Grain Trade Australia Revised Code of Practice requirements for Pool Providers May 2013 NSW Farmers Association Level 25, 66 Goulburn Street Sydney NSW 2000 Contact: Justin Crosby Ph: (02) 8251 1700 Fax: (02) 8251 1750 Email: crosbyj@nswfarmers.org.au NSW Farmers Association Background The NSW Farmers Association (the Association) is Australia s largest State farmer organisation representing the interests of its farmer members ranging from broad acre, Livestock, wool and grain producers, to more specialised producers in the horticulture, dairy, egg, poultry, pork, oyster and goat industries.
TABLE OF CONTENTS General Comment... 3 NSW Farmers does not at this point endorse the code... 3 NSW Farmers previous submission on pool management... 3 Comment on Code Requirements for Pools... 4 Section 1.1 Duties of a pool provider... 4 Section 1.2 Terms and Conditions of a Pool... 5 Section 1.3 Estimated Pool Returns... 5 Section 1.4 Reporting and Audit of Pool... 5 Conclusion... 5 NSW Farmers General Comment Page 2 of 6
General Comment NSW Farmers policy on the implementation of standards for the grains supply chain, including technical and commerce standards, seeks: that standards are set by a suitable independent body; that changes to grain technical standards include a value assessment of the onfarm impacts; and the uniform application of receival standards, including uniform calibration of testing equipment and training of personnel in grain standards and equipment operations. These policies have been determined by NSW Farmers membership, through its Annual Conference, as part of concerns that the administration of Grain Trade Australia s (GTA) mechanisms for developing supply chain standards does not adequately take into account the needs of grain farmers. As a means of implementing this policy on behalf of its grain producing members, NSW Farmers has written to GTA seeking the establishment of an autonomous committee with the power to establish technical standards. This Committee would utilise a weighted voting system based on the value respectively contributed by the grain farming, trade and handling industries when undertaking its functions. NSW Farmers does not at this point endorse the code NSW Farmers made comment in response to GTA s draft versions 9 and 13 of the code of Practice for the Australian grain supply chain (the code). These comments have communicated that at this point in time NSW Farmers believes that the code has failed to develop the rigorous framework necessary to instil greater confidence between members of the supply chain. This is with respect to the failure to mandate specific minimum standards of behaviour and to establish a compliance framework to ensure these minimum standards within the code are adhered to. With respect to the first of these deficiencies, NSW Farmers notes that within initiative 1.3 of GTA s Strategic Direction 2012, it is acknowledged that there is a need for the code to be more prescriptive with defined process and procedures. 1 With regard to the latter, NSW Farmers submission to draft version 13 of the code made the recommendation to GTA that the most appropriate means of providing an effective compliance framework would be for the code to be prescribed as a voluntary code under s 51AE of the Competition and Consumer Act 2010 (Cth). NSW Farmers previous submission on pool management In response to the earlier drafts of the code, NSW Farmers iterated that its policy of seeking appropriate oversight, scrutiny and reporting on the performance of marketing pools had been validated by evidence that estimated pool returns were no longer a 1 Grain Trade Australia Strategic Direction 2012, [1.3]. 2 See The PwC report Analysis for Growers. Estimated Pool Returns: the Relationship to Final NSW Farmers General Comment Page 3 of 6
trustworthy predictor of final pool returns. 2 To remedy this market failure NSW Farmers outlined that it believed that regulation of pools, in line with their nature of financial products, was appropriate. At that time the recommendation was made to GTA that as a precursor to an appropriate regulatory framework, the code should mirror the general obligations of the Financial Services Regulation for the holder of an Australian finance services licence, as well as the duties of the responsible entity of a managed investment scheme. NSW Farmers continues to hold the position that pools should be regulated in line with their nature as a financial product. Comment on Code Requirements for Pools NSW Farmers notes that while grain marketing pools, prima facie, would be covered by the provisions within the Corporations Act 2001 that regulate managed investment schemes, they are subject to the Class Order 02/211 exemption for Managed investment schemes interests not for money. It is the belief of NSW Farmers that this lack of regulatory oversight leads to concerns, both real and perceived, about whether operators of pools have the necessary competence to adequately manage grain pools; and are acting in the best interests of those grain farmers with equity in the pool. This reinforces the position taken by NSW Farmers with regard to the need for an adequate compliance mechanism for obligations for pool providers within the code. In addition to the proposal advanced by NSW Farmers that the Code should be prescribed under the Competition and Consumer Act 2010, the operation of pools should also be subject to appropriate oversight of the Australian Securities and Investments Commission with its financial sector expertise. This could be done through the re-drafting of the Class Order 02/211 to include that where it is the sale of grain as agricultural produce it must be done in compliance with the code of practice to meet the obligations of the exemption. Section 1.1 Duties of a pool provider NSW Farmers notes that the general duties of a pool provider proposed by the code are consistent with the earlier request that the code mirror those obligations of a financial services licence holder and of the responsible entity of a managed investment scheme. This is a welcome first step to prescribing appropriate behaviours that will better manage: actual and perceived self dealing by pool providers; and market failure caused by the inaccuracy of estimated pool returns during the marketing period. However, NSW Farmers concerns over the lack of specificity within the code on how compliance with the proposed duties is to be achieved remain. 2 See The PwC report Analysis for Growers. Estimated Pool Returns: the Relationship to Final Price. Available online http://www.wea.gov.au/poolsreport.php. NSW Farmers Comment on Code Requirements for Pools Page 4 of 6
Self Dealing The major issue that NSW Farmers members have raised in response to grain marketing pools that have substantially underperformed against their estimated pool returns, is the perception of inappropriate self dealing. This perception has manifested in concerns over how pool providers have failed to manage their cash trading operations at arms length to the management of the marketing pools it operates. To better enable the code to manage this perception and the underlying incentives for self dealing, NSW Farmers advocates for greater prescription in the requirements of pool providers to avoid conflicts of interest. With regard to traders who manage cash trading operations as well as marketing pools, these requirements should include internal structures and reporting lines that manage the conflict between the two different operations. 3 Section 1.2 Terms and Conditions of a Pool NSW Farmers broadly endorses the provision of the following information within the terms of a pool as providing greater capacity for farmers to consider the risk of different pools. Section 1.3 Estimated Pool Returns NSW Farmers broadly endorses the provisions for the regular reporting of estimated pool returns and immediate reporting upon material adverse changes being realised. Section 1.4 Reporting and Audit of Pool In accordance with the above concern of potential self dealing NSW Farmers recommends firmer language be used around the requirement for adequate separation of accounting records for each pool and the necessity for these to be separate from the reporting of cash transactions. Conclusion NSW Farmers continues to hold the position that pools should be regulated in line with their nature as a financial product and reserves the right to seek this in other forums. With regard to the proposal put forward for the self regulation of pools through the GTA Code, NSW Farmers recommends that: The Code of Practice be prescribed under section 51AE of the Competition and Consumer Act 2010. That GTA liaise with the Australian Securities and Investment Commission to revise the Class Order Class Order 02/211 so that operators of grain marketing pools are only able to rely on the exemption when in compliance with the Code of Practice. 3 See Australian Security Investments Commission Regulatory Guide 181: Licensing: Managing conflicts of interest, 11. NSW Farmers Conclusion Page 5 of 6
That the Code be drafted to include more guidance on the specific behaviours that will comply with the standards proposed within the duties of a pool provider. This should include guidance on: o o the internal structures and reporting lines necessary to manage the conflicts of interest created by the same entity undertaking cash trading operations as well as managing pools; and the requirement for adequate separation of accounting records for each pool and the necessity for these to be separate from the reporting of cash transactions. NSW Farmers Conclusion Page 6 of 6