound to repeat them. It is absolutely essential that we back former Senator Mark Bishop, of the Labor Party who, nine months ago, called for a royal commission into financial services. We need it now. I seek leave to continue my remarks later.

Leave granted.

Sitting suspended from 19:00 to 19:30