Michaelia Cash (WA, Liberal Party, Minister for Women) Share this | Link to this | Hansard source

I present the government's response to the report of the Economics References Committee on its inquiry into agribusiness managed investment schemes. I seek leave to have the document incorporated into Hansard.

Leave granted.

The document read as follows—

Report on Agribusi ness Managed Investment Schemes, Bitter Harvest

Recommendation 1

The committee recommends that the ATO undertake a comprehensive review of its product rulings to obtain a better understanding of the reasons some investors assume that an ATO product ruling is an endorsement of the commercial viability of the product. The results of this review would then be used to improve the way in which the ATO informs investors of the status of a product ruling.

The committee recommends that the ATO and ASIC strengthen their efforts to ensure that retail investors are not left with the impression that they sanction schemes, including the use of disclaimers prominently displayed in disclosure documents including PDS.

– introducing a requirement to prominently feature its customary disclaimer about product rulings in all scheme documents given to investors, including the product disclosure statement, promotional and other marketing material;

– requiring that retail sellers sign a declaration stating that they:

o understand that a product ruling is not an endorsement of commercial viability;

o will advise buyers that a product ruling is not an endorsement of commercial viability; and

o will encourage buyers to seek independent advice with regard to commercial viability.

– requiring the provider of an agribusiness MIS to obtain a signature from applicants on a separate section of the form, to ensure retail investors' attention is drawn to the disclaimer and that they understand what the disclaimer means.

Recommendation 2

The committee recommends that ASIC be vigilant in monitoring the operation of the FOFA legislation and to advise government on potential or actual weaknesses that would allow any form of incentive payments to creep back into the financial advice sector.

Recommendation 3

While noting the 1 July 2016 expiry of the ‘accountants’ exemption’ under Regulation 7.1.29A of the Corporations Regulations 2001, the committee recommends that the Treasury look closely at the obligations on accountants or tax agents providing advice on investment in agribusiness MIS (or similar schemes). The intention would be to identify any gaps in the current regulatory regime (or the need to tighten-up or clarify regulations) to ensure retail investors are covered by the protections that exist under FOFA and that the level of regulatory oversight of tax agents or accountants providing advice on agribusiness MIS (or similar schemes) does not fall short of that applying to licensed financial advisers.

Recommendation 3

The committee agrees with the view that financial literacy has 'got to get aggressive' and recommends that the Australian Government explore ways to lift standards. In particular, the government should consider the work of the Financial Literacy Board in this most important area of financial literacy to ensure it has adequate resources.

Drawing on the lessons to be learnt from the evidence on the need to improve financial literacy in Australia, the committee also recommends that the Australian Government in consultation with the states and territories review school curricula to ensure that courses on financial literacy are considered being made mandatory and designed to enable school leavers to manage their financial affairs wisely. The course content would include, among other things, understanding investment risk; appreciating concepts such as compound interest as friend and foe; having an awareness of what constitutes informed decision-making; being able to identify and resist hard sell techniques; and how to access information for consumers such as that found on ASIC's website. Financial literacy should be a standing item on the Council of Australian Governments' (COAG) agenda.

Recommendation 5

The committee recommends that the government gives high priority to developing and implementing a code of ethics to which all financial advice providers must subscribe.

Recommendation 6

The committee recommends that the government consider the banning provisions in the licence regimes with a view to ensuring that a banned person cannot be a director, manager or hold a position of influence in a company providing financial services or consumer credit.

Recommendation 7

The committee recommends that the government consider legislative amendments that would give ASIC the power to immediately suspend a financial adviser or planner, subject to the principles of natural justice, where ASIC suspects that the adviser or planner has engaged in egregious misconduct causing widespread harm to clients.

Recommendation 9

The committee recommends that the government consider not only renaming general advice but strengthening the consumer protection safeguards around investment or product sales information presented during promotional events.

20 April 2016.

Recommendation 10

The committee recommends that ASIC strengthen the language used in its regulatory guides dealing with general advice. This would include changing 'should' to 'must' in the following example:

“You must take reasonable steps to ensure that the client understands that you have not taken into account their objectives, financial situation or needs in giving the general advice”.

Recommendation 11

In light of the concerns about the lack of understanding of the role that referral networks had in selling agribusiness MIS without appropriate consumer protections, the committee recommends that the government's consideration of 'general advice' also include the role of referral networks and determine whether stronger regulations in this area are required.

Recommendation 12

In respect of research houses and subject matter experts providing information or reports to the market on financial products such as agribusiness MIS, the committee recommends that the government implement measures to ensure that IOSCO's statement of principles governing integrity and ethical behaviour apply and have force. In particular, the committee recommends that the government consider imposing stronger legal obligations on analysts, and/or firms that employ analysts to rate their product, to act honestly and fairly when preparing and issuing reports and applying ratings to a financial product.

Recommendation 13

Recommendation 14

The committee recommends that Bendigo and Adelaide Bank support the appointment of an independent hardship advocate to assist borrowers resolve their loan matters relating to Great Southern.

Recommendation 15

The committee recommends that the Australian Government initiate discussions with the states and territories on taking measures that would lead to the introduction of national legislation that would bring credit provided predominantly for investment purposes, including recourse loans for agribusiness MIS, under the current responsible lending obligations. The provisions governing this new legislation would have two primary objectives in respect of retail investors:

Recommendation 16

The committee recommends that the Australian Government consider ways to ensure that borrowers are aware that they are taking out a recourse loan to finance their agribusiness MIS and also to examine the merits of imposing a maximum loan-to-valuation limit on retail investors borrowing to invest in agribusiness MIS.

Recommendation 17

The committee recommends that the Banking Code of Conduct include an undertaking that the banks adhere to responsible lending practices when providing finance to a retail investor to invest. This responsibility would apply when the lender is providing finance either directly or through another entity such as a financing arm of a Responsible Entity.

Recommendation 18

The committee recommends that the Victorian Legal Services Commissioner and Legal Services Board thoroughly review the conduct of the lawyers who provided advice to retail investors in collapsed agribusiness MIS to cease repayments on outstanding debts and the circumstances around this advice.

The intention would be to determine whether the profession needs to take measures to ensure it maintains high ethical standards and that its members adhere to best interest obligations towards their clients. The investigation would include making recommendations or determinations on:

Recommendation 19

To augment ASIC's product intervention power, the committee recommends that the government review the penalties for breaches of advisers and Australian Financial Services Licensees' obligations and, under the proposed legislation governing product issuers, ensure that the penalties align with the seriousness of the breach and serve as an effective deterrent.

Recommendation 20

The committee recommends that the government use CAMAC's report on managed investment schemes as the platform for further discussion and consultation with the industry with a view to introducing legislative reforms that would remedy the identified shortcomings in managing an MIS in financial difficulties and the winding-up of collapsed schemes.

Recommendation 21

The committee notes that neither the ATO nor Treasury have undertaken a comprehensive review of the tax incentives for MIS and whether they had unintended consequences, such as diverting funds away from more productive enterprises; inflating up front expenses; or encouraging poorly-researched management decisions (planting in unsuitable locations). The committee recommends that Treasury commission a review to better inform the policy around providing tax concessions for agribusiness MIS.

Recommendation 22

The committee recommends further that the proposed review consider the approach to the incentives offered to investors in agribusiness ventures by other countries such as the United Kingdom to inform the review's findings and recommendations.

Recommendation 23

In addition to the above recommendation, the committee recommends that the government request the Productivity Commission to inquire into and report on the use of taxation incentives in agribusiness MIS. As part of its inquiry, the Productivity Commission should identify the unintended adverse consequences, if any, that flowed from allowing tax deductions for agribusiness MIS. For example:

– the potential for mis-selling financial products on the tax concessions;

– the incentive for retail investors to borrow, sometimes unwisely, to fund their investment;

– whether the taxation concessions:

– became an end in themselves rather than the business model;

– showed up as subsidies to higher cost structures, operations and/or returns to the operators of the schemes; and

– distorted land values and diverted high value farmland into passive monoculture such as Blue Gums.

– The main purpose of the inquiry would be to draw not only on the experiences of the failed MIS but also the successful schemes to determine whether there is merit in reforming the system of tax incentives and, if so, what those reforms.

Recommendation 24

The committee recommends that ASIC review the complaints made against advisers and accountants, licensed or unlicensed, who engaged in alleged unscrupulous practices when recommending that their clients invest in agribusiness MIS. The review would identify any weaknesses in the current legislation that impeded ASIC from taking effective action against those who engaged in such unsound practices. This review would also examine the adequacy of the penalties available to ASIC to impose on such wrong doers. In particular, ASIC should consider the adequacy of penalties that apply to those who were unlicensed or have since become unlicensed. Banning in such cases is redundant.

The committee also recommends that as part of this review, ASIC consider the practice of advisers using bankruptcy as a means to avoid recompensing clients who have suffered financial loss as a result of their poor financial advice and any possible remedies.

The committee recommends that ASIC provide its findings to the committee.

Nick Xenophon’s recommendation

That a compensation scheme of last resort for victims of ‘Forestry Managed Investment Schemes’ be established with a combination of Government funding and a contribution from financial institutions. This should be established in parallel with stricter requirements for insurance for financial planners as part of an ongoing compensation scheme for prospective failures of financial advice.

Green’s recommendation 1

That the Government establish a Royal Commission to examine misconduct within the financial services sector.

Green’s recommendation 2

That the Government should legislate to require investment in forestry MIS to be treated as investment in capital, and for tax deductions to be spread across the life of the asset.

Green’s recommendation 3

That the Government legislate such that only limited recourse loans are able to be provided for investment in complicated financial products.

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

I move:

That the Senate take note of the document.

I really like that title, Bitter Harvest. Sometimes the names of committee reports can really frame what the committee has discovered. No punches were pulled in this report. Unfortunately, however, the Greens did have to put in a dissenting report at the end. This is one of many inquiries which I have been on in recent years where we looked at financial misconduct. This to me was the most powerful inquiry I have sat on. Being a Tasmanian, over the years I have witnessed the rise and fall of Gunns Ltd. I have witnessed the rise and fall of the managed investment scheme industry—some would say it was a perverse incentive provided by government and legislation to grow the forestry industry in Australia. There may have been good intentions when it was first put up but it led to an absolute catastrophe, not just in Tasmania but right around the country.

The Senate heard evidence that nearly $4 billion of investors' money was put into forestry managed agribusiness schemes—in other words, tree farms—and the whole lot was lost. Many of the investors were mum and dad investors, not sophisticated investors. Not only did they lose their investments but some of them were leveraged into those investments. They went to their accountants and financial planners and they were sent to the company, and the company said, 'If you don't have the money to buy a tree farms scheme to claim against your tax, to reduce your tax, we'll lend you the money.' So they borrowed money to invest in what was a high-risk scheme, but many of them did not understand any of the risks associated with this scheme.

In fact, we found evidence that these tree schemes were sold as being as safe as houses. But they were anything but as safe as houses. Let me say this: ASIC admitted on the last afternoon of the inquiry that these tree schemes were not retail investment grade. They should never have been sold to Australians who were saving for their retirement. I could probably spend an hour or two just going through why they were not retail grade. At the end of the day, these were tax driven schemes—they were driven by tax deductions. Billions of dollars were poured into these schemes so Australians could get deductions to lower their tax. This was all legal; this was set up by the government. Then there was a gold rush of people getting into these schemes, setting them up, taking that money, buying land—good agricultural land, as Senator Duniam knows, in my state of Tasmania—

Jonathon Duniam (Tasmania, Liberal Party) Share this | Link to this | Hansard source

Our state of Tasmania.

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

I will take the interjection, Senator Duniam: our state of Tasmania. They bought the land, which was often used for agricultural purposes prior to tree farms—good high-grade agricultural land. The communities that used to service those farms were gone, because these trees take 20 or 30 years to grow. At the end of that, not only did investors lose their money, but the schemes all collapsed like a house of cards, as did Gunns Ltd, the timber company. What happened? What about the plan for Australia to be self-sufficient in forestry products? At the end of it, all these trees were sold for a few cents in the dollar in terms of their asset backings to foreign investors. So Australians pumped $4 billion into managed investment schemes; it all went to the wall—all the trees were sitting there unpruned and a fire risk. Farmers wanted to get rid of them but they could not get access to the land because of legal issues.

It was a total catastrophe. No-one has ever been brought to account. This was Australia's mini GFC moment. Senators Duniam, Bilyk and Brown may be thinking that, had we had a pulp mill in Tasmania, it might have bought the trees. There may be some truth to that. Had one of the world's biggest pulp mills been built in the Tamar Valley—which, I unashamedly will say, I campaigned against 14 years—it probably would have bought these trees. I have to say that these investors bought the trees for next to nothing and they still do not know what they are going to do with them. That suggests that they do not have a market. It would have been an absolute catastrophe if another couple of billion dollars of investors money had been poured into a dirty, stinking, rotten pulp mill in a tourist valley in beautiful Tasmania.

The whole thing was a house of cards from the start. Anyone with half a brain would have seen it coming. But nevertheless the investors—because of what we call, in technical terms, asymmetrical information—did not know the risks. Many of the financial planners did. Certainly the companies that were spruiking these tree farms knew the risks. What did they do? When they knew that this was a giant Ponzi scheme, the only way they could keep going was to keep new investors' money coming in so they could pay the bills. Even though they knew it was a giant Ponzi scheme, they kept dancing until the music stopped. Guess who else kept dancing until the music stopped? The banks did. Lo and behold, the big banks were loaning the money to the tree farm scheme companies to on-loan to the mum-and-dad investors who were being told that these things were as safe as houses.

But the banks were very clever. ANZ, for example, loaned the money to Timbercorp—a colossal catastrophe—but they refused to put tree farms in their own financial planning wealth management arms. We asked them, and they said they were too high a risk. But they were happy to loan this money to these investors at 15 per cent. Those of us who understand finance would be wondering why we were paying 15 per cent, because that spells risk by any means. Nevertheless, a lot of these good people, these good Australians, were not sophisticated investors. They trusted their accountants and they trusted their financial planners when they were told that these would be good for their retirement: 'They are almost annuities. They're trees. They'll pay out in the future, and you get a tax deduction now.'

No-one has been brought to account for this scheme. This report makes a number of recommendations that will help prevent this from ever happening again. However, the Greens believed, after this report, that a royal commission was needed into misconduct in the financial services sector. A royal commission could just look at this catastrophe alone, without looking at the banks, without looking at any other of the many scandals that we have seen in the financial services sector in this country in recent years. It could just look at managed investment schemes.

At the end of the day, the most important thing is that the Senate's report is here for people to read and that we act on it and make sure this never happens again. One thing I did learn in my years in finance and in teaching finance is that financial catastrophes, Senator Williams—through you, Chair—always tend to happen just outside the boundaries of people's active living memories. They always tend to happen just outside people's memories. They will happen again. There is no doubt about it. We have to put legislation in place and make changes to make sure that managed investment schemes—complex, risky products—are not bundled up by people who have their snouts in the trough trying to make a quick buck by ripping off investors. I have no doubt that it will happen again if we do not act on it. I applaud this report to senators in the chamber and ask that they read it.

The Greens will continue to crusade for an inquiry into financial services misconduct, an inquiry which will look at who is responsible for this and hopefully get some justice for the many victims who still are losing their homes and who still are tens of thousands, if not hundreds of thousands, of dollars out of pocket. We need laws reviewed and looked at to make sure this does not happen again.

Debate adjourned.