Thursday, 30 March 2006
It is again unfortunate that some 4,000 investors have pitifully lost a substantial level of their savings because of the high-risk, high-interest property schemes under the Westpoint banner. With respect to my distinguished Senate colleagues from Western Australia, I observe that perhaps Western Australia, because of the business successes and entrepreneurship in that state, have become quite risk averse, and unscrupulous promoters, financial planners, accountants, lawyers and others have taken advantage of the tolerance to high risk to gain a cheap buck.
Some years ago, this scenario was with the mass marketed tax schemes; today, it is through a property development called Westpoint. The carefully planned financial arrangements involving promissory notes put such moneys outside the regime of ASIC, the regulator. I submit that the solution requires a change to the law to bring all such arrangements within the disciplines and regulatory framework of the Managed Investments Act, a proposal that I floated in this chamber in June 1997 in relation to another matter. At that time, when addressing this chamber in support of a change to the regulation of unit trusts, I stated:
Investor confidence and efficiency in our fund raising industry are two measures which are integral to turning around our savings industry.
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... it is time for the government to deliver an enhanced regulatory arrangement to better protect the non-super investment products.
We have come a long way since that time, and I have been pleased to be part of a government that has delivered for Australia what are internationally recognised as world-class superannuation and managed investment regimes. However, it is with great concern that I consider the impact on the estimated 4,000 to 6,000 investors that had investments with the Westpoint Group. I particularly noted in the report in the 16 March 2006 edition of the Business Review Weekly that over 60 per cent of the investors in Westpoint appear to be self-managed superannuation funds. These are people who relied on the fact that, while their investment was attracting high returns, it was considered to be low risk because of a guarantee by Westpoint. Little did they know that they were investing on the basis of information memoranda in the largely unregulated world of promissory notes.
The Westpoint fiasco has shown that there are problems not only with the regulator detecting and acting on risky promotions but with the law as it currently operates. The ASIC chairman, Jeff Lucy, told investors at a recent presentation that the Western Australian government had in 2002 raised with it concerns about the apparent gap in the Corporations Act in relation to promissory notes, yet ASIC did not take action in relation to the promissory notes for two years following the matter being brought to its attention. The fact that we are still waiting for the Supreme Court of Western Australia to rule on whether promissory notes issued by a Westpoint company were debentures or interests in a managed investment scheme is quite unsatisfactory and highlights a gap in the law that I believe should be addressed.
Denise Brailey, President of the Real Estate Consumer Association Inc., stated in an article on 25 November 2005 that she had passed a Westpoint information memorandum through to ASIC in 2001 raising concerns particularly with the promotion of the promissory notes as capital safe because of the Westpoint guarantees via a second ranking mortgage. ASIC did not take any action, and Westpoint set up a further 11 projects over the following four years. These are matters that I intend to raise with ASIC in the context of the next Senate estimates hearings.
Why did Westpoint happen? Westpoint was a property developer with buildings going up all over the country. Westpoint was desperate for cash, and so offered high investment returns and commissions for distribution. To their investors, they promised a guarantee of 12 per cent interest, and to financial planners they offered up to eight per cent in commissions on funds raised. In comparison the Westpoint income fund, a regulated managed investment scheme, offered investors an indicative fixed rate of return ranging from nine per cent for a one-year fixed term to 10 per cent per annum for a three-year term. The fund offered advisers a maximum commission of only 2½ per cent.
While I note that the ASIC investigation is continuing in relation to the group and that action has been taken to wind up certain entities in the Westpoint Group, this is a matter that the government should seek to address at both a legislative and a regulatory level. Mezzanine finance generally is a recognised high-risk commercial product. It was the abuse of the product that regulators should have been looking into. The fact that it was offered to unsophisticated investors should attract a higher level of protection under the law and should be a focus of regulatory attention. We regulate fundraising to retail investors under a regulated disclosure regime. Disclosure cannot remove risk, and if you know that an investment is a high-risk proposition you must be prepared to suffer the loss in the same way that you will pocket the profits if the investment is successful.
While this parliament cannot prevent a company from making a loss in the same way, it cannot ensure that a company is profitable; however, we are responsible as legislators for the legal structure providing fundamental protections to investors and ensuring that disclosure is appropriate. Westpoint illustrates that there is still work to be done in ensuring that Australia has a regulatory regime that promotes investor confidence and efficiency while ensuring that retail investors are aware of the risks of such an investment. Both advisers and investors are reliant on the disclosure of information that is adequate or fit for purpose in making an informed investment decision. The provision of this information is primarily the responsibility of the entity and persons offering the investment opportunity. The noted writer Terry McCrann stated in the Adelaide Sunday Mail on 12 March this year that the solution is not more red tape but effective disclosure and effective professional financial planning advice while not killing the riskier investments that are a crucial part of our economic and business success.
Let me conclude tonight by presenting a challenge to ASIC. I have with me here a copy of yesterday’s Money insert from the Sydney Morning Herald. Can ASIC tell me how many of the advertisements for investment moneys in this insert, this paper, come under their responsibility? Furthermore, which ones, I ask ASIC, are outside their bounds and just why is that the case? This is an area in which we need to take action to protect our fellow Australians and to make sure that they can invest with confidence that the market is being properly regulated. I thank the Senate and I look forward to legislative action.