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Legal and Constitutional Affairs Legislation Committee

GILBERT, Mr Ian, Executive Director, Legal and Regulation, Australian Banking Association Inc.

CHAIR: Welcome. Thank you for appearing today and for your submission. We very much appreciate your assistance. I think we have given you some written material on parliamentary privilege and the protection of witnesses. There are a few other rules around but I won't bother going into them. If they become relevant we will deal with them then. Again, with our thanks and our apologies for being a little bit late having you. Would you like to make an opening statement, after which we will ask you some questions.

Mr Gilbert : Thank you for the opportunity to address the committee today. The Australian Banking Association changed its name recently and we have been gradually working through all of our materials to bring the name up-to-date. We have gone from 'Bankers' to 'Banking'. We think that is more of interest to customers who engage in that activity with our members.

CHAIR: So it is the Australian Banking Association?

Mr Gilbert : Indeed. I will keep my opening remarks very brief. First, I understand that we are looking at two bills today—one proposing to reduce the period of bankruptcy from three years to one year. In relation to that bill, we have concerns about how that is going to play out in the foreseeable term. Both these bills are dealing with people—individuals who get into financial difficulty. One concern we have is that a one-year bankruptcy term could interest people who are in financial difficulty to take that option rather than either taking a part IX or a debt agreement plan that is going to operate over several years, compared with a bankruptcy, which will be all over with debts discharged after one year. From our perspective, the bank's perspective, this would be something of a tragedy because the banks have spent an enormous amount of time and effort in helping their customers who get into financial difficulty with their loans, to provide some form of relief for them to be able to re-establish themselves and get back on their feet and become a performing bank customer again.

This is really important to our industry. We have updated our banking code to strengthen those provisions. That banking code is currently before ASIC for consideration, with the hope that ASIC will approve it. They are very important measures and we would not like to see some something operating or countervailing against that objective of helping customers, because, as we know, the aftermath of bankruptcy is not a good place for a consumer. Their credit record is impaired and of course they are on the National Personal Insolvency Index, pretty well for the rest of their lives. That's as much as I want to say about the bill in relation to the bankruptcy term. Do you want me to move to the second bill?

CHAIR: Yes, if you wouldn't mind.

Mr Gilbert : This is a much more complex one. Some of the things I've just said are similar in a way to what we are concerned about with the reforms here. Point one, we do support reform of the debt agreement administration. We think that that needs to focus on the expertise and qualifications of debt agreement administrators. We liken them to bankruptcy trustees with the sorts of skill and expertise and so forth that they should be exercising. We don't think that reducing a debt agreement term to three years is a sensible thing to do. Coupled with the increase in the assets threshold of a debtor, and what a debt might involve in terms of payments over a three-year term, rather than for example a five-year term, they could become extremely difficult payments to make, and simply because the debtor has a higher threshold in terms of assets doesn't necessarily mean that translates into a capacity to meet higher payments. We are very concerned about that.

Because of what I have said about the banks and their wanting to work with their customers who get into financial difficulty, we want to make sure that the customer comes to the bank first when they are in difficulty with their loans and not to a debt agreement administrator, because it is almost certainly going to be the case that the option of part IX will be followed rather than perhaps speaking to the bank—possibly some other creditors—to see what can be worked out with them. We think that it would be unfortunate if that were the case, because of the downside of what a part IX involves in terms of your credit record and so forth.

I think they're the main points. A point that came up which I heard about from speaking to some of the members was that quite often they're contacted by a debtor who has run into difficulty with their debt agreement administrator and there's no place that they can go to have that dispute worked out for them. We think it would be a really good idea, to help those people, those individuals who do run into debt difficulty, to have a place to go—a bit like the way someone who's got a problem with their bank can go to an external dispute resolution scheme free of charge and have that dispute resolved. We think that would be a huge advantage for individuals who run into those sorts of difficulties.

CHAIR: That's for people having a dispute with their debt manager?

Mr Gilbert : That's right, yes.

CHAIR: Not the creditor?

Mr Gilbert : No, not the creditors. It would be more to do with the way it's operating. There are some other matters that we've raised in the submission which your committee may have questions to ask about. But, in terms of the main theme of how we're approaching this, we're looking at this from the perspective that there are some potential downsides for individuals in this that I think some changes we've suggested might help to rectify. Thank you for the opportunity to raise these matters.

CHAIR: Thank you. Did I read in your submission that the limit should be, rather than reduced to one year, increased to five years?

Mr Gilbert : Not for the bankruptcy matter. We did suggest possibly two years—possibly. There's some difficulty about this. The objective that the government has is to (1) remove the stigma of bankruptcy, and (2) allow people who are entrepreneurially minded to get back out into the economic community and do what everyone's hoping they'll do: growth and jobs. But that's not necessarily how we see this playing out. We think one year is a very short period and it's at the risk of people opting for that because it sounds simple and a quick fix to their financial difficulties, or at the risk of those that are perhaps not as well-minded potentially recycling themselves in and out of bankruptcy. I saw in a submission the word 'phoenixing', a new form of phoenixing. I was quite attracted to that message. I think there are risks there if we're not careful. Of course, phoenixing, if there are entrepreneurs doing it, creates risks for other businesses if they're not going to be able to run their businesses to pay their debts and so forth.

CHAIR: I'm not sure if you had a look at the submission from ASIC to this inquiry.

Mr Gilbert : I haven't seen that submission.

CHAIR: Could I ask you, as a question on notice, to have a bit of a look at ASIC's proposal. You could drop us a note, if you want to, to comment on some of the suggestions they've made as to how the bill might be amended, to see whether that, generally speaking, would be more attractive to your members.

Mr Gilbert : I will certainly do that and get back to the committee promptly.

CHAIR: The bill before us reduces the bankruptcy to one year—again, this is obviously for individuals—but the period of repayment remains over three years. Is that good, bad or indifferent? I'm really talking about retaining the three-years.

Mr Gilbert : Yes. There is a three-year term that you're held in bankruptcy at the moment. You would be freed from bankruptcy after one year, but your obligation to make payments after release from bankruptcy would continue. Yes. The bill refers to the obligation to make payments from income subsequent to the discharge, but it doesn't necessarily deal with the question that I raised earlier about the fact that this might be seen as a relatively simple fix, not for escaping the obligation to pay debts but to clear things so that you can get out and start again, in other words.


Mr Gilbert : It's whether that might be successful in the right place; in the wrong place it might not be.

CHAIR: It assumes that after one year you can go back into business—

Mr Gilbert : Correct.

CHAIR: You wouldn't have any money, supposedly, which means that if you were starting a new business you'd be using someone else's money—perhaps, a bank that might be silly enough to lend it to you again!

Mr Gilbert : Probably one of our members, yes!

CHAIR: That all seems interesting in how it might all work out. Do you have any statistics on debts that banks have from people who go bankrupt and what percentage of the total debt is ever repaid? Is there a statistic on that?

Mr Gilbert : They would certainly have some data about those customers who have gone bankrupt and how much of the debt they were able to recover from the bankruptcy. Banks themselves tend not to—

CHAIR: Publish those—

Mr Gilbert : send people bankrupt because they are doing a lot of work in the earlier stages of the customer's difficulty with their loan to try to help them through that type of process. It's what other creditors might do that may force them over. But there would probably be some data about the recovery rate that they get. It's pretty low.

CHAIR: Yes, I would have thought that.

Mr Gilbert : Unless there's been some avoidable transactions that have been entered into by the bankrupt—perhaps some concealed money or assets—it's usually a fairly dry creek bed.

CHAIR: Yes. Mind you, my experience, which is now a bit dated, was that banks were too quick to put people into insolvency. If they had let them trade out everyone may have been better off, but I guess that's—

Mr Gilbert : That may have been a long time ago, perhaps.

CHAIR: But you don't think that applies anymore?

Mr Gilbert : Not to the same degree. I could imagine that if a bank were concerned as to where wealth might have gone they may want to have a closer look at that. And a trustee, of course, could carry out those investigations.

CHAIR: Different banks have different rules, and I don't want to name names, but for a lot of rural borrowers in the north of Queensland over years gone by, there was a bank that had been taken over by another bank—blah, blah, blah—and everyone seemed to lose, including the banks.

Mr Gilbert : Yes.

CHAIR: But, hopefully, that's better. There were also some comments, which I find amazing, that there are people who go to the banks and beg for a loan or bully them for a loan, or demand a loan and it's given to them. Then something wrong happens and it's the bank's fault. I can never quite work that out!

Senator PRATT: They might be offered credit that they never asked for but they took anyhow.

CHAIR: Well, in that instance I certainly agree. Again, this might be a difficult question for you, Mr Gilbert, but are there instances, or an acknowledgement within the industry, that perhaps we could say some banks in the past offered people credit that they really had no ability to service?

Mr Gilbert : I'm not aware of any particular circumstances that I could say yes or no to. There is a fairly strict responsible lending law applying to banks. It has been in place since about 2010 and was put in place by the previous government. That law requires two things: to look at the objectives and requirements of the applicant; and also to carry out a reasonable enquiry into the financial situation of the applicant, and to verify that information. So lenders aren't observing those two key principles of responsible lending, are allowing people to enter into a contract which is not suitable, which the law talks about, and then they're in breach, and ASIC's got responsibility to take action, to deal with those lenders who do that. So there's a strong incentive not to transgress that law.

CHAIR: Yes. I don't want to transgress the jurisdictions of the royal commission, where a lot of these things will be aired, but we're really interested in whether this bill improves across the board and does what the government hopes it will do, and so I appreciate your comments on that. I'll leave that for the moment and go to the deputy chair, Senator Pratt, and I might come back and ask you some other questions later if time permits.

Senator PRATT: Mr Gilbert, the position that the ABA has put, in terms of, a preference for debt agreements versus bankruptcy, seems to run counter to what other submitters have said. Organisations like Justice Connect, Financial Counselling Australia, and others have said very clearly that bankruptcy is preferable to unsustainable debt agreements, particularly for people who have no assets such as a house that they're trying to protect. What's your explanation of those differing positions?

Mr Gilbert : I would say that something other than an unsustainable debt agreement would be something that a debtor would really want, whether it's bankruptcy with all its accompanying complications and disadvantages is a way out or some other arrangement is another question altogether. I think that there's a stigma that goes with bankruptcy, and this proposed law is seeking to soften that. But there is still a stigma there. Some people see bankruptcy as punitive. So I hear what you're saying in the question about relief from an unsustainable debt agreement. I'm not so sure that jumping out of the frying pan into the fire is the way to go with the bankruptcy.

Senator PRATT: What do you mean by stigma attached to bankruptcy? Do you mean that in terms of real financial constraint on someone's things that they can do in the future or are you simply talking about stigma?

Mr Gilbert : I think it's how the community tends to perceive people who have failed and have failed so badly that they've had to go bankrupt.

Senator PRATT: There's no reason that people would necessarily know that your next door neighbour has gone bankrupt though. I guess organisations have said to us that people, because of that stigma, go above and beyond to try and prevent themselves from becoming bankrupt, even though those debt agreements are unsustainable for them. I'm assuming it's in your business interests to ensure that people have a debt agreement that enables banks to get as much of the money that they've lent back as possible, even if that is unsustainable for those in those debt agreements.

Mr Gilbert : If it's unsustainable then everybody loses.

Senator PRATT: Yes, because people may well go bankrupt in the end anyway.

Mr Gilbert : Yes. One of the key points in this whole exercise with the debt agreements amending bill is we're talking about periods of time, whether it's three years or for the term of an agreement, or whatever. In the submission we said that's really missing the point. The point is: has a proper assessment been made of this person's circumstances, such that they can enter into an agreement and be confident that the type of event you just described doesn't happen and that the agreement will be performed and such that the creditors who voted for the agreement are also not disappointed when it all ends in tears? We really strongly believe that there needs to be a thorough and proper assessment of the debtor's circumstances and set a realistic repayment plan.

Senator PRATT: Some of the submitters talked about a change in the income ratio that's proposed and that there needs to be better assessment; for example, one that takes into account housing and other costs. You are saying that that should be done in preference to doing away with three years and making bankruptcy a more desirable pathway. Is a change in income ratio something you would support?

Mr Gilbert : It is proposed in the bill but we have not seen what that is. We do not know what the methodology will be. That is going to be a decision for the minister. There has been no consultation that I'm aware of on what that is going to be. So we really have to reserve our view about that until we understand how that is going to work. Whatever it happens to be, it is part of the sustainability assessment. There is a standard of living. We would suggest that it is not a high life anymore—if you've got expensive cars and enjoy overseas trips and so forth. This is a fairly serious situation that the debtor is in so there has got to be some common sense around what is fair standard of living and then make your assessments in terms of what they can afford to pay. The shorter the period, the higher the payments are going to be so it becomes very important to understand that if that agreement is going to sustain over three years instead of five as we think it should then you need to be sure that there is not going to be any hiccup during that three-year term.

Senator PRATT: So if a debt agreement is reduced to three years as opposed to five, have you done the calculation of the amount of debt that is being repaid via debt agreements in terms of how that will impact on revenue?

Mr Gilbert : We haven't, no. There may be data around that may show that. For a debt agreement over three years, one of two things is going to happen. One is that the debtor is going to find it unsustainable if it's not assessed properly, in a way that they can afford to pay. If it is reduced significantly, creditors are not going to support it because they are not going to get a sufficient repayment of the debt back because the payments will be too low. They will only get a percentage of what the debt is. At then the risk is then this person could be sent into bankruptcy.

Senator PRATT: So there are two things there. The agreement needs to be sustainable for someone to pay but at the same time it needs to be approved by creditors.

Mr Gilbert : And the other factor is that there are fees coming out of it.

Senator PRATT: In your experience, how large are those fees.

Mr Gilbert : I don't have personal experience but members are telling me that they can be significant. An example that was given to me was that a percentage fee on a debt that may have the same number of creditors as another debt but the debt is much lower, the fee is roughly the same. So the recovery of fees from the debt agreement administrator is not proportionate to the total debt that is in question where the amounts are different but there are roughly the same number of creditors are involved in that debt administration. We think there should be a really good look at fees charged. This is an area where the private sector is working with extremely vulnerable people right at the end of their financial tether, if I can put it that way. There needs to be some consideration about the fact that this is a for-profit sector that's doing this management, and we think that there needs to be some proportionality then around the types of fees and charges that they can charge, because they impact the ultimate outcome in terms of sustainability and creditor returns.

CHAIR: Having a look at your submission, in your final paragraph you have four suggestions. Suggestion No.1 seems to be at odds to suggestion No. 4. Can you just explain those two?

Mr Gilbert : They've been ordered numerically in order of preference.

CHAIR: I see.

Mr Gilbert : No. 1 was the one we thought was a possible alternative to the way the bill is currently presented. If I can just step back a bit: earlier in the submission we said one of the difficulties is going to be with a one-year term a trustee that needs to look into a more complicated bankruptcy than something that may be relatively straightforward is going to need time to look and investigate what antecedent transactions have taken place before the bankruptcy occurred. There is a six-month recovery period prior to the date of the bankruptcy that a trustee can go back and claim voidable transactions, movements of property and so forth. One year is not very long to dig around and find out the answers to those types of questions, which is why a trustee should have the ability to determine and decide about extending the term of the bankruptcy. If the bankrupt wants to object, then they can make an application to the Federal Court to have that decision undone.

CHAIR: That seems to be your No. 4 point, which, to me, makes more sense for business-related bankruptcies—three years. But, from what we've heard earlier today, most individual as opposed to corporate bankruptcies are people with very few tangible assets—people who've got themselves into credit card debt.

Mr Gilbert : No. 1 covers both areas. If it's correct that the more complicated bankruptcies are going to be those where there has been a business failure, then the trustee, in those circumstances, may well seek to extend the term. But, if it's not necessary to do that for bankruptcies such as individuals who have not had a business related cause to their bankruptcy, that would work. We put No. 4 in there, but we felt that that was going to be a fairly difficult thing to decide which side of the line things fell, with one that seems to capture both sides, depending on the circumstances of the particular bankruptcy administration.

CHAIR: I don't want to carry this on, but No. 1 says:

Confine the reduced, default one year period of bankruptcy to business related bankruptcies with an expeditious right for the trustee to extend the bankruptcy period

I assume that by expeditious you mean a reasonably easy way to extend it for an extra period of two years, effectively. That's suggesting that non-business bankruptcy would still be three years.

Mr Gilbert : Yes, that does suggest three years. What we were responding to in No. 1 was very much the focus of the government's desire to have people in business back out into business, but, if it were done in all cases, I guess that's a possible outcome.

CHAIR: Okay. I follow that.

Mr Gilbert : Sorry for the confusion.

CHAIR: Thank you very much. If it's possible, as I said, have a look at that ASIC thing and let us know what you think about it.

Mr Gilbert : I shall, willingly. Thank you very much.