Understanding Australia’s personal insolvency system

The Australian Financial Security Authority (AFSA) plays a critical role in Australia’s $3.5 trillion credit system by overseeing the nation’s personal insolvency and personal property securities systems. We also preserve and manage assets from the proceeds of crime. This oversight delivers economic and social outcomes by supporting government in delivering a strong credit system for Australia.

AFSA helps Australians obtain a fresh start when in financial distress while also offering remedies to those who are owed money. With approximately $18 billion in liabilities held within our regulatory oversight, we play a significant role in supporting access to credit for individuals and business in Australia, whilst enabling confidence in Australia’s credit system through our regulatory actions.

Likewise, the Personal Property Securities Register (PPSR) secures lending and promotes access to credit by providing a visible, online government register of interests held against a wide variety of collateral. The value on the PPSR is approximately $400 billion – 20% of GDP. This value alone signals lending confidence and makes access to finance easier, more secure and accessible.

Personal insolvencies expected to rise

The State of the Personal Insolvency report, published in February 2023, found personal insolvencies are expected to rise toward preCOVID levels over the next two years.

Australian households are currently experiencing financial stress. Unemployment remains low but the risk of insolvency is rising as household saving buffers decline and cost of living pressures increase. Other adverse macroeconomic factors, such as rising interest rates, high inflation, ongoing supply chain pressures and rising energy prices will put vulnerable people under more financial stress.

Over the past 20 years, Australia has averaged more than 28,000 personal insolvencies each year. Volumes hit a high of 37,263 in 2009–10, two years after the Global Financial Crisis (GFC). Numbers have steadily declined since then, falling to historic lows, with 9,545 personal insolvencies recorded during 2021–22. Several factors are associated with the recent decline in numbers. These include debt agreement reforms, changes to creditor lending and recovery behaviours following the Hayne Royal Commission and the economic response to the COVID-19 pandemic.

Debt levels and concentrations in personal insolvencies

In 2021-22, most people who entered into personal insolvency had low levels of debt. More

Distribution of debtor liabilities by business-related personal insolvencies

than half of people (52.7%) had less than $50,000 in liabilities, with a quarter of people (25.2%) having debts totalling more than $100,000.

Just under a quarter of active personal insolvencies are business-related; however, these insolvencies contribute to nearly twothirds of tsotal system debt ($11.4 billion). The average debt for a business-related personal insolvency is $830,502 – 5.8 times larger than a non-business-related personal insolvency ($141,733).

The value of debt in the system is concentrated with a few large creditors, with the Australian Taxation Office and the ‘Big Four’ banks collectively owed $3.7 billion in business-related and $2.4 billion in non-business-related personal insolvencies. This demonstrates the impact that the recovery and collection behaviours of large creditors can have on the insolvency system.

The complete State of Personal Insolvency report is available on the AFSA website: afsa.gov.au/ stateofpersonalinsolvency

Insights for creditors

From an insolvency perspective, creditors are encouraged to consider their practices and assess risks closely. We want to ensure creditors use formal insolvency as a last resort.

From the perspective of the Personal Property Securities Register, creditors should consider the potential benefits of the PPSR. Noting the high

Creditor concentration in active personal insolvencies in 2021-22

level of business-related personal debt, a PPSR registration can provide valuable risk protection. An invoice or contract, along with an effective PPSR registration, can create a secured debt which can put you ahead of unsecured creditors if your customer goes out of business.

Harms-based regulation and AFSA’s areas of interest

AFSA focuses on systemic risk, significant harms and their reduction.

Some harms have existing rules to guide AFSA’s response – for example, legislation or AFSA’s own practice guides and work instructions. Issues such as practitioner independence and conflicts of interest are known harms. Inspector-General practice directions and recognised standards of behaviour for professionals address these.

Other risks are not yet well understood, emerging on the system’s edges. They may not always be addressed in policy and legislation. For example, the actions of untrustworthy pre-insolvency advisors erode trust and confidence in the personal insolvency system.

AFSA is directing resources to disrupt this activity and reduce risk, combining regulatory expertise with market surveillance and data analytics to respond to new and emerging harms while balancing debtor, practitioner and creditor interests. AFSA concentrates its harm mitigation efforts on the top 10 practitioners (Tier 1) which manage 80% of all activity.

Australia’s regulatory agencies also work together, sharing information to ensure those who seek to harm the system are brought to justice.

An example includes AFSA sharing information with ASIC. This saw A&M Group, trading as Debt Negotiators, convicted in the Federal Court of Australia of misleading or deceptive conduct relating to financial matters. The organisation was fined $650,000. AFSA identified the unlawful conduct while investigating an anonymous tip-off.

A contemporary approach to regulation protects those experiencing vulnerability, ensures compliance is the easiest option and sees AFSA act decisively against deliberate harm. We are firm and fair.

The personal insolvency and personal property securities systems rely on people doing the right thing. We are committed to investigating and prosecuting anyone who deliberately misuses the system and fails to comply with their legal obligations.

How you can help mitigate risk in the system

One of the ways we identify misuse is through our tip-off process – this helps stop misconduct, reduces harm and improves behaviour. This information, combined with our own surveillance and intelligence monitoring, helps to ensure the strength of our systems. We all have a role to play in regulatory stewardship and building a strong credit system.

More information about making a tip-off is available on the AFSA website, afsa.gov.au

Tim Beresford Chief Executive and Inspector-General of Bankruptcy Australian Financial Security Authority www.afsa.gov.au