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Chapter 4
Investor protection issues
4.1
The other side of the committee's inquiry into agribusiness MIS is the
decision of investors to fund them. Specifically, in this chapter the committee
examines the following agribusiness MIS investor-related concerns:
-
the advice that leads people to invest in agribusiness MIS;
-
the accuracy of disclosure material provided to investors;
-
the appropriateness of limiting the availability of these
products to sophisticated investors; and
-
educating consumers.
Advice on agribusiness MIS
4.2
While concerns about the quality of financial advice available to
consumers is pertinent to a broad range of financial products and services, the
committee received evidence specific to agribusiness MIS. There was particular
concern about the narrow focus of some licensing arrangements under which these
products were distributed, as well as interest in the role accountants played
in promoting the schemes.
4.3
General concerns about advisers' remuneration and the standard of
financial advice they provide are also mentioned in the following section of
this report, though these issues are to be addressed more comprehensively in
the committee's concurrent inquiry into financial products and services. ASIC
told the committee that it would provide further guidance on potential
regulatory shortcomings in this area for that inquiry. However, during the
committee's public hearing ASIC did indicate that issues relating to financial
advisers' remuneration structures and the quality of their advice need to be
addressed.[1]
AFSL holders giving limited advice
4.4
A matter of serious concern was the distribution of agribusiness MIS
through dedicated sales networks operating under AFSL holders licensed to advise
only on agribusiness MIS. This raised a number of questions about the capacity
of licensees and their authorised representatives to ensure clients receive
appropriate advice.
4.5
ASIC informed the committee that, between 2006 and 2009, 38.5 per cent
of total Great Southern MIS sales and 23.6 per cent of Timbercorp sales
occurred under their own AFSL.[2]
ASIC's evidence does not describe whether any other licensees and their
representatives were recommending agribusiness MIS in circumstances where they
could only advise on that product.
4.6
As described earlier in Chapter 2 (paragraph 2.33), section 945A of the
Corporations Act requires there to be a reasonable basis for personal financial
advice, including ensuring the advice is appropriate to the individual client
receiving it. FPA noted: 'We must question the quality of advice when a
representative is limited to recommending only one product'.[3]
They added:
...it is effectively impossible to put your client first, to
listen to their goals, their needs, their objectives and their are aspirations,
to work out their assets and liabilities, their income and expenses, to go
through a process of discovery and then to deliver a solution when you have
only one solution in your kit bag.[4]
4.7
Their submission also claimed that neither the regulatory regime nor
consumers are able to distinguish between this model, where advisers have only
one product to promote, and that where advisers can direct clients to a range
of investment products. FPA said:
...there is little to differentiate a representative of a
licensee that has solely one product to promote. Prospective clients
considering such investments should be able to easily identify when they are
dealing with a professional financial planner as where a product is provided
directly from the provider. We suggest that consideration be given to the
defining the term ‘financial planner’ to enable such a differentiation to be
made.[5]
4.8
FPA argued that the required competency levels of authorised
representatives are 'way too low' and the meaning of 'financial adviser' or
'financial planner' too broad for consumers to understand the variance of
services provided under that banner.[6]
They recommended that a clear definition of a 'financial planner', accompanied
by higher competency requirements, be incorporated into the regulatory regime.[7]
4.9
The Institute of Chartered Accountants in Australia (the Institute) also
told the committee that the current licensing arrangements need to be
reconsidered:
We do not believe that, if you are providing investment
advice to consumers and investors, you could adequately understand the consumer
and give them all the options if you are limited to one or two products. We do
not believe that that is appropriate.[8]
4.10
CPA Australia concurred:
...we query whether financial planning advice given by a
providing entity licensed to provide financial planning advice and/or deal in
only one or a limited number of financial products, is appropriate.[9]
4.11
Mr David Wettenhall provided an alternative view, suggesting that the
single product structure provided greater transparency:
I would not have thought that that were less of a problem
where that is their only product. At least it would be fairly clear that they
were, in effect, a salesperson for that product. It would be more dangerous
where there is an apparently independent financial adviser who is receiving a
commission, which may be a very generous commission relative to other
investment products. That apparently independent financial adviser is in a much
more hazardous position to ensure that he is acting in his client’s best
interest.[10]
4.12
ASIC told the committee that although it is technically possible to give
proper, compliant advice when authorised to advise on a single product, they
shared the concerns referred to above. ASIC stated that they were investigating
relevant instances as part of their investigations into the collapses.[11]
The role of accountants and
planners
4.13
Agribusiness MIS have been distributed through the following channels,
all operating under an AFS licence, either as licensees or authorised
representatives of a licence holder:
4.14
ASIC informed the committee that from 2006-2009 approximately 21 per
cent of Great Southern products were sold by accountants as authorised
representatives of Great Southern. Financial planners operating under external
licensees constituted 68 per cent, with the remainder from Great Southern
employees on referral. The pattern is different for Timbercorp, with accountants
predominantly from small to medium accounting firms selling 18 per cent and
Timbercorp advisers (also accountants) selling six per cent. The vast majority
of sales (76 per cent) were from financial planners.[12]
4.15
The role of accountants was of particular interest during the inquiry. Because
of the tax implications of agribusiness MIS, accountants were notable when
compared with other financial product advice. FPA noted:
...it is no coincidence that the tax deduction part or
feature of some of these arrangements was potentially attractive to the
accounting profession, who—and I do not mean any disrespect, by any
measure—would necessarily see that as an opportunity to improve their client’s
taxation circumstances.[13]
4.16
The Institute commented that the same provision of financial advice can
be provided by professionals using different titles:
I think one of the challenges is that you have accountants
who are authorised representatives who then also operate as financial planners.
... I think that is one of the challenges you have: should they be either an
accountant or a financial planner? The reality is that the provision of
financial advice and being a financial planner is very heavily involved with
tax issues and that is why more and more accountants are becoming involved with
financial planning.[14]
4.17
This comment reflects a broader debate about the carve-out of
responsibilities between AFSL holders and accountants, and whether these are
practicable in real world situations. This issue will be examined further
during the committee's inquiry into financial products and services.
4.18
The Institute told the committee a very small proportion of the industry
were recommending Great Southern:
...obviously there have been accountants who have advised on
it, but it was probably a small proportion when you consider that at the
institute we have 16,000 members who are in public practice in some shape or
form and we may actually have, as far as we are aware, only 80 who are
authorised at Great Southern. As a profession, a lot of responsibility is being
taken by a lot of accountants and only a minority have already been advising on
it.[15]
4.19
FPA informed the committee that it had undertaken a survey of its (financial
planner) members on agribusiness MIS. Just over a third of members responded to
the survey and of these, 44 per cent had recommended agribusiness MIS as a
small part of a diversified investment portfolio. According to FPA surveys most
advisers set a limit of no more than ten per cent of the portfolio to be
invested in agribusiness MIS.[16]
Remuneration models
4.20
There have been enduring concerns that commission-based remunerative
models for financial planners undermine the quality of advice they provide
their clients. The issue has been the subject of considerable debate well
beyond the matter of advice given to clients to invest in agribusiness MIS. At
the centre of this broader debate about financial advice has been the tension
between commission-based remuneration making access to financial advice more
'affordable', against the possibility that financial product recommendations are
motivated by the commissions they attract rather than their suitability for the
client.
4.21
The industry representative group Financial Planning Australia (FPA),
many of whose representatives are remunerated by selling products on
commission, have realised the capacity for perceptions created by this
remuneration model to damage the reputation of the industry as a whole. FPA
have indicated that they would like to see commission-based remuneration phased
out by July 2012, in favour of a 'client-driven remuneration model'.[17]
Their position recognises that if the public perceives that financial planners
are salespeople rather than professionals giving expert advice, their members
who provide quality, impartial financial advice will be disadvantaged. CPA
Australia supported this industry-driven shift towards more transparent
fee-for-service remuneration.[18]
4.22
The committee will examine the effect remuneration models have on the
quality of advice given to financial planning clients in its inquiry into
financial products and services.
4.23
Agribusiness MIS typically paid advisers upfront commissions averaging ten
per cent of the amount invested.[19]
Financial Planning Association (FPA) told the committee that commissions to
Great Southern were five to ten per cent, with commission rebates to clients
being rare.[20]
Gunns Plantations Ltd told the committee that its standard commission rate is 8
per cent, which may sometimes increase to 10 per cent with trailing
commissions.[21]
ASIC also outlined additional remunerative possibilities including bonuses for
sales volume, marketing allowances, and other fringe benefits such as golf
days, often called 'soft dollar' incentives.[22]
4.24
Looking to future arrangements, the committee heard that that
introduction of the 70 per cent direct forestry investment test for forestry
MIS would limit the amount of commission that could be paid.[23]
4.25
The Australian Agribusiness Group (AAG) suggested that there is scope
for up-front commissions to be reduced to a range of four to eight per cent.[24]
4.26
Forestry consultant Mr David Wettenhall queried the motivation behind
recommendations to invest in a loss-making scheme. Citing the 2008 Great Southern
PDS, he noted:
A fairly brief analysis shows that it was proposed that
investors invest $11,400 per hectare and should expect a return of at least
$9,079 per hectare— that is, a loss of over $2,000 per hectare. 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.[25]
4.27
Other submitters noted that commissions paid by agribusiness MIS are
consistent with other financial products. Rewards Group Ltd argued that
up-front remuneration of six to ten per cent over the term of a long
agribusiness MIS is not unreasonable.[26]
Gunns Plantations Ltd also defended commission levels:
Critics of MIS have argued that the commissions are excessive
but due to the long term nature of such investments it is believed that this
rate is in line with the level of advice required. This is particularly evident
when you compare the MIS commission rates to that of alternative financial
products, such as managed funds/ superannuation, which offer both upfront and
trailing commissions over the life of the investment.[27]
Disclosure
4.28
Disclosure is a critical aspect of investor protection in the financial
products area. The regulatory regime has been established on the basis that
investment product providers have the discretion to determine the types of
products they offer to consumers. This reflects a minimalist approach to
regulation that promotes efficiency, flexibility and innovation in financial
markets and reduces the cost of capital for business.[28]
Investors are in theory protected by the regulator monitoring conduct and
disclosure to ensure the following:
-
Investment product providers conduct themselves with fairness,
honesty and competence; and
-
Investors are provided with full and accurate disclosure material
enabling them to make fully informed decisions.[29]
4.29
The inquiry generated some misgivings about the manner in which
agribusiness MIS were promoted to investors in disclosure material. The main
concern among submitters was that information on returns to investors is either
inaccurate or insufficient, including suggestions that some independent expert
opinion forming the basis of scheme establishment and performance is not in
fact independent. The committee also considered ASIC's role in monitoring
agribusiness MIS disclosure material.
Projected returns
4.30
Returns from agribusiness MIS are determined by a combination of yield,
price and the cost of the scheme's establishment, maintenance, harvest and
processing. Predicting a return for investors is difficult given the variables
involved, particularly the unknown effect of weather and untested sites on
yields, as well as commodity price fluctuations. The performance of MIS schemes
was examined in Chapter 3 at paragraphs 3.33 – 3.59, in the context of the MIS
business model. Here, the committee's focus is on the availability and accuracy
of information on prospective performance, conveyed to prospective investors in
disclosure material.
4.31
As outlined in Chapter 2 at paragraphs 2.27 – 2.30, projections
contained in an MIS product disclosure statement (PDS) are taken to be
misleading if they are not based on reasonable grounds. A3P and NAFI informed
the committee that forestry MIS' had been discouraged by ASIC from promoting
their own anticipated outcomes, instead relying on independent research houses.[30]
They stated:
Taken literally, RG170 does not prevent the use of long-range
forecasts in offer documents. However, the plantation investment companies were
left with a very real fear that ASIC would issue commercially disastrous
Interim Stop Orders (ISOs) on any PDSs that contained long-range forecast
returns expected from their plantation projects, with the consequence that
retail forestry PDSs no longer contain prospective returns.
The information presented tends to be limited to historical
trends and values, assumptions on which future returns might be based, and
possible scenarios. Companies rely on the independent research houses to
conduct their own analysis and derive indicative forecasts of yields and
returns to include their ratings reports.[31]
4.32
AAG told the committee that while ASIC's guidance on projected returns
was well-intentioned, it had left investors in a position where they are unable
to compare annual returns with forecasts:
Today, the vast majority of MIS managers outline likely yield
and price scenarios for their investments in the PDS. Yield and price
information is usually provided by both the project manager and an independent
expert (the latter in a separate report included in the PDS).
We believe that there should be an adjustment to ASIC’s view
of what ‘reasonable grounds’ is such that project managers should be required
to include returns forecasts in PDSs. In this way it will be easy for investors
to determine if annual returns are being achieved in line with forecasts. This
would have to be done carefully so that a repeat of the misleading figures from
the past does not occur.[32]
4.33
CPA Australia told the committee that there is insufficient publicly
available data on the past performance of agribusiness MIS to inform investors.
They recommended that ASIC or another government body research and publish this
information.[33]
AAG recommended mandating disclosure about the past performance of previous
schemes, subject to 'prevailing economic realities' (current prices).[34]
4.34
The Institute of Foresters of Australia (IFA) acknowledged that:
...independent information about growth and yield of MIS
plantations (and for some other plantations) is not as readily available as
should be expected of such an important industry sector.[35]
4.35
IFA noted that the establishment of the majority of MIS on cleared
agricultural land made accurate predictions about productivity difficult, and
more research in this area is warranted. They suggested that predictions would
become more reliable as the industry matures.[36]
4.36
One issue of concern for IFA was the speculative nature of hardwood
plantation schemes:
Eucalypt plantations are a relatively recent phenomenon.
Rapid expansion into new areas, not previously tested for plantation growth has
led to a degree of speculation on the part of plantation developers. IFA is
concerned that some schemes are thus using investor funds to conduct broad
scale experiments for plantation suitability. Examples include areas in the
Wimmera region of Victoria, Esperance region of WA far north east of Tasmania
and some parts of northern NSW. In addition, tropical forestry schemes such as
for African mahogany and teak plantations may demonstrate high growth, but
markets are uncertain compared to established markets for blue gum woodchips or
pine sawlogs.
In regard to the above issues, the IFA is aware that there
have been some instances where growth rates forecast and then verified by
Independent Foresters for MIS plantations have not been based on sound
empirical data but have relied on a degree of personal judgment. IFA supports a
more rigorous approach to justification of plantation projects in new
development areas.[37]
4.37
Macquarie Agricultural Funds Management stressed the importance of
providing realistic expectations in disclosure material and told the committee
that they disclosed growth rates of their forestry schemes every two years.[38]
However, A3P and NAFI indicated that it was difficult to test the validity of
forestry MIS projections as many of the schemes had not yet been harvested.[39]
4.38
The committee previously discussed the high cost nature of the
agribusiness MIS model at paragraphs 3.40 – 3.48. WGGA recommended that
(vineyard MIS) prospectuses be required to include disclosure of the
comparative commercial cost of per hectare development and pricing assumptions.[40]
4.39
More broadly, A3P and NAFI stated (sub exec summary, p. ii) that
disclosure to investors in forestry MIS could be improved by:
-
disclosing how investor funds are paid to contractors for
plantation services;
-
disclosing the financial capacity of the RE to deal with
fluctuations in MIS sales; and
-
disclosing more prominently the inherent risks associated with
investing in agricultural enterprises.[41]
'Opinion for hire'
4.40
Independent experts are a critical element of an RE's decision to
establish a project and the subsequent claims they make in disclosure material to
potential investors. There were, however, questions raised with the committee
about the independence of the advice provided by these experts. Although the
committee is focusing on disclosure to investors here, the following is closely
linked with the examination of scheme performance and the revenue assumptions
underpinning agribusiness MIS contained in the previous chapter.
4.41
From a yield perspective, Mr Rod Davies told the committee that
competitive pressures may influence soil assessments conducted prior to the
establishment these schemes:
There is an amount of competition amongst these surveyors in
Australia and if a surveyor turns up to a property and does not give the
answers that is expected it can perhaps be made quite plain that there will not
be any more work forthcoming for that surveyor.[42]
4.42
Mr Davies indicated that investors are given insufficient information on
the process underpinning expectations of the scheme's success:
In a mining prospectus you are made very aware of the
background, the qualifications and the relevant experience of the experts. In
Timbercorp statements none of this detail is made available.[43]
4.43
In relation to a horticulture project's PDS, he noted:
The PDS that I have read contains an independent
horticulturalist’s report. That report references soil information and then
makes a note of which company might have collected that soil information.
Without the individual surveyors being identified and the amount of experience
they have, their technical background, being provided to a reviewer, they have
no way of knowing [the experience and knowledge of the surveyor]. Similarly,
the orchard expert needs to be identified, and their experience.[44]
4.44
Dr David McKenzie suggested that it would be beneficial for ASIC to
utilise a soil scientist to assess whether claims in agribusiness PDS' are
misleading.[45]
4.45
A3P and NAFI noted that agricultural risk is always present when
predicting forestry yield:
...even if you have the best advice in the world there is
still an agricultural risk that you are entering into. If there is not—if this
was some guaranteed return—then you would not be entitled to your tax deduction.
Even the best forester may get it wrong, or rainfall may be lower than
expected.[46]
4.46
IFA said that claims in PDSs should be subject to appraisal from a
certified forester before their release, in addition to scheme performance
through the growing cycle and at completion.[47]
ASIC monitoring
4.47
ASIC informed the committee that it had conducted 67 'surveillances'
into agribusiness MIS over the previous three years. The measures ASIC took
included requiring defective (often misleading) PDS' to be rectified with
supplementary material, issuing stop orders on misleading PDS', communicating
their concerns to the RE and in one instance having the PDS removed from being
offered to investors.[48]
4.48
The committee was also given information about ASIC's disclosure campaign
following the collapse of Timbercorp and Great Southern, which assessed all 20
agribusiness MISs being marketed preceding 30 June 2009. The campaign focussed
on disclosure of RE viability, including the consequences of RE collapse and RE
capitalisation to meet future obligations; whether the RE is relying on future
MIS sales to meet future financial obligations; and information about project
yields.
4.49
According to ASIC, the outcome of this campaign was as follows (sub p.
34):
ASIC requested improved disclosure for 12 MISs operated by
the seven largest participants in the sector. Each operator was required to
provide better disclosure to address some or all of the issues [outlined
above]. In agreeing to provide updated disclosure, 7 MIS operators were all required
to give previous applicants to the projects the opportunity to withdraw their
applications.[49]
4.50
In evidence ASIC told the committee that this work was conducted in
accordance with their powers under the Corporations Act (see Chapter 2).
However:
...it does not extend as far as looking at the underlying
business model and whether commercially it may or may not work; in other words,
whether there are commercial risks inherent in it so that the model may not
work. That is really underpinned by the legislation. It does not extend as far
as ASIC regulating business models themselves.[50]
4.51
The committee received evidence claiming that ASIC had not appropriately
dealt with disclosure material that failed to inform potential investors about
the real commercial cost of the activity for which they were being charged.
4.52
Section 1013E of the Corporations Act stipulates that a PDS contains
information that could reasonably be expected to have a material influence on a
decision to invest. Mr Kerin Smart stated that ASIC had not enforced this
provision.[51]
Delegate Station Pastoral Company said that ASIC (and the ATO) needed to
'review their lack of action and accountability as to the integrity of
information provided to investors by promoters'.[52]
4.53
Mr David Cornish was critical of ASIC for not acting on concerns about
'the unusual business practices' of Great Southern when it purchased wood
internally 'at inflated prices' in 2005, supposedly to shelter MIS sales from
investor scrutiny. Mr Cornish stated:
Given this was public knowledge at the time the question must
be asked why did ASIC turn a blind eye to these facts when it was first raised.
It is concerning that ASIC waited until the company had fallen over and
shareholder and investor had lost substantial amounts of money before
investigating these issues.[53]
Other investor protection
4.54
Protecting investors by preventing RE collapse via close prudential
regulation and protecting their interests after a collapse were discussed in
the previous chapter. Other alternatives include limiting the availability of
agribusiness MIS for unsophisticated investors and helping investors to be
better informed when making decisions. The committee addresses these issues
briefly here, particularly as they relate to agribusiness MIS; however, they
are not limited to this investment category. The challenge of protecting
investors from making poor investment decisions generally will also be the
subject of closer examination as part of the committee's inquiry into financial
products and services.
Limiting product availability
4.55
A potential problem with the disclosure-based regulatory approach occurs
when the products being marketed are too complex for unsophisticated investors
to be in a position to make an informed decision about them, even where the
relevant disclosure requirements are met. This raises the question of whether
some products should be limited to institutional or sophisticated retail
investors, with the consequential effect of reducing the efficiency of the
market and potentially raising the cost of capital.[54]
4.56
This issue of unsophisticated investors being permitted to invest in
complex or risky financial products will be examined in greater detail in the
committee's inquiry into financial products and services. ASIC suggested that
this is a reasonable question for the committee to be investigating:
It is about whether there needs to be greater thought about
whether some of these products are not suitable for investors and whether
greater protection for retail investors might be needed in the future.[55]
4.57
In the context of agribusiness MIS, evidence suggests that investor
losses through these investments have not been as catastrophic to the
individuals affected as they have been in unlisted, unrated debenture products
or margin loan products. ASIC noted in evidence:
We should not assume that we are talking about mum and dad
investors here as we are in Storm and some of the other things that ASIC and
this committee has talked about.[56]
4.58
ASIC informed the committee that 89 per cent of Great Southern investors
and 80 per cent of Timbercorp investors (between 2006 and 2009) had less than $100,000
invested in the schemes. In Great Southern schemes the median investment is
$24,000 and the mean investment $50,000, and for Timbercorp this was $37,500
and $71,318 respectively.[57]
4.59
They suggested that a lot of investors in Timbercorp and Great Southern
would have known about the speculative nature of the investment but were
prepared to 'punt the risks' to obtain a tax benefit.[58]
In other words, investors have not lost the same proportion of their life
savings in agribusiness MIS as other types of investment products, which would
negate any argument for limiting its availability to retail investors.
Education
4.60
When investors suffer losses as a consequence of corporate collapse,
attention invariably turns to whether people need to be better educated about
avoiding financial products that are unsuitable for their needs. In evidence to
the committee, ASIC provided the now customary warnings that investors should
understand the investment risk of any given product and the pricing of this
risk, as well as the importance of spreading their investment risk across
diversified asset classes.[59]
The extent to which these basic principles of investment are being received,
understood or heeded by retail investors continues to be a matter of concern
for the committee.
4.61
Again, these issues will be examined further as part of the committee's
broader inquiry into financial products and services. For this inquiry, issues
of particular concern have been the level of understanding about the intent of
ATO product rulings and how tax deferral mechanisms work generally.
4.62
As mentioned previously in Chapter 2, the ATO stressed that the product
rulings ATO makes on agribusiness MIS include the disclaimer that the ruling
does not represent a product endorsement or a guarantee of commercial viability.[60]
ASIC commented that investors may not fully understand the tax implications of
these investments: 'These schemes are not usually tax saved, just tax
postponed'.[61]
4.63
CPA Australia told the committee that it had been warning about these
products for some time:
...for over the last decade, we have been informing our
members and the public that making an investment based on the tax deductibility
features is not a very good way to make money. In fact, we have a guidance note
for our public practitioner members, which we issued some years ago, on
advising on agricultural managed investment schemes, to ensure that members
were informed and were providing the right type of advice and looking at
profitability, looking at expected chances of success and looking far beyond
just that year-end tax deduction.[62]
4.64
Unfortunately, there is little that can be done via additional
disclosure material to better educate investors. Gunns Plantations Ltd
highlighted the plethora of documentary information already available to
potential investors. They include:
-
product disclosure statements from the product issuer,
-
statements of advice from financial advisers;
-
ATO product rulings;
-
independent expert reports; and
-
reports from independent research houses.[63]
4.65
A3P and NAFI also warned that providing consumers with more information
may not be effective:
The level of information available to both the prospective as
well as the current investor is extensive. However, regardless of how much
information is available, there is no guarantee that it will be consumed,
understood and acted upon. Merely providing more information will not
necessarily address this limitation.[64]
4.66
AAG suggested that investors may not comprehend the nature of
agricultural risks:
Agribusiness MIS are inherently risky and have a suite of
risks involved that are not seen in more common asset classes (e.g.
agricultural risks). We sometimes question whether some investors fully
understand the structure of what they have invested in and the nature of the
associated risks involved. The fact that the Promoter is engaged by the
investor to do almost all of the actual farm work, distances the investor from
these agricultural realities.[65]
4.67
However, they indicated that 'there is really no excuse' for investors
and advisers to have not performed adequate due diligence on the investment.[66]
4.68
Willmot Forests Ltd suggested that the disclosure of agribusiness MIS investment
risk could be 'elevated':
...the special risks associated with agricultural enterprises
and investments should receive greater prominence in required documentation and
reports.[67]
4.69
CPA Australia told the committee that more needed to be done to ensure
that investors understood risk, along with the fact that disclosure material
approved by ASIC or a product ruling from the ATO does not guarantee success. They
recommended that ASIC:
Committee view
Advice
4.70
The committee's principal concern stemming from this inquiry is the
incidence of narrow sales recommendations, limited to agribusiness MIS under some
financial services licensing arrangements, being portrayed as financial advice.
There must be significant doubt as to whether such advice is appropriate to the
client's needs, as required by the Corporations Act, when the person offering
that advice has only one type of investment product to recommend. ASIC's investigations
into the way in which licensed advisers channelled clients into Timbercorp and
Great Southern should provide greater clarity on this issue. More generally,
ASIC's enforcement and auditing of standards of advice are matters that will be
further discussed in the committee's imminent report on financial products and
services.
Licensing and remuneration
4.71
The committee is also concerned that many consumers are not able to
readily distinguish between this type of narrow licensing arrangement and one
where financial advisers are licensed to recommend a much broader range of
products. One size fits all licensing is part of the broader problem of a lack
of clarity between product sales and tailored financial advice, compounded by
commission-based remuneration models. The committee recognises that disquiet
over remuneration for recommending agribusiness MIS mirrors wider concern that conflicted
advice is being given about a range of financial products that pay commissions
to advisers. There do not seem to have been any issues in this regard that are
unique to the advice that was given about agribusiness MIS. Indeed, the tax
considerations inherent in recommending agribusiness MIS probably diminish the
effects of the remuneration models they use. The committee will examine licensing
and remuneration matters in greater detail as part of its inquiry into
financial products and services.
Disclosure
4.72
A concern specific to agribusiness MIS was the accuracy of disclosure
material available to investors, especially in relation to predicted scheme
performance. Given the lack of historical data relevant to many of these
enterprises and the variability of agriculture generally, the committee
recognises that achieving a balance between providing useful information and
limiting the potential to mislead investors is a difficult one. It is therefore
reluctant to make prescriptive recommendations on disclosure for agribusiness
MIS. However, the committee is of the firm view that the unique nature of
agribusiness MIS necessitates that ASIC closely monitors relevant disclosure
material for misleading content, without being prompted by complaint or
investor loss. A more rigorous approach would include ensuring that historical
data is presented in the context of variable prices and climatic conditions;
the commercial cost of the activity is disclosed against the MIS cost and
relevant third party contracting arrangements; and the qualifications of
independent third parties used to justify claims about scheme performance are
disclosed.
4.73
The committee was especially concerned about the potential for less
qualified opinion about scheme performance, particularly relating to yield, to
be favoured over those more qualified, because they are able to be persuaded to
provide a generous assessment that will provide greater appeal to investors.
Investors sensibly place more weight in the opinion of those most qualified to
provide it, not only because it comes from knowledge and experience, but there
exists more of an incentive to meet peer expectations of rigour and
independence. The committee therefore recommends that ASIC require agribusiness
MIS to disclose the qualifications and accreditation of third parties that
provide expert opinion on likely scheme performance.
Recommendation 3
4.74
That ASIC require agribusiness MIS to disclose the qualifications and
accreditation of third parties that provide expert opinion on likely scheme performance.
Limiting products and educating
consumers
4.75
Finally, the committee notes that the inquiry elicited comment on
limiting investment products and better educating consumers about making
sensible investment choices. The committee agrees that certain investment
products may not be suitable for unsophisticated investors and will examine
their regulation in the financial products and services inquiry, though it is
not of the view that agribusiness MIS falls into this category. The critical
element of protecting investors purchasing agribusiness MIS is educating them
to ensure that they invest as part of a diversified asset portfolio with a
level of financial risk appropriate to their circumstances. These basic
principles will not prevent investor losses from business failure but can greatly
mitigate their effect. Again, the committee recognises that this is an issue
not limited to decisions about agribusiness MIS, and will therefore investigate
it more closely as part of its financial products and services inquiry.
Mr Bernie Ripoll MP
Chairman
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