Thursday, 20 March 2014
Future of Financial Advice
The devastating failure of agribusiness managed investment schemes has been raised in the media in recent days due to a focus on the proposed Abbott government Future of Financial Advice reforms. The failure of these mass investment schemes is an iconic example of the coalition's failure to understand economic policy. These schemes, where up-front tax deductions were given by governments to investors, were supposed to foster sustainable investment in agribusiness schemes that were capital-intensive in the beginning but delivered steady returns over time.
Wilson Tuckey took a recommendation from a single ABARES report on plantations and dreamed up this public policy failure. The dream was to expand the plantation estate. It soon went from being a dream to becoming a nightmare and one that Australia still has not woken up from. Companies emerged overnight—some small, some behemoths. Many of them failed. The failure of these schemes left a wreckage of loss across Australia: hundreds of thousands of hectares of failed hardwood plantations, a glut of grapes and a pile of walnuts and olives. Many of these products did not have a sustainable demand to underpin them. In many parts of this country, the wine industry faces a glut in production that lowers the price that producers can get. This glut is roughly the size—perhaps by coincidence—of the area of grapes put in under MISs in the past decade.
The failed MIS timber plantations now sit idle, locking out agriculture from productive uses. They cover at least 100,000 hectares in my home state of Tasmania. Land that could and should be used for food production is now covered in a tinderbox of matchsticks of very little value. They are often unpruned, unloved and a severe fire risk. These plantations are a black mark on the Tasmanian economy. There are the lost funds from the mum and dad investors, the lost tax revenue had the funds had been used in standard economic activities and the lost productive uses of the land. All of this holds Tasmania back from fulfilling its economic potential, not least because of the political energy spent on trying to solve this problem or trying to cover up a catastrophic policy failure.
The problems with the schemes were many. One aspect was that these schemes were pushed by financial advisers with conflicts of interest, driven by their thirst for exorbitant commissions. Another was companies providing product disclosure statements with exaggerated claims of returns. Then there was the seeming lack of understanding of the agricultural side of the business. These MIS companies simply did not understand basic agriculture in many instances. How to plant crops, how much it costs to do so, impacts of drought, maintenance costs, potential yields—it seems they understood very little of this.
Another problem was the lack of understanding of the eventual market for these products. This was probably the single biggest issue with managed investment schemes. Whether for timber, pulp or grapes, investments were made on the basis of a never-ending demand. But all these investments did was distort markets via perverse incentives. Prices fell for run-of-the-mill producers and markets seldom eventuated.
In Tasmania this has resulted in an oversupply of timber pulp that has no market. The discredited and failed Gunns Limited established these plantations and of course to then justify this failed investment sought government assistance to establish a pulp mill to deal with the pulp—and they had plenty of mates in both Tasmania and this chamber to help them. The zombie pulp mill proposal in the Tamar Valley keeps emerging as a tool to deal with this ridiculous amount of Labor and National Party supply-driven overplanting. It is like Tasmanians are being forced to suffer one policy failure to solve another. Without the tax deductions for managed investment schemes, funds would not have flowed into these failed investments. People would not have lost their money. Farmers would not have been alienated from their land. Production gluts would have been prevented.
Investors focused on the tax deductions instead of on the returns, probably because these were not disclosed adequately. Warning bells sounded early in the schemes as investment flows started to peak. Concerns started to be taken to the Howard government. It was reported at the time that the Howard government wanted to rein in the schemes. Then it was reported that Senator Eric Abetz successfully fought a rearguard response in cabinet to keep the schemes alive for the plantation sector and for a potential pulp mill in Tasmania.
The coalition government had the chance to stop this train wreck. They had a chance to stem the losses of mum and dad savings. They had a chance to stop the rollout of zombie plantations. But they failed to act, and their failure has cost hundreds of millions, if not billions, of dollars. The coalition can never claim to be good economic managers whilst they back managed investment schemes. The coalition chose to side with special interests, such as the forestry sector, over the interest of protecting consumers. They sided with Gunns and others rather than siding with good public policy. They sought to protect the commissions of slick marketeers instead of the interests of farmers.
And now, despite calls from backbenchers like Senator Heffernan and the member for Wannon in the other place, Dan Tehan, the government refuses to act. In a media release prior to the election, Dan Tehan said:
The Coalition has announced that, should we win the upcoming election, we will be including Managed Investment Schemes … in a complete ‘root and branch’ review of the taxation system …
This is something I have been fighting for since becoming the Member for Wannon. In my first speech to Parliament I stated that ‘with MIS companies now insolvent, banks having no confidence to lend to the scheme, leading CEOs calling for it to be axed and timbered land in prime food and fibre production areas lying unproductively dormant, now is the time for us to act’ …
Mr Tehan also said that:
… the MIS system either needs to be abolished or radically overhauled in order to protect farmers, as well as investors, and the communities in which these schemes operate.
This was featured on the front cover of the Weekly Times this week.
So when today I asked if the government had any plans to include managed investment schemes in their yet-to-be-announced tax review, I was surprised that the minister acting in place of the Assistant Treasurer, Senator Cormann, cast aside their election commitment and simply said to me, 'Make a submission.' The arrogance of this government is breathtaking. When is an election promise an election promise? Australians need to be careful. The worst elements of the coalition's economic management are now on show.
Wind backs of the Future of Financial Advice laws put the profits of a few—especially the profits of the big banks, who have so much to gain from commissions and the sale of financial products—ahead of the protections of many. It is a classic case of this government looking after the big end of town, the big banks and the financial companies against the interests of the broader financial services industry, who have come out and rallied against these potential reforms.
Already, it is being reported that there are concerns in the rural community about these FoFA changes supercharging the rollout of more commission-led MISs into the future. Likewise, the coalition's—actually, I will rephrase that: the National-Liberal coalition's—broken promise and continuing failure to address managed investment schemes, after repeated Senate inquiries and recommendations, mean that all these failures could happen again.