Tuesday, 18 September 2018
Bankruptcy Amendment (Debt Agreement Reform) Bill 2018; Second Reading
I rise to speak on at the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018. Labor supports this bill, which provides further regulation of the industry administering debt agreements. The bill amends the Bankruptcy Act 1966 by limiting the class of persons who can offer services as registered debt agreement to administrators, trustees or official trustees. Limiting who can be a debt agreement administrator by reference to schools and capabilities will provide an additional safeguard against sharp practice, which disproportionately affects disadvantaged, marginalised and vulnerable people who are at a higher risk of being damaged if exposed to unscrupulous or iniquitous practices.
The debt agreement to administration industry and any individuals who are administering their own agreement will be given nine months, following royal assent to this bill, to gain the necessary skills and effect transitional requirements. This provides creditors and debtors with the certainty they require to transition any existing arrangements.
After it was first introduced in the House of Representatives, Labor worked closely with governments to negotiate improvements to the original form of the bill. In doing so, Labor considered carefully the recommendations of the Senate Legal and Constitutional Affairs Legislation Committee. Labor supports the inclusion of a provision which requires debt agreement administrators to specify expressly in any debt agreement the expenses which may be charged by the administrator. The repayment of debt, often by disadvantaged people with limited financial literacy, should not be an exercise in profit gouging by debt agreement administrators. We support giving both debtors and creditors access to the debt agreement and administrator's proposed expenses so they assess the reasonableness of the expenses and, if necessary, seek independent financial or legal advice.
Labor supported in principle the setting of a cap on the percentage of debtors' after tax income that can be agreed to be paid in the repayment schedule of the debt agreement in the original form of the bill. To best achieve this, Labor supported the committee's recommendation that the original form of the bill be amended to require the minister to have regard to the cost of living for low-income households in setting the percentage cap. Similarly, Labor supported amendments to the original form of the bill to allow for debt agreements implemented under a three-year cap to be capable of being extended by up to an additional two years by agreement.
These amendments to the original bill are designed to ensure that where there is a substantial and unforeseen change in circumstances vulnerable people who are no longer able to complete their repayments over three years will have an opportunity to extend the repayment timeframe. In addition, in recognition of the fact that debtors with a family home stand to lose more under bankruptcy than other debtors, debtors with an interest in their principle place of residence will be able to propose a debt agreement for up to five years, instead of three years, as originally proposed by the government.
Labor welcomes the measures in schedule 1 that seek to limit the possibility of conflicts of interests and increased transparency of the corporate arrangements of companies and persons who offer services as registered debt agreement administrators, including the disclosure requirements for related entities.
Labor supports the measures in schedule 3 of the bill, which provide for more rigorous registration requirements, including that the inspector-general interview applicants after processing their paper applications and that the trustee or registered debt agreement administrator takes out professional indemnity and fidelity insurance. Labor also supports the other measures in schedule 3, which empower the inspector-general to obtain information from banks and financial institutions confirming whether or not a separate bank account is being maintained for the purpose of managing the debtor's repayments under the debt agreement. Labor will always support measures that require the proper discharge of statutory duties and safeguard vulnerable people. This is a good measure. It is aimed at preventing the misuse or misappropriation of money held on trust to pay down the debt by registered debt agreement administrators or official trustees. In addition to the substantive amendments referred to above, a number of other minor amendments have been made to the original form of the bill. Those amendments serve to clarify the operation of the bill and ensure that it is consistent with other legislation. Labor also supports these amendments. I commend the bill to the Senate.
I rise today also to speak on the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 . I want to talk through the following areas: first, I want to talk very generally about the legislation and how it will better support vulnerable Australians by amending the existing framework for debt agreements; second, I want to talk through the amendments in greater detail and, in particular, how they address the concerns expressed by the committee; finally, I want to touch briefly on the issues of debt agreements more generally and the rationale for this legislation. I am particularly grateful that it has received the support that it has from across the Senate chamber. I think that demonstrates the power of good law making at resolving injustice and what can be achieved in this place when we work across the aisle.
First, I would like to give the chamber a little bit more context of this bill. The debt agreement system is a very important part of Australia's consumer finance framework. It provides debtors with an opportunity to avoid bankruptcy and to manage their personal debts, while also giving creditors a return on what they're owed. This particular bill amends the Bankruptcy Act 1966 to comprehensively reform Australia's debt agreement system. Debt agreements are a statutory alternative to bankruptcy for eligible insolvent debtors. Debt agreements allow a debtor and their creditors to enter into an agreement to settle those debts without the debtor becoming bankrupt. They provide a viable alternative solution for managing personal debt. Debtors can regain and maintain control over their personal affairs, and creditors, at the same time, receive a portion of what they're owed. Debt agreements are also known as a part 9. I think that's probably a term that you will hear a fair bit in the second reading debate speeches this afternoon. A debt agreement is a legally binding agreement between the debtor and creditors that provides a very flexible way to come to an arrangement to settle debts without forcing that debtor to declare bankruptcy. They give people time to clear their debts and get back on their financial feet while avoiding the formal process of bankruptcy, the stigma associated with bankruptcy and the potential long-term impact on their financial circumstances.
How does a debt agreement work in practice? If an individual has a debt management problem there are a number of options available to them. They can declare an intention to present a debtor's petition—that is called a DOI. This option provides a 21-day relief from being pursued by creditors while a debtor seeks advice on how to proceed. They can declare bankruptcy, which lasts for three years and one day. At the end of that period, the debtor is released from bankruptcy and most of their debts. Alternatively, they can enter into a personal insolvency agreement, which are agreements between the debtor and creditors to pay an agreed amount in instalments or a lump sum, or they can enter into a debt agreement, which is a binding agreement between the debtor and the creditor to pay a sum which they can in fact afford.
When an individual enters into a debt agreement, a debt agreement administrator is appointed. The debt agreement administrator manages the agreement and works with both the debtor and the creditors to achieve a fair and reasonable outcome. The debt agreement administrator negotiates on behalf of the debtor to pay a percentage of the combined debt that the debtor can in fact afford over a period of time. The repayments are made to that debt agreement administrator rather than individual payments to each of the creditors. After the payments are complete and the arrangement ends, the creditors are unable to recover any further moneys that might be owed. A debt agreement can be a very suitable alternative to bankruptcy, because creditors may receive more money than they would if the debtor was to become bankrupt. Also, it could provide considerable relief to managing individual creditors for the debtor himself. But not everybody is eligible. There are limits to the amount of debt and income you can have to be eligible, and entering a debt agreement is not without consequences. Debt agreements are not a consolidation of loans and they're not an agreement to borrow money. A debt agreement releases the debtor from most of their unsecured debt when all their obligations and payments are completed, but—and this is very important—not all of it: secured debts and joint debts are not included. Some debts may still need to be paid. It might be a home loan secured on a house or a car loan secured on a vehicle. Secured creditors may cease and sell assets, which have been offered for security, at any time if payments fall behind. In addition, debt agreements don't release any third person from a debt that's jointly owed with someone who is in a debt agreement.
Some debts can't be paid out of a debt agreement. This is particularly important: a debtor is still liable for debts incurred by fraud, for child support, for any fines or penalties or for any other court ordered payments. Any student HECS-HELP or Student Financial Supplement Scheme debts also do not fall under a debt agreement. Moreover, it's really important to note that entering into a debt agreement has the potential to affect a person's ability to get credit in the future and it will appear on a public record for a limited period of time. The debtor's name appears on the National Personal Insolvency Index, the NPII, for a limited period of time depending on the circumstances and the timing of the end of that agreement. Proposing a debt of agreement is, in fact, an act of bankruptcy—even though you're not actually declaring bankruptcy, it is an act of bankruptcy and creditors can use this to apply to the court to make the debtor bankrupt.
In 2016, there were 12,150 new debt agreements and they comprised 41.5 per cent of all personal insolvencies in Australia. While the number of debt agreements has increased steadily each year, bankruptcies have, in fact, decreased since 2010. In 2016, close to 23 per cent of debtors' payments went towards debt agreement administrator's fees. The total amount of fees paid by debtors is very high in Australia, when Australian Financial Security Authority fees and set-up fees paid to the debt agreement administrators are included.
Let me make a couple of general points about this bill. The coalition is amending the Bankruptcy Act 1966 to comprehensively reform Australia's debt agreement system. It is the first major reform of the debt agreement system in over a decade. I've explained what debt agreements do. They allow debtors and their creditors to enter into an agreement to settle debts without the debtor becoming bankrupt. This bill modernises the debt agreement system to suit today's financial environment, and it safeguards the interests of debtors and of creditors.
The coalition is taking action to boost confidence in the professionalism of debt agreement administrators and also to deter unscrupulous practices. We're enhancing the transparency for debtors and for creditors by requiring those administrators to disclose more information on their relationships. We are setting a very high bar for debt agreement administrator standards, through stricter practice rules and through tougher penalties for misconduct. Debt agreement administrators deal with some of the most vulnerable people in our community. This bill professionalises that industry to reflect their very important function. It introduces a very robust set of safeguards that will protect vulnerable debtors from entering into debt agreements that are set up to fail. Under this bill, debtors with a family home to protect will be given the best possible opportunity to avoid bankruptcy and avoid potentially losing their home. Most of the bill's provisions have a nine-month commencement time to give the industry time to prepare for those changes. As I said, I think the fact that there is support across the House for this legislation has been most encouraging.
There are a number of amendments that have been introduced to this legislation. I would like to talk through some of those now in a little bit of greater detail. The amendments that the government are making give people with a family home a much better opportunity to avoid bankruptcy and to keep control over their home. They will also ensure that the protections afforded by the bill's payments-to-income ratio and the three-year proposal cap are better targeted at those vulnerable debtors. With amendments (1) and (4), the commencement of the legislation has been lengthened to change the commencement from six months to nine months following royal assent. This acknowledges the practical complexity involved with the bill's implementation as originally drafted and will ensure that AFSA is better positioned to implement the substantive provisions of the legislation.
The amendments contained in the bill modify the description of intent in relation to applicable offences. For example, the bill as amended clarifies and strengthens language in relation to 'intent'. It introduces offences for debt agreement administrators who offer inducements to creditors to influence a debt agreement vote, and it aligns the framing of these offences with what is contained in the Criminal Code Act 1995.
The amendments in the bill also prohibit self-administered debt agreements. Indeed, the amendments expressly prohibit debtors from proposing to self-administer their debt agreements. This ensures that all debtors receive the benefits of an appropriately qualified debt agreement administrator, and the bill mandates that only registered debt agreement administrators, registered trustees or the official trustee can be authorised to administer a debt agreement. This was mentioned in the Legal and Constitutional Affairs Legislation Committee in relation to those matters. There were sentiments expressed by submitters to that committee. The particular report that came back to the Senate suggested:
Submitters were generally supportive of the proposed changes to strengthen the registration and standards of debt agreement administrators and some considered that the bill could go further. For example, SRMC Limited ... recommended that all administrators be required to complete a personal insolvency course as well as undertake ongoing formal education. SRMC also suggested that administrators be required to hold membership of a professional body with a commitment to a Code of Conduct.
I'm very pleased to see that the government has been picking up on those recommendations.
There are a number of others: amendments (3), (6), (8), (10), (11), (13), (21) and (34). This was picked up by the Scrutiny of Bills Committee: the payment-to-income to ratio. The Scrutiny of Bills Committee queried the Attorney-General's existing power to alter the eligibility requirements for debt agreements and, as such, the bill that's come before the Senate chamber today allows the Attorney-General to alter the eligibility requirements for debt agreements through amending the permissible payment-to-income ratio. This is a really important safeguard. It will ensure that debtors are not able to enter into repayment obligations that are unsustainable. Allowing the Attorney-General to initially set and then amend the permissible level of this ratio is also important because it allows the ratio to be very quickly amended to adjust to changing market conditions.
However, taking on board the committee's comments, these amendments reduce the scope of debit agreements to which the ratio will apply and thereby limit the Attorney-General's ability to set the eligibility requirements. The amendments will allow debtors to exceed the payment-to-income ratio if their financial situation is subjected to heavier scrutiny by their administrator and the administrator concludes that the proposed repayments are sustainable. A 60-penalty-unit strict liability offence applies to administrators who abuse this particular option.
Amendments contained within the bill relate to debtors with a home to protect in recognition of the fact that that debtors with a home to protect stand to lose far more under bankruptcy than other debtors. This amendment relaxes the debtor protection safeguards of the three-year debt agreement time frame limitation and the payment-to-income ratio. Together, amendments (5), (18) and (21) give debtors with equity in their principal place of residence the flexibility to exceed the payment-to-income ratio and propose a debt agreement of up to five years. These amendments extend the accessibility of the debt agreement system and provide debtors with a home to protect—a viable alternative to bankruptcy.
Regarding amendments (7), (8) and (21), the Legal and Constitutional Affairs Legislation Committee made some comments on the payment-to-income ratio. Their recommendation was that the cost of living for low-income households, the average cost of housing and the potential CPI increases be considered when setting that payment-to-income ratio. The amendments therefore modify the payment-to-income ratio formula to introduce a low-income debtor amount to the numerator so it can better take account of the circumstances of low-income debtors who may be more vulnerable to financial stress. By adding that low-income debtor amount, the formula better accounts for low-income debtors, who generally spend a much higher proportion of their income on basics, and also debtors who have atypical circumstances, such as those receiving assistance from employers or from family.
Regarding amendments (17), (27), (32) and (36), the Scrutiny of Bills Committee made some comments on terms of imprisonment. They have also been considered. Regarding amendments (18), (19), (20) and (23), the Legal and Constitutional Affairs Legislation Committee made recommendations regarding the option to vary debt agreements up to five years. These amendments respond to the recommendation that the bill be amended to allow for debt agreements implemented under a three-year cap to be capable of being extended by up to two years by agreement of the debtor, the creditors and the debt agreement administrator, which makes the instrument far more flexible. Amendment (35) is a technical amendment which corrects an erroneous reference to a subsection in the Bankruptcy Act.
I turn very briefly to the issue of debt agreements in Australia and the use of them. They are a rapidly growing form of personal insolvency in our country and they're intended to help the most vulnerable of Australians who would otherwise fall into bankruptcy. The original law that was intended recognised the need to ensure reasonableness and fairness so that people were not forced into bankruptcy or undue hardship. It was their intention to ensure that they could reach a debt repayment plan that was more reasonable and considerate of their situation. In fact, many debtors pay more than 100 per cent of their original debt because of the high cost of that administration fee. I should point out, as I did earlier, that there are, in fact, different options available for managing debt. It is a growing problem in Australia, mainly because the take-up and the use of these debt agreement arrangements has become so prevalent. As I said, in 2016 close to 23 per cent of debtors' payments went towards debt agreement fees. If you're in debt, you don't want a quarter of whatever you're paying to go to your administrator. You want it to go to your creditors. Between 2007 and 2017 new debt agreements increased from 6,560 to 14,639 per year. During the same period, bankruptcies declined from 25,754 to 16,378. While these agreements are useful for some people, like those who have a home to protect from seizure and bankruptcy, there is some concern from consumer advocates that they're being used inappropriately and that administrators are potentially unscrupulous. That's what this bill is here to amend.
It should be noted, as I said, that this is the first comprehensive overhaul of Australia's debt agreement system in more than a decade. It ensures that debt agreements are based on a more affordable payment schedule by linking repayments to a certain percentage of income. They limit the length of the debt agreement proposals. They double the current asset eligibility threshold, and they provide that the official receiver in bankruptcy has the ability to reject proposed debt agreements which would cause undue financial hardship on the debtor. They ensure a far greater professionalism in this growing industry by requiring debt agreement administrators to hold and maintain professional indemnity and fidelity insurance as a requirement of registration and to have the appropriate skill set and knowledge base. This will deter unscrupulous practices by a small minority of debt agreement administrators by setting up stricter codes of practice and tougher penalties for wrongdoing. The reforms are designed to ensure that the integrity of the industry is improved overall. With the number of new debt agreements almost doubling in the last decade, debt agreements are proving to be an important, effective and popular alternative to bankruptcy for many individuals who are facing financial difficulties. Most importantly, debtors with a family home to protect must be given the best opportunity to manage their unsecured debts and avoid bankruptcy.
These proposed reforms will, for the most part, commence nine months after the bill passes from parliament, giving the debt agreement industry time to adjust and prepare for the reforms. Most importantly, the legislation will make the debt agreement system much fairer and more efficient for debtors and creditors alike. It will protect people who are in a very vulnerable position from financial exploitation. These reforms will introduce the necessary safeguards; they'll bolster community confidence in the industry; and they'll ensure that the system allows people to achieve that all-important fresh start.
As a government and as a Senate we are ensuring that the law continues to be on the side of the most vulnerable. I'm conscious that for some time it potentially hasn't been. We are now rectifying that. These reforms will reduce the risk of debtors being left worse off financially as a result of debt agreements that are unsuited to their financial and personal circumstances. It will ensure that adequate legal safeguards are in place to look after some of the financially most vulnerable in our communities.
I thank my colleague Senator Hume, an obvious expert on this subject, who was a member of the committee that looked into this bill. I apologise for not being here for my turn to speak, because I was at another committee meeting. I chaired the Legal and Constitutional Affairs Legislation Committee which inquired into both these bills and had hearings on both bills jointly in Sydney on 5 March and Melbourne on 6 March.
We had a number of witnesses who appeared before the committee and who gave assistance to the committee in their consideration of those bills. I want to thank all of those who made written submissions to the bill, which numbered 19 in all. A number of these submitters agreed to come before the committee and give evidence in person. I want to thank the committee secretariat and the staff of the secretariat for the work they do in assisting the committee in this and other bills that the Legal and Constitutional Affairs Legislation Committee is required to deal with.
The Bankruptcy Act provides a number of options for a debtor with unmanageable debt to take control of their personal affairs while also allowing for creditors to receive a proportion of what they're owed. Debt agreements were actually first introduced in 1996 and were:
… designed to be a low cost alternative to bankruptcy for persons with few if any divisible assets, and low income levels.
The eligibility requirements for bankruptcy as opposed to debt agreements were set out in a table provided by the Australian Financial Security Authority, and anyone interested in this subject would find on page 2 of our report the comparison between bankruptcies and debt agreements. I won't go through that in any detail, but anyone who's interested could follow that table.
Before I make a few comments about the committee's inquiry and conclusions into both bills, I do want to point out that these are bills submitted by the government to parliament and that when the bills get to the Senate they are referred by the Selection of Bills Committee to an appropriate committee—in this case, the Legal and Constitutional Affairs Legislation Committee—to have a look at them in detail. As Senator Hume has so clearly enunciated, the committee had a number of concerns about the bill, even though the committee, of course, has a majority of government members. But following the submissions made to the committee, and following the evidence given to the committee in its public hearings, the committee determined to recommend to the government that certain amendments be made to the government's own bill.
I think it's worthwhile noting that it's a credit to the system that after the committee having inquired into it in some detail and making these recommendations, the government has then taken the recommendations onboard and introduced some amendments to its own bill to make sure that the amendments are appropriate and that the bill actually is in its best possible form. I think in this case, if my memory serves me correctly, that whilst this committee had a majority of government members it also had Labor Party members and a member of the Greens. I might, in passing, thank all of my colleagues for their attention to the detail of this hearing and this report. But I think it's notable that this is a unanimous report of all members of the committee. Committee members from all different political parties were able to join together and say to the government, 'We like the bills, but we think there needs to be some amendments to those bills to make them work better to deal with some issues that were raised in the hearings by the witnesses'—in many cases, expert witnesses.
In its report, the committee noted and shared the concern raised by submitters in relation to the reduction in the default period under the Bankruptcy Amendment (Enterprise Incentives) Bill 2017. The committee in particular noted the various potential means of differentiating between businesses and personal bankruptcies, as suggested by submitters. The committee, however, weighed this evidence against the advice from the department, which suggested that it was impractical and potentially impossible to achieve a true distinction between the two types of bankruptcies. The committee was mindful that the causes of bankruptcy are often multifaceted and may not be clearly identified through statistical data. The committee found that, on balance, the evidence suggested that a one-year default period is appropriate, at least for some classes of bankruptcy, having regard to the issues raised at the aims of the bill. However, the committee strongly encouraged the government to consider the comments and recommendations made later in our report, which are aimed at ameliorating some of what the committee and many submitters saw as the potential risks in curtailing the current default period.
As a result of its determinations, the committee recommended that the government give positive consideration to the suggestion from ASIC, the Australian Securities and Investments Corporation, to amending the Corporations Act to ameliorate the risk of the one-year default period being made available to bankrupts for whom such a concession is not desirable or justifiable as an outcome. The second recommendation of the committee was that, subject to that foregoing recommendation, the bill should be passed by the Senate. I understand that the government has acted in accordance with that recommendation. Accordingly, the committee then unanimously recommends that the enterprise incentives bill be passed by the Senate. I'd hope that the Senate as a whole might agree with that.
In relation to the Bankruptcy Amendment (Debt Agreement Reform) Bill, the committee noticed that there had been an increase in popularity of debt agreements. One of the aims of the bill was to increase the public's trust and confidence in debt agreement administrators. The committee considered that the proposed amendment to limit the types of practitioners who are able to administer debt agreements, along with enabling the Attorney-General to set industry conditions for administrators, would assist to boost confidence in the professionalism of the administrators.
The committee noted various recommendations made by a number of submitters, including requiring debt agreement administrators to complete formal training on personal insolvency, including undertaking ongoing formal education; to hold membership of a professional body with a commitment to a code of conduct; and provide more information to debtors prior to entering into debt agreements as well as at other stages of the debt agreement. The committee also noted that debt agreement administrators should join the Australian Financial Complaints Authority once it was established. The committee made no specific recommendations in respect of these suggestions, but we did draw them to the attention of the government and suggested that they did have merit.
As my colleague Senator Hume has already advised in some detail, the committee did recommend that the government should consider amending the Bankruptcy Amendment (Debt Agreement Reform) Bill to allow for debt agreements implemented under the three-year cap to be capable of being extended for an additional two years by the agreement of the debtor, creditors and debt agreement administrators. The committee made that report after considering some of the written submissions, but particularly after various witnesses appeared before the committee and explained the need for those amendments. I'm very pleased to say that the government has acted upon that unanimous report of the committee and adopted that recommendation.
I'm not going to be able to finish my presentation. There are a couple more recommendations that the committee made that I'd like to talk on later. Clearly, it's a bill that does have the support of the committee and all members of the committee and it should be passed.