Chapter 18
Conclusion
As part of a small group of weary victims tied into the Class
action we have been disappointed and frustrated at every turn and have been let
down by everybody who is supposed to have our best interests at heart.[1]
18.1
Based on the experiences of retail investors who invested in
agribusiness MIS, the committee has made a number of recommendations directed
at improving the standard of advice provided by financial advisers, product
issuers and research houses. In this chapter, the committee recognises the
important role that ASIC has in enforcing the powers conferred on it. The committee
has also advocated expanding and strengthening ASIC's power which further
underlines the regulator's central role. The committee then summarises its
findings and recommendations.
ASIC
18.2
ASIC informed the committee that it registers and regulates registered
MIS 'at every point from their incorporation through to their winding up'
and also ensures that officers comply with their responsibilities. In its view,
this 'cradle to the grave' approach 'enhances regulatory oversight'.[2]
ASIC also has formal powers to conduct surveillance checks of MIS.[3]
18.3
The committee examined in great depth the performance of ASIC in its
2014 report and consequently will only deal briefly with the effectiveness of
ASIC as a regulator of MIS. In its report on the performance of ASIC, the
committee noted Professor Dimity Kingsford Smith's reference to ASIC's
after-the-loss approach to enforcement, which she described as: 'waiting for
complaints, investigating a minute proportion of them, and prosecuting even
fewer'.[4]
The committee also quoted from a former enforcement adviser at ASIC, who spoke
of a regulator that lacked 'a culture of urgency, pro activity and flexibility',
with its processes driven by 'a management culture that has a wait and see
attitude'. Indeed, Mr Niall Coburn suggested that if there were hundreds of
complaints from individuals in a MIS, he doubted whether ASIC could pick up on
the message or put it together and, if it could, it would still fail to react.[5]
18.4
In 2014, the committee considered two case studies in depth—predatory
lending practices and financial advice provided by Commonwealth Financial
Planning Limited (CFPL). In both cases, the committee found that ASIC's
response to known problems was too slow and disappointingly unenthusiastic. For
example, in respect of poor lending practices, the committee concluded that:
ASIC had available to it persuasive and less formal measures
to stop unscrupulous practices. In this regard, the committee believes that
ASIC did not take the opportunity to intervene in a far more direct and public
way. It did not send a strong message regarding its concerns about
irresponsible lending practices to lenders. Nor did ASIC do enough to alert
Australian consumers to the risks associated with low doc loans, their
vulnerability to irresponsible or even fraudulent activity, and of the need to
protect their own interests. Such early and decisive publicity may have
educated the community about ASIC's limited ability to protect their interests
and minimised the damage.[6]
18.5
The committee's observation applies with equal force to the marketing of
agribusiness MIS to retail investors, especially the need for early and decisive
publicity to warn potential investors of the risks associated with certain
financial products or advice.
18.6
When it came to reports of wrongdoing in CFPL, the committee formed the
view in 2014 that:
Evidence received during this inquiry has underlined ASIC's
poor handling of the CFPL whistleblowers and the information they provided. The
committee regards the fact that it took ASIC nearly 17 months to take
meaningful action in response to the information provided by the CFPL
whistleblowers as a significant failure on the part of the corporate regulator.
Having said that, the committee notes that ASIC has itself acknowledged its
failures in this regard, both in terms of taking too long to move toward an
enforceable undertaking...and in terms of its handling of the CFPL whistleblowers
and the information they provided.[7]
18.7
This concern about ASIC failing to take decisive steps early to prevent
further consumer harm was also evident in the case of the promotion and selling
of agribusiness MIS. The only difference was that ASIC became aware of concerns
through much of its own surveillance, but its response was still nonetheless
tepid.
Criticism of ASIC
18.8
A number of witnesses were dissatisfied with ASIC's performance when it
came to agribusiness MIS. Mr David Cornish of Cornish Consultancy believed that
ASIC must take its share of the blame for the losses incurred by the many
thousands of investors. He referred to the regulator's lack of policing of
corporate governance of the schemes 'even when it became public knowledge of
questionable Corporate Governance'.[8]
18.9
One investor was of the view that ASIC's involvement as a regulator
appeared to be 'more like that of an observer rather than an active participant
in protecting those who are less informed than the advisers who take advantage
of them'.[9]
Another described ASIC's contribution as 'sitting on the sidelines'—'there
seems to be threats they will get involved but in reality they seem to sit and
allow things to fall as they may'.[10]
Yet another investor stated:
It is my current view that there is absolutely no consumer
protection for financial products. I am a point in case. I took the advice of a
fully licensed financial planner with the appropriate insurances. I was sold a
product on misinformation that he took huge commissions for. When it all
imploded he has walked away, I have not [been] protected or looked after in any
way. Indeed, the very agencies charged with that, such as ASIC, the Financial
Ombudsman, and the Courts have not only failed me but they seem to be the
protector of business.[11]
18.10
In the view of one investor, a client of Mr Holt:
It seems to us that the overall performance of ASIC has been
grossly inadequate. Had a swift and thorough investigation taken place into
Peter Holt and his associates, it would have prevented years of needless
stress, anxiety, heartache and despair for his victims and protected them from
the likelihood of losing their life savings, their homes, their mental health
and their self-esteem.[12]
18.11
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 employ the powers it already has. Should the
government proceed to implement the FSI and committee's recommendations, the
onus rests squarely on ASIC's shoulders to exercise its powers accordingly.
Importantly the government must ensure that ASIC has the resources it needs to
carry out its responsibilities effectively.
Enforcement
18.12
In most cases, retail investors only became aware of the flawed
financial advice after the MIS collapsed. One particular area of concern
relates to ASIC's response to financial advisers who provided inappropriate
advice to retail investors. In this regard, the committee has before it
numerous examples of investors receiving and acting on advice from individuals
who, according to ASIC, did not hold an AFS licence but were authorised
representatives of a number of companies including Financial Wisdom, a top 10
seller of Timbercorp financial products. Some were authorised representatives
of Timbercorp Securities Limited. They appear to have been instrumental in
convincing their clients to invest in an agribusiness MIS and facilitating that
investment, including arranging the loan. Despite complaints against them, ASIC
has not taken action.[13]
The committee has not made the names of these individuals public.
18.13
In a number of cases cited in this report, the adviser who allegedly
provided inappropriate recommendations no longer holds, or ever held, an ASF
licence. In this regard the committee has named two particular individuals—Mr
Peter Holt and Mr Steve Navra. ASIC has banned Mr Holt for three years for,
among other things, failing to have a reasonable basis for the advice he gave
to retail clients but has taken no action against Mr Navra. Mr Steve Navra was
a significant seller of Great Southern products between 2006 and 2009 and,
according to a number of submitters, engaged in unethical practices. It should
be noted that, as a result of its investigations into the collapse of
Timbercorp and Great Southern, ASIC:
...did require a number of Australian financial services
licensees to write to clients where there were indicators of potentially
inappropriate advice. The letters to affected clients explained how to make a complaint
in connection with the advice provided including information about the
licensee's internal dispute resolution (IDR) process and the external dispute
resolution (EDR) process.
Further, as a result of ASIC's inquiries into these
collapses, one licensee provided an undertaking to ASIC that it would
immediately cease to provide financial services to retail clients while a
number of licensees introduced new training programs for its financial
advisers.[14]
18.14
Apart from what appears to be very lenient penalties for the harm caused
to clients, there appears to be a real problem taking action against people or
businesses that either never held an AFS licence or no longer hold such a
licence. Unfortunately, the MIS experience has left many retail investors believing
that their financial adviser or accountant, who abused their position of trust
to advantage themselves, has not been brought to account and, even worse,
continues in some form to practice in the industry.
18.15
It is important that penalties contained in legislation provide both an
effective deterrent to misconduct as well as an appropriate 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 or 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 are set at
appropriate levels. The committee reinforces 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
wrong-doers.
Recommendation 24
18.16
The committee recommends that ASIC review the complaints made
against advisers and accountants, licensed or unlicensed, who engaged in
alleged unscrupulous practices when recommending that their clients invest in
agribusiness MIS. The review would identify any weaknesses in the current
legislation that impeded ASIC from taking effective action against those who
engaged in such unsound practices. This review would also examine the adequacy
of the penalties available to ASIC to impose on such wrong doers. In particular,
ASIC should consider the adequacy of penalties that apply to those who were
unlicensed or have since become unlicensed. Banning in such cases is redundant.
18.17
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.
18.18
Finally, the committee recommends that ASIC provide its findings to the
committee.
18.19
The following section provides a summary of the committee's findings located
throughout this report and their accompanying recommendations.
Committee findings and recommendations
18.20
Overall, the committee has made recommendations directed not only at
improving the advice provided by financial advisers but, importantly the
product issuers and the research houses or experts that rate the schemes. The
committee acknowledges that the investor must take responsibility for their own
decisions and has made recommendations to strengthen disclosure obligations.
Armed with accurate and reliable information, which is presented in a clear and
comprehensible way that clearly spells out the risks associated with the
scheme, should enable the investor to make informed decisions.
18.21
Furthermore, there was irresponsible lending on a systemic basis by
representatives of the RE and, at best, a laxity on the part of the major
lenders to scrutinise the loan arrangements that many borrowers were entering.
The revelations of the lending practices around the MIS should be understood in
the broader context of predatory lending practices that emerged before 2008,
which clearly demonstrated that any form of industry self-regulation would be
inadequate. The committee believes that the government should give priority to
reforming this area of investment credit.
18.22
The committee also recognised that the legislative framework around the
winding-up of an MIS needs reform and has, accordingly, made a recommendation.
Finally, when considering the harm caused by the failure of such high-profile
agribusiness MIS, the committee formed the view that a review be undertaken before
any decisions about the taxation incentives offered to investors are made. The
committee's main findings and recommendations are listed below.
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
4.49–4.50
The committee recommends that the ATO undertake a
comprehensive review of its product rulings to obtain a better understanding of
the reasons some investors assume that an ATO product ruling is an endorsement
of the commercial viability of the product. The results of this review would
then be used to improve the way in which the ATO informs investors of the
status of a product ruling.
The committee recommends that the ATO and ASIC strengthen
their efforts to ensure that retail investors are not left with the impression
that they sanction schemes, including the use of disclaimers prominently
displayed in disclosure documents including PDS.
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
7.51
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
financial advice
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
7.67
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.
Financial literacy
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.
Recommendation 4
paragraphs 8.8–8.9
The committee agrees with the view that financial literacy
has 'got to get aggressive' and recommends that the Australian Government
explore ways to lift standards. In particular, the government should consider
the work of the Financial Literacy Board in this most important area of
financial literacy to ensure it has adequate resources.
Drawing on the lessons to be learnt from the evidence on the
need to improve financial literacy in Australia, the committee also recommends
that the Australian Government in consultation with the states and territories
review school curricula to ensure that courses on financial literacy are
considered being made mandatory and designed to enable school leavers to manage
their financial affairs wisely. The course content would include, among other
things, understanding investment risk; appreciating concepts such as compound
interest as friend and foe; having an awareness of what constitutes informed
decision-making; being able to identify and resist hard sell techniques; and
how to access information for consumers such as that found on ASIC's website.
Financial literacy should be a standing item on the Council of Australian
Governments' (COAG) agenda.
Culture in the financial services
industry
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
8.28
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
8.45
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
8.46
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.
Disclosure documents
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
considered decision-making.
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.
Recommendation 8
paragraphs 9.77–9.80
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 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.
General advice provided during
promotional events
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 team.
Recommendation 9
paragraph 10.21
The committee recommends that the government consider not
only renaming general advice but strengthening the consumer protection
safeguards around investment or product sales information presented during
promotional events.
Recommendation 10
paragraph 10.22
The committee recommends that ASIC strengthen the language
used in its regulatory guides dealing with general advice. This would include
changing 'should' to 'must' in the following example:
You must take reasonable steps to ensure that the
client understands that you have not taken into account their objectives,
financial situation or needs in giving the general advice.
Recommendation 11
paragraph 10.25
In light of the concerns about the lack of understanding of
the role that referral networks had in selling agribusiness MIS without
appropriate consumer protections, the committee recommends that the
government's consideration of 'general advice' also include the role of
referral networks and determine whether stronger regulations in this area are
required.
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
industry.
Recommendation 12
paragraph 10.52
In respect of research houses and subject matter experts
providing information or reports to the market on financial products such as
agribusiness MIS, the committee recommends that the government implement
measures to ensure that IOSCO's statement of principles governing integrity and
ethical behaviour apply and have force. In particular, the committee recommends
that the government consider imposing stronger legal obligations on analysts,
and/or firms that employ analysts to rate their product, to act honestly and
fairly when preparing and issuing reports and applying ratings to a financial
product.
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.
Recommendation 13
paragraphs 11.63–11.64
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 hardship program.
Recommendation 14
paragraph 11.78
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
lending
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 required.
Recommendation 15
paragraph 11.92
The committee recommends that the Australian Government
initiate discussions with the states and territories on taking measures that
would lead to the introduction of national legislation that would bring credit
provided predominantly for investment purposes, including recourse loans for
agribusiness MIS, under the current responsible lending obligations. The
provisions governing this new legislation would have two primary objectives in
respect of retail investors:
-
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.
Recommendation 16
paragraph 11.93
The committee recommends that the Australian Government
consider ways to ensure that borrowers are aware that they are taking out a
recourse loan to finance their agribusiness MIS and also to examine the merits
of imposing a maximum loan-to-valuation limit on retail investors borrowing to
invest in agribusiness MIS.
Recommendation 17
paragraph 11.94
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 their clients.
Recommendation 18
paragraphs 12.15–12.16
The committee recommends that the Victorian Legal Services
Commissioner and Legal Services Board thoroughly review the conduct of the
lawyers who provided advice to retail investors in collapsed agribusiness MIS
to cease repayments on outstanding debts and the circumstances around this
advice.
The intention would be to determine whether the profession
needs to take measures to ensure it maintains high ethical standards and that
its members adhere to best interest obligations towards their clients. The
investigation would include making recommendations or determinations on:
-
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
disciplinary body.
Penalties
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 breaches.
Recommendation 19
paragraph 14.47
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.
Recommendation 20
paragraph 15.51
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 MIS
In 2005, the government undertook a review of the taxation
policy of plantation forestry and, in 2008, conducted a review into non
forestry MIS.[15]
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
bathwater'.
Recommendation 21
paragraph 16.40
The committee notes that neither the ATO nor Treasury have
undertaken a comprehensive review of the tax incentives for MIS and whether
they had unintended consequences, such as diverting funds away from more
productive enterprises; inflating up front expenses; or encouraging
poorly-researched management decisions (planting in unsuitable locations). The
committee recommends that Treasury commission a review to better inform the
policy around providing tax concessions for agribusiness MIS.
Recommendation 22
paragraph 16.41
The committee recommends further that the proposed review
consider the approach to the incentives offered to investors in agribusiness
ventures by other countries such as the United Kingdom to inform the review's
findings and recommendations.
Recommendation 23
paragraphs 16.42–16.43
In addition to the above recommendation, the committee recommends
that the government request the Productivity Commission to inquire into and
report on the use of taxation incentives in agribusiness MIS. As part of its
inquiry, the Productivity Commission should identify the unintended adverse
consequences, if any, that flowed from allowing tax deductions for agribusiness
MIS. For example:
-
the potential for mis-selling financial products on the tax
concessions;
-
the incentive for retail investors to borrow, sometimes
unwisely, to fund their investment;
-
whether the taxation concessions:
-
became an end in themselves rather than the business model;
-
showed up as subsidies to higher cost structures, operations
and/or returns to the operators of the schemes; and
-
distorted land values and diverted high value farmland into
passive monoculture such as Blue Gums.
The main purpose of
the inquiry would be to draw not only on the experiences of the failed MIS but
also the successful schemes to determine whether there is merit in reforming
the system of tax incentives and, if so, what those reforms should be.
Enforcement
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
wrong doers.
Recommendation 24
paragraph 18.16–18.18
The committee recommends that ASIC review the complaints
made against advisers and accountants, licensed or unlicensed, who engaged in
alleged unscrupulous practices when recommending that their clients invest in
agribusiness MIS. The review would identify any weaknesses in the current
legislation that impeded ASIC from taking effective action against those who
engaged in such unsound practices. This review would also examine the adequacy
of the penalties available to ASIC to impose on such wrong doers. In
particular, ASIC should consider the adequacy of penalties that apply to those
who were unlicensed or have since become unlicensed. Banning in such cases is
redundant.
The committee also recommends that as part of this review,
ASIC consider the practice of advisers using bankruptcy as a means to avoid
recompensing clients who have suffered financial loss as a result of their poor
financial advice and any possible remedies.
The committee recommends that ASIC provide its findings to
the committee.
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.
Senator Chris Ketter
Chair
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