We are in a living hell. To work your entire life to pay for
your home and now lose it.
Agribusiness managed investment schemes (MIS) were developed
to finance agricultural operations on a large scale. They allow small investors
to pool their funds to invest in a large-scale agricultural operation. MIS were
introduced to Australian investors after the passage of the Managed
Investments Act 1998, ostensibly to encourage agricultural diversification,
after the decline of the local forestry industry.
Over the 20-year life cycle of a typical MIS, investors
would pay fees in the first few years as orchards were planted, which would
become significant tax deductions. Fees would drop after a few years, and the
scheme would return profits as the products were harvested in the latter years.
MIS quickly became an attractive new tax deduction for wealthy investors, but
in a few short years, demand for the deductions grew, and the nature of the
industry changed rapidly, to the point where it is best described as an
abhorrent 'Ponzi scheme'.
People of all ages and from all walks of life were
encouraged to become investors and, more pertinently, to borrow to invest in
agribusiness MIS. As a group, many investors, known as growers, bore the brunt
of massive losses after the failure of a number of these schemes.
Importantly, not all growers could be characterised as sophisticated investors.
In fact, a number were retail investors entering into complex borrowing
arrangements to finance a speculative venture. They clearly identified
themselves as inexperienced investors—'just average hardworking Australians'
trying to achieve financial security for the future. Some were single; some had
young families; while others were approaching or already in retirement and merely
looking for a stable and safe income stream.
When the schemes collapsed, many of these investors lost not
only their investment and prospects of future income but were also saddled with
the burden of repaying the loans and interest on a valueless asset.
The stories of financial loss and personal anguish retold in
this report do not adequately convey the deep pain and suffering endured by
many of the growers who invested in MIS that eventually folded. Some struggled
to put together their submission because re-living the financial and personal distress
was 'extremely confronting', while others could not rouse the energy and have
For tax reasons, many agribusiness schemes were structured
so that investors were described as operating this investment in their own
right. Thus, an agribusiness MIS is a tax effective investment vehicle.
It should be noted, however, that many investors who wrote
to the committee indicated that the broad assertion about the tax concessions
driving their decision to invest was too simplistic. For them, the tax benefit
was only part of their reason for investing in an agribusiness MIS and
definitely not the compelling reason. Certainly, not all growers were simply
looking for a way to minimise their tax. Many submitters provided information
on their annual income, which could only be described as modest—they were not
While the tax advantage may not have been the primary
consideration for some investors, it was a factor and certainly a major part in
the marketing strategy for the various MIS products. But even investors
primarily motivated by the tax advantages were entitled to sound financial advice
that was appropriately tailored to their particular circumstances. There has
been no suggestion that growers acted illegally in taking advantage of the tax
It was not unusual for growers to borrow up to 90 per cent of
the value of their investment or gear their entire investment in MIS. Even
those who clearly indicated that they were not in a strong financial position
were encouraged to borrow.
Typically, the loan arrangement was based on the assumption
that the project would be cash flow negative for the first few years, then
subsequent harvest proceeds would become cash flow positive, which could then
be used to pay down the loan.
Investors had no reason to be concerned that they would default on their repayments
because of assurances that the cash flow from the harvest would pay off the
loan and eventually produce a reliable and secure income stream.
A number of investors not only borrowed substantial sums of
money but found themselves in a debt trap of having to take out additional
loans for annual fees. In this regard, it would appear that the practice of
re-financing loans to pay for maintenance and other expenses was commonplace
and forced some growers further into debt.
Some claimed that they did not understand that the yearly management costs
would become additional loan commitments 'to sustain the overall investment'.
Finally, many of the borrowers suggested that they did not
fully comprehend the loan arrangements and assumed that the loan was held
against the actual investment with liability limited to the trees or plants. The
loans, however, were 'full recourse' and borrowers were personally liable for
their outstanding debt. Thus the anguish and financial loss suffered by those
who had invested in the failed schemes was compounded many times over by the
loans they took out to fund their venture. The prospect of having to sell the
family home to pay off their loan had never entered their minds.
Many of the investors argued that they should never have been
granted the loan: that their financial circumstances indicated that the
repayments were beyond their means. They argued that had they been fully
informed of their loan arrangements they would never have entered into such an
agreement and asked where was the lender's responsibility for due diligence.
New credit laws
It is important to note that loans made for the purposes of
investment (other than for investment in retail property) are not covered by either
the legislative protections of the Uniform Consumer Credit Code (UCCC) or new
credit laws introduced in 2010.
Financial advisers and trust
This report abounds with accounts of investors following the recommendations
of their adviser whom they genuinely believed was a professional: an expert who
would act in their best interests irrespective of incentives that might
influence that advice.
But the committee has established that there were horrifying
deficiencies in the way some advisers adhered to the basic requirements to know
their client, the product they were recommending and to have a reasonable basis
for their advice. Evidence indicates that, in some cases, advisers disregarded
their clients' risk profiles; withheld important information, particularly
about the speculative nature of the venture; failed to provide critical
documents; wilfully downplayed risks; and exaggerated the promised returns. There
were many claims that the tax deductibility of the schemes somehow equated to a
government endorsement or guarantee.
Some financial advisers or accountants put their own
interests above those of their clients and gave unsound advice, which resulted
in their clients sustaining substantial financial losses. In case after case
presented to the committee, it was clearly evident that some advisers were more
intent on selling a product because of the attractive commissions they could
earn rather than providing their clients with appropriate advice.
Financial advisers, however, were only one component in the
promotion and selling of MIS. They relied on marketing material provided by the
product manufacturers and were often part of a larger public relations campaign
to entice investors into the schemes. In some instances, advisers may have
misled their clients, sometimes inadvertently, sometimes deliberately, as they
themselves may not have understood or appreciated the pitfalls of the products
they were promoting.
The producers of agribusiness MIS must then bear some
responsibility for the marketing of these speculative ventures to retail consumers.
Without doubt, the evidence supports the contention that retail investors need
robust consumer protection and, in the case of agribusiness MIS, the current
reliance on disclosure—product disclosure documents (PDSs) and statements of
advice (SOAs)—is woefully inadequate. When considering any regulatory change,
it is imperative that the government and regulator take close account of the
evidence presented by investors to this inquiry that:
retail investors have difficulty deciphering the information
contained in disclosure documents (PDSs and prospectuses) and do not adequately
comprehend the significance of the risks being presented (or disguised) in these
small investors place the utmost trust in their adviser's
do not always read information contained in key disclosure documents and rely
on their adviser to interpret this material for them;
despite statutory obligations, advisers and product issuers clearly
do not always act in the best interests of their clients and may deliberately
withhold, conceal or downplay important information—in the case of agribusiness
MIS, some appeared to have conveyed false impressions, for example, by
intimating that the schemes were government approved and presenting overly
optimistic predictions; and
important information contained in glossy brochures, prospectuses
and PDSs, and sometimes cited during promotional or 'educational' seminars, do
not necessarily help investors understand the product and its risks and often
serve to obscure rather than inform.
Put bluntly, people unfamiliar with investment matters went
to specialists for expert advice: they relied on these professionals to inform and
advise them on
decision-making. Given the findings of behavioural economics and ASIC's own
surveys, the committee recognises that oral advice from a trusted adviser will
tend to prevail over information, including on risk, contained in a disclosure
document. Of course, this recognition does not downplay the responsibility of
product manufacturers and issuers to ensure that the information in their
promotional material and disclosure documents is accurate. In fact, it
underscores the importance of PDSs doing what they are intended to do—help
consumers compare and make informed choices about financial products. There is
no doubt that disclosure documents could be clearer and easier to comprehend
but the marketing techniques employed by the product issuer and an adviser's
interpretation of the documents may drown out warnings about risk in these
There is a persuasive argument that high risk agribusiness schemes
should not have been marketed to retail investors. Indeed, the Financial
Planning Association (FPA) described agribusiness MIS as 'particularly complex'
products...'at the higher end of the risk spectrum' and with a 'particularly
complex financing arrangement'. It indicated that:
Many of our members have related to us that forestry and
agribusiness MIS are so difficult to understand and justify as an investment
option over alternative products that their licensees do not include them on
their approved product lists and financial planners avoid them. Professional
indemnity insurers likewise have begun to exclude such products from their
policies, as a response to the perceived risk and opacity of the investment
case for MIS recommendations.
Yet agribusiness MIS were marketed and sold to unwary
investors who had not been properly informed of, or understood, the complexity,
or inherent high risk of their investment or loan. As noted earlier, they were
retail investors relying heavily on the advice of their advisers and who, on
their own admission, had limited capacity to understand or appreciate the risks
posed by the investment.
There can be no doubt that much stronger measures are needed to
protect retail investors from the promotion and marketing of high risk financial
products. A number of inquiries, including the committee's 2014 inquiry into
the performance of the Australian Securities and Investments Commission (ASIC)
and the Financial System Inquiry (FSI) have mounted a compelling argument for ASIC
to have greater powers to intervene in the marketing of financial products. The
agribusiness MIS provided just one example of where improved regulation could
have prevented many unsuspecting investors from entering into unsafe financial
While improved financial literacy is to be encouraged, it would
only go part of the way to protecting consumers from investing unwittingly in
risky products such as agribusiness MIS. As one witness observed, 'consumers
are pitched against the resources and ingenuity of people with the knowledge
and wherewithal to outwit them'. Thus, while improved disclosure and education
are necessary, they must be accompanied by other measures. The committee has
made recommendations that would place obligations on product issuers and
research houses to act responsibly in the promotion and marketing of MIS.
In its 2014 report on the performance of ASIC, the committee raised
particular concerns about banned advisers, or advisers who had been dismissed
for misbehaviour, continuing in other roles in businesses providing financial
advice. Evidence before this inquiry gives further weight to the call for
increased and expanded powers to prevent unscrupulous and unethical advisers
from practicing in the industry. In the committee's view, there can be no
excuse for not taking stronger action against advisers engaging in egregious
conduct and those already banned from providing financial advice.
The liquidators winding up agribusiness MIS have encountered
many practical difficulties that were not contemplated by current legislation
and exposed the complexities in untangling the rights and obligations of the
various parties. It is clear that legislative change is required: that this
area of the law is in need of reform.
In this regard, the committee is strongly of the view that the
valuable work produced by the Corporations and Markets Advisory Committee (CAMAC)
on MIS in 2010, especially the very difficult problems of dealing with MIS
companies in financial stress, provides an ideal starting point for reform.
Future of agribusiness MIS
The failure of a number of high profile agribusiness MIS has
caused significant damage to investors, farmers, neighbouring communities and the
reputation of agribusiness MIS. There was no single cause for their failure but
a combination of factors including high upfront costs (sizeable commissions to
financial advisers, funds diverted into the general working capital of the
parent company, excessive overspending on administration and marketing); poor
management decisions regarding the planting and location of the schemes; a
business structure that depended too heavily on new sales for cash flow; and
the lag time between initial investment and dividends. In addition, the effective
implementation of the policy applying to agribusiness MIS was undermined by:
poorly managed implementation of the policy objective;
inadequate tracking of, and reporting on, project performance
resulting in poor quality information available to investors and policy makers;
poor monitoring and understanding of the tax incentives and
whether they were having unintended adverse effects, such as investment in
non-commercially viable products.
The MIS structure has a number of advantages, particularly the
pooling of investment funds to achieve economies of scale. Should the
government determine that agribusiness MIS warrant continued government
support, then important lessons must be drawn from the failures.
First and foremost, policy makers must have before them solid
research on the effects of tax incentives to ensure they do not produce adverse
Finally, the committee has made recommendations to strengthen
ASIC's powers in order to provide more robust investor protection measures by
enhancing and expanding banning powers and conferring the power to intervene in
the marketing of products. But, for some time, the committee has been concerned
about ASIC's slow and inadequate response to use the powers it already has.
Should the government proceed to implement the FSI and the committee's
recommendations, the onus rests squarely on ASIC's shoulders to exercise its
In the committee's view, ASIC must ensure that it uses its
powers to expose misconduct and brings the full weight of the law to bear on
wrong-doers in the financial services industry. It is also important that the
penalties for breaching the corporation laws match the seriousness of the
offence; recognise the harm it has caused; and provide a strong deterrence.
Findings and recommendations
Removing misconception about government
endorsement of schemes
It would appear that some product issuers and financial
advisers allowed, or even encouraged, investors to assume that an Australian
Taxation Office (ATO) product ruling meant that the government was vouching for
the commercial viability of the scheme. There was a similar misunderstanding that
ASIC was giving its support to the schemes. Thus, growers mistakenly formed the
view that the products had ATO and ASIC approval and considered the various
schemes safe and suitable for retail investors.
Recommendation 1 paragraphs
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
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.
Future of Financial Advice reforms
The committee recognises that the Future of Financial Advice (FOFA)
reforms may well have remedied one of the most pernicious incentives
underpinning poor financial advice—commissions. The evidence clearly
highlights, however, the importance of ensuring that there are no loop-holes in
this legislation that would allow any form of incentive payments to creep back
into the financial advice industry.
Recommendation 2 paragraph
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.
Accountants/tax agents providing
In light of the evidence and the concerns expressed about
possible conflicts of interest and blurring of responsibilities in situations
where a tax agent provides financial advice, the committee is convinced that
this area of financial advice should be reviewed, particularly advice on
borrowing. Clearly, there are important lessons to be learnt from the
experiences of retail investors who acted on advice from their accountants or
tax agent and invested in MIS.
Recommendation 3 paragraph
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.
ASIC provided the committee with examples of its efforts to
lift the standard of financial literacy in Australia. The committee has made
recommendations that would place obligations on product issuers and research
houses to act responsibly in the promotion and marketing of MIS. Much more,
however, is required to provide investors with the information needed to
protect their own interests. The committee recognises that improved financial
literacy will go some way to help consumers make informed decisions.
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'
Culture in the financial services
The committee notes that a code of ethics was one of the
government's proposed legislative amendments to raise financial advisers'
standards. In light of the evidence demonstrating that integrity issues were at
the heart of some of the poor financial advice given to MIS investors, the committee
highlights the importance of establishing such a code of ethics and suggests
that this measure warrants close and determined attention.
Recommendation 5 paragraph
The committee recommends that the government give high
priority to developing and implementing a code of ethics to which all financial
advice providers must subscribe.
Banned or unscrupulous advisers
In its response to the FSI report, the government indicated its
intention to develop legislation allowing ASIC to ban individuals in management
roles within financial firms from operating in the industry. The committee
welcomes this move but, to underline the importance of removing opportunities
for a banned financial adviser to resurface in other roles in the industry, the
committee considers that the term 'management' may be too narrow. Thus, in
light of the findings of this committee in two previous reports and of the FSI,
the committee reinforces two recommendations it made in June 2014.
Recommendation 6 paragraph
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 a financial service or credit business.
Recommendation 7 paragraph
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.
The inadequacy and complexity of MIS disclosure documents and
accompanying advice has been of long-standing concern. Agribusiness MIS are
complex products and difficult to understand. Disclosure
documents—prospectuses, PDSs and Statements of Advice (SOAs)—proved inadequate
in alerting consumers to the risks of investing in agribusiness MIS. The
inadequacies in the disclosure together with poor financial advice and slick
promotional strategies created an environment unsuited to informed and
The evidence underscores, as noted previously, the importance
of PDSs doing what they are intended to do—help consumers compare and make
informed choices about financial products.
The committee recommends that, based on the agribusiness MIS
experience, the Australian Government consult with industry on ways to improve
the presentation of a product's risks in its respective PDS. The intention
would be to strengthen the requirements governing the contents and presentation
of information, particularly on risks associated with the product. This measure
should not result in adding to the material in these documents. Indeed, it
should work to further streamline the contents but at the same time focus on
information that an investor requires to make an informed decision with
particular attention given to risk.
With this objective in mind, the committee also recommends
that the government consider expanding ASIC's powers to require additional
content for PDSs for agribusiness MIS.
The committee recommends further that ASIC carefully examine
the risk measures used in Europe and Canada mentioned by the FSI and prepare
advice for government on the merits of introducing similar measures in
In conjunction with the above recommendation, the committee
recommends that the government consider the risk measures used in Europe and
Canada mentioned by the FSI to determine whether they provide a model that
could be used for Australian PDSs.
General advice provided during
The committee welcomes the government's undertaking to replace
the term 'general advice' with a term that clarifies the distinction between
product sales and financial advice. It is not convinced, however, that renaming
the term, in and of itself, provides adequate consumer protection particularly
in circumstances where the product producer uses seminars and dinners to
promote the product. The committee heard numerous accounts of growers, who
attended seminars or promotional dinners, being encouraged to sign up to invest
in agribusiness MIS. It has highlighted the role that investment seminars had
in influencing investors and is particularly concerned about the way in which
scheme promoters used high pressure or hard sell techniques during so called
public 'information' or 'educational' sessions. This advice would be classified
as general advice.
In the highly charged environment around information sessions, there
should be clear obligations on the promoters engaging in this type of marketing
to ensure that potential investors are made fully aware of the risks carried by
the product they are promoting. Investors must have access to full and accurate
information about the product and be discouraged from signing up before
receiving independent financial advice—that is receiving personal advice with
all the attendant regulatory safeguards. Worryingly, however, the committee notes
occasions where the financial adviser was very much part of the promotional
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
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.
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
Research houses experts' reports
The committee acknowledges that there are numerous participants
who offer products or services within the financial advice value chain that
influence, directly or indirectly, consumers' decisions on financial matters.
It particularly notes that research houses and subject matter experts produce
reports containing important information for financial advisers and investors
in agribusiness MIS. Generally, such information is attached to, or included
in, disclosure documents including PDSs. Under the user pays model, however, the
experts' opinions may be biased by the remuneration offered by the product
issuer and the promise of further business. In the committee's view, research
houses and experts providing opinions should be held to high standards of
honesty and integrity. In this regard, the committee notes the relevant
International Organization of Securities Commission's (IOSCO) statement of
principles governing integrity and ethical behaviour and is of the view that
they should apply and have force in Australia.
The committee is concerned that the message about compliance
and adherence to high ethical standards is not reaching all participants in the
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
Role of the banks
The committee is firmly of the view that the banks that
financed investor loans through the financing arm of both Timbercorp and Great
Southern cannot outsource their responsibilities for allowing borrowers to
enter into unsafe loans. Even though the banks were not directly involved in
arranging the loans and can legally distance themselves from the loan
arrangements, they absolutely owed a duty of care to borrowers. As such, the
committee contends that the banks, or liquidators with the banks' support,
should, as a gesture of good-will, extend to those borrowers special
consideration in resolving their outstanding debts.
The committee is disappointed that an apparent adversarial
mind-set is undermining the work of the independent hardship advocate (IHA),
which was appointed by the liquidator of Timbercorp, KordaMentha. Despite this
initiative, the Holt Norman Ashman Baker Action Group (HNAB–AG), a collection
of investors who received advice from Mr Peter Holt or his associates,
continues to raise complaints against the IHA. The engagement of the advocate
had the potential to defuse the confrontational and ultimately damaging
relationship that had developed between the liquidator and this group of
borrowers. The committee takes the view, however, that despite falling far
short of HNAB–AG's expectations, the work of the IHA still offers a more
productive way to resolve long-standing disputes over unpaid loans.
The committee recommends that KordaMentha continue, through
its hardship program, to resolve expeditiously outstanding matters relating to
borrowers who are yet to reach agreement on repaying their outstanding loans
from Timbercorp Finance.
The committee recommends that spokespeople for HNAB–Action
Group consult with KordaMentha and the independent hardship advocate on implementing
measures that would help to restore confidence, faith and good-will in the
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.
Regulation around investment
Investment lending has been instrumental in causing significant
financial loss to retail investors who borrowed to invest in agribusiness MIS.
In the committee's view, the responsible lending obligations imposed on brokers
and lenders through the new credit laws should apply equally to the promoters,
advisers and lenders involved in providing funds for investment purposes. The
committee has no desire to stifle funding for investment, but to put an end to
situations where retail investors are unwittingly entering into unsuitable loan
arrangements. The committee is particularly concerned about consumers being
encouraged to take out 'full recourse' loans, which means that, in the case of
default, the lender can target assets not used as loan collateral. Evidence
presented to the committee shows that, in many cases, investors did not realise
that if their investment failed to generate the anticipated returns or failed
completely, they would need to meet repayments from other sources and could be
at risk of losing their home.
The committee is also extremely troubled by the numerous
accounts of growers signing over a power of attorney to their adviser to
arrange and refinance loans. Clearly, there was a serious breakdown in
communication with growers unaware not only of the risky investment venture but
of the high risk loan agreement they entered.
These glaring gaps identified in the regulatory framework
around credit laws mean that retail investors borrowing to invest are not
covered by the responsible lending obligations. The committee formed the view
that this situation needs to be remedied. The consultation process, which commenced
with the release of the National Consumer Credit Protection Amendment (Credit
Reform Phase 2) Bill 2012, would provide an ideal starting point for reform and
should include recourse loans for agribusiness MIS. The committee understands a
referral of legislative power from the states and territories would be
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
oblige the credit provider (including finance companies,
brokers and credit assistance providers) to exercise care, due diligence and
prudence in providing or arranging credit for investment purposes; and
ensure that the investor is fully aware of the loan
arrangements and understands the consequences should the investment
underperform or fail.
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.
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.
Legal advice causing harm
Some investors took legal advice to cease repayments on their
MIS loans and are now faced with a loan substantially greater than at the time
their schemes collapsed. The committee is concerned that vulnerable people who
joined class actions expecting, in effect, to have their loans nullified are
now in a financial position far worse than when the class actions started.
The committee is firmly of the view that the legal profession
has the responsibility to inform itself of the circumstances around the advice provided
to retail investors in collapsed agribusiness MIS to cease repayments on their
outstanding debts. The profession needs to act to ensure that it maintains high
ethical standards and its members adhere to best interest obligations towards
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
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:
remedies available to investors belonging to the class actions
who have suffered considerable financial loss as a result of following advice
to cease repayments on their outstanding loans;
whether disciplinary action should be taken against the
lawyers who provided the advice to stop repayments;
whether the matter warrants any form of compensation; and
whether the matter should be referred to any appropriate
There can be no doubt that much stronger measures are needed to
protect retail investors from the promotion and marketing of high risk
products. A number of inquiries, including the committee's 2014 inquiry into
the performance of ASIC and the FSI, have mounted a compelling argument for
such action. Agribusiness MIS are a clear example where, based on the evidence
before the committee, disclosure was inadequate; information was confusing
rather than instructive for retail investors; and oral advice either
misinterpreted the disclosure documents, downplayed risks, or selectively
presented positive messages. Clearly, improved regulation could have prevented
many unwary investors from entering into unsafe financial arrangements.
The committee is of the view that Australia's financial
services regulatory regime, with its focus on disclosure, has not served
Australian investors well and has not provided a reasonable level of consumer
protection. While improved disclosure and education are necessary, they must be
accompanied by other measures. Attention must be given to product issuers and
their obligation to act in the best interests of investors.
The committee welcomes the government's endorsement of the
FSI's recommendation to confer on ASIC a product intervention power. The
committee understands that penalties commensurate with the offence are needed
to send a strong message to product issuers to act responsibly when marketing
products to retail investors. Indeed, in light of the FSI and ASIC's
observation regarding the importance of having higher penalties, the committee formed
the view that the government should consider increased penalties for serious
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.
Liquidation of agribusiness MIS
Evidence before this committee has highlighted the
complicated task of untangling the interests of the various parties affected
when an MIS gets into financial difficulties and ultimately fails. In this
regard, it should be noted that in November 2010, the government commissioned CAMAC
to undertake a review of the current statutory framework for all MIS. The
subsequent report was comprehensive and produced a range of well-considered and
practical proposals for reform under the current legal framework and, in
addition, set out an alternative legal framework for the regulation of schemes.
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.
Taxation incentives for agribusiness
In 2005, the government undertook a review of the taxation
policy of plantation forestry and, in 2008, conducted a review into non
Since then, there have been major developments in this area that have exposed
flaws either in taxation policy and/or its implementation. Now, with the
benefit of hindsight, the committee is convinced that, based on the MIS
collapses, it is time to examine the tax incentives and any unintended
consequences that flowed from them. In particular, the review should look at
the extent to which the tax concessions created distortions.
In this respect, the committee notes, however, the pleas
from some quarters of the industry not to 'throw the baby out with the
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.
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.
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
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 should be.
It is important that penalties contained in legislation provide
both an effective deterrent to misconduct as well as an adequate punishment,
particularly if the misconduct can result in widespread harm. Insufficient
penalties, or the failure to apply them, undermine the regulator's ability to
do its job. Inadequately low penalties or poor enforcement do not encourage
compliance and they do not make regulated entities take threats of enforcement
action seriously. In 2014, the committee considered that a compelling case had
been made for the penalties currently available for contraventions of the
legislation ASIC administers to be reviewed to ensure they were set at
appropriate levels. The committee has reinforced this recommendation. But, ASIC
must also ensure that it uses its powers to effect in order to send a potent
message to all those in the financial services industry that it is serious
about exposing misconduct and bringing the full weight of the law to bear on
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
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
In this regard, it should be noted that the committee is
currently inquiring into the inconsistencies and inadequacies of current
criminal, civil and administrative penalties for corporate and financial
misconduct or white-collar crime.
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