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.]
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.
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'
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
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
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.
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
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
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'.
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'.
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
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
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
[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]