Speech by AFSA Chief Executive Tim Beresford at the 2024 Australian Institute of Credit Management (AICM) National Conference, Thursday 17 October.
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I wish to acknowledge the Wurundjeri and Bunurong people of the Kulin Nation, the traditional custodians of the land on which we meet, and pay my respect to elders past and present.
Thank you for the opportunity to speak to you today.
With members across 800 of Australia’s leading companies, the Australian Institute of Credit Management is vital to the health of the nation’s credit ecosystem.
You also have a role in the collective stewardship of the system and I’ll speak more on that later.
Today I want to touch on what we’re seeing in the personal insolvency space, the structural shifts occurring in Australia’s credit system and how we’re responding.
I’m conscious I’m the final speaker of the day, so I don’t intend to talk at you for 45 minutes. Instead, I’ll leave time to hear your perspectives.
Personal insolvency trends
Let’s look at personal insolvency trends over the past 50 years.
You can see from this slide that they rose steadily for almost 40 years from 1972 to a peak of 37,000 after the GFC.
And they’ve dropped significantly in the past 8 years, thanks to 3 key drivers.
Firstly, we’ve experienced low unemployment, particularly in the past few years.
Ten years ago, unemployment was between 5 and 6% – but for the last 3 years, it’s had a 3 or a 4 in front of it.
The second driver is changed creditor behaviour after the Hayne Royal Commission.
Creditors are now much more likely to work with debtors when they experience financial difficulty – to seek solutions, to reach a workable compromise.
And the third key driver is changed debtor behaviour since the pandemic, which means people in financial difficulty are more likely to raise this with their creditors.
As a result of these drivers, personal insolvencies have fallen to levels we haven’t seen since the late 1980s.
But there are some modest headwinds.
Households are digging into their savings to pay their bills.
Unemployment is gently nudging higher.
Other factors, like the resumption of the ATO’s debt collection activities that were relaxed during COVID, also impact our system.
The tax office is our biggest creditor and its share of the system keeps growing – from 12.5% of system liabilities in 2015-16 to around 20% today.
Because of these headwinds, we expect insolvencies to rise from just under 12,000 to around 14,850 this financial year.
This is still a long way short of the 10-year average. Nonetheless, it is modestly rising and we all need to remain vigilant.
Insights into the personal insolvency system
I want to share 4 key insights we’re seeing.
The first key shift in the Australian economy is a substantial contraction of the unsecured credit market, as large creditors make commercial decisions to reduce their unsecured exposure.
Non-housing personal credit has fallen from 15% of GDP in 2008 to 6% last year – a significant contraction.
So, what does this mean?
Firstly, it’s changing the face of the personal insolvency system.
While the Big 4 banks still constitute the 2nd largest group of creditors in the system after the Australian Taxation Office, their share of liabilities has fallen.
ANZ’s share of personal insolvency system liabilities was 8.9% eight years ago. Now it’s 2.4%. CBA’s share has dropped from 8.8% to 3.4%.
Meanwhile, mid-sized financial institutions, such as Pepper Money and Latitude Finance, and new entrants, such as Zip Pay, are increasing their share of system liabilities.
So, there’s been a shift in the mix of who is doing business in the unsecured lending market.
And there’s also been a shift in the product mix, with people turning to products like payday loans, buy now pay later agreements and cryptocurrency.
We all know the risks associated with these products.
A recent newspaper article highlighted a single mum living on Jobseeker who took out a $250 payday loan to buy groceries – 3 weeks later she owed more than $500. There are many more stories like hers.
This all adds up to higher risk coming into the system, in 2 ways – through products with higher risk profiles and operators without a social licence to operate.
The second key insight I want to share with you is that personal insolvency system is not representative of the broader economy.
For example, people entering our system often don’t have an established asset base to fall back on when times get tough.
They don’t own a home or have a mortgage.
In fact, renters make up 93% of new personal insolvencies.
This is at odds with an economy where 31% of Australians rent.
People entering personal insolvency also have relatively little debt.
While Australian household debt averages more than $260,000, most people entering personal insolvency have liabilities of less than $50,000.
That’s the equivalent of a couple of credit cards, a personal loan and a handful of buy now pay later agreements – the kind of unsecured debt I’ve just mentioned.
In other words, personal insolvencies are largely skewed towards renters with unsecured debts.
What else do we know about people entering personal insolvency?
We know they’re mostly young, aged between 25 and 44.
They live in the most populous cities – Sydney, Melbourne and Brisbane – or across the rest of NSW and Queensland.
They work in construction, healthcare and social assistance, retail trade, and transport, postal and warehousing.
The third observation regards the historic link between corporate and personal insolvencies.
Historically, personal insolvencies have followed trends in corporate insolvencies 9 to 12 months later.
But we’re not seeing that link so strongly in the current environment.
ASIC data shows corporate insolvencies grew by 39% in 2023-24, well above the increase in personal insolvencies that occurred last year and the anticipated increase this year.
While corporate insolvencies exceed the pre-COVID-19 average, personal insolvencies have still not trended back to those levels.
As mentioned before, this highlights the value of a low unemployment rate. The current unemployment rate of 4.2% is well below the historical average of 5.5% pre-COVID.
When people have sufficient work, they’re far better equipped to meet their personal financial obligations.
My final insight concerns the role of business-related insolvencies in our system.
While we deal in personal insolvencies, this includes business-related personal insolvencies relating to sole traders and partnerships, which account for about 40% of Australian businesses.
Incorporated businesses go through the ASIC insolvency channel, unincorporated businesses come through ours.
Business-related insolvencies make up a fraction of overall personal insolvencies – about 25%, or 3,000 a year.
But they make up three-quarters of system liabilities, or $13.2 billion out of $17.3 billion.
They’re a small part of the volume but they make up the lion’s share of the debts.
In that respect, the business community is an important part of our system.
How AFSA is responding
The 4 insights I’ve just given you give us a clear understanding of the changing dynamics in our ecosystem.
They enable us to continuously adapt our practices to meet the evolving needs of the Australian economy and community – and I’ll give you a few examples shortly.
They assist the government in structuring bankruptcy reforms.
And by sharing our insights, sharing them with you, we help foster collaboration and, ultimately, stronger financial regulation.
This gets to the collective stewardship I mentioned before.
We believe the system works best when we all work together.
We’ve seen a powerful example of that in recent weeks with the ACCC’s action against Coles and Woolworths over allegations of misleading discounts.
It was consumers who called out the alleged poor behaviour of the supermarket giants.
These consumers listed their grievances on social media and the ACCC picked up on their concerns and took action.
That’s collective stewardship at its most powerful, where everyone has a voice and the responsibility to act.
In the current environment, where constant and unpredictable change is becoming more normal, this intelligence-led regulation is crucial.
In speaking engagements like these, no matter the audience, I have one clear message.
I convey it to insolvency practitioners, to creditors, to financial counsellors, and now to you as credit managers.
You are part of that collective stewardship. You may see things we don’t. So, we want to hear from you:
- Where you think the system can be improved.
- Where you’re seeing emerging risks in the credit system.
- Where you see system misuse.
I need your eyes and ears. If you see something, say something.
You can speak to me or your preferred AFSA contact, while our website provides further contact details, as well as an online tip-off form.
Protecting against system misuse
All forms of intelligence sharing are important when increasing levels of financial stress pose system risks and increase the potential for poor behaviour.
Accordingly, AFSA is taking a more proactive compliance and enforcement posture.
We have beefed up the resourcing of our enforcement and legal teams to investigate and act against system misuse.
We currently have a number of active investigations underway.
Three of those investigations relate to the potential misuse of personal insolvency agreements to protect some creditors over others.
This has become an area of focus for us, to ensure the system is fair, open and transparent.
Recently, we applied to the Federal Court to set aside a personal insolvency agreement protecting Gold Coast lawyer Beau Hartnett from bankruptcy.
The application is against both Mr Hartnett (the debtor) and the trustees for the personal insolvency agreement.
Through this and other actions, we’re sending clear signals to our regulated community that system abuse won’t be tolerated.
We recently cautioned a trustee who agreed to a proposal by 2 debtors to pay creditors as little as 0.00005c in the dollar, under the same legal mechanism used by Alan Bond to end his bankruptcy.
After we intervened, the trustee chose not to proceed with the debtors’ offer and transferred the estates to other trustees, who resolved the case with significantly higher creditor returns.
I have placed the practitioner community on notice that we expect more from them as joint stewards of the system.
I’ve made it clear to them that they should report misconduct when they see it, even if it’s in their own firm.
This is part of the responsibility of their office and the position of trust they hold.
At the same time, we’re looking at how we can model best practice for the practitioner community, by positioning the Official Trustee as a model trustee.
So, we’re looking to lift our own game, as we ask registered practitioners to lift theirs.
Another area of focus for us is unethical and untrustworthy advice.
This is a key system harm we’re targeting as part of a multi-year program of work.
For example, we found one vulnerable client paid a $1,500 fee in 13 weekly instalments from her Centrelink payments before her bankruptcy form was submitted. She didn’t know submitting the bankruptcy form was free.
We’re now broadening the scope of our work to include unethical and untrustworthy advice by registered trustees and debt agreement administrators.
Some of the practices we’re targeting are:
- excessive fees and practitioner remuneration,
- delaying entry to the personal insolvency system,
- engaging in activities with the intent to defraud creditors, and
- deficient administration of personal insolvency agreements.
We’re currently finalising the research we commissioned into untrustworthy advice.
What we’ve learned so far is that the likely scale of the problem is bigger than we expected, with the harms impacting people who can least afford the costs, delays and distress associated with untrustworthy advice.
This is a significant issue worthy of a coordinated response across the credit system, to promote positive outcomes for both debtors and creditors.
I would like to thank those of you have participated in our study to date – the insights from the creditor community have been invaluable.
Untrustworthy advice doesn’t just impact debtors. It negatively affects creditors as well, and I know from many of our discussions that you want to see it stop too.
Conclusion
Australia’s personal insolvency and credit systems are constantly evolving.
Our job is to maintain public trust in these systems as they evolve, so people can use them with confidence.
I’d argue it’s a job for all of us. We all benefit from a strong credit system that ensures access to finance.
If you see something, say something.
That’s how businesses grow, productivity grows, and the economy grows.
We welcome any insights you can give us and opportunities like this to share ours with you.
Thank you.
