Executive Summary
Investment in property is a long established and accepted
strategy for Australians to build wealth. Heralded as a smart way to increase
wealth, 'land banking' is a particular form of investment whereby an investor
or company purchases a block of undeveloped land in the expectation of selling
it in the future when its value has increased significantly. Investors with
reputable property development companies generally purchase an off-the-plan
development—a house and land package, or an apartment. Such companies may hold
land until it increases in value before proceeding to the development stage.
Not all schemes, however, are reputable.
In the context of this inquiry, concerns were raised about
the number of Australians who have lost their investments at the hands of unscrupulous
companies securing funds for highly speculative land banking schemes.
While some Australians were aware that they may have already
lost their life savings, the committee is concerned that an unknown number of
Australians are currently holding similar investments without realising that
they may be worthless.
The committee found that inexperienced investors were
persuaded to invest in risky property investments at great personal cost. In the
specific cases examined during this inquiry, the areas chosen for land banking were
often located on the outskirts of cities in anticipation of future urban
development and rapid increases in land values. Investors were given the
impression that the investment would be realisable over the short to medium
term, when in fact there was little likelihood that the land would be rezoned
or developed for several decades. As a result, investors were left with a share
of land with little prospect of being developed and hence, unlikely to increase
in value.
Although investors may still hold some limited value in
property, there were land banking schemes of even greater concern involving the
offer of 'options'. In this regard, the evidence shows clearly that some
investors were unaware that they were purchasing an option to exercise a future
purchase and had no claim on any physical asset. The committee found that they
did not understand the difference between an option and a land purchase and in
some cases did not have sufficient funds to exercise their option in the
future. Worryingly, these types of schemes were targeted at inexperienced
investors who did not have sufficient funds to purchase a property themselves
and generally were not financially literate. In other words, the promoters were
selling high risk investments to people who had very limited funds and little
understanding of the financial arrangements into which they were entering.
It became evident to the committee that the spruikers of
such schemes were able to entice vulnerable retail investors to sign up to
deals without alerting them to the inherent risks of land banking in general or
their particular land banking scheme.
During this inquiry, the committee became increasingly concerned
about the promotion and marketing of land banking schemes associated with two
companies in particular—21st Century Group and Market First. Both
companies engaged in practices prejudicial to investors' interests. The
committee was particularly troubled by the spruikers of such schemes, who:
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received high commissions, with the inducement to sell the
product irrespective of the investor's interests;
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took advantage of retail investors with poor levels of financial
literacy and often limited funds by persuading them to invest in high risk
inappropriate schemes, especially during 'wealth education' seminars—they did
so by:
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making investors feel special—offering so-called exclusive deals
and privileged access to opportunities 'too good to be missed';
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providing promotional material that wilfully underplayed risk and
deceptively overstated the anticipated benefits and commercial robustness of
the scheme they were promoting;
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using endorsements from celebrities and testimonials from self-made
millionaires who purportedly became wealthy using the tips and tricks taught at
seminars;
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associating their development with reputable companies,
regardless of how tenuous that connection may be; and
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employing high pressure marketing techniques at investment
seminars intended to rush investors into a decision without first seeking
independent advice;
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provided poor advice that runs contrary to the fundamentals of
sound investment, for example advising an investor to place the majority of
their funds in the one, often overvalued, asset;
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ignored the risk profile of clients and advised them to invest in
risky products unlikely to deliver the promised returns;
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failed to provide investors with an accessible avenue to obtain
redress (dispute resolution mechanisms) should things 'go wrong'; and
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re-surfaced in the industry under another guise, even after being
exposed for unscrupulous conduct.
The committee also found that investments made in the form
of 'options' are not required to be held in trust in the same way that land
sales are. In such cases, the company selling the option was at liberty to
spend the money raised without any regard to the interests of the investors who
had provided it.
This inquiry into land banking also drew attention to the
practice of investors with limited funds in superannuation using most of these
funds to invest in land banking schemes through a self-managed superannuation
fund (SMSF).
The problems associated with the marketing of property
investment, evident in recent land banking schemes, have plagued the industry
for decades. These schemes have highlighted the urgent need for reform and a
much improved regulatory regime for the provision of advice on property
investment. The committee identified two ways to implement this regime:
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the Commonwealth assuming responsibility for property investment
advisers; or
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strengthening provisions in the Australian Consumer law that
would see the introduction of protections for retail investors mirror those for
retail investors in financial products.
The committee prefers the first option. It endorses the
principle that if two investment products are functionally similar, they should
be regulated in the same way. In this regard, the committee considers that the
functionally similar nature of advice about property and other investment
types, as well as the effect of the regulatory framework for financial services
on the property spruiking sector, more than justifies the extension of the
Corporations Act to advice on investment property.
The extension of the Corporations Act to advice on property
investment would provide the licensing, disclosure and conduct obligations the
committee considers is required, and eliminate the regulatory gap between
property investment advice and financial product advice. The committee
recognises that there may need to be appropriate exemptions for particular
services associated with property investment and adjustments to the educational
and training requirements to make them more appropriate for people providing
property investment.
The committee made the following recommendations. They are
listed in order of priority with the most important recommendation first.
Recommendation 1 paragraph
8.56-8.57
The committee recommends that the government, in consultation
with the states and territories, should strengthen the regulatory framework of
the property investment industry to bring it into line with regulations
applicable to the financial investment industry. Specific areas include:
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making the regulation of property investment advice a
Commonwealth responsibility (recognising that services provided by licensed
real estate agents would remain under state and territory regulation);
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inserting a definition of property investment advice into the
Corporations Act and the Australian Securities and Investments Commission Act;
and
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requiring that anyone providing property investment advice should
hold an Australian Financial Services Licence (with appropriate exceptions).
In respect of the last recommendation, the committee
suggests that the independent industry-established standards setting body for
financial advisers could set the educational and training requirements for
property investment advisers and the code of ethics to which they would
subscribe.
Recommendation 2 paragraph
8.77
Having regard to recommendation one, the committee recommends
that Consumer Affairs Australia and New Zealand, in its review of the
Australian Consumer Law, give serious consideration to:
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the options for reform proposed
by the national review project into property spruikers;
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whether investment property
advice rightly belongs under the same regime as financial products and
financial advice and, if not, how consumer safeguards available to investors in
financial products can be replicated for investors in property;
-
measures needed to prevent
property investment spruikers with demonstrably compromised integrity from
continuing to operate in the business;
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introducing a licensing regime
for those providing advice on property investment which would include minimum
qualifications and a code of conduct to which they would subscribe; and
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increasing the penalties for
misleading and deceptive conduct, including the introduction of civil penalties
and criminal sanctions.
Recommendation 3 paragraph
8.63
The committee recommends that Consumer Affairs Ministers
consider the terms of the reference for the review of the Australian Consumer
Law with a view to inserting a specific reference to advice on property
investment in term of reference no. 1.
Recommendation 4 paragraph
6.26
The committee recommends
that state and territory governments consider requiring that moneys paid to
purchase an option in a land banking scheme be held in trust consistent with
the requirements for off-the-plan agreements.
Recommendation 5
paragraph 8.104
The committee recommends that ASIC, the ACCC
and state and territory regulators have a stronger focus on providing
up-to-date and accessible information alerting consumers to risks arising from
the activities of spruikers as part of their efforts to improve the financial
literacy of Australians and to encourage the early reporting of concerns about
property investment seminars and schemes.
Recommendation 6 paragraph
8.90
The committee recommends that the Australian Government give
due consideration to:
-
the characteristics of
investment seminars, wealth education programs and similar product sales
environments when consulting with stakeholders and conducting consumer testing
to rename general advice;
-
whether the general advice
warning needs to be strengthened to ensure consumers are aware that general
advice is not required to meet the higher regulatory obligations applying to
personal advice; and
-
whether the obligations on those
providing general advice should be strengthened in regard to misleading information.
Recommendation 7
paragraph 5.22
The committee recommends that the Victorian Legal Services
Commissioner and Legal Services Board (and, where appropriate, other state and
territory legal professional bodies) investigate thoroughly the conduct of
lawyers involved in providing advice to investors in the land banking schemes
considered in this report, as well as those lawyers who provided advice, and
controlled trust accounts, for the operators of the schemes.
Recommendation 8
paragraph 5.23
The committee recommends that Consumer Affairs Victoria
investigate whether Market First and/or other parties, including lawyers,
breached the requirements in the Sale of Land Act 1962 (Vic) in regards
to off-the-plan contracts of sale for the Foscari and Veneziane developments.
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