Product developers and promoters
I feel embarrassed and ashamed at having put my hard earned
money into products so unreliable and totally unsuitable for my circumstances
that have delivered zero returns and cost me money. I have, and still continue
to suffer stress and sleeplessness.
Financial advisers had a prominent role in marketing and selling MIS but
they were not the only agents. They relied on promotional material provided by
the product manufacturers and were often part of a larger public relations
campaign to attract investors into the schemes. While there can be no doubt
that in many instances advisers may have misled their clients, sometimes
inadvertently, sometimes deliberately, they themselves may not have understood
or appreciated the pitfalls of the product they were recommending. Even though
financial advisers should have known better, some of them fell under the spell
of the promotional material produced by the product manufacturer and issuer.
Therefore, it should be recognised that there are various other parties
in the industry that should also be held accountable for the promotion and
marketing of financial products. The FPA drew attention to this fact in its
submission to the committee's 2014 inquiry into the performance of ASIC:
It is well established that, rather than all fault lying with
the advice provider, there are multiple participants who offer products or
services within the financial advice value chain, all of whom influence, directly
or indirectly, consumers' decisions on financial matters. However,
accountability of these participants to the end consumer is variable, limited
and for some practically non-existent, which significantly restricts ASIC's
ability to act...
Thus, all stakeholders involved in selling agribusiness MIS contributed
in some way to influencing a consumer's decision to invest in the product.
Indeed, the FPA attributed the large-scale losses associated with agribusiness
MIS to 'inadequate leadership' and 'the non-existence of accountability' of
those responsible for developing, providing research on, and marketing the
In this chapter, the committee considers the disclosure obligations
imposed on the producers and promoters of MIS and the extent to which they kept
investors informed of their respective MIS. It looks not only at the
comprehensiveness and comprehensibility of the disclosure documents but also of
the conduct of the promoter and adviser when offering these products to the
market. The committee also considers whether investors were appropriately and promptly
informed of significant developments in the performance of the scheme.
As observed throughout this report, most of the growers who wrote to the
committee described themselves as inexperienced and definitely not
sophisticated investors. They claimed that they understood little about the
complexities of MIS. For example, the common thread that seems to run through
the experiences of many of the investors was that they were not 'savvy'
business people but mostly 'working class people...trying to do their best to provide
for our families'.
Information asymmetries are a major factor that can prevent the market
operating efficiently and have the potential to put retail investors at a
disadvantage. Asymmetric information is when one party to a transaction has an
inherently greater knowledge of the quality and risk profile of a product than
the other side.
Those in possession of knowledge not available to the investor are able to use
this imbalance for their own benefit. The information advantage, according to
ASIC, 'gives opportunities to institutions and intermediaries to profit at the
expense of investors and financial consumers'.
In this regard, the financial services' disclosure regime includes rules
overcome the information asymmetry between industry participants
and investors by requiring disclosure of information required to facilitate
informed decisions by investors; and
promote transparency in financial markets, and the efficient and
appropriate pricing of assets and risks—for example, through continuous
disclosure by companies of price-sensitive information.
Product providers, distributors, advisers, and other gatekeepers of
agribusiness MIS must then bear some responsibility for ensuring that consumers
buying their product are fully informed about the risks associated with
investing and borrowing to invest in their schemes.
Long standing concerns about disclosure
Long before the collapse of the major agribusiness MIS, some people in
the industry were concerned that the risks associated with the schemes were not
sufficiently disclosed. As early as 1993, the Law Reform Commission and the
Companies and Securities Advisory Committee were issuing clear and unambiguous
messages highlighting the importance of investors being well informed about the
schemes in which they were intending to invest.
In particular, they noted that the regulatory framework for managed investment
schemes had long recognised that:
...the law can and should ensure that investors are given all
the information they need to understand fully, and to judge for themselves, the
level of investment risk associated with any scheme so they can choose, with
full knowledge, the scheme that best suits their investment objectives.
At that time, however, the Law Reform Commission and the Companies and
Securities Advisory Committee, with great prescience, issued the following warning:
As collective investment schemes, and the way in which they
are marketed, become more complicated, it is more likely that schemes will be
marketed to individuals who lack the financial sophistication to assess the
risks involved in investing in them.
They conceded that the law could not ensure that all intending investors
would understand the nature of the scheme. They argued, however, that the law
can, and should, impose rules to ensure that:
the operator of the scheme gives investors all the information relevant
to the assessment of risk that the operator has available to it; and
information is presented in a clear and comprehensible way and is
Prospectuses and product disclosure statements
An MIS is deemed to be a financial product and hence various disclosure
requirements regulate the process of giving personal advice recommending this
product and offering or arranging its issue.
There are a number of key documents that form the basis of information that
investors need in order to make informed decisions. The prospectus and product
disclosure statement (PDS) are of central importance and legislation sets down
the information they must contain.
The function of a prospectus is to provide potential investors and
advisers with sufficient information regarding the company's financial position
and the nature of the security on offer so they can make an informed investment
It should explain the merits and risks involved in participating in the scheme.
This document must be prepared by, or on behalf of, the issuer or seller of a financial
product. ASIC's Regulatory Guide made clear that the law requires an issuer to
ensure that information contained in its prospectus is 'always current during
the application period and to lodge a supplementary or replacement prospectus
if it is not'.
The product disclosure statement replaced the prospectus from March 2002
as a required instrument of disclosure for MIS.
Product Disclosure Statement
In order to offer an agribusiness MIS to the market, the RE must publish
a PDS. The PDS is designed to help consumers compare and make informed choices
about financial products. When a financial adviser provides financial advice to
a client that contains a recommendation to invest in an MIS, the adviser must
give the client a PDS for that scheme.
Under these requirements, the adviser must do so at or before the time the
adviser provides the advice; the information contained in a PDS must be up-to
date at the time it is given and worded and presented in 'a clear, concise and
The Corporations Act recognises the matters that a PDS should take into
Section 1013D of the Corporations Act sets out the main requirements governing
a PDS which, among other things, specifies that the PDS include the following
information: any significant benefits to which a holder of the product will or
may become entitled; any significant risks associated with holding the product
and costs; amounts payable by a holder of the product after its acquisition;
and the times at which those amounts will be payable. The PDS must include
information about any other significant characteristics or features of the
product or the rights, terms, conditions and obligations attaching to the
product. In other words, it is required to contain any other information that
might reasonably be expected to have a material influence on the decision of a
reasonable person, as a retail client, whether to acquire the product.
ASIC explained that, with an unlisted product such as an agribusiness MIS,
the product issuer, under the law, must lodge an 'in use' notice, which informs
ASIC and others including investors that a PDS is in use and where they can
obtain a copy of it.
Importantly, ASIC does not receive a copy of the PDS: it is not lodged with
ASIC and ASIC does not approve a PDS' contents or 'stand behind the
investment-worthiness of particular PDS' statements'.
Disclosure of commissions and fees
Consistent with the requirement to disclose whether the product will or
may generate a return to a holder of the product, the PDS must contain
information about any commission, or other similar payments, that will or may affect
the amount of such a return.
In 2003, ASIC provided the following guidance on fee disclosure in the PDS:
Where the purpose of a fee includes the remuneration of
advisers, this should also be indicated in the fee description.
At that time, there was general recognition in the industry of the need
for improved disclosure of adviser remuneration with ASIC advising that it was
'important in a good practice model to clearly disclose whether a particular fee
Also, ASIC was of the view that commissions and information on soft dollar
arrangements needed to be spelt out clearly in the PDS. It advised that:
...improved disclosure of adviser remuneration at all stages of
the investment decision-making process (including the PDS) is an important
The committee has already noted the high commissions advisers received
for selling MIS. Some submitters suggested, however, that the commissions paid
to advisers were not always fully disclosed.
Based on their recollection, they were unaware their financial planner was
'getting a substantial benefit in addition to the initial fee' with a reference
to secret commissions being paid.
Evidence also indicated that the PDS failed to disclose to growers other
material information about their investment in MIS.
As highlighted in 1993, the law should ensure that investors are presented
with all the information, in a clear and comprehensible way, required to make
an informed decision. But, as noted throughout this report, many investors were
confused, or simply misinformed, about important features of their scheme. For
example, some investors were allowed, or even encouraged, to assume that the
schemes were government backed—ATO and ASIC endorsed. The catalogue of
misunderstandings about the nature or operation of MIS' investments included,
in some cases, the requirement to pay up-front and ongoing maintenance fees. In
particular, investors were under the false impression that their loans were structured
in such a way that they were almost self-funding; that there was little risk of
default with long term returns a certainty and liability limited to the actual
investment (home not at risk). Few understood the implications of signing over
power of attorney. Overall, many of the growers who made submissions to this
inquiry thought the schemes were fail-safe: that they were unaware of the risks
involved in the MIS. Some argued strongly that the PDS was misleading and had
the document spelt out such risks, they would not have invested. In this regard,
an investor stated that there was never any discussion of the risks, no PDSs
provided until after the client had signed and all documentation was mailed.
Ownership of tangible asset
Confusion about the structure and operation of the MIS went beyond the
matters already identified in this report with grower after grower recalling
their bewilderment at many aspects of the schemes' operation. For example, many
were under the impression that their funds would go directly to their
particular allotment. They thought that they would own a tangible asset—the
trees or the actual harvest. One couple thought they were actually purchasing
'a piece of land as per the loan agreement...'
ASIC on the other hand explained that:
...grower application money is (in most cases) diverted into
the general working capital of the parent entity. The parent entity manages
this money to meet expenses associated with all of its operations, including
maintaining, cultivating and harvesting each scheme.
Mr Tom Ellison, financial analyst specialising in Tasmanian listed
companies, who bought two Gunns wood lots, stated that at one stage he did have
a map but was yet to meet someone 'who actually invested in a scheme and who
got to go and look at their own trees'. He noted:
I know that, until 2006, Gunns and FEA [Forest Enterprises
Australia] would pop people on a bus and take them up to the north-west and
show them around, but I do not think it was a case of, 'Here are your trees.'
Investors who came late to the schemes, felt particularly aggrieved
about the apparent suddenness of the collapse which meant that their trees or
crops were never planted. One woman explained that only a few months after
investing, Timbercorp went into liquidation. It was inconceivable to her that
she should have to repay with interest nearly $80,000 for something she had
entered into just before its collapse—it did not seem 'fair or just'.
The question of property rights became especially contentious during the
liquidation of failed MIS. In its consideration of the establishment and operation
of MIS, CAMAC observed that scheme members who have rights as lessees of
property 'may have an expectation that their interests in the scheme are
property interests that should have a favoured position in the winding up of a
scheme'. It explained, particularly in reference to agricultural schemes:
That expectation is not met under the present law where the
lease can be disclaimed by a liquidator of the RE. To avoid disclaimer, member
lessees would need to show that the prejudice to them is grossly out of
proportion to the prejudice to the RE's creditors generally.
CAMAC indicated that if the law remained unchanged, a question arises
whether those who intend to become lessee investors should have the benefit of
disclosure of the possible consequences of a liquidation of the scheme as it
relates to the interests they intend to acquire in the scheme.
This confusing area of rights of investors, farmers who leased property to the
RE and creditors is dealt with in chapter 15.
Projections and forecasts
The likely yield, which is a critically important consideration for any
investor, was another aspect where growers failed to appreciate fully the
information provided in disclosure documents. According to two researchers:
The Product Disclosure Statements for plantation forestry do
not give financial projections because ASIC policy strongly discourages them
from doing so. However, they do give projections of physical yield, usually
through the medium of an independent forester's report.
During the early 2000s, however, some in the agribusiness industry were
troubled by the yield projections in disclosure documents. They expressed
concern that many agribusinesses were making 'excessively optimistic, if not misleading,
projections of future product yields and marketability in their prospectuses'.
For example, in 2004, a number of submitters to the Senate Rural and Regional
Affairs and Transport References Committee gave evidence indicating that the
price estimates for future cropped plantation timber were either impossible to
forecast or incorrect. One such witness put to the committee that 'forecasts
contained in at least one prospectus for plantation investment indicated that
realisable prices for wood were higher than the market was returning'.
Doubts about predicted yields of MIS projects did not abate especially
as early plantations came 'on stream'.
Some submissions to the 2005/06 Plantation Forestry Taxation Review were
concerned about the accuracy of the material which appeared in MIS prospectuses
and cited 'some very ambitious yield forecasts'.
Around the same time, a study by the Rural Industries Research and Development
Corporation also noted the poor quality of information available to investors.
Arguably, the understandable attempts by ASIC to deal with
the serious information problems of MIS have not been successful.
In evidence to the committee, Mr Samuel Paton, principal of an
agricultural consulting valuation firm, recalled that a PDS for a start-up MIS
just out of Ballarat being developed by Environinvest stated that the scheme
was going to produce 270 to 300 cubic metres per hectare of E. globulus from
the site. Together with a forester, Mr Paton inspected the site, which, in
his words, did not look 'too promising'. Further, Mr Paton informed the
committee that based on the calculations of rainfall and soil structure, among
other variables, the forester came up with a projected yield of 116 cubic
metres per hectare. According to Mr Paton, '49 million dollars later, Environinvest
In the lead-up to the collapse of some MIS, concerns were still being voiced
about a number of aspects of the schemes, including the information available
to investors on performance. For example, in its 2008 submission to the
non-forestry MIS review, the NFF raised significant doubts about the adequacy
and independence of information available to potential investors in
In its view, an appropriate level of market accountability by promoters and
managers of MIS projects had been lacking. While the NFF recognised that some
MIS already provided detail on the long-term financial performance of the
schemes, it formed the view that the current system could not be relied on to
deliver accurate and independent information commercially evaluated by industry
The Victorian Farmers Federation was similarly concerned about that the lack of
transparency surrounding MIS, which made it difficult to determine whether schemes
were commercially viable and structured towards long-term sustainability.
In 2008, Dr Judith Ajani observed that while planting continued apace,
prospectus expectations of market opportunities for woodchips had not yet
ASIC noted in 2009 that a number of past projects operated by participants in
the agribusiness managed investment scheme industry had failed to achieve their
expected returns. It was of the view that:
This information may be relevant to assist retail investors
to decide whether or not they are prepared to invest in an agribusiness scheme.
Accordingly, disclosure of historic yield information might reasonably be
expected to have a material effect on the decision of a reasonable person to
invest in an agribusiness scheme and required under the Corporations Act to be
disclosed in PDSs. However, it appears that this information has not been
disclosed in some agribusiness managed investment scheme PDSs.
Evidence before the committee noted similar concerns about the
reliability of projected yields. The Department of Agriculture referred to
doubts being raised about the accuracy of the growth rate and yield forecasts
contained in some forestry MIS.
Mr Peterson, a former Timbercorp officer, explained to the committee:
...the most disappointing thing about Timbercorp is that it did
not disclose to the growers, including senior management...exactly what would be
the costs on horticulture, produce and timber lots if yields were not met and
what was happening behind the scenes.
He stated further that had Timbercorp been more honest about how the
projects were performing, then certainly he and the many investors who lost badly
would not have invested so heavily in the projects.
According to Mr Peterson, Timbercorp was very good at not disclosing full
information to clients:
In all the horticulture projects, you looked at a cash load
to see whether you would go into it to see whether you would basically be able
to meet your ongoing payments. What they did not do on an annual basis was give
you an adjusted cash flow for your previous investment because if the growers
saw that they would have been up in arms, saying: 'Hang on a minute! These
yields are down, these costs are up; I'm never going to get into a positive
cash flow position here.
Mr Michael Hirst, Tasmanian farmer, similarly referred to numbers quoted
in prospectuses, describing them as 'pure fudging of the figures'. With regard
to tonnage, he told the committee that generally the yield was 'half of what
they were quoting'.
Importantly, a number of growers have taken their concerns about alleged
defective PDSs to the courts. They maintained that the documents were deficient
and because of this deficiency the arrangements they entered into should be
nullified. While there is compelling evidence that information contained in
PDSs on projected yields was optimistic, with some suggesting that it was
misleading, the courts have, however, taken a different view. Two cases in
particular are instructive—the first case dealt more broadly with claims of misleading
PDSs, the second was concerned with the yields.
In 2011, in a case before the Supreme Court of Victoria, the plaintiff
argued that Timbercorp Securities, in breach of its disclosure obligations
under the Corporations Act, failed to disclose in its PDSs information about 'significant
risks, or risks that might have had a material influence on the decision to
invest'. In essence, the investors argued that the PDSs given to them contained
false or misleading statements.
In his judgment of September 2011, Justice Judd summarised the case
pleaded by the growers who had invested in Timbercorp schemes. They claimed
the RE, Timbercorp Securities, had failed to disclose information
about risks it was required to disclose in compliance with its statutory
the Group business model involved risks associated with its
financial structure that should have been disclosed to existing and potential
scheme investors because the risks were significant or may have had a material
influence on a decision to invest in a scheme.
The plaintiff argued that he would not have invested in the schemes and
would not have borrowed from Timbercorp Finance to do so if he had been
the structural risk—that the Timbercorp Group might fail because
of insufficient cash; or
any of the adverse matters—ATO's proposal to change its position
on the deductibility of up-front fees paid by investors; and the tightening of
global credit markets.
The investor was seeking declaratory relief, damages and/or compensatory
orders, including an order that he and the group members were not liable for
repayment of the loans from Timbercorp Finance.
The court, however, was not persuaded and found, among other things,
that the Timbercorp Group was not required to disclose the risks identified by
the growers; that there had been no misleading or deceptive conduct; and, in
any case, there had been no relevant reliance by the investor on the alleged
non-disclosure or representations.
This decision adversely affected former members of the schemes, who
hoped to be released from obligations under loan agreements they had reached with
In October 2013, the Court of Appeal of the Victorian Supreme Court
handed down a decision confirming Justice Judd's 2011 decision that denied
damages to investors in the failed Timbercorp schemes. It also declined to
grant investors relief from having to pay any further instalments on loans that
had been arranged through Timbercorp and used to pay for the investments.
The second case, the Great Southern (GS) proceedings, also centred on
alleged deficiencies in the PDS. The plaintiffs argued that GS had issued PDSs
relating to the offer of interests in its MIS that were 'defective' by reason
of the provisions contained in Part 7.9 of the Corporations Act, which deals
with financial product disclosure, and as a result suffered loss and damage.
This misrepresentation case—the 2005 and 2006 Plantation Group Proceeding—concerned
the target yield capability of 250m3 of timber per hectare of
woodlots referred to in the PDS issued on 8 March 2005.
In response to the plaintiffs' argument, the defendants contended that,
when regard is had to the contents of the PDS, the misrepresentation case
advanced in proceedings must fail: that the PDS, 'on its face, plainly does not
represent what the plaintiffs plead that it represents'.
Turning to the contents of the PDS, the court found:
...its contents demonstrate that GSMAL [Great Southern Managers
Australia Limited] did not promise, either expressly or by implication, that
the plantations would produce an average of 250m3 gross of timber
per hectare of woodlots after approximately ten years of growth. On the
contrary, the PDS contained many statements to the clear effect that the
investment in the 2005 and 2006 Plantation Schemes was speculative, and that
GSMAL and the directors did not make any forecasts or predictions as to future
yields. Those statements are completely inconsistent with the implied
promissory statement that the plaintiffs allege in paragraph 35(a).
In essence, the court concluded that none of the PDS subject to the
proceedings was 'defective'.
Bendigo and Adelaide Bank was also of the view that the relevant PDS
were not flawed, pointing out that:
Each PDS made it abundantly clear to investors that
participation in the projects was considered to be speculative and prospective.
Investments were of a medium- to long-term nature. The risks associated with
plantation forestry were similar to any farming or agricultural venture.
Investors were advised to read the PDS in its entirety and seek professional
advice to ensure that an investment of that type was appropriate for their particular
circumstances. The risks and speculative nature of the participation in the
project were repeated many times throughout each PDS.
In this context, the committee concludes that the disclosure
requirements of the PDS cannot be considered in isolation. Retail investors
make decisions in a complex environment where information and impressions are gleaned
from numerous sources. The PDS is but one and, indeed, may not be the
determining influence. For example, retail investors were expected to understand
the significance of projected yields. In 2010, researchers referred to the
practice of providing projections of yields and prices, rather than cash flow
projections, in the disclosure documents to retail investors. They explained,
Projections of yield, harvest costs, and harvest (produce)
value, independently are based on a myriad of complex factors each of which is
exacerbated by the long investment horizon.
Consistent with generally accepted views, they argued that retail
investors have limited ability to unravel the risks in such forecasts.
Reconciling courts decisions with
The committee has examined the testimony of growers in great detail trying
to gauge the messages that advisers and product producers actually conveyed to
potential investors in MIS. The courts have also grappled with the difficulty
in determining the actual content and nature of the advice that product issuers
and advisers offered their clients—whether it was deceptive, misleading,
whether risks were appropriately identified and emphasised or important
information omitted. They have to weigh up the written record with undocumented
recollections. Although not dealing with agribusiness MIS, the courts have
commented on this difficult task. For example, Justice Hulme had 'real doubts
about the terms of the conversations concerning' investments where there was
'no reliable confirmatory documentary evidence'. Justice Hulme cited Chief
Justice McLelland who in a judgement said:
'[H]uman memory of what was said in a conversation is
fallible for a variety of reasons, and ordinarily the degree of fallibility
increases with the passage of time, particularly where disputes or litigation
intervene, and the processes of memory are overlaid, often subconsciously, by
perceptions or self-interest as well as conscious consideration of what should
have been said or could have been said. All too often what is actually
remembered is little more than an impression from which plausible details are
then, again often subconsciously, constructed.'
Justice Croft also referred to the fallibility of human memory and of
the need to exercise care in evaluating the significance of memory, or the lack
of it, with respect to events, conversations and documents experienced or
encountered many years ago. He cited a statement of approach which appeared in
the judgement of Justice Lewison:
Witnesses, especially those who are emotional, who think that
they are morally in the right, tend very easily and unconsciously to conjure up
a legal right that did not exist. It is a truism, often used in accident cases,
that with every day that passes the memory becomes fainter and the imagination
becomes more active. For that reason a witness, however honest, rarely
persuades a Judge that his present recollection is preferable to that which was
taken down in writing immediately after the accident occurred. Therefore,
contemporary documents are always of the utmost importance. And lastly,
although the honest witness believes he heard or saw this or that, is it so improbable
that it is on balance more likely that he was mistaken? On this point it is
essential that the balance of probability is put correctly into the scales in
weighing the credibility of a witness, and motive is one aspect of probability.
All these problems compendiously are entailed when a Judge assesses the
credibility of a witness; they are all part of one judicial process and in the
process contemporary documents and admitted or incontrovertible facts and
probabilities must play their proper part.
The committee was similarly placed in attempting to reconcile the
accounts of past conversations with advisers and scheme promoters with
contemporaneous written documentation such as the PDS. While the written
evidence told one story, many growers were recalling a very different version.
The committee has discussed at length the trust that clients placed in
their financial advisers, even to the extent that some may have signed
documents they did not fully read and did not comprehend. They looked to their
adviser to interpret the information. Conversations between adviser and client,
however, are not recorded and hence their contents cannot be verified.
Even so, it should be noted that the committee found the consistency of
evidence produced from a range of different investors about their understanding
of the risks identified with MIS cannot be discounted. It is persuaded that
their accounts have validity. The committee contends that the written evidence,
such as the PDSs relied on by the courts, does not capture the full breadth of
advice that the investors received from the promoters and advisers: that PDSs
do always convey the full story. Thus, even if disclosure documents complied
with the regulations, investors may have received wrong messages or misinterpreted
the information. In the committee's view, consideration must be given to the
broader context in which advice is given.
Agribusiness PDS—scope for improvement
As mentioned above, matters such as yield projections contained in PDSs were
based on a multitude of complex factors complicated further by the 'long
investment horizon'. Thus, with their limited ability to unravel the risks in
such forecasts, growers tended to rely on others to interpret the material for
Industry Super Australia also noted that 'inadequate or unnecessarily
complex disclosure documents have been a common theme in complaints regarding
It suggested, however, that even where disclosure is of a high standard, it
alone is not an adequate tool to protect consumers. It cited the findings of
the FSI that 'many cases of financial firm failure include situations where
consumers have failed to understand the risk/return trade-off involved in a
product, even if disclosure and advice were compliant'.
CA indicated that industry broadly recognised that there were
deficiencies in the current disclosure regime and, because agribusiness MIS
were complex, greater attention to the appropriate design of these products and
their disclosure was required. It stated clearly that the industry needed to
take 'greater responsibility and accountability in terms of both the advice
provided and the products designed'. 
The committee also notes the conclusions reached by Mr Garry Bigmore QC
and Mr Simon Rubenstein Barrister at the Victorian Bar, who, in a recent
publication, acknowledged the practical difficulties for investors bringing
claims for relief for defective PDSs, including an 'overly prescriptive,
complex and poorly drafted liability regime in part 7.9 of the Corporations
Act'. They wrote:
The regime relies on and incorporates definitions within
definitions and exceptions within exceptions. It is difficult for lawyers to
get their heads around—let alone investors lacking in legal training.
In their words, this part of the Corporations Act is 'a prime
illustration of confusing legislative drafting'.
In response to a question on the practical difficulties bringing claims
for relief for defective PDSs, ASIC noted that the liability regime in part 7.9
sets out the consequences for failure to comply with the various obligations
with respect to a PDS and its interaction with the consumer protection
provisions in the ASIC Act. It agreed that the provisions are 'relatively complex
and may be difficult to navigate'. ASIC also highlighted the challenge for
investors having to wade through these documents and, based on its experience regulating
retail financial markets, noted:
...people often do not read mandated disclosure documents,
inadequately understand or even misunderstand those documents, particularly
where the financial product involved is complex and/or the document is lengthy.
The difficulty for investors in establishing that they relied on information in
a PDS and suffered loss or damage as a result of being given the PDS, is more
closely aligned to issues arising from the limitations of disclosure in
addressing market failure.
ASIC acknowledged further that certain limitations mean that disclosure
is not always sufficient for the task of 'arming investors and financial
consumers with key information to guide decision making'.
It noted that the Timbercorp and Great Southern class actions failed because in
each case it was found that:
the impugned PDSs were not defective, in that they did not
contain misleading statements or omit information that should have been
the plaintiffs failed to establish that they relied on the PDSs,
and consequently, that they suffered loss and damage because they were given
In January 2012, to assist investors in agribusiness ventures, ASIC released
an agribusiness MIS regulatory guide with five new disclosure benchmarks and
five principles that apply to all agribusiness scheme prospectuses.
These benchmarks were designed to help retail investors understand the risks
and rewards of the offer and to enable them to make a more informed decision.
more transparent fee structures;
annual reporting to investors; and
disclosure of engaged third parties and their qualifications.
Context of information—oral advice, wealth seminars
The committee has already highlighted the importance of considering the
context in which advice is provided when determining whether the investor was
appropriately informed particularly of the risks associated with an investment.
The committee has referred to financial advisers often interpreting or
misinterpreting the contents of disclosure documents for the clients. In this
regard, the FPA argued that product manufacturers should be accountable for
information acquired and contained in their PDS. In its view, the failure
occurred whereby the product manufacturer put inaccurate harvest figures in
their product disclosure statements:
The product manufacturer should have been aware of that, and
should certainly have been correcting it in the future, but should have been
looking at what was realistic. That information has then been used second hand
and third hand further down and obviously from an incorrect basis.
But such documents, as well as glossy brochures, are also presented
during promotional or information seminars.
Product issuers must also be responsible for the way in which they
present disclosure documents such as the PDS. The committee has mentioned the
high pressure tactics used by some advisers to convince their clients to invest
in an agribusiness MIS. But investors were often primed by managers and product
promoters, as well as accountants and financial advisers, at information or
A number of submitters referred to their advisers as salesmen, not financial
advisers, who were not providing advice but merely selling a product not suited
to their clients' needs and from which they profited. For example, one couple went along to one
such investment session:
There was a seminar held at the Hilton Hotel in George Street
around this time in early 2008 which was attended by hundreds of people. Once
again there was a mixture of various people from all walks of life but this
time the attendance was the largest we had seen. The audience was addressed by
Steve Navra and other representatives from Great Southern all of whom were
extremely positive towards the scheme and all of the great plans they had in
place at that time.
Many were persuaded to invest by slick and compelling sales tactics: by
talk of the 'returns so beautifully outlined and promised in the prospectus'.
As noted earlier, a number of the growers referred to being reassured by
reference to the ATO and ASIC's endorsement of the scheme.
As one grower explained:
I was provided with many glossy brochures, and the forecast
returns looked healthy plus the scheme was endorsed by the ATO with the tax
credits which made my decision to sign up seem like a good idea. I was happy I
was doing something positive with my money and taking charge of my future to
look after my family so as I didn't have to rely on Government handouts during
my retirement years.
A wife described how her husband was invited to a seminar where he was
urged to sign up for a guaranteed return and without any discussion of risk.
In greater detail, an investor recounted:
For each of the two years during my investment, my financial
adviser had an evening seminar attended by a director/manager from TC [Timbercorp].
At the last such seminar a TC director was questioned on the risk to their
projects if the government stopped the MIS schemes. His reply was that they
were lobbying to have this not implemented and there is no risk to existing
One investor, who considered herself an ordinary, everyday suburban
mother, also referred to the pressure to sign up for a 'rock solid project',
Timbercorp products were promoted and highly marketed
during dinner presentations and group discussions with investors. The
representatives were at liberty to change and alter loan applications forms on
the spot, without consulting with Timbercorp Finance.
Yet another investor wrote of how investment managers organised flashy
dinner get-togethers and well-polished seminars and materials that 'all
promoted their Australian Tax Office approvals and low risk returns'.
They created a 'perception of security and a failsafe investment'.
The sophisticated marketing techniques employed by marketing people well
versed in the art of selling financial products exerted significant influence
over inexperienced investors. The committee has also commented on the trust
that investors placed in their financial advisers. Thus, when considering any
regulatory change, it is imperative that the government take close account of
the findings of behavioural economists and the evidence presented to this
retail investors may have difficulty deciphering the information
contained in the PDS and hence do not comprehend adequately the significance of
the risks as presented (or disguised) in disclosure documents;
small investors tend to place the utmost trust in their adviser's
recommendations, they do not always read information contained in key documents
such as prospectuses, PDSs and statements of advice, and rely on their adviser
to interpret this material for them;
despite statutory obligations, advisers and product issuers do
not always act in the best interests of the clients and may deliberately
withhold, conceal or downplay important information—indeed, in the case of
financial advisers, some appeared to have conveyed false impressions (or
allowed them to take hold): for example, that the schemes were government and
ASIC approved and optimistic yields were achievable;
key information contained in glossy brochures, prospectuses and
PDSs, and sometimes cited or distributed during promotional seminars, may not
always help investors understand the product and its risks and instead may
serve to obscure not inform; and
highly charged marketing events—seminars and dinners—may be ideal
vehicles for product issuers to promote and sell their products but without
appropriate consumer safeguards can work to disadvantage potential investors.
The committee stresses that the context in which advice is provided—sales
techniques and trusted financial advisers—is a potent influence and should not
be underestimated. Disclosure documents, such as PDS, must be considered in
this context, which further demonstrates why PDS must disclose, in a clear,
concise and comprehensible way, all information required to enable an investor
to make an informed decision. They must clearly spell out the risks associated
with the investment.
The FSI report supported the need for mandated product disclosure. In
its view, such disclosure was 'necessary to inform the market and to support
issuers and consumers in setting out the terms of their contract'. The FSI saw,
however, scope to provide issuers with more flexibility to communicate mandated
disclosure to better engage and inform consumers.
...a self-regulatory, flexible approach to improving
communication of risk and fees, allowing tailoring for different classes of
products and avoiding prescriptive regulation, which would involve higher
compliance costs. Industry should build on existing measures to improve
consumer understanding of risk by including risk measures for investment
products; for example, simple and non-simple MISs, securities and structured
products. Industry should also consider examples of risk measures used in
Europe and Canada.
From the investor's perspective, the disclosure of risk in many
agribusiness disclosure documents was not presented in a clear and
comprehensible way and definitely not in a way that would have alerted them to
the risk accompanying the schemes. The range of misconceptions chronicled in
this report attests to the inadequacy of PDS on agribusiness MIS and the advice
that accompanied their presentation.
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, PDS and SOA—proved inadequate in alerting
consumers to the risks of investing in agribusiness MIS. The shortcomings in
the disclosure statements together with unsound financial advice and slick
promotional strategies created an environment unsuited to informed and
Clearly, product manufacturers and issuers should be held accountable
for the information contained in their promotional material and disclosure
documents. Such information must be accurate and comprehensible to retail
investors and relevant to their investment decision. The evidence 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, as a consumer protection mechanism, disclosure documents have not always
served retail investors well. While these documents could be clearer; easier to
comprehend; and better designed to inform the investor of risk, the product
issuer and financial adviser must take responsibility for ensuring that the
promotion and marketing of the product facilitates informed decision making.
Without doubt, evidence before the committee supports the contention that
retail investors need robust consumer protection and the reliance on disclosure
documents left growers exposed to risks they did not understand.
The committee is of the view that the time is ripe to examine once again
the efficacy of PDSs when it comes to conveying information to retail investors
and enabling them to make informed choices.
The committee recommends that, based on the agribusiness MIS
experience, the 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 Australia.
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.
In the following chapter, the committee continues its consideration of
the manner in which product issuers promote and sell their products.
Recognising the current weaknesses in the disclosure regime, the committee, in
chapter 14, explores whether MIS should have been marketed to retail investors
in the first place. The committee is primarily concerned with regulations
governing the product being sold.
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