Executive summary
1.1
The terms of reference for this inquiry into the impairment of customer
loans required the committee to consider the practices of banks towards
borrowers who they judge may be in financial difficulty and may have breached
the terms of their loan contracts.
1.2
The majority of the evidence received by the committee addressed small
business and commercial loans, so the committee has focussed its attention on
those areas, rather than residential loans which were considered in the
post-GFC banking inquiry by the Senate Economics References Committee in 2013.
The Committee notes that business lending spans a large range of disparate
parties. Some borrowers are publically listed entities with considerable
resources to conduct due diligence prior to entering into a contract with a
lender. Many, however, are small family businesses—who may still have to borrow millions of
dollars to achieve their commercial objectives—yet
be run by an individual, family or partnership that has significant personal exposure
due to the use of personal assets such as the family home as security.
1.3
The bulk of the evidence received in relation to lenders also related to
banks and therefore so does much of the committee's report. However, to ensure
consistency across all relevant lenders, the committee's recommendations should
be interpreted as applying to all lenders listed as authorised deposit taking
institutions by the Australian Prudential Regulation Authority.
1.4
The terms of reference drew particular attention to:
-
constructive or non-monetary defaults which include breaches of
loan contract terms other than borrowers not meeting repayment requirements;
and
-
the role of other service providers including valuers and
receivers.
1.5
From the evidence it has received, the committee has been able to
determine that there has been—albeit
in a minority of cases—a
persistent pattern of abuse of the almost complete asymmetry of power in the
relationship between lender and borrower.
1.6
Many submitters and witnesses alleged that banks had engaged in a range
of illegal actions, or actions that breached the Banking Code of Practice. The
committee has not been able to discover evidence that demonstrates that there
was widespread or systematic illegal behaviour by banks or that there were
deliberate impairments of loans motivated solely by clawbacks or warranties
associated with acquisitions of banks. However, the committee does consider
that there are four factors that create an environment in which small business
borrowers are very vulnerable and that banks are able to exploit this
vulnerability.
1.7
These factors are:
-
that there is a wide variation of conduct that is deemed
acceptable by lenders due to the significant level of discretion and commercial
judgement available to the banks for both initial lending and the management of
loans in financial difficulty;
-
complex, non-negotiable loan contracts, coupled with gaps in
existing legislation and regulations, give banks the power to behave in ways
that—in relation to
loans—are unethical,
unreasonable and lack transparency;
-
in many cases, borrowers in financial difficulty are unable to
pursue their rights though the courts because the process in either
unaffordable, or they have lost control of their financial assets due to the
appointment of receivers; and
-
there are significant gaps in the coverage of mediation and
external dispute resolution schemes leaving borrowers without the means to have
their disputes with banks tested.
1.8
This inquiry has been conducted at a time when there has been
substantial activity in relation to financial services generally, including the
Financial Systems Inquiry, reforms arising from a major parliamentary inquiry
into the performance of Australian Securities and Investments Commission
(ASIC), the ASIC capability review and law reforms relating to insolvency and
unfair contract terms. The Australian Small Business and Family Enterprise
Ombudsman (ASBFE Ombudsman) was established in March 2016.
1.9
In addition, in April 2016 the government made a range of announcements
relating to regulation of banks and lending practices. Commendable as each of
these initiatives or reforms are individually, there is a very real risk that
significant resources will be committed to processes that may operate in
isolation, or worse, at odds with each other. This could leave small business
consumers still having to engage in relationships with lenders that are neither
transparent nor fair and still facing gaps in their access to effective and
affordable dispute resolution.
1.10
The committee considers that to address the vulnerability of small
business and commercial borrowers it is essential that a single body be
empowered to:
-
lead and/or coordinate the implementation of the outcomes of this
inquiry and the aspects of the above reforms (government and financial services
sector) that relate to small business in order to avoid the significant risk
that major gaps and flaws in the protections for small business would remain;
-
bring together a team with expertise in financial services,
ethics and education to establish standards for the conduct of bank management
and their employees in relation to small business loans and to work with the
banking industry to implement those standards and appropriate mediation and
dispute resolution schemes;
-
to work with the banking industry to develop nationally
consistent standardised loan contracts; and
-
where gaps in the implementation of those standards and
appropriate dispute resolution schemes remain, to act as a small business loans
dispute resolution tribunal.
1.11
The committee considers that the most appropriate body to undertake this
role is the ASBFE Ombudsman. The committee therefore recommends that the
government bring forward legislation and other measures to give the ASBFE
Ombudsman the relevant powers to carry out this role, and to do so
retrospectively where appropriate
1.12
The provisions of the ABSFE Ombudsman Act prevent the ABSFE Ombudsman
from recommending the use of commercial arbitration. Commercial arbitration
could provide a viable alternative to courts for those businesses and
commercial borrowers that do not qualify for external dispute resolution
schemes. The committee considers that commercial arbitration may be appropriate
in some circumstances and is therefore recommending that the ASBFE Ombudsman be
able to direct parties to participate in commercial arbitration for larger
commercial loans outside of its jurisdiction.
1.13
The committee also noted suggestions for the development of a nationally
consistent farm debit mediation scheme. The committee recommends that a
national farm debt mediation scheme should be established. The committee
further recommends that a similar nationally consistent mediation scheme be put
in place for small business.
Conduct of the inquiry
1.14
The committee has examined the evidence it received in the context of a
number of existing legislative, regulatory and other requirements relating to
loans including:
-
the role of the Australian Prudential Regulatory Authority in
protecting financial stability and the interests of depositors;
-
the role of ASIC including:
-
licensing and consumer protection for financial services;
-
authorisation and oversight of external dispute resolution
schemes;
-
the role of the Australian Small Business and Family Enterprise
Ombudsman in relation to disputes between small business borrowers and banks;
-
industry peak bodies, self-regulatory functions, codes of
practice and other roles that these bodies perform relating to banks, other
lenders, valuers and receivers;
-
the role of the Australian Competition and Consumer Commission in
making public competition assessments of acquisitions of banks by other banks;
and
-
the role of the Commonwealth government in approving
acquisitions.
1.15
The committee is aware that the matters raised in this inquiry have been
examined previously and despite previous examination, allegations continue to
be raised. In order to ensure that the issues raised during the inquiry
were thoroughly examined, the committee has:
-
conducted this inquiry over a period of approximately 11 months;
-
received and published 195 submissions, including submissions
received after the closing date and considered more than 11 000 thousand pages
of evidence;
-
held eight public hearings leading to more than 450 pages of
transcribed evidence;
-
asked and received answers to over 300 written questions on
notice from banks, industry bodies, government bodies and others;
-
requested that the Commonwealth Bank provide documents and then
used these documents to:
-
consider the behaviour of the Commonwealth Bank in relation to 95
borrowers, including 36 submitters to the inquiry and 59 cases associated with
the acquisition of Bankwest by the Commonwealth Bank;
-
consider in detail eight disputes between borrowers and banks and
considered responses and counter responses to information provided by both
parties to the disputes; and
-
formally referred four disputes to ASIC for consideration and
response to the committee.
1.16
At the start of the inquiry, the committee resolved and stated publicly
that while it welcomed submitters' experiences with banks to inform the
committee's report to the Parliament, the committee would not investigate or
seek to resolve disputes between individual borrowers and banks. As the
committee has concluded this inquiry, it notes that for some submitters, their
grievance remains unresolved and that a number of them have called for a Royal
Commission.
Recent announcements
1.17
The committee acknowledges the Commonwealth government's release of the
ASIC Capability Review, the government response and a new policy announcement
on 20 April 2016. The government announced that five of the
Capability Review recommendations would be implemented, and that it expected
ASIC to provide an implementation plan for the other 29 recommendations. The
announcement identified a user pays industry funding model to deliver $127
million in additional funding for:
-
deepening the surveillance and enforcement capability of ASIC
with a specific focus on investigating financial advice, responsible lending
and life insurance;
-
enhancing data analytics and surveillance capabilities as well as
modernising data management systems; and
-
strengthening ASIC's powers.[1]
1.18
The committee acknowledges the government's policy announcements on
20 April 2016 including an additional ASIC commissioner, bringing forward
law reforms recommended by the Financial System Inquiry, a review of the jurisdiction of the Financial Ombudsman
Service and possible consolidation of disputes and complaints functions
in the financial system.[2]
However, the committee does note that it is disappointed with the pace of the
implementation of other related reforms, including recommendations made by this
committee during earlier inquiries.
1.19
The committee also notes the announcements made on 21 April 2016 by the
Australian Bankers' Association including a
review of commissions and product based payments, improving protections for
whistleblowers, improving complaints handling, and better access to external
dispute resolution.[3]
The committee will monitor the progress of the above announcements and the
coordination of their implementation.
Practices of banks
1.20
With the benefit of hindsight (post GFC) and based on the evidence it
has received, the committee observes that for many failed loans, including
those with Bankwest, it is likely that irresponsible lending was the primary or
significant cause of loan failure in a number of cases. However, the committee
considers that the manner in which the banks facilitated the defaulting of
loans, and the subsequent treatment of customers, was in many cases
unconscionable. In making its recommendations, the committee is seeking to
prevent this type of conduct by banks in the future.
1.21
While mechanisms have been put in place to require banks to meet
improved standards of responsible lending for residential and related loans,
this inquiry has identified that these standards are only implemented on a
voluntary basis in relation to small business and commercial loans. The
committee is therefore recommending that responsible lending provisions,
including ASIC's monitoring under the National Consumer Credit Protection
Act 2009, become mandatory and be extended to small business loans. The
committee is disappointed that banks have not chosen to implement these
standards voluntarily.
1.22
The committee considers that the banks' compulsion to deliver
ever-increasing returns to shareholders has become the overriding driver of
behaviour and culture in the banks. As the margins on business loans reduce,
this culture is evidenced by some customers being offered high risk credit
facilities such as credit cards, instead of secured loans.
1.23
The committee is deeply concerned that more than three years have
elapsed since the conclusion of the post-GFC banking inquiry by the Senate
Economics References Committee in which a number of recommendations were made
to improve banking practices. Since this time, the banking industry has not
addressed matters as simple as providing borrowers with copies of valuation
reports.
1.24
The current inquiry into impairment of customer loans has amply
demonstrated that the provision of valuation reports to borrowers has not been
written into the Banking Code of Practice, or become universal practice by
banks.
1.25
The committee has also received evidence that borrowers perceive that
banks provide inconsistent information and advice between the bank's lending
departments and their credit management departments. Evidence considered by the
committee indicates that there is the potential for lending departments in
banks to be more optimistic about valuations than credit management
departments. The committee is concerned that this may be influenced by
inappropriate or conflicted remuneration incentives and cultures in those
departments. The rules that exist in the financial advice space, which restrict
conflicted remuneration and require financial advisers to act in the customer's
best interest, do not extend to small business loans. The committee is very
concerned about the lack of any obligation on lenders to provide consistent
information in the best interests of borrowers.
1.26
The committee also heard a large number of concerns about the
appointments of and instructions to valuers, investigative accountants and
receivers. These concerns related to inconsistent information, as already
discussed, but also included concerns about transparency and accountability.
1.27
To address these issues, the committee is therefore recommending that
appropriate legislation and regulations be put in place to:
-
prohibit conflicted remuneration for all bank staff;
-
require bank officers to act in the customer's best interests for
small business loans;
-
require officers from lending and credit management departments
to provide consistent information to borrowers, including:
-
copies of valuation reports and instructions to valuers; and
-
copies of investigative accountants' reports and instructions to
investigative accountants and receivers;
-
require banks to ensure that the valuation instructions do not
change during the term of the loan agreed in the loan contract, and that
businesses are valued as the market value of a going concern, not just a
collection of business assets, and that the market value of all security
supporting the loan are taken into account, not just real property.
1.28
This will require internal processes that ensure coordination between
lending officers and credit management officers prior to making the initial
offer to the borrower.
1.29
While inconsistent valuation instructions from banks are a significant
concern, they are not the only concern. From the evidence presented to this
inquiry, there is fragmentation of relevant professional standards,
registration processes and dispute resolution arrangements that apply to
valuers, and which are spread across three peak bodies and several state
bodies. The committee notes recent media reports[4]
which allege that banks are bullying valuers into accepting below cost fees,
strengthening the need for greater oversight of the relationships between banks
and valuers.
1.30
Prudential Standard 220 sets out substantial requirements for how banks
must value property held as security for loans, including: regular assessment,
bank procedures, marketing periods, determining fair value and the role of the
bank's credit administration function. Evidence put to this inquiry suggests
that cases may exist where the above requirements are not met. APRA's position
is that it only considers systemic issues, it is not mandated to consider the
relationship between banks and borrowers, and it may have a conflict of
interest if it did consider the relationship between banks and borrowers. There
is what seems to be an appropriate standard in place, but no way of ensuring
that the standard is applied, or that borrowers are able to raise concerns about
its implementation.
1.31
The committee is therefore recommending that a nationally consistent
approach be developed for the professional standards and conduct of valuations
in relation to small business loans, and which includes valuation of all
assets, not just real property.
Bankwest and Landmark
1.32
The committee considered allegations that there was a deliberate
strategy by the Commonwealth Bank to over-impair loans in order to seek
financial gain through a range of mechanisms after the acquisition of Bankwest
in 2007. After considering the evidence and responses it has received, the
committee has not been able to determine that deliberate impairment of loans,
solely motivated by clawbacks or warranties, occurred. While the contractual
arrangements associated with the acquisition of Bankwest may have played a
role, the evidence before the committee points strongly to a culture of placing
profit and return to shareholders ahead of the interests of borrowers.
1.33
Loans associated with the price adjustment mechanism in the Bankwest
acquisition by the Commonwealth Bank were separately assessed by three major
accounting and audit firms. The fact that the three assessments differed by
hundreds of millions of dollars would suggest that despite the same accounting
and prudential standards being used, identifying which loans were impaired and
the extent of the impairment was an uncertain process requiring commercial
judgements in a significant number of cases. Such a broad discretion must be
subject to appropriate monitoring and accountability. There are many loans for
which the accountability is limited due to the lack of an applicable dispute
resolution scheme. As discussed earlier, the committee is therefore
recommending substantial improvements to dispute resolution schemes, codes of
practice and regulation and monitoring of lending.
1.34
The committee considered allegations regarding deliberate impairments or
defaults of performing loans associated with ANZ's acquisition of Landmark.
After considering the evidence and responses it has received, the committee has
not been able to conclusively determine that this occurred. The committee
welcomes ANZ's acknowledgement that its treatment of customers could be
improved and that it is now implementing better practices. The committee will
follow with interest developments in ANZ's approach to resolving issues with
customers and encourages all lenders to take an open and constructive approach
to helping borrowers to resolve their difficulties, especially in light of the
significant power imbalance that may exist between lenders and borrowers.
1.35
In conclusion, the committee is struck by the different approaches
employed by the ANZ and the Commonwealth Bank. The ANZ, after internal review,
appears to have realised that their conduct was questionable, and have
voluntarily sought to make recompense to their customers. The Commonwealth
Bank, on the other hand, have consistently denied that there have been issues
with their conduct and the way in which they have engaged with their customers.
The evidence of witnesses and submitters to this inquiry has strongly called
into question the Commonwealth Bank's denial of unreasonable or unethical
conduct.
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