Protesters outside the 2014 Senate inquiry into the collapse of Timbercorp.
The banking royal commission isn’t the right forum to resolve the gripes of failed managed investment schemes investors because it won’t deliver redress for individual cases and may damage banks’ appetite for agricultural lending, rural investment experts said.
As investors in failed managed investment schemes (MIS) like Timbercorp petition the royal commission to take on their cases, fund managers say banks would have been criticised by politicians and the public if they were not providing capital to support rural development ahead of the GFC.
“If the banks didn’t lend into the MIS sector, it unquestionably wouldn’t have gotten as large as it did. But if they didn’t lend at the time, when the sector didn’t have many critics, they would have been criticised harshly for preventing economic growth,” said David Bryant, the managing director of Rural Funds Management, which manages $ 640 million of rural assets in NSW, Queensland, South Australia and Victoria.
“This was effectively unsecured lending, and investors were borrowing for the purposes of carrying on a business, which was growing the trees or the almonds. These were unsecured business loans. If you are going to inquire into the provision of unsecured credit, you need to think about what the knock-on effects will be, as this could effect the big picture appetite to support business.”
The reasons for the MIS failures during the financial crisis “were many and varied and all participants in the industry must bear some responsibility for it”, said a report published in March last year by the Senate’s standing committee on economics.
It fingered manufacturers, promoters, experts who rated the schemes, financial advisers, finance companies, lenders, regulators, governments, and “retail investors enticed to enter into highly speculative ventures on borrowed money”.
Professor Pamela Hanrahan, from the UNSW Business School, said Timbercorp victims may want the Hayne commission to hear their stories but this will not result in banks being ordered to restore their losses.
“There are two ways the royal commission could unfold,” she said.
“It could be like a truth and reconciliation commission, focused on individual customer experiences, where investors who made choices in the lead up to ’07 to gear their investments and suffered bad outcomes have an opportunity to be heard.
“But just telling their stories isn’t helping them – they want someone to do something to change their individual circumstances. That’s unlikely to happen – the royal commission will not be handing out instructions to banks to change outcomes.
“The other alternative is for the commission to look at a sample of particular interactions between consumers or small businesses and their financial institutions, including involving lending money on complex investment schemes that customers do not understand,” Professor Hanrahan said.
“It could look at the ways they are marketed and regulated, the role of ASIC, and whether there should be a new approach to those interactions.”
“That is more likely to produce real and durable change. But the difficulty is the banks don’t necessarily want to change, and nor does the government because a fundamental rethink of the policy settings is really challenging. The MIS failures had a terrible impact on people who were heavily geared into those complex products. But it is not clear that the community wants access to this type of credit rationed.”
Bob Seidler, who led a subcommittee of the Corporations and Markets Advisory Committee (CAMAC) that investigated managed investment schemes, said a royal commission may not be able to get to the bottom of the more fundamental issue of deficiencies in the MIS legislation.
“You could say Timbercorp investors should be compensated as a moral view. But the difficulty is, from a legal perspective, is that possible?” he said.
“MISs, at the time, were operating under a different legal regime which has been improved. But even today it is different to that which would occur if one invested in a corporation. A better solution would be to harmonise the regimes for MISs and corporations and address issues in investor protections.”
CAMAC proposed in its 2012 report the MIS and corporations regimes be unified to assist retail investors. But former Prime Minster Tony Abbott shut down CAMAC in 2012 and the government has not acted on the recommendations.