Context

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) fourth round of public hearings commenced on 25 June. The hearings considered two topics (and accompanying case studies): farming finance; and issues arising from interactions between Aboriginal and Torres Strait Islander people and financial services entities. A high level overview of the open findings and general submissions highlighted by Counsel Assisting Rowena Orr QC in her closing statement is below.
[Note: The case studies considered over the course of the Round 4 hearings have been reported previously in Governance News 02/07/2018 and 09/07/2018.]

Closing statement to the Commission: Open Findings and General Submissions

In her closing statement to the Commission, Counsel Assisting Rowena Orr QC outlined the findings that may be open to the Commissioner to make (or not to make) with respect to each of the case studies considered over the course of the two weeks of the hearings.
Ms Orr also identified a number of 'general questions' arising from the case studies. Immediate parties to the hearings were invited to respond to the specific findings in relation to each case study by the 13 July. Responses to general submissions (open to all parties to the proceedings) are due 16 July.

Topic 1: Farm Finance

Landmark Case Study (ANZ)

This case study concerned ANZ and its handling of former customers of Landmark financial services following ANZs acquisition of Landmark's loan and deposit books in March 2010. The Commission heard evidence from ANZ's head of lending services, corporate and commercial Mr Benjamin Steinberg concerning: the communication to customers regarding the acquisition Landmark; issues arising in relation to the transfer of former Landmark customers to ANZ systems; and ANZ's conduct in relation to 13 farmers or farming families who were former customers of Landmark financial services with particular focus on two families the Cheesmans and the Harleys (see: Governance News 02/07/2018).

Possible open findings

Ms Orr said that Mr Steinberg had acknowledged that ANZ's actions may have fallen below community expectations in a number of instances and that it was open to the Commissioner to make findings consistent with his acknowledgements. She also identified some instances in which she said ANZ may have breached obligations under Clause 2.2 of the Banking Code of Practice. For example, the refusal by ANZ to accept a request from the Harleys to delay selling their properties and to instead proceed to enforcement action was identified by Ms Orr as a possible breach of Clause 2.2 of the Banking Code of Practice and/or breached community standards and expectations.

General Submissions: The duty to act 'fairly and reasonably'

1.  'What does it mean for a bank to act fairly and reasonably towards a customer in a consistent and ethical manner? What does that obligation require of a bank in relation to agribusiness customers in an enforcement context?
2. What weight should a bank give to the interests of the customer when making decisions about agribusiness customers experiencing financial difficulty? How should a bank balance the competing interests of the customer and the bank in that context?                                                Commenting on this, Commissioner Hayne said: 'As to that second question and competing interests, it would be of assistance if parties addressing that question identified with some care and precision what exactly are the interests that are in competition. At least at one level, an available view may be that the minimising of loss to the bank will minimise loss to the customer and, to that extent, the interests of both parties are parallel rather than competing. To approach it only in that way may, perhaps – I don't say it does – obscure issues about increased cost of capital and the like that arise in connection with non-performing loans but, be that as it may, generalised references to competing interests are likely to be less helpful than more particular and specific identification of the interests that are in competition and require resolution according to the party submitting one way rather than the other'.
3. 'In what circumstances is it both best for the customer and best for the bank to appoint an external administrator?' 

Brauer Case Study (Rabobank)

Possible open findings

Ms Orr said it was open to the Commissioner to find that in line with acknowledgements made by Rabobank representative Mr James in written submissions, it was open to the Commission to find that Rabobank's conduct fell below community expectations and standards and may have been in breach of the Banking Code of Practice in some respects. For example, Ms Orr said that it was open to the Commissioner to find that Rabobank may have failed to exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods and in forming its opinion about the Brauers’ ability to repay the $3.7 million loan. This may have been a breach of Clause 21 of the Code of Banking Practice, Ms Orr said. Ms Orr added that Mr James indicated that 'Rabobank's current remuneration structure is still predominantly driven by sales and is, therefore, not yet consistent with the recommendations of the Sedgwick Review'.

General Questions: conflicts of interest arising in the context of internal valuations (appraisals); provision of documents ahead of mediation

1. 'Is it appropriate for financial services entities to conduct internal appraisals, as opposed to obtaining independent valuations of farms and other rural property? If so, in what circumstances is it appropriate?
2. Is it appropriate for staff involved in origination of the loan to conduct or otherwise be substantively involved with such appraisals? Should there be minimum levels of qualification, skill, and experience before a bank employee can be authorised to conduct appraisals? If so, what are the appropriate minimum levels?Should there be a code that sets out the requirements for the conduct of internal appraisals by financial services entities, either in respect of rural properties or more generally? If so, what form should that code takeIf it is inappropriate for financial services entities to conduct internal appraisals of property to be taken as security, what should be done to stop or discourage that practice?
3. Are the legislative obligations on financial services entities to provide documents prior to a farm debt mediation, such as the obligation in section 21 of the Farm Business Debt Mediation Act in Queensland, sufficient? Should they be extended to oblige financial services entities to provide information on request, as well as documents?' 

Ruddy Case Study (Bankwest)

Possible open findings

Ms Orr said that is was open for the Commission to find that Bankwest may have engaged in misconduct by breaching the obligation in clause 2.2 of the Code of Banking Practice to act fairly and reasonably towards the Ruddys in a consistent and ethical manner and outlined the specific conduct that may have amounted to a breach. For example: Ms Orr said that Bankwest representative Ms Taylor acknowledged that 'by getting the valuation wrong, Bankwest had engaged in conduct that fell below community standards and expectations, but she did not concede that it was misconduct'. The Commissioner commented that this is an example of 'the need to unpack what is seen as being community standards and expectations and what that requires and how, if at all, that differs from the obligation to be fair'. He added that though the question arises in this particular case, the question of what entities should be expected to do if they become aware of 'something having gone awry in a particular file' might have more general application. 

Ms Orr added that it was also open to the Commission to find that there were a 'number of causes of the misconduct which are attributable to Bankwest’s culture and governance practices, as well as to its remuneration practices and to inadequate internal systems' noting that at the time Bankwest offered the facilities to the Ruddys, 60% of its KPIs for employees like the bank manager in the Ruddy case, were weighted towards profitable growth and half of that was allocated to asset sales targets. Ms Orr went on to say that it was open to the Commissioner to find that Bankwest did not 'have in place adequate internal systems to minimise the risk of conflict of interest posed by internal valuations'.

General Questions — conflicts of interest arising in connection with remuneration practices

1.  'Do remuneration and incentive policies that reward bank employees for the volume of loans sold create an unacceptable risk that bank employees will prioritise the sale of loan products over the bank's responsible lending obligations; over the bank's statutory obligations, including to provide loans in a manner that is efficient, fair and honest, and to have in place adequate arrangements to ensure that customers are not disadvantaged by any conflict of interest that may arise in relation to the provision of loans; and over the bank's obligations to act fairly and reasonably towards customers in a consistent and ethical manner?'

Ms Orr noted that the 'second set of questions that arises from this case study relates to internal valuations' already outlined in the Rabobank case study. 

Smith Case Study (NAB)

Possible open findings

Ms Orr said that it was open for the Commissioner to find that the charging of default interest to the Smiths 'for in excess of five years on one facility and in excess of six years on the other, in circumstances where the Smiths' business was affected by more than one natural disaster, NAB engaged in conduct falling below the standards and expectations of the community'. Ms Orr added that it's open to the Commissioner to find that the failure of NAB to alert the Smiths to the existence of the hardship policy in the circumstances amounted to conduct falling below community standards and expectations. Mr Orr went on to say that it is open to the Commission to find that NABs 'conduct in charging default interest to the Smiths over such a long period was the product of a culture by which default interest was used as a strategic tool to place pressure on borrowers in default'.

General Questions — How should lenders respond to farmers in financial stress

1.  'To what extent does default interest reflect the cost to financial services entities of carrying impaired loans? Should there be a moratorium on the charging of default interest in respect of farm debts secured by farm debt mortgages during periods when the farm property is affected by natural disaster? If so, how should such a moratorium be implemented? By legislation, by an industry code, or by some other means? In what circumstances should the moratorium come into effect? In what circumstances should the moratorium be lifted?'
2. 'Should there be a moratorium on the taking of enforcement action in respect of farm property while that property is, or soon after that property has been, affected by natural disaster? If so, how should such a moratorium be implemented, in what circumstances should it come into effect, and in what circumstances should it be lifted?
3. Should provision be made in the farm debt mediation Acts or another legislative instrument or binding code to facilitate earlier discussion between financial services entities, farmers, and third parties such as rural financial counsellors in cases where farmers face actual or probable financial distress? Should there be a uniform Farm Debt Mediation Act? If so, is any of the current Acts in a suitable form for uniform adoption?'

Rural Bank Case Study

The facts in this case study were briefly outlined in Governance News 02/07/2018.

Possible open findings

Ms Orr said that it is open for the Commissioner to find that Rural Bank may have breached the obligation to exercise the care and skill of a diligent and prudent banker in selecting and applying credit assessment methods and in forming opinions about customers’ ability to repay; may have breached the obligation under the Code of Banking Practice to act fairly and reasonably toward its customers in a consistent and ethical manner and may have engaged in conduct that fell below community expectations and standards in a number of ways. Ms Orr went on to say that it’s open to the Commissioner to find that any such misconduct can be attributed to Rural Bank’s culture and governance practices, to its remuneration practices, and to inadequate internal systems.

General Submissions — balancing competing interests

1.  'How should banks balance the competing interests of strengthening the long-term relationships with their customers and being prepared to act decisively, where necessary, particularly to safeguard shareholder interests?'
2. 'How should banks balance portfolio growth against the need to monitor and manage their existing clients?'
3. 'Do banks have appropriate policies in place for dealing with external events that may impact an agribusiness loan portfolio? If not, what should those policies entail? And should banks be required to…contact individual customers when they become aware of misconduct in relation to their accounts?'

Nature of the requirement to act with the care and skill of a diligent and prudent banker: Commenting on these questions, Commissioner Hayne said that 'they raise their own sets of issues'. Referencing Clause 27 of the Code of Banking Practice (which requires the exercise of care and skill of a diligent and prudent banker in connection with the provision of credit) the Commissioner questioned whether the standard applied is the same/should be the same in all circumstances, or whether it differs: 'shareholders, customers, the public more generally, would expect banks to abide by a standard described as the standard of a diligent – the standard of care and skill of a diligent and prudent banker, not only in deciding whether to provide credit, which is now dealt with by the Code of Banking Practice. But is it the same standard or a different standard that applies in deciding whether to vary the terms of credit as, for example, reprice or alter the terms? Is it the same standard or a different standard that should apply in deciding whether, when and how to enforce the credit contract? The three questions, whether, when and how, call for distinct and different consideration. You may or may not get to the same answer in respect of each of them – I don't know – but whether to enforce, when you enforce, not least how you enforce, seem to me to raise considerations that may require separate examination'.

CBA Case Study

The final agricultural case study concerned Commonwealth Bank of Australia's failure to apply fee waivers and ongoing package benefits to eligible AgriAdvantage Plus package customers.

Possible open findings

In a separate written submission, Ms Orr writes that it is open to the Commissioner to find that CBA breached its statutory obligations under s 912A(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act) to do all things necessary to ensure that the financial services covered by its financial services licence were provided efficiently and fairly; that CBA breached its obligations under cl 3.2 of the Code of Banking Practice, which obliged it to act fairly and reasonably towards its customers in a consistent and ethical manner; and that any such misconduct 'can be attributed, at least in part, to the inadequacy of CBA’s "control environment". The errors were not prevented or detected by the Bank’s risk management systems. In addition, CBA’s internal IT systems were inadequate to deal with the complexity of the product'.

Topic 2: Interactions of Aboriginal and Torres Strait Islander people in regional and remote communities with financial services entities

Funeral Insurance case studies

ACBF Case Study — Possible open findings

Ms Orr said that on the evidence it's open for the Commissioner to find that ACBF may have engaged in misconduct in a number of ways including: potential breach of its obligations under s12DA, 12DF(1), 12DB(e) of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and also that it is open to the Commissioner to find that its conduct fell below community standards and expectations in various ways. Ms Orr went on to say that it is open to the Commissioner to find that the misconduct can be attributed 'at least in part, to ACBFs remuneration and bonus scheme for its sales and field representatives'. Ms Orr added that it is also open to the Commissioner to find that 'ACBF did not have a corporate culture which enabled it to communicate and sell its products to Aboriginal and Torres Strait Islander people in a respectful manner' and did not effectively and adequately respond to the detriment suffered by Ms Walsh, one of its customers, as a result of its misconduct.

Select AFSL Case Study — Possible open findings

Ms Orr said that it is open to the Commissioner to find that AFSL Select may have engaged in misconduct in a number of ways including (among others) potentially breaching: s952C of the Corporations Act (by providing personal advice to Ms Marika, an AFSL Select customer); s992A(3)(e) of the Corporations Act (by providing an oral product disclosure statement to Ms Marika without expressly obtaining her consent); and ss 12CA, or 12CB of the ASIC Act (for example: by selling funeral insurance to Ms Marika in the circumstances may have been unconscionable conduct). Ms Orr said that it's open for the Commissioner to find that the actions of two Select representatives may also have constituted a breach of s13 of the Insurance Contracts Act 1984 noting that 'upon the termination of their employment, [AFSL] Select told the employees that there was no doubt in the company's mind that they had failed to act in the utmost good faith by taking advantage of people in the postcodes with high proportions of indigenous clients'. Ms Orr went on to say that it's open to the Commissioner to find that AFSL Select's conduct fell below community expectations and standards in a number of ways. For example: Ms Orr said that when 'coupled with Select's sales culture and Select's remuneration and KPI arrangements, the referral program used by Select clearly carried a risk that Select representatives would mis-sell funeral insurance policies'. Ms Orr added that it's open to the Commissioner to find that there were a number of causes of the misconduct which were attributable to culture and governance practices and to remuneration practices at AFSL Select and that the organisation did not have adequate internal systems in place to deter or detect misconduct.

General Questions — adequacy of current regulatory framework in respect of funeral expenses products

1.  'Is the current regulatory framework in respect of funeral expenses products adequate? In particular, should the framework be amended so that funeral expenses products are not excluded from the definition of financial product by virtue of section 765A(1)(y) of the Corporations Act and regulation 7.1.07D of the Corporation Regulations 2001'.
2. 'Should section 12BAA(8)(o) of the ASIC Act be amended to put beyond doubt that funeral expenses policies are not excluded from the definition of financial product, as applicable to part 2 Division 2 of that Act?'
3. 'Is the current regulatory framework sufficient to minimise the risk of funeral insurance providers using inappropriate sales practices to sell their products to vulnerable people, including Aboriginal and Torres Strait Islander people living regionally or remotely?'
4. 'Is the current regulatory framework sufficient to minimise the risk of sales of unsuitable funeral products to these people, including to avoid the risk of individuals having multiple forms of funeral insurance, and to address the sales of funeral insurance policies to children and young people.'
5. 'Does the current regulatory framework deal adequately with the potential for people with funeral insurance policies to pay more in premiums than may ever be paid out? And should the current regulatory framework be modified to include protections for holders of funeral insurance in relation to the cancellation of their policies for non-payment of premiums?'
6. In addition, Commissioner Hayne invited general submissions about whether estimates of total cost should be given as per the ASIC recommendation (which has not been adopted). Commissioner Hayne invited submissions on whether 'that's right or wrong'

Banking fees and practices case studies (ANZ)

The Commission considered two case studies on the issue of banking fees and practices at ANZ.

Access to basic or no-fee bank accounts

The first case study considered the conduct of ANZ in connection with the fee-free and low fee accounts it offers to customers living in remote communities, including Aboriginal and Torres Strait Islander customers. Ms Thy Do, a senior family support worker at Save The Children outlined the difficulties experienced by one of her clients, an Aboriginal woman from a remote community, when trying to open a no-fee account at the Katherine ANZ branch.

Possible open findings

 Ms Orr said that it is open to the Commissioner to find that ANZ potentially breached Clauses 8(a), 8(b), 8(c) and 8(d) of the Banking Code of Practice in failing to make information available in an accessible manner information about banking services that may have been relevant to the client; failing to provide details of accounts suitable to the client's needs upon request; failing to notify the client of the differing ways the identification requirements could be met and failing to adequately train its staff to be culturally aware. In addition, Ms Orr said that it is open to the Commissioner to find that ANZ engaged in conduct that fell below community standards and expectations.

Access to a 'basic account' (no-fee account): Commenting on Ms Orr's summation of the possible open findings, the Commissioner said: 'The more general question may be in what circumstances, if any, is it appropriate for a bank to challenge directly or indirectly a customer’s expressed wish to have a basic account. If the customer comes in, especially if the customer comes in with a support person, and the request is made for a basic account, in what circumstances, if any, is it appropriate for the bank to challenge that request? Whether that challenge takes the form of exploring the customer’s "needs", or otherwise'.

General questions: provision of banking services to Indigenous people

1.  'Do banks take sufficient steps to promote the availability of fee-free accounts to eligible customers?'
2. 'Are banks’ identification requirements appropriate for Aboriginal and Torres Strait Islander customers? If so, are those identification requirements sufficiently understood and implemented by staff on the ground?'
3. 'Do financial services entities have in place appropriate policies and procedures to assist Aboriginal and Torres Strait Islander people to overcome obstacles associated with geographical remoteness, to address the cultural barriers to engagement that some of these people face, to address the linguistic barriers to engagement that some of these people face, and to address the obstacles posed by the financial literacy levels of some of these people? And, if appropriate policies and procedures are not in place, what changes should be made to those policies and procedures to deal with those matters?'
4. 'Should more banks have a telephone service staffed by employees with specific training in assisting indigenous consumers?'

Overdraughts Case Study

This case final study concerned ANZ and informal overdrafts offered on some transaction accounts.

Possible open findings

Ms Orr said that it's open to the Commission to find that ANZ may have engaged in misconduct by failing to comply with the code of operation (contrary to the code, ANZ places the onus on its customers to opt in to the 90 per cent arrangements); potentially breached Clause 3.1(b)(1), 8(a) and 3.2 of the Code of Banking Practice and that it is also open to the Commissioner to find that ANZs conduct in providing informal overdrafts with high rates of interest and high fees to customers with low incomes on an opt-out rather than opt-in basis was conduct falling below community standards and expectations. Ms Orr went on to say that it's open for the Commissioner to find that the ANZ's conduct 'was attributable to a culture that was inadequately concerned with placing customers in the most appropriate product and more concerned with revenue enhancement' and the result of 'inadequate internal systems at ANZ'.

General questions: Informal overdraughts

1.  Is it lawful for informal overdrafts to be available in connection with basic accounts? If so, what policies and procedures should banks put in place to minimise the risk of consumer detriment in respect of those products? If lawful, is it appropriate?
2. Is it lawful for informal overdrafts to be offered on an opt-in rather than an opt-out basis to recipients of government benefits in circumstances where the costs of utilising the informal overdrafts are high and where informal overdrafts may not be adequately notified to customers?
3. Should any other aspect of the current regulatory regime in respect of informal overdrafts be reformed to minimise the risk of consumer detriment? And do ADIs presently have adequate policies in place for the implementation of the code of operation?

[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: 6 July 2018 – Final Transcript for Day 39; EXHIBIT 4.218 – RCD.9999.0061.0001 - Summary of certain evidence in ANZ; EXHIBIT 4.219 – RCD.9999.0062.0001 - Submissions of Counsel Assisting in relation to the CBA processing errors case study; EXHIBIT 4.220 - CBA.9000.0078.0001 - STATEMENT OF SIAN LEWIS OF CBA]