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Legal and Constitutional Affairs Legislation Committee

McCOSKER, Mr Gavin, Deputy Chief Executive, Australian Financial Security Authority

MITRA, Mr Dipen, Director, Insolvency and Trustee Service, Australian Financial Security Authority

PAUL, Ms River, Australian Financial Security Authority Statistician, Australian Financial Security Authority

SELLARS, Mr Andrew, General Counsel, Australian Financial Security Authority

SHAW, Mr Paul, National Manager, Regulation and Enforcement, Australian Financial Security Authority


CHAIR: You know the rules and you would have heard me say them several times so, I won't repeat them. Would you like to make an opening statement? But you must, in your opening statement, what a realisation charge is and where it goes.

Mr McCosker : We picked up that that might be a question that you might ask, Senator, so we thought we might usefully cover that in the introductory statement. We'll keep it very short. We'll just highlight the roles that are relevant in respect of the insolvency regime. You've heard some comments about the inspector-general, for example, so I'll just clarify the roles and then discuss the realisation charge and then leave it for questions from the committee.

The relevant role that AFSA plays in this regime is as the official receiver, and that is assessing applications for bankruptcy and debt agreements, and that would come in respect of the undue hardship provisions et cetera that are proposed, coming through as a component in the debt agreement reform. We also play the role of the official trustee, which is Australia's largest trustee in bankruptcy, in that it administers about 80 per cent of bankruptcies, a large percentage of which are those bankruptcies which do not have assets in them—you might call them the consumer-type bankruptcies, for example. We also have the role of inspector-general, who also is our chief executive, and, obviously, that regulates the private sector, trustees and debt agreement industries in that particular area.

We are 100 per cent cost-recovery funded. The government, in 2014, made the decision to move us to 100 per cent cost-recovery funding. The realisations charge is the only levy that we charge, but we have a range of other fees. The debt agreement proposal fee was one that you heard some of the witnesses comment on. It is currently a $200 fee for debt agreements to be proposed to the official receiver to accept and then go through the voting process with creditors et cetera. That is an example of other fees; we have a range of other fees as well. But the realisations charge is a component of our 100 per cent cost-recovery funding model.

CHAIR: So does every debt management fee require a $200—

Mr McCosker : All debt agreement proposals, yes. Not the bankruptcies; only on the debt agreement side of it yes, correct.

CHAIR: And then you get seven per cent of the collections, so to speak.

Mr McCosker : Yes; in general terms, that is correct.

CHAIR: These are pretty basic questions. Does the inspector-general have to approve every debt management agreement?

Mr McCosker : The official receiver is the former role that plays the acceptance and determination as to whether the debt agreement proposal will be able to be issued to creditors to vote upon. The creditors are the ones who control whether a debt agreement proposal is actually accepted or not.

CHAIR: So every debt agreement proposal actually goes to the—

Mr McCosker : Through AFSA, yes; through the official receiver.

CHAIR: If there is a creditors' vote on it, who actually organises that?

Mr McCosker : AFSA organises that. We collect the results and, obviously, we then determine, based on those results, whether the debt agreement has been accepted or not.

CHAIR: Do people meet in a hall like this and vote, or do they do it by post or—

Mr Winters : There's a range of mechanisms. We've recently provided and issued an online voting process. That's only been available since February this year. That's being incrementally taken up at the moment, but there's a range of different mechanisms used at the moment.

CHAIR: You're not an authority that would comment on another government agency. You're not in a position to give a view on ASIC's suggestions of some problems, and there could be some safeguards.

Mr McCosker : No, Senator, we'll leave those policy questions to the department.

CHAIR: So you actually accept the government's proposals and try to work within them to make them work as the government intends?

Mr McCosker : Indeed.

CHAIR: I will pass to Senator Pratt.

Senator PRATT: Thank you, Chair. You don't have a position on the bills before us; it'll be your job just to implement them. You don't have a view on the policy intent behind them.

Mr McCosker : Not on the policy intent, Senator, no. But, in terms of the workability, we are Australia's largest trustee in bankruptcy, so we can provide comments on the workability of it from our perspective. But, in the terms of the policy intent, absolutely not; that's a question for the department.

Senator PRATT: In terms of the workability of it, have you forecast the extent if debt agreements are reduced to three years—currently only 2.6 per cent of agreements are within that scope anyway, so essentially therefore it's going to force debt agreements, that 86 per cent of agreements; in fact it'll be 100 per cent of agreements needing to come into that. Some submitters have told us that that will make debt agreements less viable and that more creditors are going to want to push people into bankruptcy. Is that something that you've got any evidence that will show us what will happen, based on your experience?

Mr McCosker : No. Unfortunately we can't. There's no evidence that we can sensibly model to provide in that regard. We certainly know, and we can provide some information, we have a raft of statistics. We can provide a raft of information around the statistics and the returns that we see to date for debt agreements which are for three years, for five years, and we can discuss some of those comments if that's useful to you.

Senator PRATT: Yes, it is.

Mr McCosker : Okay. We do see at the moment the average rate of return for debt agreements of five years or longer having around 60 cents in the dollar return to creditors and for those of three years in the current pool around 69 cents in the dollar to creditors. It's not possible to predict the sustainability or the impact to the returns to creditors in the three-year mark if more were consolidated into that three-year pool. That would require, if they were looking at the same returns, a higher cents-in-the-dollar return to creditors as a result of that. We wouldn't be able to determine the sustainability. But we have seen that trend to reduction in the fees to creditors since 2011 and 2012 from around 74 cents in the dollar down to 69 currently, and, through that same period, a marginal increase to the debt agreement administrator fees in that area from around 22 cents in the dollar to 23½.

Senator PRATT: That's the return to the creditor.

Mr McCosker : Yes.

Senator PRATT: Is the amount being paid out by the debtor still—clearly that might be much higher than that once you account for other fees.

Mr McCosker : Yes. The total amount paid out by the debtor during that same time—

Ms Paul : Total amount in 2016-17 of $180.9 million was paid in dividends. The total payments made by debt agreement administrators in relation to finalised debt agreements was $259.5 million. That comprises payments in dividends to creditors as well as trustee fees and other payments. Other payments include things like costs of selling an asset, or the realisations charge. It's a range of smaller fees that are combined in for recording purposes.

Senator PRATT: $259 million, recovered in total, with 69 per cent of that—no, that's 69 per cent of the original debt. What percentage of that $259 million is going to the creditor?

Ms Paul : $180.9 million went to creditors.

Senator PRATT: Which means it's not far off a hundred per cent of the original value of the debt having been repaid. Just that there's a proportion of that that's going elsewhere.

Ms Paul : That's of the payments that were administered by the debt agreement administrators. It doesn't necessarily relate to their debts.

Senator PRATT: Sorry, so that is just the payments that they get, separate to the debt.

Ms Paul : Yes.

Senator PRATT: What proportion of that—you can't really work out how much above that 69 per cent those organisations are getting without knowing what the total figure repaid by a debtor is.

Ms Paul : Yes. So when they lodge a debt agreement proposal, they recommend what they're going to repay creditors, and so that's why we end up reporting in cents per dollar. In general, as we've said, it's 60c per dollar. Then, as the debt agreement progresses, there are those additional fees that've been talked about today: there are the set-up fees, there are the administrative fees and so on, and there are also the costs of administering the debt agreement itself.

Senator PRATT: How much is that component of it?

Ms Paul : As to the fee component of that $259½ million, we look at the finalised debt agreements for each year and where they landed—so, when it's all done and dusted, regardless of how long the debt agreement went for. In 2016-17, of those finalised debt agreements, practitioners ended up paying out $259.5 million. Of that $259.5 million, $180.9 million was to the creditors and $60.7 million was paid in practitioner fees, and the balance is those other payments that I talked about.

Senator PRATT: So it was $180 million of that that went to the creditors?

Ms Paul : Yes.

Senator PRATT: What is the overall percentage of what is recouped relative to the original debt?

Ms Paul : Generally it's around 60c in the dollar—

Senator PRATT: No, no; that's not my question. It is in terms of: once you add the fees on top of the debt, in terms of what the consumer has paid out, if they'd paid out the original debt versus what they've paid with the fees and the original debt combined.

Ms Paul : We'd have to take that one on notice because of the different structures of the practitioner fees. There is some work involved in figuring out exactly which proportions of fees—

Senator PRATT: Yes. It's really a question of whether a consumer would've been better off—if it's something like just a consumer credit problem, whether a consumer is better off in a debt agreement, or whether they're really better off paying out the debt in other ways, in terms of what they owe, or negotiating with the bank or whatever. You've got to be able to compare the relative value of the two. So you don't have a view about the viability? Is there anything you could tell us about how the different kinds of debtors are streamed within what you do? For example, the government has told us that they want to allow people who are likely to be entrepreneurial to get back into business. For example, take a tradie who has gone bankrupt, and who might've lost their house because it was tied up with their business assets; you really want to be able to give that person an opportunity to get back to work as a sole trader or whatever. That's their explained rationale for these changes, but they haven't really talked about that other large proportion of people who have, also, a lot of consumer debt.

Mr McCosker : There is a lot of difficulty in being able to provide any real confidence in information between what would be classified as a business versus a non-business bankruptcy in that particular area. At the moment, that information is collected via a self-assessment on the application. You heard earlier today that around 90 per cent of applications to become bankrupt are made by the debtor themselves. Through that application, they actually self-assess a range of different categories, which is where we come up with the figure for the percentage of business related bankruptcies. Because of the range of different mechanisms—where, even through ARITA's statements, you heard that they're determining for a sole proprietor, for example, if they have debt guaranteed and whether it is personal or corporate debt, or 'corporate' in inverted commas, as I think Mr Winter commented—debt, for example, is a very difficult thing to be able to dissociate in some cases.

Senator PRATT: Could you help us with dissociating the scale of debts—the people who are going bankrupt for debts under $50,000, versus the people who are going bankrupt for between $50,000 and $100,000, versus those who are going bankrupt for over half a million dollars, for example? When you are trying to differentiate between who should be eligible to go and be on a board versus go and be a sole trader, I'm interested in whether we can learn anything from that data. Do you think we will learn anything if we look at that data?

Ms Paul : Yes. You actually will. I think our best bet would again be to provide more up-to-date information. But one thing you will see is that the number of debts and the amount of debts will give you different insights. What we see is that the lower income debtors tend to hold a lot of very small debts to a number of creditors, such as the tax office, for example. Whereas people with larger debts, generally that is going to be more banks and so on. The demographics of the two can be quite different. So I think the best insight would be if we gave that to you at a later date as well. That would be terrific. Thank you. I don't think I have any more questions.

CHAIR: Thank you. I asked earlier about some statistics and someone said you were the ones with the statistics; is that right? Could you on notice give us those statistics? I don't know whether you recall what I was actually seeking, and by this time in the afternoon neither do I. It was things like the percentage of debts actually recovered under existing debt management or under insolvency. If we get to the Hansard—Hansard is doing a lot of things so it may not be out for a few days—you could have a look at those. I think it was in the first session that I was asking those questions. And anything else useful you can give us statistic-wise—I don't think in your submission, were they?

Mr McCosker : Not those particular ones, I don't think. We have a raft of additional statistics which we can certainly try to package up based on those questions that were asked earlier in the day and send those through in addition to the ones that we just discussed.

Senator PRATT: Can I quickly ask: the reason only 0.2 per cent of agreements are completed is the new debt agreements largely have run their five-year average? This is on page 5 of your submission.

Ms Paul : They are debt agreements that were entered into during the 2016-17 financial year, so they are very unusual debt agreements in that they have been finalised within the year of entering into them.

Senator PRATT: If only 48 per cent of agreements were completed in 2012-13, what proportion of that 52 per cent would now be complete, five years later?

Ms Paul : As at 30 June, none of them were. We could have a look at now how many additional ones have been finalised.

Senator PRATT: I am interested—we have been told that we want to bring the five-year average down to a limit of three years. I am unsure about the length to which debt agreements are actually operating. It is a five-year average. Is that right? Some people are advocating that, rather than a three-year limit, we should have a five-year limit, and we can't judge the returns on that because we don't—

Ms Paul : No, they haven't elapsed. Okay. One of the issues as well is that, of course, as debt agreements are varied the length has often varied as well. So around 80 per cent of variations are actually to increase the length of the debt agreement. So that complicates that as well. If you have varied that debt agreement during that time then it's—

CHAIR: Beyond the seven years?

Ms Paul : They can vary it for any amount. What I mean is that some of those ones that haven't been completed—like, if you have lost your job, you might have added a variation to extend the length.

CHAIR: Just adding to Senator Pratt's questions: if this is brought in, there will be no flexibility to extend beyond three years. Is that your understanding?

Mr Sellars : My understanding is that the bill provides for a three-year maximum, but there is some flexibility in that the agreement can run for up to a period of six months in arrears beyond that time and then it will automatically terminate, if not terminated somewhere between the three years and three years and six months. But, generally speaking, you wouldn't be able to propose a variation to have the agreement run more than three years.

Senator PRATT: If it's a reasonably large debt and you're trying to protect a housing asset, surely it might be on occasion be in your interest to have a longer-run debt agreement. I guess you'd probably just reverse-mortgage the house and pay the debt outright; you don't need a debt agreement to do that.

Mr McCosker : Those would be options, but again, that's a question of policy. It's entirely creditor driven whether to accept a debt agreement or not. The bill does not change that proposition, therefore it would be upon the creditors to determine what they felt was sustainable and what they would be willing to accept in that regard.

CHAIR: Is one year sufficient time for the official receiver to do all he needs, particularly if the bankruptcy is a little more complicated than others?

Mr McCosker : In general terms as the official trustee we feel a one-year period is not a significant impediment to operate a bankruptcy. There are some potential challenges with regard to the timing to identify issues where you may wish to lodge an objection to the discharge of that bankruptcy in that time. If you became aware of information only quite late in the bankruptcy, with a couple of weeks to go, could you as a trustee in that particular area adequately assess whether or not that's reasonable grounds for an objection? In reality that also occurs if you become aware of information only right at the back end of a three-year period.

CHAIR: That's right. For a complex thing, 12 months, 365 days isn't many working days.

Mr McCosker : Currently the vast majority of objections to discharge raised by the official government trustee compared to the registered trustees in the private sector are lodged within the first 12 months of a bankruptcy. That's different for registered trustees in the private sector. There is the possibility for those objections to be raised within those first 12 months, but it depends upon the complexity of the arrangements and administration on foot.

CHAIR: Is the official trustee going to get criticised because he hasn't been able to do the work in 12 months?

Mr McCosker : We feel in general terms there's no significant impediment to our ability to complete the work for the most part within the 12 month period.

CHAIR: Thanks very much for your assistance today. We very much appreciate it.

Committee adjourned at 16 : 47