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Consumer Action has voiced its support for improved regulation of unsupervised finance and debenture companies. The Centre believes the recent collapse of Banksia in regional Victoria has highlighted problems with the operations of finance and debenture companies that give investors a false sense of security about risky investments.

Unlisted debenture issuers, like Banksia, ask investors to loan them money for a fixed term (or sometimes ‘at call’) and at a specified rate of interest. While there is a trustee that is appointed to protect the interests of investors, these finance companies, unlike banks, building societies and credit unions, are not regulated by the Australian Prudential Regulatory Authority (APRA), nor are there any prudential standards that apply. In essence this is regulation regarding the amount and quality of a company’s assets.  While the Australian Securities & Investments Commission (ASIC) has developed benchmarks to assist investors assess risks in investments, this has not protected investors that have lost money in collapses.

‘We’re concerned that, as things stand, debenture companies are allowed to look and feel like banks when they’re nowhere near as tightly regulated’ said Gerard Brody, Director of Policy & Campaigns at Consumer Action.

Consumer Action believes that written disclosure about the high risk nature of debenture investments in  product information statements is undermined by the way some of these companies operate and present themselves. For example, the ability to rent Bank-State-Branch Numbers, commonly known as BSB numbers, can lead people to feel like they’re depositing their money into a traditional bank account.

We understand that the selling of BSB numbers is relatively common practice.  But we believe this practice has been allowed to develop without regard for its potential impact on consumers.  it is timely to examine what rules and responsibility should be placed on entities selling and buying BSBs.

‘Current regulation on debentures relies on “disclosure and investor education”. But any disclosure or education about risk is countered by their use of BSB numbers, in-branch ATMs and account offerings that look like regular savings accounts. We need to ask why a company like Banksia was allowed to look and feel like a bank – it’s confusing to say the least and has the potential to mislead inexperienced investors.

‘It’s often said that if it walks like a duck and quacks like a duck, it’s probably a duck. But, in the case of debenture companies, it can look like a bank and sound like a bank, but is certainly isn’t a bank,’ said Mr Brody.

Consumer Action is also concerned that the association between local professionals such as lawyers and accountants, and debenture companies, in regional towns can further mask the risky nature of debentures.

‘When professionals of high stature are seen to put trust in risky finance offerings, it can lead others to put their confidence in them without doing their own homework. Trust built on pre-existing relationships, or those with expertise and familiarity with the financial system can, in practice, override sensible financial behaviour, such as seeking to really understand the risks and benefits of investing.

‘What Banksia has shown is that our current regulatory system is insufficient to stop thousands of people losing their savings. More needs to be done by our regulators so that finance companies, through their practices, aren’t able to create the impression that they are banks. Prudential regulation, which sets standards enforced by APRA about capital, liquidity and governance, needs also to be considered. And it’s time we had another look at establishing a last resort compensation scheme to protect vulnerable investors,’ said Mr Brody.

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