Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697627842546.pdf (Australia)
Inquiry into Forestry Managed Investment Schemes (MIS) SUBMISSION Issue date 15 December 2014 Forestry managed investment schemesSubmission 136 ABOUT INDUSTRY SUPER AUSTRALIA Industry Super Australia is a research and advocacy body for Industry SuperFunds.

ISA manages collective projects on behalf of a number of industry super funds with the objective of maximising the retirement savings of over five million industry super members.
Please direct questions and comments to: Robbie Campo Deputy Chief Executive Matt Linden Director of Public Affairs ISA Pty Ltd ABN 72 158 563 270 Corporate Authorised Representative No.
426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514 Forestry managed investment schemesSubmission 136 ISA SUBMISSION Contents 1.1 Summary 1.2 Evidence highlighting a need for greater consumer protection 1.3 The relevance of FoFA 1.4 Disclosure alone is ineffective 1.5 Recommendations from the Financial System Inquiry 1 1 2 3 4 Forestry managed investment schemesSubmission 136 1.1 Summary Industry Super Australia (ISA) welcomes the opportunity to respond to the Senate Economics References Committee’s Inquiry into Forestry Managed Investment Schemes (MIS).
The terms of reference for the Inquiry cover all aspects of the establishment, financing and collapse of such schemes.

Industry Super Australia does not intend to address all matters raised but will provide a brief comment on the failings of the current policy and regulatory framework in relation to consumers of MIS.

ISA submits that due to the current regulatory regime for financial advice, the level of consumer protection and disclosure relating to forestry MIS requires attention.
In particular, we wish to bring to the Committee’s attention the risk stemming from any watering down of the Future of Financial Advice reforms, and the recent recommendations of the Financial System Inquiry which emphasise stronger intervention powers for ASIC and greater protection for consumers of advice.
1.2 Evidence highlighting a need for greater consumer protection In recent years, there have been a number of high profile financial advice collapses which highlight the inadequacy of regulatory settings to protect consumers and to set minimum conduct requirements for providers in the forestry MIS environment.

The largest of these have been Timbercorp and Great Southern, which have affected approximately 65,000 clients and resulted in losses of over $3 billion.
The Parliamentary Joint Inquiry into aspects of Agribusiness Managed Investment Schemes in September 2009 was primarily in response to the collapses of Timbercorp and Great Southern and emphasised a need for stronger regulation around MIS.

According to the inquiry, the vast majority of sales of Timbercorp and Great Southern (76 per cent) were from financial planners,1 highlighting the need for greater scrutiny of regulation around financial advice.
Key issues in relation to consumers identified by the report include: • The incidence of narrow sales recommendations being portrayed as financial advice2 • Concern that many consumers are not able to readily distinguish between narrow licensing arrangements and arrangements where financial advisers are licensed to recommend a much broader range of products3 • The accuracy of disclosure material available to investors, especially in relation to predicted scheme performance4 The concurrent Inquiry of The Parliamentary Joint Committee on Corporations and Financial Services into Financial Products and Services emphasised that the regulatory regime was ‘failing to protect consumers 1 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, p 52 2 Parliamentary Joint Committee on Corporations and Financial Services Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, 4.70 3 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, 4.71 4 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, 4.72 INQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES (MIS)| 15 December 2014 | www.industrysuperaustralia.com 1 Forestry managed investment schemesSubmission 136 from poor financial advice and its consequences.5’ The report pointed out serious problems, including conflicts of interests, commission-based remuneration and the limited regulatory power of ASIC.
Protections from these problems were not afforded to participants in MIS.

Consumer inertia and a failure to understand the risk of investment choices are common themes in relation to financial loss arising from investments in forestry MIS.
The Final Report of the Financial System Inquiry highlighted the consumer loss caused by the leveraged investment strategies in some managed investment schemes, stating: “The product did not perform in the way that consumers were led to believe, including schemes relying on ongoing sales to fund their operations.

Many consumers did not understand the potential risk of borrowing to invest in these products.
In total, more than 65,000 consumers invested and lost close to $3 billion6.” The flow on effects of this loss are emphasised by the ongoing impact on the victims, many of whom have not received compensation.

For some, repaying these debts may result in losing their homes or declaring bankruptcy.
The following statements from victims of the Timbercorp collapse – as told to the recent Senate Economics References Committee Hearing – emphasise the importance of stronger consumer protections in forestry MIS and the broader regulatory landscape.

“I was terrified, totally panic-stricken, filled with dread.

I did not know what to do.

I was just completely overwhelmed and out of my depth.
I have worked hard all my life and I was trying to do the right thing to secure a safe and comfortable retirement, and suddenly my world and everything that I have worked for collapsed completely around me.7” “Apparently the forms I was signing, I later learnt, were not just buy-in forms but were loan applications.

I was borrowing money I did not know I was borrowing.

It can be argued that I signed these forms and no-one held a gun to my head.
Some will argue that there is a loan application and it has your signature on it, so it is a loan application.

It is hard to argue against that, except for the fact that it all came down to trust over years—two decades even—of signing forms without having to read them and having total faith in the financial adviser.

I had got into that bad habit.

It is a habit I will never repeat, but it is too late now.

I owed Timbercorp $240,000 and they wanted their money back.
That figure has now almost doubled.8” 1.3 The relevance of FoFA Commencing 1 July 2013, the aim of the Future of Financial Advice (FoFA) reforms was to ensure consumers could obtain quality, impartial financial advice.

The laws were premised on two key pillars: the banning of the receipt of conflicted forms of payment for financial advice and the imposition of a requirement for financial advisers to act in the best interests of their clients.
In banning commissions and introducing a water-tight best interest duty, FoFA as originally legislated provided stronger protections for consumers of MIS.

However, recent attempts to wind back FoFA threaten to mark a return to the days of sales-driven advice and an obligation on the adviser to ensure that the advice is appropriate, which is a lower standard than the best interests obligation, and failed victims of previous collapses such as Great Southern and Timbercorp.
5 Parliament Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, November 2009 6 Final Report, Financial System Inquiry, December 2014, p 208 7 Halpern, Ms Naomi Alexandra, as told to the Senate Economics Reference Committee, Wednesday, 12 November 2014, p 1 8 McDonald, Mr John Denis, as told to the Senate Economics Reference Committee, Wednesday, 12 November 2014, p 3 INQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES (MIS)| 15 December 2014 | www.industrysuperaustralia.com 2 Forestry managed investment schemesSubmission 136 The bank and financial planning industry’s attempts to lobby the government to wind back key aspects of the FoFA reforms are an extraordinary instance of self interest.
The proposed changes would: • Make it possible for an adviser to meet the best interests duty without considering their clients’ best interests • Allow advisers to get client ‘agreement’ to limit the scope of advice even if a reasonable adviser would know this is not in the client's best interests.
• Create new exemptions (on top of the generous concessions in the original FoFA laws) that allow payment of conflicted remuneration and commissions for advice on complex products like super, debt products and managed investment schemes • Remove the requirement for advisors to get biennial client agreement to pay ongoing fees (the “opt in” requirement) and limit the annual fee disclosure statement to new clients The disallowance of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014, on November 19, marks a welcome return to FoFA as implemented.
FoFA as originally legislated goes some way to addressing the problems that led to inappropriate and fraudulent distribution of MIS.

The Corporations Amendment (Streamlining Future of Financial Advice) Bill 2014 (the Streamlining Bill), however, remains before the Parliament.

As such, it is important to understand the impact that any relaxing of the FoFA laws could have on consumers.
Elements of the proposed amendments will result in the re-emergence of practices such as conflicted remuneration which were central to the mis-selling of forestry MIS such as Timbercorp.
In particular we wish to bring to the Committee’s attention the risk stemming from the use of using general advice to push complex products such as forestry MIS, conflicted remuneration on complex products and the availability of forestry MIS to retail investors in the absence of a robust best interests duty for financial advisers.
As noted by forestry consultant David Wettenhall to the Senate Committee in reference to the 2008 Great Southern PDS: “It is hard to understand why that type of loss-making enterprise was recommended to investors and indeed how it got a product ruling from the ATO.

I suspect that some of the advisers do not understand the available information.
There is a potential conflict of interest between the commissions and incentives paid to some of the advisers, and their consideration of the public disclosure statements has been somewhat superficial.9” These changes are at odds with the original objectives of the FoFA legislation to improve the professionalism, quality and level of consumer trust and confidence in advice.
1.4 Disclosure alone is ineffective Inadequate or unnecessarily complex disclosure documents have been a common theme in complaints regarding Forestry MIS.
The main concern among submitters to the Inquiry into Agribusiness Managed Investment Schemes with respect to disclosure was that ‘information on returns to investors is either inaccurate or insufficient10’ with suggestions that ‘some independent expert opinion forming the basis of scheme establishment and 9 Mr David Wettenhall, Committee Hansard, 15 July 2009, Canberra, p. 84 10 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, para 4.29 INQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES (MIS)| 15 December 2014 | www.industrysuperaustralia.com 3 Forestry managed investment schemesSubmission 136 performance is not in fact independent11’.
There is also concern that ASIC does not possess sufficient funding or powers to adequately assess that disclosure requirements are being met.

Despite this, evidence suggests that even where disclosure is of a high standard, disclosure alone is not an adequate tool to protect consumers.
The final report of the Financial System Inquiry notes that ‘Many cases of financial firm failure include situations where consumers have failed to understand the risk/return trade- off involved in a product, even if disclosure and advice were compliant12’.

1.5 Recommendations from the Financial System Inquiry The final report of the Financial System Inquiry was handed down on December 7 and contains recommendations of relevance to this Inquiry.
The Inquiry finds that there is a misalignment of interests in the financial advice industry which has resulted in poor standards of conduct and professionalism with insufficient consumer focus.

It is recommended that there should be a rise in the standard of conduct and professionalism in the financial advice industry via the introduction or enhancement of industry and individual firm codes of conduct.
The Inquiry also notes that the existing banning powers are insufficient to stop particularly unscrupulous practitioners and recommends that ASIC be provided a product intervention power and enhanced banning powers to remove certain individuals from the industry.

The Inquiry also recommends changes to the law to promote more engaging and effective communication with consumers and their understanding of products.
The following recommendations, if implemented correctly, have the potential to reduce consumer detriment in relation to forestry MIS and to ensure that consumers are adequately protected from poor product design and misleading advice.
Financial System Inquiry Recommendations Recommendation 21 Recommendation 22 Recommendation 23 Recommendation 25 Recommendation 29 Recommendation 42 To strengthen product issuer and distributor accountability through the introduction of a targeted and principles-based product design and distribution obligation To introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment To facilitate innovative disclosure to improve the way risk and fees are communicated to consumers To raise the competency of financial advice providers and introduce an enhanced register of advisers To strengthen ASIC’s funding and powers Support Government’s review of the Corporations and Markets Advisory Committee’s recommendations on managed investment schemes, giving priority to matters relating to: • Consumer detriment, including illiquid schemes and freezing of funds.
• Regulatory architecture impeding cross-border transactions and mutual recognition arrangements.
With regards to ensuring consumers receive adequate compensation following the collapse of forestry MIS, ISA believes that there is merit in considering recommendations arising from Richard St John’s 2012 report 11 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes: Final Report, September 2009, para 4.29 12 Final Report, Financial System Inquiry, December 2014, p 34 INQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES (MIS)| 15 December 2014 | www.industrysuperaustralia.com 4 Forestry managed investment schemesSubmission 136 Compensation Arrangements for Consumers of Financial Services13.
Key issues highlighted by the report include the inability of individual providers to cover claims, the limitations of professional indemnity insurance and the social impact of lack of compensation.
ISA would like to draw the inquiry’s attention to the following recommendations: Recommendations from Compensation Arrangements for Consumers of Financial Services Recommendation 2.1: Licensees to demonstrate adequacy of their insurance Require licensees to provide ASIC with additional assurance that their professional indemnity insurance cover is current and is adequate to their business needs.
Recommendation 2.2: Licensees to hold appropriate capital resources More attention should be given, on a risk targeted basis and in conjunction with the level of their insurance cover, to the adequacy of licensees’ financial resources to enable better management of risks and unexpected costs such as compensation liabilities Recommendation 2.3: A more pro-active stance by ASIC ASIC should take a more pro-active approach in monitoring licensee compliance with the requirement to hold adequate professional indemnity insurance cover and any new requirement in regard to financial resources, and in targeting licensees who are most at risk Recommendation 2.4: Policing the licensing system in regards to compensation To assist ASIC in playing a more pro-active role in administering the licensing regime with respect to compensation arrangements, consideration should be given to clearer powers to enforce standards and to sanction licensees who do not comply Recommendation 2.5.1: Compensation where licensees cease to trade In dealing with licensees who give up their licence or reduce the scope of their licensed activities, ASIC should seek where possible to secure ongoing protection for retail clients including by imposing appropriate conditions in relation to the termination of a licence or the amalgamation or takeover of a licensed business Recommendation 2.5.5: External Dispute Resolution scheme processes Given their key role in the regime for the protection of consumers of financial services, and marked increases in their jurisdiction, External Dispute Resolution schemes and ASIC should give more attention to the adequacy of the EDR scheme processes as those schemes grow beyond their origins as forums for small claims In addition to the above recommendations, the Government should abandon its changes to FoFA through the Corporations Amendment (Streamlining Future of Financial Advice) Bill 2014 and the law as commenced on 1 July 2013 should be given an opportunity to take proper effect.
In order to reduce the likelihood of future collapses such as Timbercorp and Great Southern, a ban on commissions and incentive payments, and a duty for financial advisers to act in the best interest of clients are essential features of the regulatory framework.
13 Compensation Arrangements for Consumers of Financial Services, Final Report, Richard St John, April 2012 , Final Report INQUIRY INTO FORESTRY MANAGED INVESTMENT SCHEMES (MIS)| 15 December 2014 | www.industrysuperaustralia.com 5 Forestry managed investment schemesSubmission 136