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Thursday, 26 November 2009
Page: 13209


Mr CRAIG THOMSON (5:36 PM) —I rise to support the Bankruptcy Legislation Amendment Bill 2009. This bill is part of the government’s wider microeconomic reform agenda, which continues to improve the effectiveness of Australia’s credit markets. The amendments are intended to modernise Australia’s personal insolvency system. The amendments will give people in financial distress a more realistic opportunity to consider their options and, where possible, avoid bankruptcy. The reforms will encourage more debtors to get advice and information about all of their options before choosing bankruptcy. In particular, the reform aims to encourage people experiencing financial trouble to consider debt arrangements rather than bankruptcy. These arrangements provide a much better return to creditors and are far less of a stigma for those people who in the past have been forced to go into bankruptcy. The increase in the threshold for creditor petitions will also ensure that people are not bankrupted over a small debt. Creditors have other options to recover debts without resorting to bankruptcy as a collection tool. These options include negotiated payment arrangements, civil debt recovery and garnisheeing income and assets.

Before I take a more detailed look at these amendments, I would like to talk about the scale of bankruptcy in Australia. In New South Wales over the year July 2008 to June 2009 there were 10,499 bankruptcies. I am referring to personal administrations. This represents an increase over the previous year of 5.7 per cent. The total number of bankruptcies in the whole of Australia in 2008-09 was 27,503, up from 25,970 in the previous 12 months, or an increase of around 5.9 per cent. These figures are naturally of concern, but what is perhaps a little more troubling is the increase in bankruptcies, again in personal administrations, in more recent months. The total bankruptcies in Australia for the June to September quarter this year were 7,329, as opposed to 6,886 for the same quarter the previous year. This is an increase of 9.62 per cent. Business bankruptcies, according to various studies done in recent years, are caused by a number of issues, including economic conditions, excessive drawings, excessive interest, lack of capital, seasonal conditions and gambling or speculation. Those same studies show non-business bankruptcies are caused by unemployment, excessive use of credit, domestic discord, ill-health, adverse litigation and, again, gambling or speculation. So this puts the subject of this bill into some perspective.

Now let us look at the bill in a bit more detail. The proposed amendments provide a clearer regime for setting and reviewing remuneration for trustees. In particular, they provide a more accessible and streamlined process for challenging a trustee’s remuneration claim. They ensure creditors can be satisfied that the remuneration is reasonable and reflects the value added to the estate by the trustee’s work. The changes to offences under the proposed amendment will introduce an infringement notice regime as an alternative to prosecutions for offences of strict liability; ensure that penalties for some offences, particularly those involving fraud, reflect the seriousness of the conduct and are consistent with penalties for similar offences in other Commonwealth, state and territory legislation; provide stronger powers to obtain a statement of affairs from a bankrupt who fails to file this as required; and provide stronger powers for the Inspector-General in Bankruptcy to investigate possible offences under the act.

The bill will also result in the abolition of bankruptcy districts. This will allow the Insolvency and Trustee Service Australia to administer the personal insolvency system in a more efficient way. The bill proposes an increase in the minimum debt for a creditor’s petition to $10,000. Currently a creditor can petition for bankruptcy where the debtor owes at least $2,000. This amount has not been updated since 1996. There is also evidence that some creditors use bankruptcy inappropriately as a means of enforcing payment of very small debts. These cases often result in trustees’ fees which are many times the amount of the original debt.

Another amendment will increase the stay period for declarations of intent to file from seven to 28 days. A longer stay period will increase the likelihood of the debtor obtaining proper information and advice about all options. The official receiver will notify creditors of the declaration, which will allow them to be proactive in contacting the debtor to negotiate alternative arrangements. The debtor will be required to file a simple statement of affairs with the declaration. This will mitigate the risk of debtors dissipating assets during the period and provide an opportunity to explain to the debtor the seriousness of the action being taken. The bill will also increase the debt, income and assets thresholds for debt agreements by 20 per cent. These were last amended in 2002 to encourage more people to consider a debtor agreement as a viable alternative to bankruptcy. The proposed increase will make these agreements available to more consumer debtors.

It has been asked what impact these changes will have on small business. Again, let us put this issue into perspective. In 2008 and 2009 there were only 391 sequestration orders for an amount less then $10,000. Given that there are approximately 1.93 million small businesses in Australia, it is likely that only a very small proportion of small businesses would file a creditor’s petition in any given year for an amount less than $10,000. Small businesses will also benefit from other reforms. Increasing the availability of debt arrangements will increase returns to creditors in many cases and the 28-day moratorium on payments will enable more creditors to negotiate with debtors to achieve payment.

Earlier I touched on the fact that the bill is part of the government’s wider microeconomic reform agenda, which continues to improve the effectiveness of Australia’s credit markets. Of course, we have also embarked on a major reform of Australia’s credit regulation regime to bring it into the 21st century, and we determined that at the heart of this plan would be a new approach for Australia built on responsible lending and consumer protection. Just over two weeks ago the National Consumer Credit Protection Bill 2009 was passed in both houses. The government is implementing a credit reform package that delivers on its commitment to nationalise and modernise Australian consumer credit laws. The package will, for the first time in this country, provide for one single standard and nationally consistent regime for consumer credit regulation. There are substantial benefits to be realised from this credit reform package and its implementation is long overdue. It is a key COAG reform and represents the first stage of a plan to transfer the consumer credit regulation to the Commonwealth.

The reform package includes several key components. The credit bills will establish for the first time a comprehensive national licensing regime for people engaging in credit activities—that is, lenders and providers of consumer credit broking services must obtain an Australian credit licence. Licensing will, over time, encourage the improvement of standards in the industry and thereby improve consumer confidence and market integrity. In particular, fringe or predatory players will be excluded. In other areas, such as the broker space, this will improve the credibility of the profession. In order to become licensed, the person will need to demonstrate to ASIC that they are a fit and proper person—for example, a person cannot be licensed where they are banned by a state regulator or are subject to a state control order used against organised criminal gangs—and can comply with the standards expected of a licensee: for example, conducting business efficiently, honestly and fairly or properly training and supervising their agents. ASIC will publish guidelines for the industry on how to demonstrate that they meet the requirements for being licensed to make this as straightforward as possible. This guidance will include parts particularly directed at small businesses to give them simple, practical assistance on how to become licensed.

The key change in the market for consumer credit in Australia arising from the credit bill will be the requirement for credit not to be given to consumers irresponsibly. The enhanced level of consumer protection requires all lenders to lend responsibly and all brokers to suggest loans responsibly by ensuring that a credit product is not unsuitable for the customer after assessment that it meets their needs and they have the capacity to repay the financial obligations.

In addition to these key fundamental obligations, the consumer will be provided with specific protections that will assist with the problems associated with financial distress and refinancing. These specific measures include, for example, a presumption that the primary home should not have to be sold to afford any refinancing arrangements. And, in the event that a consumer in hardship is unable to be placed into an alternative contract, credit assistants will now be obliged to inform consumers of their ability to seek respite from their credit provider.

To ease the transition burden for industry and facilitate the implementation of the national credit regime in a sensible and practical fashion, the government has, firstly, simplified the way in which the proposed responsible-lending arrangements will apply and, secondly, delayed the commencement of responsible-lending obligations for credit licensing to 1 January 2011. This will give industry more time to put in place the necessary infrastructure changes needed to support responsible lending. Thirdly, and importantly, the government is giving ASIC more flexibility to exempt or modify the licensing and registration requirements in the law. ASIC will play a key role during the transition period to provide assistance to industry. The government is confident that, by industry and ASIC working closely together in this process, we will effectively facilitate a seamless and successful transfer to the new credit regime.

The state based Uniform Consumer Credit Code, which has been in force since 1996, has been largely replicated, with minimal changes in the credit bill. However, several enhancements have also been made. A key enhancement is the extension of the coverage of the code to credit for residential investment properties. This will extend existing protections under the code to this type of credit, including precontractual disclosure requirements, a right to seek a variation to payments on the grounds of hardship, and remedies against the lender where they have engaged in unjust conduct. The monetary threshold under which consumers have the right to seek a hardship variation or stay of enforcement has been increased to $500,000. Under the state code, the threshold has fluctuated monthly according to the average cost of homes in Sydney and has varied between $295,790 and $368,390 since 2004.

Other key adjustments have been made to address specific abuses and avoidance techniques, such as prohibiting the taking of mortgages over essential household goods and the use of fee-splitting structures between related parties to avoid the code, as under the state code only fees charged by lenders are relevant in assessing whether there is a charge for credit attracting the application of the code; and amending the effect of business purpose declarations. Under the state code, if a borrower signed a declaration that the credit was for a business purpose, the result was to exclude the code, leading to abuses of the declaration by predatory lenders. This has been changed so that in general terms a lender will only be able to rely on such declarations where they have made reasonable inquiries as to the purpose of the credit.

Considerable and realistic protections for consumers have also been included in the new credit regime. For example, there will be heavy penalties for licensees who place consumers in unsuitable loans. ASIC will have enhanced powers to deal with licensees who act contrary to their obligations, and it can issue infringement notices to act quickly to penalise certain breaches of the law. All licensees will be required to be members of the external dispute resolution scheme. Consumers with disputes with their lenders or service providers will be able to complain to these schemes. They are an effective alternative to court, as they are free and operate without the formality of costs of court action.

Concerns about the loss of access to state tribunals in the states of Victoria and Queensland to hear credit disputes have been specifically addressed by putting in place the new dispute resolution framework. For example, the Federal Magistrates Court and state and territory magistrate and local courts will be able to hear consumer credit claims using an opt-in streamlined small-claims procedure for compensation claims up to $40,000 and to obtain orders under the code. This mechanism replicates some of the advantages of the state tribunal systems by having a presumption against consumers needing legal representation and allowing the court to operate without formalities. This will minimise the time and costs to consumers of having a court resolve their disputes.

Those are the features of the national consumer credit protection legislation. To sum up: a nationally consistent consumer-credit framework marks a generational change that will significantly improve the effectiveness of protection for consumers and address the gaps that continue to exist in the state regulatory system. A single standard regulation will reduce the cost of doing business across the eight different jurisdictions. In the longer term, it would also allow the consolidation of requirements within the broader financial services sector and reduce compliance costs for those businesses that provide both credit and other financial product services.

Some of the other vital microeconomic reforms which the Rudd government is undertaking include strengthening the international legal cooperation arrangements; promoting better dispute-resolution processes, including arbitration at the national and international levels; personal property securities reforms; and uniform regulation of the legal profession across Australia. These reforms will reduce costs for business and support business confidence and will be vital to growing our economy in the future.

The reforms in the Bankruptcy Legislation Amendment Bill 2009 will go towards improving the effectiveness of Australian credit markets and for this reason I commend the bill to the House.