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Let down by banking on Banksia

Let down by banking on Banksia

Georgia Wilkins Sydney Morning Herald   3 November 2012

The rural lender's demise has hit its home town hard.

AS RECEIVERS start piecing together the sudden demise of failed rural lender Banksia, a heavy silence has fallen over the country town from which it grew.

Kyabram, a rich irrigation town 200 kilometres north of Melbourne, was this week stunned by the collapse of its home-grown lender, leaving the future of $660 million in savings across several states in doubt.

The company employed about 60 people at its offices in the heart of Kyabram and its relationship with the town of more than 7000 ran deep.

''It was an iconic local business that put a lot back into the community,'' says Suzanne Solly, chief executive of the Kyabram Community & Learning Centre. ''It had always been exceptionally well managed.''

Receiver McGrathNicol yesterday said investors in Banksia will likely know their fate in early December at an information session for debenture holders.

While uncertainty remains over the fate of the investments, some light is being shed on the fragility of lawyer-run investment groups, such as Banksia, which continue to thrive in communities where trust and loyalty are a currency.

As a non-bank lender, Banksia grew out of a network of such groups, traditionally known as solicitors' mortgage investment companies, or SMICs.

Banksia's predecessor business was started by Patrick Godfrey in 1968, called Kyabram Housing Investments. In 1999 this merged with several small investment companies to form the Banksia Financial Group.

One of the companies involved in the roll-up was Statewide Secured Investments, formerly Goulburn Valley Housing Loans, set up by Kyabram law firm Dawes & Vary. Another was Hedon Investments, a finance group set up by Ballarat law firm Heinz and Partners.

''It started with a solicitor's office,'' said Michael Polan, a councillor and former mayor of nearby Shepparton. ''People felt secure with that. It wasn't so much about chasing a higher interest rate. It was about personalities and relationships that built up over time.''

SMICS have kept their legal roots, despite often outgrowing them. This is especially the case in smaller communities, where financial expertise is harder to access.

''Often if there are limited options available for the communities, whatever comes forward, they go for it,'' said Professor Milind Sathye at the University of Canberra.

Banksia's relationship with law firms always remained strong. In 2008, the then Banksia chairman Ian Hankin, who was also a partner at Heinz and Partners, told the Ballarat Enterprise magazine that much support for Banksia came from the firm's existing clients.

Some Banksia branches shared office space with law firm Dawes & Vary.

''In years gone by, they sort of pushed work to each other,'' said Mr Polan. A lawyer familiar with the area said: ''They were basically a match-making service between people who wanted to buy and people who wanted to sell.''

Banksia was a former member of Provic, an industry body representing debenture-issuing companies based in regional centres across Victoria and southern New South Wales.

Provic's 10 member companies hold almost $919 million of investors' funds and in excess of $703 million lent on the security of mortgages over freehold property, according to its latest annual report.

Mr Godfrey was Provic's secretary from 1984 to 1999. During this time, he participated in talks with the Victorian Commissioner for Corporate Affairs for granting licences to member companies in 1985, annual reports show.

Questions remain over the role of regulators when it comes to Banksia. The lender was providing quasi-banking services, offering at-call accounts, but regulation fell between the cracks.

Australian Prudential Regulation Authority spokesman Andrew McCutcheon said the regulator was confident Banksia was not acting like a licensed bank, credit union or building society - businesses that are authorised to take deposits.

''Nothing has come to our attention to suggest that Banksia has been operating in contravention to the exemption order 96, which requires them to disclose that they are not a bank,'' he says.

However, some Banksia customers had their salary paid directly into Banksia, while the presence of a Westpac sub-branch inside a Banksia branch in Tatura in central Victoria only added to Banksia's perception of safety. Apart from a commercial leasing arrangement there were no links between Westpac and Banksia. A spokesman for APRA declined to comment.

Ms Solly said many people in the town were ''basically using [Banksia] as a bank''.

''Some people used it like a savings or everyday account,'' she said. Centrelink says it has had about 200 calls regarding Banksia, including about 100 requests to change their bank details from Banksia accounts.

The Australian Securities and Investments Commission is considering toughening regulation of the country's debenture industry.

In February, after taking submissions from investment companies, it changed its regulation to permit issuers of debt to name its product a secured note.

Issuers may only call a product a debenture if the security is over tangible property.

''All issuers must make clear in their advertising that the products are not a bank deposit and should not suggest that they compare favourably to a bank deposit,'' it said.

However, many of Provic's members still openly describe transactions as deposits.

Last week McGrathNicol said investors in the failed Banksia Securities would get back a ''meaningful'' amount of their money tied up with the firm.

One senior finance executive highlighted the pivotal role some law firms have in directing investor funds into financing houses.

''There is a strong link between solicitors, mortgage funds and regional Australia, where they have a strong following from the locals. This loyalty can't be underestimated,'' he told BusinessDay. ''They aren't banks, but they are effectively banks, but don't get the same scrutiny as banks.''

Provic president John Stephenson said SMICs emerged during the 1960s when it was very difficult to get housing lending in rural towns.

''Back in those days, the end of the Earth was Essendon. The law firms saw an opportunity to be able to provide housing finance,'' he said.

Last modified onSaturday, 29 June 2013 04:00

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