The Banking Royal Commission and Agriculture
Late last year, Agfarm published an article looking at the Agricultural lending landscape. This was written as the Banking Royal Commission was concluding and as we awaited the findings and recommendations. In this article we will look at these findings and the impact on both the rural and regional lending landscapes, particularly in the agricultural sector.
The final report handed down by the Royal Commission contained four main observations. These were;
1. The connection between conduct and reward
2. The asymmetry of power and information between financial services entities and their customers
3. The effect of conflicts between duty and interest
4. Holding entities to account
What do each of these findings mean?
As a summary, the royal commission found that in most cases poor behaviour shown by those in breach of the above-mentioned points was driven by the desire for profit for both the entity and individual (either personally profiting or their business’s bottom line profiting). The fall out from this was the customer and the customers best needs were not always a priority. Lines sometimes became blurred when those, whom a customer should have been able to trust, became both sellers and advisors. At times, customers were pushed into products based on profit for the financial business or incentive to the individual, not what was best for the customer.
The information flow, or lack of it, as detailed in point two showed that in many instances consumers were advised or driven towards products and offerings with little clarity around the finite detail of the products. The final report mentions “There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.”
Many consumers came to use a particular banking product by way of a third party such as a broker, advisor or planner. Again, the report findings state in many cases the third party presented financial products to the consumer based on kick backs or incentives and not the best financial interests of the consumer. This was elegantly described in the final report as “An intermediary who seeks to ‘stand in more than one canoe’ cannot. Duty (to client) and (self) interest pull in opposite directions”.
Finally, point four found when those in the financial services sector did break the law and this was discovered, they were not properly held to account. In most cases the financial institution or individual was made to repay compensation and admit to their wrong doing by way of a press release. Again, in most cases, this compensation was a small percentage of the profits that would have been ultimately received.
How do these outcomes play out for those in the farming sector with regard to farm lending?
Farmers were long term campaigners for the Royal Commission and for years we have been witness to stories of farmers losing long held generational properties. It was therefore positive to see five days of public hearings specifically allocated to agricultural lending. The major outcomes from this were:
– Default interest should not be charged on loans secured by agricultural land in areas that have been declared affected by drought or other natural disaster
– Establish a national scheme for farm debt mediation and that mediation should occur as soon as possible after a loan becomes distressed and not as a final measure as has been the case in the past
– A separation of duties and conflict of interest by land valuation being undertaken by someone outside of the organisation with which the loan is held
– Ensure distressed agricultural loans are managed by experienced agricultural bankers and to recognise the appointment of receivers on a farm loan as a last resort
If these outcomes are implemented, they should go some of the way to rebuilding the long-held relationships and trust between a farmer and their banker. The government has already endorsed some of the recommendations such as the Farm Debt Mediation Scheme and agri banking specialists managing distressed farm loans.