Thursday, 5 March 2020
Banking Amendment (Rural Finance Reform) Bill 2019; Report from Committee
On behalf of the Standing Committee on Economics, I present the committee's Advisory report on the Banking Amendment (Rural Finance Reform) Bill 2019, together with the minutes of proceedings.
Report made a parliamentary paper in accordance with standing order 39(e).
by leave—The ability for farm business owners to access credit with reasonable and fair terms is an integral part of agri-business. A fair and equitable banking system for all Australians has come into sharp focus in recent years, with the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry bringing to light a raft of issues. The committee has been overseeing the remediation of these issues in its rolling review of the four major banks and other financial institutions.
The Banking Amendment (Rural Finance Reform) Bill 2019 was presented on 22 July 2019 by Ms Rebekah Sharkie MP, the member for Mayo, as:
A Bill for an Act to amend the Banking Act 1959 in relation to loans to primary production businesses and related purposes.
On 25 July 2019 the Selection Committee referred the bill to the House Economics Committee for consideration.
The bill seeks to provide certainty and fairness to small farm businesses taking out loans under $5 million, by setting standard practices for all authorised deposit-taking institutions (ADIs) offering such products. These measures include easy-to-read one-page summaries of clauses that may trigger non-monetary default by the borrower; prohibiting catch-all material adverse change clauses in loan documents, except where it relates to fraud or criminal activity; requiring a 30-business-day notice period before an ADI can exercise a power under a general restriction; and requiring the lender to contact the borrower and request to meet at least six months prior to the expiry of the loan.
The committee held a roundtable public hearing with the Australian Small Business and Family Enterprise Ombudsman; the Australian Financial Complaints Authority; the Rural Policy and Farm Performance Division, Department of Agriculture; and the Australian Banking Association. This roundtable discussion covered the reform measures as outlined in the bill.
The National Farmers Federation (NFF) contributed a submission that was supportive of measures in the bill, noting the importance of fairness and transparency for both the lender and the borrower.
The committee recommends that these suggested measures be considered by the government as a part of its royal commission implementation road map or any subsequent legislation that may arise.
Being in the magnanimous position that I was in the earlier report, I would like to express my frustration that we couldn't have the full participation of all the committee members in this important roundtable, because of the petulance of members of the opposition in constantly calling divisions and quorums. The deputy chair of the committee may have further observations to make, since I was not able to be present throughout the committee. This is the consequence of their petulance and childishness. In practice, what it leads to is less consideration of legislation, less consideration of important committee work and a circumstance where the parliament isn't able to fulfil its full and proper function. The committee recommends that these changes be considered.
On behalf of the committee, I thank all of the participants at the roundtable and the NFF for their submission to the inquiry. I thank the secretariat. I commend the report to the House.
by leave—In continuation of the magnanimity that has been demonstrated in the House, I'd like to wish the chair a happy 40th birthday for next week and pass my thanks on to the committee secretariat, the Reserve Bank governor, the assistant governors and others who've come before us.
The committee heard from the Reserve Bank governor about the state of the Australian economy in 2019. The governor noted that there had been slow growth in household spending, saying:
For some time now, households have been gradually adjusting their spending to slower growth in income.
At that time, the governor was hoping for some economic pick-up. That now seems much less likely. The governor also went to some of the more deep-seated challenges in the Australian economy. He said:
I fear that our economy is becoming less dynamic. We're seeing lower rates of investment, lower rates of business formation, lower rates of people switching jobs, and in some areas lower rates of R&D expenditure. So right across those metrics it feels like we're becoming a bit less dynamic. I worry about that for the longer term.
So it's clear that the Reserve Bank governor has significant concerns about the health of the economy which predate the bushfire and coronavirus issues, significant as they may turn out to be.
We also heard from the Reserve Bank their forecasts from the February Statement on monetary policy, which has inflation remaining below the target band until the end of 2021, suggesting to my mind that the Reserve Bank has become troublingly comfortable with a rate of inflation that sits below the target band. We also heard from the Reserve Bank governor:
My own view is that the society would be better off having lower housing prices relative to people's incomes.
The Reserve Bank governor noting that, while there is a temporary wealth effect, the ongoing effect of higher housing prices is, on balance, negative for the economy. This is reinforced by research from Diego May, Gabriela Nodari and Daniel Rees published in the Australian Economic Review, which found:
… increases in household wealth supported household spending between 2013 and 2017, when growth in disposable income was weak.
In effect, house price rises masked the fall in household incomes, allowed households to keep on spending and meant that we didn't immediately see the structural weaknesses in the economy, which many have noted have been there since 2013—perhaps, not coincidentally, the moment in which the coalition government was elected.
In the context of scrutiny of the Reserve Bank, it's pleasing that there is an increasing body of research and public commentary around the role of the Reserve Bank. One of the problems in macroeconomics has been that some of the country's best macroeconomists are in the Reserve Bank or Treasury, which means the quality of the macroeconomic commentary isn't as good as it is on issues such as, for example, public finance, labour markets or industrial organisation. But now we're increasingly seeing work by researchers such as the University of Sydney's Stephen Kirchner, who astutely pointed out that the Reserve Bank had said in their November minutes that board members 'recognise the negative effects of lower interest rates on savers and confidence'. That led me to a line of questioning to ask the governor about whether interest rate cuts would indeed reduce confidence. He acknowledged that what the board minutes should have said was that interest rate cuts reduce the 'confidence of savers'. He acknowledged the correctness of Stephen Kirchner's research showing that interest rate cuts boost business and consumer confidence.
I have also benefited from the research of the University of Melbourne researcher Bruce Preston, whose important paper 'The case for reform of the Reserve Bank of Australia policy and communication strategy' has been influential on my thinking. Professor Preston has criticised the way in which the Statement on Monetary Policy has in some sense been put off to one side in recent years, with inflation sitting below the target band for almost the entire period of Governor Lowe's governorship. As Professor Preston says:
If we are not meant to take the language of the Statement literally, what language should we take literally? If the Statement on the Conduct of Monetary Policy does not specify the objectives to which the RBA is accountable, what public document does?
Isaac Gross at Monash University has also contributed valuable research using the Reserve Bank's so-called MARTIN model—standing for 'MAcroeconomic Relationships for Targeting INflation'. He uses that model to estimate the impact on the economy of a large quantitative easing program, suggesting that it would reduce unemployment by 0.3 percentage points, equivalent to 40,000 extra jobs, and boost wages across the economy.
In my view, the current macroeconomic circumstances highlight the importance of improving the quality of expertise on the Reserve Bank Board. Australia's Reserve Bank Board does not stack up well against the expertise in other central bank boards. It would be timely to add to the expertise of the Reserve Bank Board a number of additional macroeconomists with the technical ability to challenge the work of the Reserve Bank's internal staff papers. A more capable Reserve Bank Board may not make much difference when times are good, but when times are bad it could come into its own. As the US showed in having Ben Bernanke as Chair of the Federal Reserve during the global financial crisis, expertise matters considerably in moments of crisis. I would urge the Reserve Bank and the government to consider improving the expert capability of the Reserve Bank Board.
I turn to the second report, the report of the House Standing Committee on Economics on the Banking Amendment (Rural Finance Reform) Bill 2019. This reports on a piece of draft legislation which flows out of the royal commission. We know this is the royal commission that the coalition never wanted—the royal commission that Prime Minister Morrison described as a 'populist whinge', the royal commission that they voted against 26 times. As the shadow Treasurer and shadow Assistant Treasurer noted, a year after receiving the final report just six out of 76 recommendations have been fully implemented. The members for Rankin and Whitlam noted that meant that families who suffered claims-handling issues from devastating bushfires would be left without protection, there's no compensation scheme of last resort for distraught customers, and mortgage brokers have no legislated duty to act in the best interests of their customers.
The royal commission also noted a number of pieces of evidence relating to farm loans. Instances in which banks revalued assets held as security changed the loan-to-value ratio. The banks then relied on that as non-monetary default, permitting the banks to call up the loan. The royal commission referred to the difficulty farmers have in obtaining access to banking services and appropriate support, particularly in areas where the nearest branch can be some distance away. The royal commission referred to changes in the conditions of lending to the detriment of the borrower, which particularly occurred immediately following a change in the ownership of the lender.
The royal commission made a number of recommendations going to lending for farmers—a national system of farm debt mediation, valuations of agricultural land that reflect the inevitable fluctuations in the farming sector, the importance of ensuring distressed agricultural loans are managed by experienced agricultural brokers and that farm debt mediation is offered as soon as possible. The bill put forward by the member for Mayo addresses some of these issues. The government has said that it will respond to it in the context of its royal commission response. We on this side of the House simply hope that that response comes more swiftly than the response to the other 76 recommendations of the royal commission on which the government has badly dragged its heels.