Report handed down: Senate Inquiry into Lending to Primary Production Customers


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.

Legislative Reform

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.

Government Funding

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.

‘Missing’ recommendation

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.

Next steps

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:

Detoured? One year bankruptcy referred to committee

In one sense it is surprising that the Senate referred the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 to Committee on 30 November 2017.  The tiny Bill (only ten pages long) really only contains one measure – shortening the statutory bankruptcy period from three years to one year – which presumably Senators either support, or not.  But the legislation was tabled in Parliament without any prior consultation, and so consultation now via the committee process is welcome, and appropriate.

The reduction in the bankruptcy period means that unless an objection is lodged, bankruptcy will end after twelve months.  Individual debtors will then again be able to act as a director of a company, travel overseas, and incur credit without having to disclose bankruptcy.  Significantly though, they will remain subject to the income contribution regime for three years, as is now the case.

The legislation implements the final phase of the 2016 National Innovation Agenda – improving Australia’s bankruptcy and insolvency laws proposals paper, discussed here, intended to promote entrepreneurship by reducing the penalty and stigma associated with business failure.  Notably, despite being intended to reduce stigma associated with business failure, the shorter term will apply to all bankrupts – not just the circa 16% (per the September 2017 quarter statistics) who are business bankrupts.

The major criticisms of the changes are:

  • It will make bankruptcy ‘too easy’ – Debtors may be tempted to incur additional credit to update household items or take a holiday, knowing they can declare bankruptcy rather than repay.  Notably, there are no anti-abuse mechanisms to limit access to the shorter period – for example to first time bankrupts only.
  • Trustees will not have enough time to properly investigate a bankrupt’s affairs and file an objection to extend bankruptcy, before the twelve months expires.
  • Collecting contributions after bankruptcy has ended will be more difficult and more expensive.  In practical terms the ‘threat’ of an objection is a simple and inexpensive leverage point for trustees to calculate and collect income contributions.
  • There is no grandfathering – perhaps surprisingly, bankruptcies on foot at the commencement date will be shortened to the twelve month term – and so the changes will have retrospective effect.

The deadline for submissions to the inquiry is 31 January 2018.

An earlier post on this topic: Shortening Bankruptcy

Comment on the draft legislation is here and a copy of my submission is here.

For my commentary on the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, also referred to the Senate Standing Committees on Legal and Constitutional Affairs, see here.

Will the Banking* Royal Commission impact restructuring and turnaround professionals?

The Senate Select Committee on Lending to Primary Production Customers was the sixth inquiry in the last seven years to examine the conduct of Restructuring and Turnaround practitioners – will the recently announced Royal Commission be the seventh?

Unlike both the Senate Select Committee Inquiry, and the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans before it, the terms of reference released on 15 December 2017 (available here) do not directly refer to ‘insolvency practitioners’ or ‘insolvency’ at all.

However, the first term of reference directs inquiry into ‘the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf).’  Whilst there may be technical legal discussion about the extent to which a receiver is acting on behalf of a lender, at a practical level it seems likely that the work of receivers may well be under review.

The definition of ‘financial services entity has been extended to cover ‘a person or entity that acts or holds itself out as acting as an intermediary between borrowers and lenders.’  This has been described as extending the Royal Commission to include the work of finance brokers – but in fact the broadened scope would appear to potentially also include the work of the “Non-mainstream advisers” who concerned the Senate Inquiry.

The terms of reference specifically allow the Commission to choose to not investigate matters where to do so would duplicate the existing work of another inquiry or civil proceeding.

That power to avoid duplication may assist the commission to meet its tight deadline, but it has the potential to frustrate those who see their previous failure in Court as defining a ‘broken’ legal system, and who use each fresh inquiry as an opportunity to re-litigate those failures.

The Commission may submit to the Government an interim report no later than September 2018, and must submit a final report by 1 February 2019.

*Although headlines have referred to a ‘Banking Royal Commission’ in fact the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry specifically extends to non-bank lenders, as well as insurance companies, and Superannuation Funds.

Posts about the Senate Select Committee Inquiry into Lending to Primary Production Customers:

A “War zone”?

Rather than continue the committee’s earlier scrutiny of the role of “non-mainstream advisers,” the final hearing of the Senate Select Committee Inquiry into Lending to Primary Production Customers returned to an examination of the work of receivers (transcript here).

A focus on one case in particular highlighted the most difficult and challenging aspects of a receiver’s work, and provided outsiders with a clear understanding as to why the Court officials responsible for taking possession of properties will sometimes involve the local police.

One receiver gave evidence about ‘personal threats’ made to ‘numerous parties’ – including a contract truck driver who had his arm broken.  When asked why the farm in question had been left idle for four years the receiver explained that although he had found tenants to farm the property, they withdrew because they believed that they would not enjoy quiet occupation of the property.  He likened the situation to ‘trying to plant wheat in the middle of a Balkan war.’

His partner addressed some of the broader issues raised in earlier hearings, pointing out that:

  • Although in theory the costs of a receivership were charged to the borrower ‘in the majority of cases, where there’s a shortfall, the cost is paid by the bank and borne wholly by the bank’ – who scrutinised those costs very carefully.
  • Comparing a sale price to a valuation was problematic. Not only because valuation can move – with examples of ’40 per cent in a year for grazing properties’ – but the reality was that receivers ‘can’t force people to pay more’ than they think a property is worth.
  • There was an ‘expectation gap’ between the value of a property bought ‘when it was going well,’ and sold when it was not.

One committee member raised the idea of a prohibition on the appointment of receivers to ‘family farms’ – an idea which is discussed in more detail in End of the line?…..should we ban receiverships? – but which is problematic for at least two reasons.

The first is that the core problem is severe financial stress.  Preventing a lender from appointing a receiver may only mean that the enterprise will trade a little longer until it is wound up by another creditor – quite possibly the ATO.  The failure of the business will not be any more pleasant for the proprietors simply because it is a liquidator rather than a receiver who sells the farm, and in many cases, other creditors will be in a worse position because ongoing trading has increased the amount they are owed.

The second issue is that – as one of the witnesses explained – if lenders are unable to take the steps to recover debts due it seems likely that it will impact their lending decisions.  Higher risk operators may find themselves paying a higher rate, or unable to borrow as much as they wish.

The final report is due on 29 November 2017.

Update: The report is now due on 6 December.

Other posts about the hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers:

“Non-mainstream advisers”

The Senate Select Committee Inquiry into Lending to Primary Production Customers began with an obvious focus on lenders.

However, as the hearings proceeded, that focus seemed to shift.  One member’s view was that ‘when you look at what’s come before this committee, the big banks have come out pretty well.’  By contrast, as the chair noted, ‘the number one area…standing out for complaints is the receivers’ (more background here).

To those following the hearings it was therefore no surprise that the 20 October hearing was dedicated to evidence from restructuring and turnaround professionals and their professional association, ARITA.

Those giving evidence (listed below) did a tremendous job in explaining the extensive regulation to which they are subject, the duties and reporting obligations imposed by the Corporations Act, and the challenges of dealing with farmers and small business operators in moments of greatest stress and difficulty.

Through the course of evidence on 20 October, the beginnings of a new line of inquiry appeared: those described by one witness as ‘non-mainstream advisers,’ often without appropriate qualifications, whose involvement was a ‘consistent element of matters which become protracted and difficult to resolve.’

The witness referred to the use of ‘arguments, which have no legal substance,’ as well a routine by which a ‘promissory note’ is tendered purportedly in satisfaction of the debt. Other devices (albeit not the subject of evidence) include the promise of offshore refinance or funding, and of evidence purporting to show that a loan has been ‘securitised’ (which is somehow said to invalidate the loan), both of which seem to require a significant and non-refundable up-front fee.

As another witness explained, those purported ‘strategies’ provide borrowers with false hope, when more realistic advice would lead them to negotiate with creditors.

One of the committee members noted his personal experience with non-mainstream advisers, one ‘pretty good’ – but others ‘not so good,’ and raised the question of whether they should be regulated.  The committee chair also raised concerns: ‘we can see the damage of non main-stream advisers.’

Another hearing has been scheduled for 17 November.  It will be interesting to see whether there is further exploration of the problems caused by non-mainstream advisers, and what can be done to mitigate the damage caused by the worst of them.

Update: Some of the relevant footage of the committee proceedings have been made available via youtube.

Witnesses who represented the turnaround and restructuring profession, in my view with great distinction, at the 20 October 2016 hearing:

  • Justin Walsh of Ernst & Young
  • Stephen Longley and David Leigh of PPB Advisory
  • Ross McClymont, Narelle Ferrier, and John Winter of ARITA
  • Jamie Harris, Rob Kirman, Matthew Caddy, and Anthony Connelly of McGrathNicol
  • Will Colwell, Stewart McCallum, Tim Michael and Mark Perkins of Ferrier Hodgson

For comment on some other problematic advisers: Wanted: Regulation of pre-insolvency advisers

Consultation on the Industry wide EDR for Business Credit disputes: AFCA

Yesterday the government opened a 17 day consultation window for input into the design of the Australian Financial Complaints Authority, and its operations.

As the consultation papers explain, AFCA is the single external dispute resolution scheme that will replace three existing schemes: the Financial Ombudsman Service, the Credit & Investments Ombudsman, and the Superannuation Complaints Tribunal.

For lenders, the most significant change is the increase in jurisdiction.  Currently, there is a cap of $309,000 on the compensation that FOS can award.  It is proposed that AFCA will have jurisdiction over small business credit facilities up to $5 million, with a compensation cap of $1 million.  Notably, there is no limit on disputes about the validity of guarantees supported by security over a guarantor’s primary place of residence.

The dual reference – facility limit amount as well as compensation cap – highlights that outcomes will not necessarily be limited solely to compensation.  In 2016/17 FOS received 2,772 complaints about lender responses to claims of financial difficulty, and many of those complainants would have been seeking slower or different recovery processes rather than compensation.

There will be some non-bank lenders (those who aim above the micro-business market with say a minimum loan of $500,000) who currently operate mostly outside the current FOS jurisdiction, who will find that AFCA has significant coverage in the future.

The consultation paper notes that AFCA has a specific objective to deploy ‘a consistent approach’ to determinations.  Elsewhere the paper references that FOS currently has regard to ‘applicable industry codes’ and ‘good industry practice.’  Taking those together, might AFCA have scope to decide that the Code of Banking Practice should apply to Bank and non-Bank lenders alike?

Responses are sought by 20 November 2017.

The beginning of the end? The RBS/GRG saga

Last week’s release of an interim summary of an independent review into Royal Bank of Scotland’s (RBS) treatment of distressed small business customers may signal the end – or perhaps the beginning of the end – of an extremely challenging period for RBS.

As discussed here, public concern about the treatment of customers transferred to the RBS workout area – the Global Restructuring Group (GRG) – followed the issue of the so-called ‘Tomlinson Report’, in 2013.

The report – highly critical of GRG, and those who advised it – generated an immediate media and political response, and led to the UK Financial Conduct Authority (FCA) seeking an independent ‘Skilled Person’ review of the allegations by consulting firm Promontory Financial Group and accountants Mazars.

Only later did it emerge that Lawrence Tomlinson, who held an honorary role as an ‘Entrepreneur in Residence,’ was not commissioned to undertake a review, and that he himself was an unhappy RBS customer.

To some extent the controversy cooled, but public interest re-kindled following a joint report by BBC NewsNight and Buzzfeed in October 2016 which seemed to anticipate the delivery of the report to the FCA.

The High Level summary

On 8 November 2016 the FCA released a statement setting out a high level summary of the main findings and key conclusions, reporting that:

  • Notwithstanding the Tomlinson allegations to the contrary, RBS did not set out to artificially engineer the transfer of customers to GRG
  • The customers transferred to GRG were exhibiting clear signs of financial difficulty.
  • There was no evidence that property purchase by RBS entity West Register had increased financial loss to the customer.
  • Inappropriate treatment of SME customers appeared ‘widespread’ and that ‘much communication was poor and in some cases misleading.’
  • There was a failure to support businesses ‘consistent with good turnaround practice,’ and an ‘undue focus’ on pricing increases.

It was surely no coincidence that on the day that the summary was released, RBS announced a response to the report which included a complaints process to be overseen by a retired High Court Judge, and the automatic refund of some types of fees paid by SME customers.

However, the RBS response did not close out the controversy, and calls for release of the full report continued.

More detail: a sixty-nine page summary

Almost 12 months later the FCA has released – not the full report – but rather a sixty-nine page ‘interim summary.’  What does it tell us?

Firstly, it highlights the large scale of the review: 207 cases, including 60 in which West Register had some involvement.  The reviewers had access to 1.48 million pages of data and more than 270,000 emails, supplemented with interviews of RBS staff and customers.

Critically, the most serious of the Tomlinson allegations were not upheld by the independent review.  However, the reviewers found that inappropriate treatment of customers was widespread and systemic – evident in 86% of all cases reviewed, and 92% of the cases involving viable businesses.

The report clearly identified that GRG’s twin objectives – turnaround of businesses in distress and financial contribution to RBS – resulted in inherent conflicts of interest, and that RBS did not have appropriate governance and oversight procedures to balance the interests of RBS and its SME customers.

The specific findings included:

  • In practice RBS had failed to place appropriate weight on turnaround options, failed to manage the conflicts of interest inherent in the role of West Register, failed to handle complaints fairly, and was unduly focused on pricing increases.
  • RBS’s policies and procedures for problem loans were appropriate, and broadly reflective of normal turnaround practice – but in many aspects the policies were not actually followed.
  • GRG notionally used a ‘balanced scorecard’ approach, but in practice the generation of additional income from customers took precedence over any other aspect.
  • GRG often sought a reduction in facility levels ‘with insufficient regard’ for the impact on customers.  Extensions were typically short-term, and accompanied by fees or higher interest rates.
  • Interactions with customers ‘were often insensitive, dismissive and sometimes unduly aggressive.’
  • A target of “zero justifiable complaints” actually incentivised a lack of recording and reporting of complaints.
  • There had been previous misreporting of the turnaround success rate, in fact only around one in ten cases was returned to mainstream banking.

Where next?

The summary included a careful explanation of FCA policy around the release of skilled person reports, noting that full disclosure was ‘subject to a wide prohibition in the legislation.’  The summary further explained that an attempt to publish the full report in this case would require ‘heavy redaction’ – a ‘complex and lengthy’ process.

It appears clear that the FCA will not publish the full report unless compelled, and so it seems – no doubt to RBS’ relief – that the issue might finally be heading towards closure.

Regardless of whether the full report is ever published, the message for banks is clear: the public and political expectation is that ‘is it fair?’ is a more important question than ‘is it legal?’

Other posts about the RBS/GRG saga:

‘Inhuman,’ ‘Crooks’ – Receivers’ right of reply?

Receivers: are “crooks”?  commented on some of the most strikingly-phrased evidence given at hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers, and Receivers: are “inhuman”?  discussed the responses of the committee members to the testimony (available here) that they had heard.

Some turnaround and restructuring professionals have expressed concern about the risk that the Inquiry might conclude without the benefit of an explanation of the duties and obligations of the registered liquidators who undertake such receivership roles, or information about the level of scrutiny and regulation imposed by the Corporations Act and applied by ASIC.

Those concerned will be pleased that ARITA has been invited to give evidence to a hearing in Canberra on 20 October, which should be broadcast live via the browser-based ParlView service, available here.

ARITA President Ross McClymont, CEO John Winter, and Technical & Standards Director Narelle Ferrier will give evidence at 12 noon.

Update: You can watch ‘replays’ of Part 1 (ARITA appears at 12.25) and Part 2 of the hearing online.

“Fixing” Section 420A

Earlier posts (Receivers: are “crooks”?  and Receivers: are “inhuman”?)  have noted that receivers have been the subject of strident criticism in many of the nine public hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers.

One of the areas of specific and regular complaint has been the sale of assets at – it is claimed – a significant discount to their reported value.

However, none of the valuations referenced in the evidence appear to have been tabled, and so it is difficult for outsiders to understand whether the reference is to sworn valuations conducted by independent valuers, or whether the reference is to something less structured and formal.  Likewise it is also unclear to outsiders whether those reported valuations reflect the seasonal and market conditions at the time of the sale, or whether they are framed against different conditions present at an earlier time.

Nonetheless it seems that at least one of the committee members is concerned about the effectiveness of section 420A – which imposes an obligation upon receivers to:

“take all reasonable care to sell [mortgaged] property for:

(a)  if, when it is sold, it has a market value–not less than that market value; or

(b)  otherwise–the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.”

At the 18 September hearing (transcript available here) a bank was asked to comment on a proposal that would require receivers to take a fresh valuation on appointment, and prevent them from selling ‘for less than 80 per cent of that current valuation.’

It was not clear whether the hypothetical requirement would apply only where the sale was other than by public auction, or whether it would apply to all sales.

Regardless, the response (admittedly, off the cuff) did not raise concerns about the proposal – which suggests a greater degree of confidence in the sales programs conducted by receivers, and the outcomes they deliver, than some of the borrowers who gave evidence may have expected.

Receivers: are “inhuman”?

In Receivers: are “crooks”? I commented on some of the most quotable evidence given to the first two hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers.

The transcripts from hearings three and four are also now available here.

Notably, in the fourth hearing one senator asked whether “receivers have professional standards bodies?”  Neither the bank to whom the question was directed, nor the other members of the committee, were able to identify ARITA’s role or the fact that ARITA had already lodged a submission to the inquiry.

Towards the end of the hearing the Chair referred to having seen conduct by receivers that ranged from “fraudulent—through to things that we could possibly describe as inhuman.”

If the committee does continue to pursue its present line of investigation it would not be a surprise to see a further Senate Inquiry into the conduct and regulation of receivers.