The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released its Final Report and recommendations for consideration by the Government. The recommendations relevant to the agricultural sector responded to the issues raised by farmers and rural communities during the Commission hearings. In addition the aim was to simplify the law where possible, address conflict of interest, improve compliance and effectiveness of the regulator and achieve more ethical behaviours in the financial services industry.

The Commission’s investigation allowed transparency and recognition of misconduct by the banking and financial services industry by assessing the difficulties faced by farmers and the broader regional communities.

Key facts on agriculture lending and regional communities (year-ending 30 June 2017):

• Finance provided to the agriculture sector was worth $62.3 billion¹, largely financed through bank debt to fund on-farm investments and maintain working capital.
• Total debt of the agriculture, forestry and fishing industries to institutional lenders was $71.7 billion, with 96 percent related to bank lending accounts (i.e. $68.6 billion²).
• About 28 percent of the Australian population live in regional or remote areas.

 As part of the investigations conducted by the Commission, 5 days of public hearings were allocated to agricultural lending and five days related to interactions between Aboriginal and Torres Strait Islander people and financial services entities. These hearings supported the observations submitted in the Commission’s Interim Report released on 28 September 2018.

The investigations drew out the social responsibility the banking and financial services sector has towards Australian’s living in remote and regional communities, in particular, the specific needs and characteristics of the sector that should be considered.

The fourth round of public hearings and broader investigations considered issues affecting farmers and Australians who live in remote and regional communities. These issues included, but are not limited to, sales practices, the charging of default interest, forced sales of farms and changes to conditions of lending to the detriment of the borrower.

Key issues analysed and set out by the Commission included: difficulty to deal with consequences of uncontrollable external forces such as drought; lending against a variable market value; a conflict of interest between the internal appraisal of security value of property and the validation of the loan; lack of expertise in dealing with the specific challenges of the rural sector arises when dealing with distressed agricultural loans; challenges for remote communities in accessing banking services or getting assistance required for application of standard identification requirements.

The Commission made recommendations which will specifically address key aspects of agricultural lending and services to rural communities. Some of the key recommendations made by Commissioner Hayne include but are not limited to the following:

• Amend the Banking Code to ensure that banks will:
  • work with customers living in remote areas or who are not adept in English
  • follow AUSTRAC’s guidance about the identification and verifications of persons of Aboriginal or Torres Strait Islander heritage
  • not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or subject to other natural disaster.
• Establish a national scheme for farm debt mediation.
• Amend Prudential Standard APS 220 to ensure separation of duties and conflict of interest by:
  • requiring that internal appraisal of the value of land as security should be independent of loan origination, processing and approval
  • handle the valuation of land to take into account the likelihood of external events affecting its realisable value.
• Ensure that distressed agricultural loans are managed by experienced agricultural bankers.
• As soon as agricultural loans are declared as distressed, offer farm debt mediation.
• Recognise that appointment of receivers on a farm loan is a ‘remedy of last resort’
• Stop charging default interest when the bank is not likely to recover the amount charged.
• Review the definition and threshold for small businesses to have the Banking Code govern loans to any business employing fewer than 100 full time equivalent employees, where the loan applied for was less than $5 million. 

• Recommendations and findings specific to agriculture and regional/remote communities will improve the quality and fairness of services provided to farm businesses and rural communities. The recommendations do not seem onerous or expensive to implement and therefore should not add materially to the cost or complexity of services. 
• The establishment of a national scheme for farm debt mediation can provide a new mechanism to encourage the earlier and more comprehensive consideration of disputes relating to distressed loans or other financial service matters. Combined with the recommendation for increased rural expertise in teams dealing with distressed loans, it is likely that farm businesses will see a more efficient and fairer process for managing distressed loans.
• The Commission’s recommendation to amend the Banking Code of Practice to prohibit charging penalty interest on loans to farmers in drought and natural disaster declared areas seems to be a fair and reasonable. 
• Amendments to Prudential Standard APS 220 will require banks’ lending to the agricultural sector to have the valuation of the land as security for the loan assessment conducted by someone independent of loan origination, processing and approval. This will remove the potential for land values to be over/under estimated to correlate with staff incentives to secure loans. This is already the case with some banks but for others this will require changes to standard back office operating procedures and could add some cost to services.
   

The recommendations supported by the Commission in its Final Report have addressed some of the key challenges raised during the public hearing and summarised in the Interim Report. Some of these recommendations such as the implementation of the national farm debt mediation scheme were highly anticipated by the farm business sector. Other recommendations, if implemented, will enable significant change to support farming finance and remote communities and restore confidence and trust between the financial services industry and the stakeholders affected by their misconduct.

It is now key that the Government back all the recommendations made in the Final Report and that those recommendations deliver effective outcomes to the regional communities. At the time of writing, the Government has already endorsed some recommendations such as the Farm Debt Mediation Scheme, special consideration to distressed agricultural loans and 'specialised' agricultural bankers managing distressed farm loans.

In the short term, the biggest challenge will be to identify the priorities and pathways to deliver the outcomes in a timely manner to respond to the main concerns.

Going forward, further consideration and options for the agricultural sector to access new capital and reduce risk is crucial to enable farm businesses to contribute to the agricultural sector’s vision to double output to $100 billion by 2030.