The Banking Royal Commission Implementation Roadmap & Agri Lending

The Treasurer today announced the Banking Royal Commission “Roadmap.”

The roadmap document, available here, provides a response to each of the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The recommendations relevant to Agricultural Lending, and the response today, are set out below:

Recommendation 1.11 – Farm debt mediation – A national scheme of farm debt mediation should be enacted.

Roadmap:

The Government is working with states and territories through the Agriculture Ministers’ Forum (AGMIN) to progress work on the establishment of a national farm debt mediation scheme

A National Farm Debt Mediation scheme is a universally supported measure, which has been recommended by numerous inquiries over several years. Implementing such a popular and well-supported measure should be relatively straightforward.

Recommendation 1.12 – Valuations of land – APRA should amend Prudential Standard APS 220 to:

require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and
provide for valuation of agricultural land in a manner that will recognise, to the extent possible:
- the likelihood of external events affecting its realisable value; and
- the time that may be taken to realise the land at a reasonable price affecting its realisable value.

Roadmap:

On 25 March 2019, APRA released for public consultation proposed revisions of Prudential Standard APS 220 Credit Quality. Consultation closed on 28 June 2019. APRA intends to finalise the standard in the second half of 2019 with a view to it becoming effective from 1 July 2020.

An independent internal valuation will add some cost and delays for some remote customers, but otherwise should not be controversial, or difficult to implement.

As discussed here in greater detail, it is harder to understand how valuers will change their practices to implement the second recommendation around “external events.”

Recommendation 1.13 – Charging default interest – The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.

Roadmap:

The ABA has announced the amended Banking Code, incorporating recommendations 1.8 and 1.13, will be implemented by March 2020.

Recommendation 1.14 – Distressed agricultural loans – When dealing with distressed agricultural loans, banks should:

ensure that those loans are managed by experienced agricultural bankers;
offer farm debt mediation as soon as a loan is classified as distressed;
manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and
cease charging default interest when there is no realistic prospect of recovering the amount charged.

Roadmap:

The Government expects that banks will implement recommendation 1.14 as soon as possible.

Banks will believe that they already manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst and recognise that appointment of receivers or any other form of external administrator is a remedy of last resort. In my opinion they will be untroubled by those recommendations, and comfortable with immediate implementation.

A requirement to offer farm debt mediation as soon as a loan is distressed may be problematic – depending on what is meant by distressed, which is not otherwise defined. For example, in Victoria a lender can only initiate FDM by serving a notice that they “intend to take enforcement action.” If the recommendation is intended to make FDM available in situations where enforcement is not planned, then the respective FDM legislation will require amendment.

A mandatory requirement to ensure Agri loans are managed by experienced agricultural bankers will have banks working to understand what “managed” means. Often the banker in contact with the customer is not the banker making the final credit decision. Does the recommendation require the customer contact to be an experienced agri banker, or the credit approver, or both?

Concessional RIC loans for farmers impacted by Drought or Flood

The Federal Government established the Regional Investment Corporation in March 2018 to administer concessional farm business loans. This began with Farm Drought loans, and in 2019 was expanded to also include AgRebuild loans for farmers affected by the North Queensland floods.

The AgRebuild loans are very tightly targeted, but eligibility for the Farm Drought loans is broader than many might expect.

Loans for working farmers

The loans are available owners of farms that are Australian citizens or permanent residents – although it is important to understand that the farms can be held through companies or trusts.

Not all members of a farming partnership must work on the farm, but at least one person must contribute at least 75% of their labour to the farm business under normal circumstances, and at least one partner must rely on the farm for their income – so the loans are not available for corporates.

Terms and pricing

As of 1 August, the year loans are currently at a variable interest rate of 3.11%, with no application or other fees,

Drought loans are interest only for the first five years. AgRebuild loans are interest free for the first two years, then interest only for the next three years.

Support of the current lender

Although the loans can be used to reduce bank debt, they can’t be used to completely replace it – normally a farmer must keep 50% of their debt with a “commercial lender.”

It’s worth highlighting that RIC will often agree to take second mortgage security. This means that in practical terms the commercial lender’s security cover (i.e. loan-to-value ratio) can significantly improve, and so they might be quite happy about RIC becoming involved!

One other point is that even if the current lender isn’t prepared to confirm support, it may still be possible to get a conditional offer from RIC. With a much better LVR to offer the incoming lender it may be easier for farmers to secure a refinance.

Drought loans

Drought loans are up to $2m, available to farmers across Australia, which can be used to:

Prepare for drought or recover from the effects of drought.
Pay down debt.
Invest in productivity or water efficiency measures.

Farmers will need to provide a copy of their drought management plan.

Flood loans (AgRebuild)

The AgRebuild loans have a much tighter eligibility criteria. They are for farmers affected by the flooding caused by the Monsoon Trough from 25 January to 14 February 2019 North Queensland.

The AgRebuild loans are for a maximum of $5m, but rates and other terms are the same.

There are some key differences to the drought loans:

As noted, the loans are interest free for the first two years.
RIC might waive the requirement that 50% of the debt stays with a commercial lender – but only in cases of “extreme hardship,” and will be assessed on a case by case basis.
The loans are only available until 30 June 2020.

Restrictions

There are some restrictions:

RIC is not a lender of last resort and will not lend unless it is satisfied that the farm is viable and has capacity to repay the loan.
RIC will require a drought management loan for drought loans.
As above, the ongoing involvement of a commercial lender is required, although this can be a new lender in some cases.

Summary

For eligible farmers the RIC loans can be a great option and it is well worth checking availability. There is a lot of useful information at www.ric.gov.au, or you can contact the author on 0404 885 062. You can also get structured assistance through a website that I have a link to, via my involvement with Ecosse Capital Partners: ricloan.com.au.

This article first appeared on my Harbourside Advisory website

Less butting of heads? Changes to the NSW Farm Debt Mediation Act

The Farm Debt Mediation regime established in NSW in 1994 is now well understood, and is regarded by most observers as the Australian benchmark.

The changes contained in a Bill tabled in Parliament on 10 April 2018 and available here follow a careful and thorough consultation. Although the reforms represent more of an adjustment than a major overhaul, they are significant nonetheless.

One of the most striking changes is the creation of an offence, committed by a creditor who enforces a farm debt without having first obtained an ‘exemption certificate’ from the Rural Assistance Authority. An exemption certificate will only be available if a ‘satisfactory mediation’ has been already undertaken and completed, or if the farmer declines mediation or fails to properly participate.

Other changes include:

Broadening the ambit of the scheme, to apply to ‘matters involving farm debts’ rather than ‘farm debt disputes.’
More specific definition of a ‘farming operation’ as a business undertaking that ‘primarily involves’ agriculture, aquaculture, the cultivation or harvesting of timber or native vegetation or any connected activity – but excludes wild harvest fishing, or the hunting or trapping of animals in the wild.
Confirmation that a breach of an earlier mediated outcome does not require a second round of mediation.
Allowing the parties to waive the 14 day cooling off period in writing.
Implementing a more structured approach by which the parties may reasonably request information or copies of documents from each other.
Sensibly allowing parties to break the current confidentiality regime if it will ‘prevent or minimise the danger of injury to any person or damage to any property.’

What’s missing?

To create a criminal offence for enforcement absent an exemption certificate will be seen by some as heavy-handed, but otherwise the changes should receive broad support. That said, there are some missed – albeit less significant – opportunities for improvement:

Currently lenders can only invite a farmer to mediate if he or she is in default. In practice this may lead a lender to call a default earlier than they otherwise might, because that is the only way to access the mediation process. A way to initiate mediation without a default would be useful in some situations.
Attendance at a mediation by all parties is preferable – but sometimes relationship breakdowns contribute to financial difficulties, and vice versa, and it can sometimes be better to mediate with one party ‘attending’ by video conference. The amendments don’t directly facilitate this, however there is allowance for later modification of the mediation process by regulation.
There is no ‘minimum’ size for a farming operation. The question: ‘how many fruit trees turn a weekender into a farm?’ remains unanswered.

If passed, the legislation will commence on proclamation.

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

Background

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:

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

‘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.

Receivers: are “crooks”?

The registered liquidators I speak to have a real sense of being under close and careful scrutiny. ASIC is an increasingly active regulator – as evidenced in the most recent enforcement report (available here). The roughly 85% of registered liquidators who are ARITA members must also comply with its comprehensive Code of Professional Practice (available here), or risk facing its Professional Conduct Committee. And many would say that FEG – an active and well-resourced priority creditor – provides additional scrutiny to receiverships where employee priorities are involved.

It is clear from the evidence provided to the Senate Select Committee on Lending to Primary Production Customers (available here) however, that some of the borrowers subject to receivership do not see – or do not appreciate – the level of scrutiny and supervision.

One borrower claimed that asset sale proceeds “finish up in the receiver-manager’s accounts” and do not reduce the farmer’s debt – a “systemic misappropriation of those funds” by the “most corrupt, the most unscrupulous, the most unethical industry in Australia.”

Another debtor said that receivers “are crooks down and out,” and a former rural agent described the insolvency profession as “the greatest bunch of virtually bloody criminals and they get away with it.”

Insolvency practitioners may argue that those giving evidence are the most vocal of an unrepresentative minority, but it seems that their evidence may be having an impact. The committee chair closed the Perth hearing with a reminder that the inquiry was “not only into lending practices, including default, but also into other service providers associated with this sector, including receivers, brokers and agents.”

The reputation of the insolvency profession remains an ongoing issue, and we should not take outsiders’ understanding – of a technically complex function – for granted.

Postscript: Some comment on the later deliberations of the Inquiry is here: Receivers are ‘inhuman’?