In 2009, two of Australia’s largest agribusiness managed investment schemes (MIS) failed—Timbercorp and Great Southern. In quick succession, a number of other major schemes collapsed, including Willmott Forests Ltd and Gunns Plantation Ltd. The Senate Economic References Committee has just released its review and report.
The collapse of several agribusiness managed investment schemes during the height of the GFC was financially devastating for investors. This event sparked a Senate Economic References Committee review – the report for which has just been released.
The committee was concerned primarily with retail investors caught up in these schemes, many of whom were first time investors and not highly literate in financial matters, and has examined the role of all parties involved in managed investment schemes, including the finance companies, credit assistance advisers and lenders that facilitated and provided the loans; the regulators and governments, with the intention of identifying measures that could be taken to help protect retail investors from any similar financial debacle in the future.
What are Agribusiness Managed Investment Schemes?
Like other managed investmwent, 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.
They were an attractive tax deduction for some investors as large upfront costs attracted significant tax-deductions. Accoridng to the report, it was not unusual for investors (known as 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..
The report has stated that 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.
The viability of Agribusiness managed Investment Schemes
The Committee has made a totoal of 24 recommendations to strengthen ASIC’s powers in order to provide more robust investor protection. A brief summary of the recommendations are as follows:
Recommendation 1: The committee recommends that the ATO undertake a comprehensive review of its product rulings to obtain a better understanding of the reasons some investors assume that an ATO product ruling is an endorsement of the commercial viability of the product.
Recommendation 2: The committee recommends that ASIC be vigilant in monitoring the operation of the FOFA legislation and to advise government on potential or actual weaknesses that would allow any form of incentive payments to creep back into the financial advice sector.
Recommendation 3: While noting the 1 July 2016 expiry of the ‘accountants’ exemption’ under Regulation 7.1.29A of the Corporations Regulations 2001, the committee recommends that the Treasury look closely at the obligations on accountants or tax agents providing advice on investment in agribusiness MIS (or similar schemes). The intention would be to identify any gaps in the current regulatory regime.
Recommendation 4: 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.
Recommendation 5: 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.
Recommendation 6: The committee recommends that the government consider the banning provisions in the licence regimes with a view to ensuring that a banned person cannot be a director, manager or hold a position of influence in a company providing a financial service or credit business.
Recommendation 7: The committee recommends that the government consider legislative amendments that would give ASIC the power to immediately suspend a financial adviser or planner, subject to the principles of natural justice, where ASIC suspects that the adviser or planner has engaged in egregious misconduct causing widespread harm to clients.
Recommendation 8: 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.
Recommendation 9: The committee recommends that the government consider not only renaming general advice but strengthening the consumer protection safeguards around investment or product sales information presented during promotional events.
Recommendation 10: The committee recommends that ASIC strengthen the language used in its regulatory guides dealing with general advice. This would include changing ‘should’ to ‘must’ in the following example: “You must take reasonable steps to ensure that the client understands that you have not taken into account their objectives, financial situation or needs in giving the general advice.
Recommendation 11: The committee recommends that the government’s consideration of ‘general advice’ also include the role of referral networks and determine whether stronger regulations in this area are required.
Recommendation 12: In respect of research houses and subject matter experts providing information or reports to the market on financial products such as agribusiness MIS, the committee recommends that the government implement measures to ensure that IOSCO’s statement of principles governing integrity and ethical behaviour apply and have force.
Recommendation 13: 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.
Recommendation 14: The committee recommends that Bendigo and Adelaide Bank support the appointment of an independent hardship advocate to assist borrowers resolve their loan matters relating to Great Southern.
Recommendation 15: The committee recommends that the Australian Government initiate discussions with the states and territories on taking measures that would lead to the introduction of national legislation that would bring credit provided predominantly for investment purposes, including recourse loans for agribusiness MIS, under the current responsible lending obligations.
Recommendation 16: The committee recommends that the Australian Government consider ways to ensure that borrowers are aware that they are taking out a recourse loan to finance their agribusiness MIS and also to examine the merits of imposing a maximum loan-to-valuation limit on retail investors borrowing to invest in agribusiness MIS.
Recommendation 17: The committee recommends that the Banking Code of Conduct include an undertaking that the banks adhere to responsible lending practices when providing finance to a retail investor to invest. This responsibility would apply when the lender is providing finance either directly or through another entity such as a financing arm of a Responsible Entity.
Recommendation 18: The committee recommends that the Victorian Legal Services Commissioner and Legal Services Board thoroughly review the conduct of the lawyers who provided advice to retail investors in collapsed agribusiness MIS to cease repayments on outstanding debts and the circumstances around this advice.
Recommendation 19: To augment ASIC’s product intervention power, the committee recommends that the government review the penalties for breaches of advisers and Australian Financial Services Licensees’ obligations and, under the proposed legislation governing product issuers, ensure that the penalties align with the seriousness of the breach and serve as an effective deterrent.
Recommendation 20: The committee recommends that the government use CAMAC’s report on managed investment schemes as the platform for further discussion and consultation with the industry with a view to introducing legislative reforms that would remedy the identified shortcomings in managing an MIS in financial difficulties and the winding-up of collapsed schemes.
Recommendation 21: The committee notes that neither the ATO nor Treasury have undertaken a comprehensive review of the tax incentives for MIS and whether they had unintended consequences, such as diverting funds away from more productive enterprises; inflating up front expenses; or encouraging poorly-researched management decisions (planting in unsuitable locations).
Recommendation 22: The committee recommends further that the proposed review consider the approach to the incentives offered to investors in agribusiness ventures by other countries such as the United Kingdom to inform the review’s findings and recommendations.
Recommendation 23: In addition to the above recommendation, the committee recommends that the government request the Productivity Commission to inquire into and report on the use of taxation incentives in agribusiness MIS.
Recommendation 24: The committee recommends that ASIC review the complaints made against advisers and accountants, licensed or unlicensed, who engaged in alleged unscrupulous practices when recommending that their clients invest in agribusiness MIS.
Industry response to the Agribusiness report
Response to the report thus far has been:
Financial Planning Association of Australia
The Financial Planning Association of Australia (FPA) has welcomed the recommendations of the Senate Economics References Committee report into failed agribusiness managed investment schemes (MIS), particularly those around improving consumer protection.
Dante De Gori CFP®, CEO of the FPA, said he was pleased that the recommendations reflect the FPA’s submission to the Senate inquiry into forestry managed investment schemes (FMIS) in December 2014, as well as recommendations made by the FPA as part of the Financial Systems Inquiry (FSI). These recommendations sought to highlight insufficient regulation governing the meaning of term ‘general advice’, and the need to legislate a clear distinction between financial advice and product sales.
“The FPA recognises that thousands of Australian investors suffered when the agribusiness investment schemes collapsed. Unfortunately, many investors did not fully understand what they were buying, and believed that they had been recommended an investment which took into account their personal circumstances, when this wasn’t in fact the case.
“Agribusiness MIS are highly complex products. Indeed many FPA members have said they are so difficult to understand and justify that financial planners avoid them, and their licensees do not include them on their approved product lists. That’s why the distinction between product sales and financial advice must be made clear,” he said.
The Institute of Foresters of Australia
The Institute of Foresters of Australia commended the Senate’s Economic Reference Committee for its report on Agribusiness managed investment schemes.
Rob de Fégely, National President of the Institute of Foresters, said, “The IFA particularly supports Recommendation 12 which suggests that the International Organization of Securities Commission’s (IOSCO) statement of principles governing integrity and ethical behaviour should apply and have force in Australia.
“The Institute of Foresters regularly reviews its code of ethics and, in its 2016 review, will make note of the recommendation from the Senate’s Economic Reference Committee.”