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Thursday, 1 March 2007
Page: 129


Mr KELVIN THOMSON (10:22 AM) —The background to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 is that debt agreements were introduced in 1996 with the intention of providing consumer debtors with an option to enter into a formal arrangement with creditors as an alternative to bankruptcy. The number of these debt agreements has grown significantly in recent years. I understand that there were over 7½ thousand proposals in 2005-06, and just under 5,000 of those proposals resulted in debt agreements being made. Debt agreement administrators received over $55 million from debtors in 2005-06, of which approximately $38 million was paid to creditors. Over the course of the 10 years since 1996, administrators have been largely unregulated. There are no entry requirements. People can, however, be declared ineligible to be administrators on the basis that they have failed to properly perform their duties. Those duties are restricted to putting the agreement into effect and do not cover information and advice that they provide to the debtor before the agreement is made.

There has been, however, what could be described as a pretty high failure rate in relation to these debt agreements; I understand that it is more than one-third. The reasons given for that are, firstly, that the proposals from debtors are unsustainable, particularly where they are not fully informed about all their options, so the debt agreement that they enter into may not be a suitable one; secondly, that there is little allowance made in proposals for changes in circumstances—debtors are not always advised properly on budgeting and planning before committing to an agreement which typically lasts for at least three years; and, thirdly, that debt agreement administrators have been able to take their fees in priority to creditors, which can result in proposals being developed that might be attractive to creditors—and, naturally, creditors want the large settlement of 70c in the dollar or whatever—but which are unsustainable over the longer term.

So you can end up with a situation in which administrators get paid and creditors do not and the debtor may be worse off than before commencing the agreement. Finally, creditors can focus on the rate of return rather than on what the debtor can afford. That contributes to a high number of unsustainable offers and consequently to the high failure rate. It is my understanding that this proposal has been the subject of significant consultation and that creditors, debt agreement administrators and financial counsellors—that is to say, key stakeholders who have an interest in debt agreements—generally support the proposals before the House. The intention is to bring these changes in from 1 July this year. Creditors and administrators are now investing in the systems, making procedural changes and engaging in the training necessary to respond to this legislation.

What we will have from here on in is a formal registration system for debt agreement administrators based on their ability to properly perform their duties. There will be mandatory qualifications to ensure a minimum level of knowledge for all administrators. Their duties will cover pre-agreement work such as informing the debtor about alternatives, ensuring that the proposal is affordable over the promised term and ensuring that the debtor makes proper disclosure to creditors. It is hoped that this regulatory regime will add to the professional standing of administrators, provide clear guidance about what is expected of them and assist in addressing some of the concerns about the ability and conduct of some administrators.

It requires debt agreement administrators to be paid proportionately over the life of the agreement rather than in priority to creditors. The idea behind this is to provide an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of the agreement. It requires creditors to be paid proportionately based on their respective debts rather than negotiating different rates of return within an agreement. The idea behind this is to encourage creditors to focus on what the debtor can afford to pay rather than on the rate of return that they might prefer to receive. A debt agreement ought to be seen as a simple one-off offer to creditors which they can accept or reject rather than a series of individual offers which aim to meet the different demands of all the creditors involved.

The new regulatory regime also seeks to provide more effective mechanisms for dealing with default and meeting creditors’ expectations that the administrator be actively managing defaults and keeping creditors informed. The amendments require the administrator to notify creditors when a debtor defaults and has not rectified it within three months. An agreement will be automatically terminated if no payments are made for six months or the agreement is not completed within six months of the agreed term. It also applies the realisations charge and interest charge in a manner that is in accordance with the government’s cost recovery policy and the intention of recovering the cost of regulating the system.

It has been suggested that there are some concerns amongst debt agreement administrators about not being paid in priority to creditors and that this could affect their cash flow. The response to this is that the value of the amendment is that it provides an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of their agreement. Some creditors have expressed concerns about the requirement to be paid proportionately based on the size of their debts. These creditors are concerned that they will become involved in debt agreements which do not meet their expectations in terms of acceptable rates of return.

It ought to be noted in response to these concerns that debt agreements can currently provide for different rates of return to creditors and payments to creditors at different times. This complicates the system. It adds costs by requiring significant negotiation prior to developing proposals in order to try to meet creditors’ different demands. It excludes many debtors from the system who could afford to make payments which are greater than creditors might otherwise receive and it suggests or is based on the principle that debt agreement should be seen as a simple one-off offer to creditors representing the best offer the debtor can make and creditors then decide whether to accept that offer—and it is probably fair to say that this amendment is fundamental to the success of the overall reform package.

It is also the case that some creditors may be concerned that the government has not proceeded with the amendment that it was talking about back in July last year, which would have required administrators to defer payment of at least 15 per cent of their remuneration until the end of the agreement. The idea behind this amendment was to provide an additional incentive for administrators to focus on sustainability and to assist debtors to complete their agreements. However, it would have penalised administrators who are doing the right thing and in situations where a debtor’s failure to complete an agreement was outside the administrator’s control. The government’s case for the amendment is that a greater incentive will result from an amendment that requires administrators to be paid proportionately over the life of the agreement rather than in priority to creditors and that we do not want to see an additional compliance burden for creditors which would be difficult to monitor, could have outweighed the marginal benefits provided and indeed had the outcome that administrators increased their fees by 15 per cent to overcome its effect.

There has been some consultation and a process behind the legislation. The Attorney originally announced amendments in March 2006. There were amendments announced in July 2006. Further consultation and revised proposals occurred after July 2006 and we now have the legislation before the House.

The objects of this legislation—providing for enhanced regulation of debt agreement administrators, specifying the duties of a debt agreement administrator, encouraging creditors to make decisions based on the debtor’s capacity to pay, providing more effective means of dealing with defaults and seeking to streamline some of the provisions—I think are all things that we can support.

Schedule 1 contains provisions relating to the registration of debt agreement administrators. They will commence on the date of royal assent so that existing and prospective administrators can be registered prior to 1 July this year with the idea of administering debt agreements which will be subject to the new rules from that date and the official receiver will not be able to accept debt agreement proposals nominating an unregistered debt agreement administrator from that date unless the administrator is administering no more than five active debt agreements. Schedule 2 contains amendments which apply in relation to debt agreement proposals and resulting debt agreements from 1 July this year. This schedule contains all the amendments apart from those which deal with the registration of administrators.

We have got the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 and also the Bankruptcy (Estate Charges) Amendment Bill 2007. The companion bill extends the application of the realisations charge and interest charge to money received by debt agreement administrators under debt agreements under part IX of the Bankruptcy Act. The state charges cover the cost of regulating the system and what this bill is going to do is spread the cost recovery over a broader range of realisations. It is my understanding that the amount recovered will be the same and that it is essentially the same group of creditors who end up paying the charges, so I do not see this as a particularly controversial change. It is designed to give effect to the government’s cost recovery policy, the basic principle of which is that users of services provided by the government should generally pay for those services and that the price they pay should reflect the actual cost of providing the services.

In this case, the realisations charge and the interest charge recover the cost of regulating the personal insolvency system. The cost of regulating debt agreement administrators within that system is currently recovered through the realisations charge and interest charge as they apply to bankruptcies and personal insolvency agreements. The present situation means that the cost of regulating debt agreement administrators is effectively borne by creditors in bankruptcy and personal insolvency agreements. This is no longer considered appropriate as debt agreements make up a significant proportion of insolvencies in Australia and the cost of regulating the system should now be reflected by imposing these charges on money received from debt agreements. In practice, it is largely the same creditors paying the realisations charges in bankruptcies and personal insolvency agreements who cover the cost of regulating debt agreement administrators. Applying the charge to debt agreements will broadly result in the same creditors paying the same amount of money but over a larger range of administrations. This means that the rate of the realisations charge will be reduced following these amendments.

I note there was some media commentary on the legislation which we are debating. The Financial Review back on 16 February reported on a disagreement between the regulator, Insolvency and Trustee Service Australia, and debt administrators. The Financial Review reported that the regulator had blamed the way in which debt agreement administrators charged fees for the high failure rate of insolvency agreements. But the administrators of debt agreements rejected those claims about the impact of up-front fees. For example, one of the directors at Fox Symes, one of Australia’s biggest providers of debt agreements, expressed the view that:

... administrators put in an enormous amount of effort upfront and should be allowed to draw down fees as and when work is performed.

The Attorney responded to this article with a letter to the Financial Review, stating that the requirement in the bill:

... is that fees be taken over the life of the agreement rather than as a priority before creditors are paid ...

He made the point that the reforms:

... do not require that 15 per cent of fees be paid only once the creditors have been paid in full.

The Attorney has expressed the view that the reforms do not prevent administrators from charging up-front fees but:

... seek to regulate fees to administer a debt agreement that has been entered into. Administrators are still able to impose ‘upfront’ fees for services provided to the debtor before entering into the debt agreement.

I should not close a discussion about these issues without expressing concern about issues to do with insolvency and repossessions in Australia. In September last year figures were released which indicated that there has been a quite substantial jump in mortgage repossessions. Mortgage repossessions have been rapidly rising since around May 2002 for each of the various states and territories for which data has been collected. The data released in September last year indicated that mortgage repossession orders in New South Wales are now higher under this government than they were under Prime Minister Keating, who gets pilloried on these matters, back in 1990.


Mr Slipper —And rightly so!


Mr KELVIN THOMSON —If you are concerned about Prime Minister Keating, why are you not concerned about the fact that mortgage repossession orders are now higher?


The DEPUTY SPEAKER (Hon. BK Bishop)—Order! We are discussing bankruptcy here, so I will ask you to come back to the subject matter of the bill.


Mr KELVIN THOMSON —Indeed, and that is exactly what I am referring to. The increase in mortgage repossessions reflects the fact that many households are under more financial pressure than at the peak of high interest rates in 1990. The data from the Supreme Court of New South Wales shows a rapid and, from my point of view, concerning acceleration of mortgage repossessions in New South Wales since 2002. The figures from the Supreme Court of New South Wales show that the number of repossession actions increased from 2,189 in 2002 to 5,368 last year. I am concerned about the impact of that on the individuals concerned. I am concerned about the fact that a Macquarie Bank survey shows that almost two-thirds of mortgage referrers expect to see an increase in the incidence of mortgage distress and defaulting over the next year and that that is almost twice the level reported in last year’s survey.

We now have a situation where the OECD Economic Outlook No. 80, released just before Christmas, found that Australia’s household debt, as a proportion of household income, experienced the second fastest growth in the OECD over the last decade. Clearly, if you have that situation going on and you have Australians seeking to repay a mortgage at much greater levels of payment than is occurring in other countries around the world and you have increasing mortgage repossessions as a result, then we ought to be concerned about the impact on housing affordability, bankruptcies and insolvencies of the now eight interest rate rises since 2002. The figures that have been released for administrations under the Bankruptcy Act show that bankruptcies increased from 20,051 in 2005-06 to 22,300 in 2004-05. That was an increase of well over eight per cent. Debt agreements also increased, from 4,738 in 2004-05 to 4,866 in 2005-06.

These things are a direct consequence of increased household debt, an increased proportion of income going into repayments and people being unable to pay. We see this happening in the area of mortgages and we see it happening in the area of credit cards. Debt accrued on credit cards reached $39 billion at the end of last year, 14 per cent higher than a year earlier, which has prompted concerns about household debt levels. Reserve Bank of Australia figures show that total household debt in Australia was $962 billion as at 31 December. Reserve Bank figures on credit card debt are also matched by comments made by key people in our largest banks talking about the perils of credit card debt. For example, the Commonwealth Bank of Australia chief executive, Ralph Norris, said that he was ‘worried about predatory pricing in the credit card business’, saying that smaller lenders had taken on risks that the CBA had rejected.

Household debt is very important to the health of the economy and also to the individuals concerned—those people who end up on the sharp end of this and who are unable to repay their debts. The main source is mortgages, as I mentioned, but credit card debt is also skyrocketing. According to the chief economist at AMP Capital Investors, the ratio of household debt to annual income is about 160 per cent, and that ratio was 102 per cent five years ago and 69 per cent 10 years ago.

After a series of interest rate rises, we have had an increase in calls from Australians in financial distress. It has apparently risen by 35 per cent from last year. We have also had an increase in bankruptcies—6,016 in the December quarter, which was 20 per cent more than in the same period in 2005. The Wesley Mission, Debt Helpline and the like, who have surveyed these things and measured these things, say that households are finding it increasingly difficult to make ends meet. There are more Australians in financial distress than there used to be. The managing director of Debt Helpline said:

These days, there is no discretionary spending in the suburbs. After accommodation, food, education and fuel, there is nothing left over.

When you put these things together, there is a disturbing picture of rising household debt and problems with housing affordability in this country which the government has failed to understand. When we have tackled the Prime Minister with questions about interest rate rises and so on, he says: ‘It is fine. Asset prices are going up, house prices are going up, and this is a fine thing.’ But the sharp end of this is mortgage repossessions going up, people finding it impossible to get into the housing market and, in some cases, finding it impossible to stay there once they have entered and arrived. I hope the government will be less smug and less complacent about these issues and turn its attention to them so that we do not get the insolvencies, the debt agreements and the things of this character that we are presently being required to deal with.


The DEPUTY SPEAKER —The question is that this bill be now read a second time. I remind the chamber that this is in fact a cognate debate.