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Thursday, 1 March 2007
Page: 136

Mr LAURIE FERGUSON (10:53 AM) —The opposition is supporting the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007. The parliament is essentially regulating industry developments which have emerged due to factors not envisaged by the initial drafters of the debt agreement provisions in 1996. The amendments to be made by this bill are designed to improve the operation of debt agreements under part 9 of the Bankruptcy Act 1966. The objects of this bill, as detailed by the speakers, include the provision for enhanced regulation of debt agreement administrators, specification of the duties of debt agreement administrators, encouragement of creditors to make decisions based on the debtor’s capacity to pay et cetera.

Schedule 1 contains provisions relating to the registration of debt agreement administrators. These amendments will commence from royal assent to enable existing and prospective administrators to be registered prior to 1 July 2007. This will ensure that they are able to administer debt agreements which will be subject to the new rules from that date. Most importantly, 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 schedule contains all the amendments other than those relating to registration of administrators. In their submissions to the Insolvency and Trustee Service Australia—ITSA—inquiry into amendments of the debt agreement provisions of the act, the Consumer Law Centre of Victoria submitted that debt agreements were introduced in 1996 as a low-cost, informal, flexible alternative to bankruptcy for low-income earners. Since their inception, the number of accepted agreements has increased significantly, from 48 in 1996-97 to 4,739 in 2004-05. According to an ITSA profile of debtors for 2003, the majority of those who entered the agreements had a gross income of less than $30,000 in the year prior to the debt agreement with 61 per cent owing unsecured creditors less than $20,000 and with 25 per cent of them owing less than $10,000. Unemployment followed by excessive use of credit were the main attributed causes of insolvency. Sixty-three per cent of debtors who entered into debt agreements were under 34 years of age.

Since the inception of debt agreements, concerns have arisen regarding the operation of part 9. In particular, debtors and creditors have indicated concerns regarding the conduct of some administrators of debt agreements, the lack of knowledge of administrators in relation to the alternatives to debt agreements, the lack of frank information provided to debtors as to the consequences of entering a debt agreement, the payment of excessive fees for the setting up and administration of agreements and the drawing up of unsuitable debt agreements by commercial debt agreement administrators. These concerns have been responsible for diminishing the benefits that were expected from debt agreements. Problems include excessive fees charged by administrators, which add to the debts of the debtor and are payable irrespective of the outcome of the agreement. Hence, even failed attempts incur fees. Another issue is that the administrator may, once the agreement is accepted, pay his or her fees first. If the agreement becomes unsuitable and the creditor requests a termination of the agreement, the debtor may be in no better position than if he or she had not pursued a debt agreement.

Due to the imposed limits on income, debt and assets, debt agreements are undertaken by people who have low incomes and are otherwise disadvantaged. A large proportion of debtors who enter into debt agreements are young people who often display financial naivety. Fees are being extracted by administrators from a section of the population that is least able to seek lower cost alternatives or negotiate a better deal.

In the groundbreaking research report Do the poor pay more?, Anna Stewart wrote:

The lack of knowledge amongst administrators/agents and brokers as to the alternatives to debt agreements and the lack of frank admissions as to the consequences of entering a debt agreement, means that a debtor entering a debt agreement may unwittingly place himself or herself in a similar position to bankruptcy when it comes to securing credit in the future. Debtors who enter debt agreements are permanently recorded on the National Personal Insolvency Index (NPII) and the agreement also appears on his or her credit report. These events effectively exclude the debtor from mainstream lenders, place the debtor at the mercy of high cost fringe lenders and thereby works to entrench financial exclusion, as research undertaken by CLCV demonstrates.

The commonly expressed view of consumer advocates working at the coalface of financial counselling is that the debt administration industry has been formed in a highly opportunistic and ad hoc manner. It is a relatively new industry and this bill represents the first efforts to regulate it. A key concern emanating from financial counsellors is that consumers who enter into debt agreements tend to be highly vulnerable. That was obviously indicated by the earlier figures. Many of those consumers also find it difficult to understand the implications of entering into these agreements.

Whilst the opposition is supporting the bill, I would point out that this support is in the context that the bill does not represent a comprehensive examination of all the issues which should have been assessed. This is especially the case given that the introduction of debt agreements happens to coincide with the coming to power of the Howard government. We have seen a massive increase in personal debt—and some of the figures in relation to that have been alluded to earlier.

According to the Parliamentary Library statistics on monthly economic and social indicators, Australian household debt has seen a massive hike while the coalition has been in government. Accordingly, in the 1995-96 financial year, total household liabilities as a proportion of annual household gross disposable income averaged about 70 per cent. That already too high figure—and the member for Fisher agreed that it was too high back then—has during the past 10 years ballooned to a staggering 157.3 per cent for the current quarter. So when the government is trumpeting the economic fortunes of this nation, it must be reminded that it has also presided over historically massive increases in household debt. ‘Relaxed and comfortable’ is a fantasy perpetuated by the Howard-Costello government. Our reality is that we are in debt up to our eyeballs.

I return to the Consumer Credit Legal Centre. In their outstanding submission to ITSA, they argue that the review of the provisions is disappointing due to its limited scope. Given the huge growth in debt agreements, the review should have asked the following fundamental questions: whether debt agreements are in fact a viable low-cost alternative to bankruptcy; whether debt agreements are serving the needs of debtors who are in financial difficulty and yet wish to avoid bankruptcy and make some payments to their creditors; whether the rise of commercial debt agreement administrators has furthered the objectives of the part IX regime or has had negative consequences for debtors and/or creditors; and, finally, could the debt agreement regime be amended and regulated to achieve its objectives or should alternative options be explored.

It goes without saying that debtors experiencing financial difficulty are an especially vulnerable group. They are characterised by a desperation to find any solution to stop creditors from ringing them, harassing them and demanding money that they simply do not have. The CCLC argued:

In our experience, many commercial Debt Agreement Administrators take advantage of this vulnerability to convince debtors, either by active misrepresentation or by omission, that a Debt Agreement is the best option for the debtor, without adequate explanation of the other options available, or of the consequences of the path recommended.

In our view—

that is, the organisation’s view—

Part IX debt agreements are currently failing many debtors. What was intended as a low-cost alternative to bankruptcy has now turned into an expensive alternative to bankruptcy. Indeed, for many callers to our service, it is not an alternative to bankruptcy at all, but a long and expensive path to eventual bankruptcy.

The following case studies taken from their advice line demonstrate the point:

Caller has a Part IX that she cannot service. She was referred to a financial counsellor by ITSA. Caller is interested in bankruptcy information.

Client has had a Part IX disbanded and owes the creditors $25,000. Wants to know what she can do and also wants to know about bankruptcy.

Caller has a Part IX that is ready to be terminated as he cannot make the payments. He wants to file for bankruptcy or to know whether there are any other options—

et cetera. The CCLC go on to say:

In many of these cases clients have paid fees to Debt Agreement Administrators that would have been better spent on living expenses to avoid the accumulation of more debt or distributed to their creditors. Their inevitable bankruptcy occurs later than it would have done were it not for the intervention of the debt agreement, meaning that more years have passed by the time they are discharged from bankruptcy and they have less time in which to re-establish themselves financially. Some remain in limbo for indefinite periods as creditors refuse applications to terminate or vary agreements and yet payments are not being met.

The bill before us is a step forward. However, I fear it is also an opportunity missed to provide a more fastidious consumer protection mechanism. Consumers of financial services become accustomed to the certainties and high levels of transparency provided by the Financial Services Reform Act. The CCLC argues that, as debt agreement administrators are only regulated in a minimal way, the debtors accessing their services do not have the protection enjoyed by consumers of financial services. For example, it is compulsory for banks and credit unions to become members of the ASIC approved industry external debt dispute resolution scheme, but the same obligation does not exist for debt agreement administrators and their agents.

Some of the key licensee obligations under FSR include: doing all things necessary to ensure that relevant services are provided; acting honestly and fairly; managing conflicts of interest; complying with conditions of the licence—or vary or revoke existing licence conditions—having adequate resources to provide relevant services; maintaining the competence to provide those financial services; ensuring representatives are adequately trained and are competent to provide services; and having a dispute resolution system that includes internal dispute resolution and membership of an ASIC approved industry dispute resolution scheme.

In summing up, I again stress that the opposition will be supporting the bill. However, we are disappointed that the voice of consumer groups has been ignored once more. This is despite the fact that numerous submissions were made by all of the key consumer groups around the country. I am indebted to the interest and work of the Consumer Action Law Centre and the Consumer Credit Legal Centre. I commend the bill to the House.