Chapter 1
Introduction and background
Introduction
Duties of
the committee
1.1
The Parliamentary Joint Committee on Corporations and Financial
Services (the committee) is established by Part 14 of the Australian
Securities and Investments Commission Act 2001 (the ASIC Act). Section 243 of the ASIC Act sets out the
committee's duties as follows:
-
to inquire into, and report to
both Houses on:
-
activities of ASIC or the
Takeovers Panel, or matters connected with such activities, to which, in the
Parliamentary Committee’s opinion, the Parliament’s attention should be
directed; or
-
the operation of the corporations
legislation (other than the excluded provisions); or
-
the operation of any other law of
the Commonwealth, or any law of a State or Territory, that appears to the
Parliamentary Committee to affect significantly the operation of the
corporations legislation (other than the excluded provisions); or
-
the operation of any foreign
business law, or of any other law of a foreign country, that appears to the
Parliamentary Committee to affect significantly the operation of the
corporations legislation (other than the excluded provisions); and
-
to examine each annual report that
is prepared by a body established by this Act and of which a copy has been laid
before a House, and to report to both Houses on matters that appear in, or
arise out of, that annual report and to which, in the Parliamentary Committee’s
opinion, the Parliament’s attention should be directed; and
-
to inquire into any question in
connection with its duties that is referred to it by a House, and to report to
that House on that question.[1]
Referral of the inquiry
1.2
On 4 June 2015 the House of Representatives referred an inquiry into the
impairment of customer loans to the committee for inquiry and report by 31 March 2016.[2] On 4 June
2015 the committee resolved that:
-
in conducting the inquiry the committee would not investigate or
seek to resolve disputes between customers and banks; and
-
where the experiences of customers may inform the committee about
the practices of banks, the committee welcomed submissions that explicitly
addressed the terms of reference.
1.3
On 2 March 2016, the House of Representatives extended the reporting date
until 20 May 2016.
On 15 April 2016, the inquiry lapsed due to the prorogation of the House of
Representatives.[3]
On 19 April 2016, the committee resolved to re-adopt the inquiry using the same
terms of reference as the original inquiry referred by the House of Representatives
on 4 June 2015 but with a reporting date to be determined by the committee.
Terms of
reference
1.4
The terms of reference are as follows:
(a) practices of banks and other financial institutions
using a constructive default (security revaluation) process to impair
loans, where constructive default/security revaluation means the engineering or
the creation of an event of default whereby a financial institution
deliberately reduces, through valuation, the value of securities held by that
institution, thereby raising the loan-to-value ratio resulting in the loan
being impaired;
(b) role of property valuers in any constructive default
(security revaluation) process;
(c) practices of banks and other financial institutions in
Australia using non-monetary conditions of default to impair the loans of their
customers, and the use of punitive clauses such as suspension clauses and
offset clauses by these institutions;
(d) role of insolvency practitioners as part of this
process;
(e) implications of relevant recommendations of the
Financial System Inquiry, particularly recommendations 34 and 36 relating to
non-monetary conditions of default and the external administration regime
respectively;
(f) extent to which borrowers are given an opportunity to
rectify any genuine default event and the time period typically provided for
them to do so;
(g) provision of reasonable written notice to a borrower
when a loan is required to be repaid;
(h) appropriateness of the loan to value ratio as a
mechanism to default a loan during the period of the loan; and
(i) conditions and requirements to be met prior to the
appointment of an external administrator; and
(1) in undertaking this inquiry, the Committee take
evidence on:
(a) the incidence and history of:
(i) loan impairments; and
(ii) the forced sale of property;
(b) the effect of the forced sale of property in depressed
market conditions and drought;
(c) comparisons between valuations and sale price;
(d) the adequacy of the legal obligations on lenders and
external administrators (including s420A of the Corporations Act 2001)
to obtain fair market value for the forced sale of property; and
(e) any related matters.[4]
Conduct of
the inquiry
1.5
The committee advertised the inquiry on its webpage and in relevant
national and regional newspapers and invited submissions from a range of
relevant stakeholders. The committee set a closing date for submissions of 24
July 2015 and subsequently extended the due date for submissions to
21 August 2015. The committee received 195 submissions, with the
public submissions being published on the committee's website. The committee
held public hearings in Melbourne on 16 October 2015, Sydney on 13 and 18
November 2015, Brisbane on 19 November 2015, Canberra on 23 November 2015 and 2
December 2015, and in Sydney on 16 February 2016 and 4 April 2016.
Structure of this report
This report is structured as follows:
-
The remainder of Chapter 1 provides background to the inquiry;
-
Chapter 2 discusses the practices of banks relevant to the terms
of reference;
-
Chapters 3 and 4 discuss dispute resolution schemes;
-
Chapter 5 discusses the role of valuers in relation to loans;
-
Chapter 6 discusses the role of receivers and investigative
accountants; and
-
Chapter 7 discusses allegations put to the committee regarding
the acquisition of Bankwest by the Commonwealth Bank and Landmark by ANZ.
Background and previous inquiries
1.6
In conducting this inquiry, the committee was acutely aware that many of
the issues raised were not new, and that many of the issues and fact scenarios
have been considered by earlier parliamentary and other inquiries. A number of
submitters to this inquiry have also had their matters considered in other
forums, including earlier parliamentary inquiries. Despite this, as part of
assessing systemic issues within the small business lending environment, the
committee devoted time to examine submissions from Bankwest
customers who alleged that the acquisition
of Bankwest by the Commonwealth Bank in 2007 had adversely affected them. The
Committee also took evidence from customers of a number of lenders
including ANZ, NAB, Westpac, Macquarie Bank, Rabobank, Landmark, Elders, Suncorp,
Bank of Queensland, AMP, Rural Bank, Adelaide Bank, AMP Bank, Members Equity
Bank, St George Bank and the Uniting Church.
1.7
The committee notes that this inquiry has been conducted at the same
time as a number of relevant and significant reforms were being considered by
government. Therefore previous inquiries relevant to this inquiry, as well as
recent policy announcements made in relation to the powers and reach of the
Australian Securities and Investments Commission (ASIC), are set out below.
Inquiry into the post-GFC banking
sector
1.8
In 2012 the Senate Economics References Committee conducted an inquiry
into the post-GFC [global financial crisis] banking sector, which devoted three
chapters to issues related to Bankwest customers. That committee considered the
appropriateness of regulatory
settings governing the financial sector and whether the government agencies
charged with administering and enforcing these regulations were effectively
performing their role. That committee noted that while there were many
sad and distressing stories, the borrowers may have been able to operate
successfully when the business environment was relatively strong, however, the GFC
placed stress on less robust and speculative projects. In many cases, loans
were sought for ventures that posed a considerable risk even during a stable
economic environment. That was evidenced by the cases where banks other than
Bankwest had refused to finance the initial loans. The Senate Economics
References Committee stated that:
This of course does not apply to every case, nor does it
excuse Bankwest— under its previous owners Bankwest was willing to enter into
these loans that other financial institutions, acting more prudently, chose not
to. When its small business borrowers are experiencing difficulties, Bankwest
has a duty to make genuine attempts to work with the borrower, to clearly
explain what is happening and why, and to treat them with courtesy.[5]
1.9
During that inquiry, that committee was advised by ASIC that it had not
received evidence to suggest that Bankwest had engaged in systemic misconduct,
and nor had they received a significant number of complaints from Bankwest customers.[6]
Relevant inquiries in the United
Kingdom
1.10
In the United Kingdom (UK), the Independent Commission on Banking was
established in 2010 and reported
in 2011. This Commission considered structural and related non-structural
reforms to the UK banking sector to promote financial stability and
competition. It made a number of recommendations that led to the release of a
white paper in June 2012. A key recommendation from the inquiry was the
ring-fencing of banks so that retail activities such as deposit-taking are made
separate from international wholesale and investment banking operations.[7]
1.11
Another relevant UK inquiry, conducted by the Parliamentary Commission
on Banking Standards (PCBS) was published in June 2013 on failures of
accountability of senior bankers in the wake of the global financial crisis.
The PCBS found that there was a loss of trust caused by profound lapses in
banking standards. The PCBS argued that no single change, however dramatic, could
address the problems of banking standards and that reform across several fronts
was required. The PCBS therefore made the following proposals to restore public
confidence in the banking sector:
-
requiring individual responsibility in banking at the most senior
levels;
-
reforming governance within banks to reinforce each bank's
responsibility for its own safety and soundness and for the maintenance of
standards;
-
creating better and more diverse banking markets in order to
empower consumers and provide greater discipline on banks to raise standards;
-
reinforcing the responsibilities of regulators in the exercise of
judgement in deploying their current and proposed new powers; and
-
specifying the responsibilities of the government and
Parliaments.[8]
1.12
The UK government's response to the PCBS was released in July 2013 and
noted that banks in the UK have not done enough to carry out their core role of
financing economic growth. The UK government response was also critical of
banks for failing taxpayers, customers and shareholders. The UK government announced
plans to implement the major recommendations including:
-
a new banking standards regime governing the conduct of bank
staff;
-
a criminal offence for reckless misconduct by senior bank staff;
and
-
further steps to improve competition in the banking sector.[9]
1.13
On 17 November 2014, the former members of the PCBS released a statement
noting their concerns about continued examples of misconduct in the sector, and
expressing their disappointment about the slow progress in implementing reforms.[10]
Relationship to the inquiry into
the impairment of customer loans
1.14
The committee's current inquiry into impairment of customer loans was
triggered to some extent by allegations of issues arising between Bankwest and
its customers. Prior to the acquisition of Bankwest by the Commonwealth Bank,
Bankwest was owned by HBOS Australia. On 5 April 2013 the PCBS published a
report on the failure of HBOS, titled An accident waiting to happen. The
report drew a number of conclusions about HBOS, including that:
Whatever may explain the problems of other banks, the
downfall of HBOS was not the result of cultural contamination by investment
banking. This was a traditional bank failure pure and simple. It was a case of
a bank pursuing traditional banking activities and pursuing them badly.
Another lesson is that prudential supervisors cannot rely on
financial markets to do their work for them. In the case of HBOS, neither
shareholders nor ratings agencies exerted the effective pressure that might
have acted as a constraint upon the flawed strategy of the bank. By the time
financial markets were sufficiently concerned to act as a discipline, financial
stability was already threatened.[11]
1.15
The report also noted that for HBOS's operations in Australia, the
impairments totalled £3.6 billion, equivalent to 28 per cent of the value of
the loan book there at the end of 2008, an even higher loss as a proportion of
loans than incurred by the Corporate Division in the UK. The report argued that
such a loss is all the more striking in view of the comparative resilience of
the Australian economy in the global downturn. The PCBS report on HBOS also
stated that:
In two markets alone—Australia and Ireland—it incurred
impairments of £14.5 billion in the period from 2008 to 2011. These losses were
the result of a wildly ambitious growth strategy, which led in turn to
significantly worse asset quality than many of its competitors in the same
markets. The losses incurred by HBOS in Ireland and Australia are striking, not
only in absolute terms, but also in comparison with other banks. The HBOS
portfolio in Ireland and in Australia suffered out of proportion to the
performance of other banks. The repeated reference in evidence to us by former
senior executives to the problems of the Irish economy suggests almost wilful
blindness to the weaknesses of the portfolio flowing from their own strategy.[12]
Productivity
Commission inquiry into business set-up, transfer and closure
1.16
The Productivity Commission inquiry into business set-up, transfer and
closure published its final report in December 2015. The committee has noted
that several of the findings of this report are relevant to this inquiry, and
include the following:
-
access to finance is not a significant barrier for most new
businesses—most, with good reason, do not seek finance
from external sources;
-
most businesses are closed or transferred without
financial failure;
-
specific reforms to Australia's corporate insolvency regime are
warranted, but a wholesale change to the system, such as the adoption of the
United States' 'chapter 11' framework, is not justified nor likely to be
beneficial; and
-
formal company restructuring through voluntary administration
should only be available when a company is capable of being a viable business
in the future.[13]
The Financial System Inquiry
1.17
In December 2014 the final report of the Financial System Inquiry (FSI)
was released. This report aimed to provide a blueprint for the Australian financial
system over the coming decade. Previous financial system inquiries, including
the Campbell Report in 1981 and Wallis Report in 1997, provided the catalyst
for major economic reforms. The Campbell Report led to the floating of the
Australian dollar and the deregulation of the financial sector, while the
Wallis Inquiry led to streamlined financial services regulation, the creation
of the Australian Prudential Regulation Authority (APRA), and the current form
of ASIC.[14]
1.18
The FSI made the following two recommendations which were specifically
included in the terms of reference for this inquiry:
-
Recommendation 34: Unfair contract term provisions
-
Support Government's process to extend unfair contract term
protections to small businesses.
-
Encourage industry to develop standards on the use of
non-monetary default covenants.
-
Recommendation 36: Corporate administration and bankruptcy.
-
Consult on possible amendments to the external administration
regime to provide additional flexibility for businesses in financial difficulty.[15]
1.19
Subsequent changes relating to the above recommendations are discussed
further in chapters 4 and 6.
The ASIC Capability Review and
other recent announcements
1.20
On 24 July 2015, the ASIC Capability Review commenced as part of the government's response to the FSI
which recommended periodic reviews of the capabilities of financial and
prudential regulators, commencing with a review of ASIC in 2015 to ensure it
has the skills and culture to carry out its role effectively.[16]
1.21
The Capability Review found that many of ASIC's regulatory capabilities
are in line with global best practice. However, the review recommended
additional measures to support ASIC in delivering its mandate and ensuring it
is fit for the future. The Capability Review found there were aspects of
strategy, governance, IT, data infrastructure, management information systems
and ASIC's approach to stakeholder engagement that required improvement.[17]
1.22
On 20 April 2016 the Commonwealth government released the ASIC Capability
Review and its response to the review. 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.[18] The
announcement identified a user pays industry funding model to deliver $127m 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.[19]
1.23
The government also made the following policy announcements on 20 April
2016:
-
appointment of an additional ASIC commissioner with experience in
the prosecution of crimes in the financial services industry;
-
bringing forward of law reforms recommended by the FSI, including
product intervention powers, product distribution obligations, strengthening
consumer protection for electronic payments and a review of ASIC penalties and the
enforcement regime;
-
a review of the Financial
Ombudsman Service's (FOS's) small business jurisdiction, monetary limits and
compensation caps;
-
additional funding for the
superannuation tribunal to deal with legacy complaints; and
-
establishment of a panel to advise on consolidation of disputes
and complaints functions in the financial system.[20]
1.24
On 21 April 2016, the Australian Bankers' Association announced a range
of new measures which they claim will protect consumer interests, increase
transparency and accountability and build trust and confidence in banks. The
new measures include:
-
an independent review of product
sales commissions and product based payments, with a view to removing or
changing them where they could result in poor customer outcomes;
-
improving protections for
whistleblowers to ensure there is more support for employees who speak out
against poor conduct;
-
improved complaints handling and
better access to external dispute resolution, as well as providing compensation
to customers when needed; and
-
supporting the Federal Government's
review of the FOS.[21]
1.25
This inquiry has been conducted at a time when there has been
substantial activity in addition to the announcements above, including the
Financial Systems Inquiry, reforms arising from a major parliamentary inquiry
into the performance of ASIC, and law reforms relating to insolvency and unfair
contract terms that may interact with the above announcements. In addition the
Australian Small Business and Family Enterprise Ombudsman (ASBFE Ombudsman) was
established in March 2016.
1.26
The announcements above identify the establishment of a panel to advise
on consolidation of disputes and complaints functions in the financial system. 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 coordinate the implementation of the outcomes of this inquiry and the
aspects of the above reforms and announcements 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. The committee considers that the
most appropriate body to undertake this role is the ASBFE Ombudsman.
1.27
The committee further considers that additional funding should also be
available for the ASBFE Ombudsman to deal with legacy complaints along similar
lines to the recently announced funding for the superannuation tribunal to deal
with legacy complaints.
1.28
The committee is therefore recommending in chapter 2 that the government
bring forward legislation and other measures to give the ASBFE Ombudsman the
relevant powers and resources to carry out the functions discussed above, along
with other functions to address gaps identified by this inquiry.
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