Senator Nick Xenophon—Additional
Comments
Government
has been MISsing In Action: Time for a Compensation Scheme for MIS Victims
1.1
I
commend the Committee for the non-partisan way it has approached this moist
serious issue and the outstanding work of the Secretariat.
1.2
What
is outlined in the Committee’s report can, in my view, best be described as a
train wreck in slow motion. Government, regulators and financial institutions
either saw the train wreck coming, or should have seen it coming.
1.3
There
was a seemingly inevitability that Forestry Managed Investment Schemes were
going to end in tears.
1.4
The
evidence given to the Committee in Melbourne on the 4th of August
2015 by Mr Sam Paton, the respected principal of Agribusiness Valuations
Australia, is very telling:
Senator WHISH-WILSON: I
want to go to two very quick questions. Unfortunately, we are running out of
time. We have looked at lots of different layers, I suppose, of proportioning
the blame on why things went astray and led to this catastrophic policy failure.
Do you think the government has any role in providing compensation to victims
of MIS failures given the role they played in Vision 2020, the tax deductions,
the setting up of MISes and not making changes when people were ringing the
bells about the risks?
Mr Paton: Philosophically
I guess that, as I alluded to in here, I cannot feel much sympathy for someone
who is so naive as to think that that was their get out of jail card getting in
an MIS. I do feel sorry for the people who had financial planners hand out the
back, ANZ securitising their loans to invest, but I think—
Senator WHISH-WILSON: The
buyer beware caveat.
Mr Paton: Yes.
Out of all the work your committee has been doing, hopefully one good thing is
the focus on the banks. That double standard of saying, 'We'll lend them money
even though'—I think the best thing government can do is close this legislation
down.
Senator WHISH-WILSON: That
was my next question. Are they fixable or are they broken?
Mr Paton: I
do not think so. That supply driven model just does not work. If you want to
road test it, just say there was something that looked like it needed a
kick-start—a new embryonic industry that just needed a bit of critical mass. If
you could name one—and blue gums was not one—all the other industries like
pines and grapes were mature. You would go about it a different way where
government would make the developers have some skin in the game. As Senator
O'Keefe said to me in the 2007 hook-up, if they had some skin in the game—like
if Timbercorp had to stump up half the money and have some involvement and risk
sharing—it would be totally different. In a nutshell, I do not think the
legislation has any beneficial use.
Senator WHISH-WILSON: I
would like to thank you for your evidence in speaking out today. What is really
important to me is that there is evidence to this committee that the Liberal
government at the time was made aware of these risks by people such as you
while they were considering over a very long period of time a policy response.
It is good to know that that kind of conversation had occurred.
Senator XENOPHON: I
have a very quick question that follows on Senator Whish-Wilson's question
about the Ponzi schemes. Without going into what a Ponzi scheme, can I put it
to you another way? Is it your view that this was always going to end in tears
because it was not a viable way of agricultural production—that it was
completely artificial and never sustainable in the longer term?
Mr Paton: Yes,
because in my experience you create a supply response where there is underlying
demand, and then it evolves on its merits. You keep a sink. The analogy to MIS
is that it created, if you like, a supply platform that was always going to
fail a bit like in the wool boom. The Australian Wool Corporation ratcheted up
the floor price for wool, so it guaranteed growers. It went up from 700c to
870c. The next thing is we had four million bales of wool just like we have a
wall of wood we cannot sell. It is a similar analogy. Just leave it to the
marketplace to sort out, and keep government out of it.
1.5
Mr
Paton was clearly being sardonic in his final comment about the market place
being left to sort it out.
1.6
The
Government clearly had a role in establishing, by legislation and regulation,
an investment scheme that was clearly not sustainable—that was going to
eventually fall over like a house of cards.
1.7
As
Mr Paton alluded to, Financial Institutions need to be scrutinised for their
roles in providing massive lines of credit and loans to these companies, giving
‘mum and dad’ investors a false sense of security that their investment was
safe. This was compounded by financial advisors providing poor advice without
relevant considerations of the risks.
1.8
Recommendation
17 of the Committee goes in part to the role of the banks in relation to this
debacle.
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.
1.9
The
committee received very relevant and significant evidence[1] from
Catriona Lowe, Independent hardship advocate for Timber Corp victims. The
scheme is clearly welcome, and I have seen first-hand how genuine efforts are
being made to resolve difficult matters, for individuals in extraordinarily
awful circumstances.
1.10
The
Senate reference committee report into The Performance of ASIC in June 2014 did
discuss issues of compensation in the context of Commonwealth Financial
Planning Ltd. Chapter 17 of the Committee’s report discussed the issue of a
compensation scheme which is also the subject of the current Scrutiny of
Financial Advice inquiry. I expect that Inquiry will provide specific
recommendations in due course. However, I flag now that victims of Forestry
Managed Investment Schemes need to be included in any such compensation scheme.
Existing mechanisms for compensation are inadequate and not appropriate.
Government should have a role to adequately deal with victims of a scheme that
Government should never have allowed to come into existence in the first place.
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.
Senator
Nick Xenophon
Independent
Senator for South Australia
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