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Wealth Creation Schemes

An edited extract from NSW Legislative Assembly Hansard. For the full version, click this link

Urgent Motion

Ms MEAGHER (Cabramatta—Minister for Fair Trading, and Minister Assisting the Minister for Commerce) [3.58 p.m.]: I move:

That this House:

1. notes the Australian Competition and Consumer Commission's investigation into the practices of property investment advisers involved in so-called "wealth creation seminars";

2. supports the Reserve Bank of Australia Governor, Mr Ian Macfarlane, in his view that the Australian Securities and Investment Commission [ASIC] should regulate such practices; and

3. calls on the Federal Government to extend ASIC's powers to cover property investment advisers.

Property investment advice—or, as it is often coined, wealth creation seminars or get-rich-quick schemes—has certainly been in the news in recent months. Earlier this month the Australian Competition and Consumer Commission [ACCC] announced that it would step into the issue of wealth creation seminars, possibly using its powers under the Trade Practices Act. In its statement, dated 2 September, the ACCC said its investigation would look at four issues: two-tier marketing; advice given by financial consultants, solicitors and valuers; unconscionable conduct by financial institutions; and real estate investment seminars. As ACCC Chairman Mr Graeme Samuel said:

The ACCC is particularly concerned that in a very hot property market, mum and dad investors and superannuants are being pressured into joining property investment programs that promise massive wealth through property investment.

The ACCC investigation into this issue is timely. It brings into focus the urgency of tighter regulation in this area—and the most appropriate regulator to undertake that job is the Australian Securities and Investment Commission [ASIC]. In August State and Territory governments received a concession from the Federal Government when it agreed to allow ASIC to join a national working party to look at the issue. We now have the ludicrous situation of another Federal regulator, the ACCC, investigating and possibly taking action under its powers. Although the ACCC is dealing with the symptoms of unregulated property investment advice only ASIC is in a position to treat the causes. On the one hand, the consumer protection regulator, the ACCC, has seen the importance of undertaking an investigation into this issue and possibly using its powers to bring people to account but, on the other hand, ASIC, which already regulates financial investment advice, will not step in and take the necessary preventative action—or perhaps the answer is that the Federal Government will not let it step in.

It is time for the Federal Government to put an end to this uncertainty. It has said that it favours a national approach, yet it is still to be convinced, despite all the evidence around it, that ASIC is the appropriate vehicle to lead that national approach. I am pleased that the ACCC will investigate this practice, but investigating possible breaches of the Trade Practices Act is not a substitute for strict regulation of the industry, which is the role of ASIC. Marketeering was identified in the late 1990s as a problem of two-tiered investment property markets in Queensland. Since that time it has become clear that two-tiered markets in other forms of considerable profiteering at the expense of investors has proliferated throughout Australia and New Zealand. Basically, these people use very clever and slick marketing techniques to gain profits from unsuspecting victims. They particularly target vulnerable consumers—the young and the elderly—and they are lured into property speculation by promises of large returns with minimum financial outlay. This advice is often delivered in expensive property investment seminars that provide access to properties and financial products that can expose consumers to significant financial risk.

We have all heard of Henry Kaye. Mr Kaye has already been nabbed for misleading sales pitches, primarily for claiming that his courses were ASIC approved. On 31 July, following proceedings commenced in the Federal Court in Melbourne, ASIC obtained undertakings from Mr Henry Kaye and others. The undertakings included corrective advertising, payment of compensation and ongoing monitoring of the parties' compliance with these undertakings. This was a welcome step, but more needs to be done. It has become clear that the key regulatory gap allowing this to happen was not so much the point of sale but the marketing and investment advisory services that have lured and psychologically prepared investors for the kill.

Queensland first raised this issue and I commend my colleague the Hon. Merri Rose for her unwavering interest in it. In August New South Wales hosted the annual Ministerial Council on Consumer Affairs [MCCA]. The States and Territories called on the Federal Government to expand its current regulatory regime of financial investment advice to fill the regulatory gap. This was not a big ask: ASIC already has the enforcement powers and regulatory regime in place to fill the gap. Even the Chairman of the Reserve Bank, Ian Macfarlane, recognised the gap and saw the sense of the Australian Securities and Investments Commission expanding its regulatory regime to cover this area of investment advice. On 6 June Mr Macfarlane told the House of Representatives Standing Committee on Economics, Finance and Public Administration:

I think there is a regulatory gap there. It is clearly a problem if there is one group of people who are holding seminars on how to invest your money who are regulated - the financial planners - and there is another group who are doing almost exactly the same thing, although doing it within one asset class, which is property, who are unregulated.

He concluded:

So I think there is a need to extend the capacity for ASIC to do that.

The States and Territories also argue that the regulation of investment property seminars and advisory activities needs to be nationally consistent. After all, the industry knows no State bounds. Therefore, there are two very sound reasons why it is desirable for the Commonwealth to assume responsibility. The Commonwealth, through ASIC, already has a regulatory regime that it put in place under the Financial Services Reform Act 2001 to cover investment advice for financial products such as superannuation and life insurance. Investment advisory services regarding capital and equity markets fall within the responsibilities of ASIC. Notwithstanding this, there is a clear functional similarity between investing in financial products and investing in real estate. As far as advisory activities are concerned, the risk to consumers of poor-quality advice or advice that is tainted by conflicts of interest is very similar in each case.

The State's ability to take action to regulate this industry is limited. State Governments regulate the sale of property and can take action for false and misleading statements that are made by an enterprise. While there have been successes in dealing with false and misleading practices, these are usually able to be dealt with only after the fact and in some cases after consumer detriment. In fact, only last month the Supreme Court granted orders by consent against one such enterprise, Radisson Maine Financial Group Australia Pty Ltd. However, obviously a national regulatory regime backed by the existing powers and jurisdiction of a Federal Government is a much more desirable outcome to protect consumers.

In the lead-up to the MCCA the Parliamentary Secretary Senator Ian Campbell wrongly claimed that the States were asking the Commonwealth to take over State property laws. This was not correct for two reasons: first, the majority of people offering their services are not real estate agents and, second, the States are not suggesting the removal of state-based regulatory control of real estate agents. But we did score one victory at MCCA on 1 August: The Federal Government agreed with the States and Territories that a working party be set up, chaired by Queensland, to provide a regulatory framework for the property investment advice industry. The working party would involve all States and Territories as well as ASIC and develop a framework for regulation of investment advisers by March next year. That was not a bad result. But the Federal Government can resolve uncertainty and tell Australian consumers today that it will expand ASIC's powers. I assure the Commonwealth that such an announcement would be most welcome by consumers.

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Mrs PERRY (Auburn) [4.17 p.m.]: I welcome the opportunity to participate in this important debate. I represent an electorate that is culturally diverse and that represents people from many non-English-speaking backgrounds. In fact, I am pleased that next week the Minister will visit Auburn to promote new partnerships between ethnic communities and the Office of Fair Trading. Many of these people come from countries where there is much distrust of government. They also come from societies where consumers have negligible rights. Unfortunately, ethnic communities are often targeted by slick and devious traders who attempt to capitalise and milk them of their hard-earned money. We have tough consumer protection laws in this country. However, the Commonwealth has let down consumers in the area of property investment advice.

On the weekend I noticed an interesting article in the Sydney Morning Herald about the so-called wealth guru Roy McDonald. The article talks about Father David Smith from Holy Trinity in Dulwich Hill, who forked out $5,500 to learn how to manage a small inheritance on behalf of the church. He paid the money to attend a lecture by Roy McDonald at a property near Cessnock. The article quotes Father David Smith as saying that what followed was five-days deprivation of food and sleep in the name of financial security. He said that conditions appeared to be manipulated to reduce the emotional defences of the group and to enhance the power of McDonald. Apparently, Father Smith wrote to McDonald after the Born Rich seminar and said:

I believed, when I signed up, that I was going away to do some training in financial management. I did not realise that I was being inducted into a cult.

I notice that the Office of Fair Trading is currently in discussions with Mr McDonald about his business and has fielded numerous complaints. This and many other examples demonstrate the need to protect consumers by Commonwealth regulation. It is simply a constitutional issue that requires the Commonwealth to enact regulations. As the property boom continues unabated, there is more urgency for regulation of this growing industry. Property investment advisers target the most vulnerable in our community: the young, the elderly and people from culturally and linguistically diverse backgrounds. They are more vulnerable and can easily be attracted by the message of these spruikers. The message is that for a small outlay you can realise your fortune. For an elderly couple looking to build their retirement nest egg, the message could be irresistible. For the young, promise of a quicker and cheaper way into the property market seems too good to be true.

As I said, people from culturally and linguistically diverse backgrounds are particularly susceptible to the slick and often disingenuous marketing techniques of these property investment advisers. The fact is that if an offer seems too good to be true then it probably is. Obviously, prevention is better than cure. Consumers should be aware of these offers and ensure that they always seek their own financial advice before signing on the dotted line of any deal. But governments also have a responsibility—a responsibility to ensure that these property investment gurus cannot exploit regulatory loopholes for their own selfish financial gain. I hope that the Commonwealth heeds the call of the New South Wales Government and the Minister, and takes responsibility for this important issue, as it should constitutionally.

Ms HODGKINSON (Burrinjuck) [4.21 p.m.]: In speaking to this motion, I realise that in the past couple of weeks there has been a lot of publicity in the papers about this issue. Indeed, the article referred to by the honourable member for Auburn is significant. The article entitled "The get-rich-quick trick" appeared in the Sydney Morning Herald last weekend. When I got to the page I was drawn to the article immediately and read it with great interest. It contains the story of the self-made multimillionaire Roy McDonald, who is offering to show people how to turn $1 into $1 million in seven years or less.

I took this article with me when I visited some friends on the weekend. They told me that a mutual friend had attended one of these seminars recently, and she now has a plan to have $1 million worth of investments in the next four weeks or something extraordinary like that. I find it amazing that so many people are drawn to these seminars. They work for some people, but obviously not or many people. They seem to be a way for people such as Roy McDonald to talk people into getting credit cards so that he can get their $6,000 for doing the Born Rich program. This issue is of significant concern.

I echo the remarks of the shadow Minister for Commerce that the Office of Fair Trading has not done enough to advise the public of the pitfalls in wealth creation schemes despite the fact that it has a statutory authority and duty to do so. More and more people seem to be getting tied up with these get-rich-quick schemes, many of which are obviously a sham. There is a lot of information available on the Internet, and the Government needs to target the Internet to ensure that unscrupulous operators are shut down quickly. I am sure the Federal Government would welcome any move by the Australian Competition and Consumer Commission [ACCC] to step in and use its powers under the Trade Practices Act to take action against promoters of property investment schemes and any professionals or financial institutions involved in misleading or deceiving consumers in relation to these sorts of get-rich-quick property schemes.

As we know, and as we have heard from Senator Ian Campbell in recent months, the regulation of real estate agents is a longstanding and traditional responsibility of the States and Territories, as is the regulation of many other activities relating to real estate within their jurisdictions. Earlier the Minister said that the Queensland Minister for Fair Trading has introduced legislation that regulates property marketeers. Today New South Wales has started a push to have responsibility for the regulation of property investment advisers shifted to the Commonwealth. The Minister mentioned that there was a meeting on 1 August, at which the States and Territories and the Commonwealth agreed to set up a working party to establish a common regulatory framework to deal with high-pressure property investment marketeers. I commend them for that: a working group is a good idea.

The working group will be chaired by the Queensland Minister, and is due to report next March. I put on the record that the Parliamentary Secretary to the Treasurer, Senator Ian Campbell, wrote to all the States and Territories last July to express the Commonwealth's support for a thorough examination of regulatory arrangements covering the activities of property investment advisers by the Ministerial Council for Consumer Affairs. That would ensure that the nature and extent of the problem is appropriately ascertained. I have a lot of information on this topic. It is important that the States and Territories do not shirk their responsibilities and that the working group proceed in such a way as to enable the States and Territories to get their act together and formulate a uniform approach to this important matter. One Internet site I found is run by the Dynamic Success Group Sydney New South Wales Australia, and is another Born Rich scheme. The site states:

We invite you to embark on a journey that will change your life forever!

I ask the Minister for Fair Trading and the Office of Fair Trading to look at all Internet sites and to investigate the people who put forward these Born Rich seminars, including their history and whether they are accountable. I note that Graeme Samuel of the ACCC recently expressed concern that in a hot property market mum and dad investors and superannuants are being pressured into joining property investment programs and are promised massive wealth through property investment. It is time this issue was looked at seriously. [Time expired.]

Mr TRIPODI (Fairfield—Parliamentary Secretary) [4.26 p.m.]: The Australian Securities and Investment Commission [ASIC] administers a regulatory regime covering investments in financial products. Property investment is excluded because in theory the regulation of real estate agents is a State-based function. However, as the Minister outlined, State regulatory regimes applying to real estate agents generally are not designed for regulating investment advice. The fact is that most people who engage in this practice, whether we want to call it wealth creation or get-rich-quick schemes, are not real estate agents. The end result may be that some poor coot has bought an overpriced property, but the property is the end result.

We are concerned about the so-called investment advice. Investment advisers lure unwary customers into property speculation by offering general taxation advise on the benefits of negative gearing. This advice is often delivered in property investment seminars from which property is sold at significantly overvalued prices through two-tier marketing. This area should be regulated by the Commonwealth. The regulatory gap was first exploited primarily in Queensland by property marketeers who ran property investment seminars at which property was sold to unsophisticated investors at significantly overvalued prices. It was claimed that losses by investors amounted to close to $20 million.

These people are using the direct marketing recruitment techniques pioneered by time share fraudsters and combine them with the entrapment techniques used by cult religious groups to ensnare unwary victims. As this industry continues to grow, it is important that there is a national approach. As the Minister said, in August the States and Territories received a concession from the Federal Government when it agreed to allow the ASIC to join the national working party to look at the issue. However, this issue needs to be led by the Commonwealth because this industry knows no State borders. The Federal Government already regulates the financial advise sector. It needs to act now. The longer it leaves the regulation untouched, the longer we leave Australian consumers vulnerable to these financial pied pipers. In ASIC, the Commonwealth has the existing regulatory infrastructure to move quickly and effectively.

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Motion agreed to.

To see the full version of this Parliamentary debate, click here

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