On December 6th the Senate Select Committee on Lending to Primary Production Customers released its report, available here, after gathering evidence at eleven separate hearings around Australia.
Established in February 2017 to ‘inquire into and report on the regulation and practices of financial institutions in relation to primary production industries,’ the terms of reference of the Committee included:
(a) the lending, and foreclosure and default practices, including constructive and non-monetary default processes
(b) the roles of other service providers to, and agents of, financial institutions, including valuers and insolvency practitioners, and the impact of these services
As discussed in Receivers: are “crooks”? and Receivers: are “inhuman”? much of the early evidence was highly critical of the role of restructuring and turnaround professionals. However, as explained in “Non-mainstream advisers” and A “War zone”?, in later hearings some of the practitioners whose work was the subject of the early criticism had the opportunity to present the other side of the story, and also provide evidence about the damage caused by some of the non-mainstream advisers.
Twenty seven recommendations
The final report includes twenty seven recommendations which address the following areas:
National FDMA scheme
As universally expected and supported, the report calls for a National Farm Debt Mediation system, based on the NSW scheme. For reasons not explained however, it is proposed that scheme will only apply to loans less than $10m, which is disappointing.
Changes to the Code of Banking Practice
The reports recommends specific changes to:
- Apply the responsible lending obligations contained in the National Consumer Credit Protection Act, and Unfair Contracts terms protections, to primary production loans of less than $10 million.
- Oblige lenders to ‘commence dialogue’ with a borrower at least six months prior to loan expiry.
- Ensure that lenders provide farmers with full copies of signed loan applications and ‘other relevant documents.’
- Keep families on farms during a sale process, with vacant possession sought only in ‘extenuating circumstances.’
Who should the Code of Banking Practice apply to?
Recommendation 6 proposes that the CoBP be incorporated in loan contracts – but this is already the case for bank lending. It may be that the committee intended to extend the CoBF to non-bank lending, but this recommendation is not as clear as it might be.
Changes to bank procedures
The report recommends various changes to banks’ internal processes to:
- Provide at least 90 days notice where a bank has decided that it will not further extend a loan.
- Similarly, provide 90 days notice before acting on a default – albeit this would become superfluous if a National FDMA scheme was in place.
- Prevent banks from making ‘fundamental, unilateral changes’ to loan terms.
- Forbid bank staff from helping farmers to prepare projections or other financial information used in a loan assessment processes.
- Improve controls to ensure that farm finance is only provided through appropriate agribusiness products.
- Offer ‘better training and more comprehensive supervision’ of frontline staff to help them deal fairly and reasonably with farming customers.
- Ensure that customers are aware of the Code of Banking Practice.
Default Interest rates
The report recommends that default rates be contemplated only in ‘the most exceptional of circumstances,’ but additionally recommends that default interest should not:
- Be charged at all in the first 12 months after default.
- Exceed an additional 1% in months 12 to 24.
- Exceed 2% from month 24 onwards.
Some of the recommendations would require legislative change:
- A proposal that the statute of limitations should not apply to claims about a bank or its agents changing the details of loan documents without the customer’s knowledge, or acting ‘unethically’ in dealings with a borrower.
- Implementation of “higher standards” of accountability by receivers and transparency for their costs, with monthly information on their farming management and fees to be provided to both lender and borrower.
- Changes to section 420A of the Corporations Act ‘to establish a private right of action’ – presumably the intention is to provide guarantors with a right of action, because borrowers already have such rights.
Special review of the takeover of the Landmark loan book’
The report recommends that the (yet to be constituted) Australian Financial Complaints Authority undertake a special review of ‘the ANZ takeover of the Landmark loan book’ so as to ‘shed more light on the implications of this significant corporate takeover’ – although the report does not identify the specific objectives of such a review.
The report calls for the government to commit funding to train rural counsellors in mediation, and establish tailored initiatives that provide primary producers with guidance on financial literacy and business management, and resilience training. Both of these suggestions would be widely supported.
ABA and ARITA to work together
The report asks the Australian Bankers Association and ARITA to work together to:
- Ensure that receivers, and any valuers that they appoint, have appropriate qualifications and experience. This will be uncontroversial, lenders and insolvency practitioners will believe they already meet this standard.
- Require banks and receivers work to achieve the ‘maximum sale price of an asset’ – this is a effectively a ‘plain english’ rendering of section 420A, and will also be uncontroversial.
- Ensure copies of bank or receiver-ordered valuations are provided promptly to farmers. This may be a problematic recommendation because of the potential impact on sale processes where a borrower has an involvement with a potential purchaser.
Although the committee spent some time understanding the considerable problems caused by “non-mainstream advisers,” unfortunately, that recognition of the issue did not lead to any recommendations about much-needed regulation.
It is worth highlighting that there is no guarantee that any recommendations will actually be implemented – the current absence of a National Farm Debt mediation scheme is evidence that Inquiry recommendations do not always translate to action. And some may say that implementation should be deferred until it is further informed by the upcoming Royal Commission (discussed here). That may be true, but it would be a shame if the most worthwhile recommendations – the National Farm Debt Mediation scheme, and funding for skills programs for rural counsellors and financial literacy programs for farmers – were unnecessarily delayed.
Other posts about the hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers: