Farm finance continued to be a focus of the Financial Services Royal Commission Round 4 week 2 hearings (2-6 July 2018). A high level overview of farm finance case studies (considered during the first week of hearings) the Ruddy (Bankwest) and Smith (NAB) case studies and evidence from Rural Bank in relation to its lending practices is below.

In addition, the Commission moved onto the second topic of this round of hearings: issues arising from interactions between Aboriginal and Torres Strait Islander people and financial services entities. In the main, the Commission focussed on issues relating to the sale of funeral insurance; difficulties in accessing banking services and on bank fees and practices. A high level overview of the common issues impacting remote Indigenous communities as highlighted by Counsel Assisting Rowena Orr QC is below.
[Note: Counsel's closing statement will be covered in a separate post in the next issue of Governance News which will be published on 16 July.]

Farm finance case studies

As previously flagged in Governance News 02/07/2018, in her opening statement to the Commission, Counsel Assisting Ms Rowena Orr QC said that the issues experienced by the cattle farmers in the three case studies considered by the commission on this topic, the Brauer case study (Rabobank); the Ruddy (Bankwest) and Smith (NAB) case studies 'expose a number of the difficulties faced by Queensland cattle farmers in the past 10 years' including difficulties that were triggered or exacerbated by a series of external factors eg declining property and cattle prices, a number of severe weather events, including both drought and cyclone related flooding, and the live cattle export ban. More particularly, Ms Orr said that the case studies raised issues concerning:
responsible lending; the use of property valuations; the provision of hardship assistance by banks; the adequacy of the farm debt mediation process; and bank practices in connection with the charging of default interest.

Ruddy case study (Bankwest)

This case study concerned a Bankwest loan to former Bankwest customer and QLD cattle farmer Mr Melville Ruddy. The Commission heard that Mr Ruddy owned two properties, his primary property (Sunrise) and a second property (Arrandale). Both properties were mortgaged with Rural Bank. Following the departure of the Rural Bank manager dealing with Mr Ruddy to rival lender Bankwest, the Commission heard that the (now) Bankwest manager contacted his former customer Mr Ruddy, regarding the possible refinancing of Mr Ruddy's loans, an offer which Mr Ruddy declined. However, some months later and following an annual review by Rural Bank, Mr Ruddy was again contacted by the Bankwest manager and decided to refinance with the lender.

The Commission heard that Mr Ruddy's decision was based on a meeting with the Bankwest manager at which he (Mr Ruddy) was told that: based on a valuation conducted by the Bankwest manager of his primary property, the combined value of the two properties had significantly increased and was now excess of $2m; that he (Mr Ruddy) could access additional funds against the value of both properties in order to invest in developing his cattle business, that interest rates would be cheaper and that fees would be lower with Bankwest. 'We would have sold Sunrise because we were moving toward selling Sunrise, and – and reducing our debt, but – yes, well, when Bankwest sort of offered us that – that – such a good deal, me being an extreme optimist, I thought, "Yes, that would be the way to go"' Mr Ruddy told the Commission.

Mr Ruddy said that he could not meet the new loan repayments and that he increased his overdrafts with another lender, Bank of Queensland, in order to meet the shortfall. In 2012, Mr Ruddy was told that his Bankwest manager was moving, though he was given no reason for the move, and Bankwest subsequently closed the closest branch to Mr Ruddy.

Mr Ruddy was then asked by Bankwest to pay for revaluations of his two properties. The new valuations valued the properties at significantly less than the initial $2m+ combined valuation and Bankwest informed Mr Ruddy that he needed to sell his primary property in order to lower his debt.  Unhappy with this, Mr Ruddy complained to the financial ombudsman service (FOS) and subsequently the matter went to mediation. Ultimately an agreement was reached whereby Mr Ruddy agreed to sell his primary property within six months and to pay Bankwest 75% of the proceeds of the sale in addition to discharging the mortgage over the second property. Sunrise was eventually sold, but as the sale price was insufficient to pay down the whole of the debt owed, Mr Ruddy borrowed $160,000 from his mother and sold equipment to do so. The Commission heard that Mr Ruddy is now funding his farm by selling cattle when necessary and by contracting out his own services. 

Bankwest executive general manager, personal and business banking Ms Sinead Taylor was asked to comment generally on the 'spike in monetary and non-monetary defaults by agricultural customers of Bankwest in 2013' which she put down in large part to external factors (eg drought) and more specifically on the Ruddy case study. Ms Taylor was also questioned about the remuneration and accountability structures at Bankwest at the time, the conduct of the Bankwest manager in the Ruddy case and the actions of the lender in re-valuing the property, allegedly with the object of triggering a non-monetary default.
The Commission heard that the manager dealing with Mr Ruddy was rewarded by the bank for exceeding his sales targets (as KPIs were linked to writing new loans). The Commission also heard that the manager subsequently resigned from the bank after an investigation into 'conduct issues' was initiated. The conduct issues included (among others) overstated valuations (including overstatement of the valuation in the Ruddy case and four other cases); manipulation of internal systems to optimise bonuses, discrepancies in transactions and inaccurate information in his files. The Commission heard that no action was taken by the lender against the banker for his (alleged) misconduct and that the Ruddys and the FOS were not informed of these issues. Ms Taylor said that the FOS may not have been informed because the staff dealing with the Ruddy case by this point, may have been unaware of them (the information would not have appeared on the client file).

Ms Taylor was also questioned about the bank's actions in initiating a revaluation of the Ruddy property and the fact that the bank did not inform the Ruddys as to when payment would be deducted from their account. Asked whether it was fair and reasonable for Bankwest to 'to rely on a revision to its own erroneous valuation to trigger a non-monetary default?' and whether this was a breach of the Code of Banking Practice Ms Taylor agreed that it was, but disagreed that there were 'broader issues' at Bankwest with 'relying on incorrect or otherwise flawed valuations to trigger breaches of LVR covenants'. Asked whether it was possible, under current Bankwest policies, for the same people who are conducting internal bank valuations to write loans (with sales-based KPIs attaching), Ms Taylor said that it was. Asked whether this may pose a conflict of interest Ms Taylor responded that it does not: as 'long as these [the valuations] are actually checked by someone else to validate that they’re correct, and all of the inputs are checked, which is what now happens, then they have been validated by another party who’s not involved in that transaction and not rewarded for that transaction, then I – I don’t have an issue with it' she said.

Smith case study (NAB)

This case study concerned a $3.1m loan and a $250,000 overdraft made to graziers, the Smiths, by NAB over two properties. After Ms Smith defaulted on the loan due to external factors (eg flood and the live export ban on cattle) and NAB proposed farm debt mediation, a process described by Ms Smith as 'intimidating…We were told that if we didn't sign what documents they [NAB] had, that we would walk out of there with nothing but the clothes on our back'. The Commission heard that the Smiths agreed at the mediation to a payment timetable which required the sale of one property and the sale of cattle to pay down the debt owed. Given the ongoing drought Ms Smith told the Commission that she viewed this timetable as 'unrealistic'. Ms Smith also said that in her view the value of both properties was less than what she had paid for them (due to the drought).

Following the mediation, the Smiths fell behind in their payments. According to Ms Smith, NAB commenced charging default interest at this time.
A year after the mediation was completed the Smiths had not repaid the $800,000 agreed and though they had listed one property, they hadn't been successful in selling it. The Smiths requested an extension of time, which the Commission heard was refused by NAB. The drought continued and the condition of the Smith's cattle continued to deteriorate. In 2015 (2 years after the mediation) NAB made some funds available to purchase additional feed for the stock. In January 2017, Ms Smith said that NAB had written proposing a second mediation which she and her husband are yet to respond to.
General Manager strategic business services at National Australia Bank Ltd Ross McNaughton was questioned in relation to:

• the decision by the lender to charge default interest on the loan, the Commission hearing that the Smith's debt had increased from approximately $3m to closer to $6m. Mr McNaughton was questioned as to why other options to resolve the Smith's case were not pursued.
• whether there was 'any trigger' for a borrower to be notified about hardship processes at NAB. Counsel suggested that customers (including the Smiths) should be told about the bank's hardship policy, and that it would be reasonable to expect that clients proceeding to mediation would be made aware of the existence of the policy. Mr McNaughton said that the issue is not always a clear cut issue of hardship, but also one of 'business viability'.
• the bank's approach to resolving the Smith's case, the Commission hearing that an internal email suggested that the bank planned to appoint a receiver to sell the property when it rains (increasing the chances of a sale). Mr McNaughton said that the bank's object is to work with the Smiths to enable them to remain on the land and to have cattle from which they can earn an income.

Rural Bank Case study (Bendigo Bank).

The final case study in relation to agricultural finance involved Rural Bank which was acquired by Bendigo Bank in 2009-10. The focus of questions put to Alexandra Gartmann CEO and Managing Director of Rural Bank Ltd was largely on issues in connection with loans made to QLD agricultural customers during a period of intense drought. More particularly, the questions focussed on the alleged failure of staff to appropriately establish loan serviceability, alleged over reliance by staff on security values, and alleged inadequate management of loans as well as the allegedly slow response by Rural Bank to address concerns raised by the Australian Prudential Regulation Authority (APRA) regarding these issues.

The Commission alleged that a 2006 APRA review, and subsequent 2009 review, should put have put Rural Bank on notice of (allegedly) 'systemic' serviceability and loan management issues (though Counsel noted that the date given by Ms Gartmann in submissions as the time when critical issues were identified was 2011). Ms Gartmann denied that there were any systemic issues with the QLD loans (disagreeing with the conclusions made by the Chief Risk Officer of Rural Bank as to the extent of the issues made in a 2010 internal report). The Commission heard that Rural Bank nevertheless made significant changes relating to loan serviceability, securities, valuations and loan monitoring following the 2010 report, and that a further review conducted in 2011 made recommendations largely consistent with the issues identified by APRA in 2006. The Commission heard that a work project to implement the report recommendations took a number of years, and in 2012 APRA identified similar issues still in play.

Counsel Assisting Ms Rowena Orr QC questioned whether the time taken to implement 'the first tranche' of reforms — a year and a half — was a reasonable timeframe to which Ms Gartmann responded that it was given the scope of work. Ms Orr also queried the absence of any work relating to customer remediation in Rural Bank's statement, Ms Gartmann confirming that no Rural Bank clients whose loans were examined as part of the work that was done on these issues were informed of any issues that had been discovered in respect of their loans.

Issues arising from interactions between Aboriginal and Torres Strait Islander people living in regional and remote communities, and financial services entities.

In her opening statement introducing this topic, Counsel Assisting Rowena Orr QC outlined the obstacles to accessing financial products and services that are experienced by Aboriginal and Torres Islander peoples living in remote communities arising from financial exclusion. 'Fundamental barriers can exist for Aboriginal and Torres Strait Islander people in accessing financial services, including language barriers where English is not spoken as a first language, lower levels of financial literacy, and limited exposure to people with high levels of financial literacy' Ms Orr said. In addition, Ms Orr said that there is physical lack of access to banking and financial services due to geographical isolation of some communities.

Common issues impacting remote Indigenous communities.

Common issues impacting remote Indigenous communities highlighted in Ms Orr's opening statement included the following:

• The 'predatory sales practises' of funeral insurance companies: Ms Orr said that the sale (of 'often unsuitable') funeral insurance was a common issue raised with the Commission and noted that the Australian Securities and Investments Commission (ASIC) also considers it to be an area of concern, noting ASIC' work in this area.
• Issues with accessing superannuation: Issues with accessing superannuation funds eg lacking the necessary knowledge about superannuation benefits and entitlements in order to make a claim, difficulties accessing entitlements due to difficulties in meeting the identification requirements and issues associated with remoteness were also common, the Commission was told. Ms Orr said that ASIC also flagged this issue with the Commission as an area of concern.
• Irresponsible lending: Ms Orr said that irresponsible lending issues flagged with the commission 'bore a number of similarities to consumer experiences that we examined in the first round of Commission hearings, in circumstances that involve the added challenges of remoteness, language, and cultural barriers'. More particularly, issues highlighted to the Commission included: problems with a range of consumer credit products including car loans, credit cards, consumer leases, particularly those taken out to obtain essential household items, such as furniture and white goods, pay day loans, and in-store credit arrangements, including the practice of book-up. Ms Orr explained that the Commission would not be considering consumer leases, payday loans or in-store credit arrangements as they fall within the terms of reference of the Commission. Ms Orr noted that ASIC also raised concerns in regard to these issues noting that ASIC had said that many remote Indigenous communities are not serviced by ADIs and that much of ASIC's work in relation to loans and credit products is directed towards providers of book-up and consumer leases for household goods as a result.
• Banking fees and practises including overdraft fees: Ms Orr said that issues associated with informal overdraft facilities and high dishonour and overdrawn fees were a common theme and that ATM fees associated with withdrawing cash and checking account balances appeared to be of particular concern in remote Aboriginal communities. ASIC told the Commission that many clients spend significant proportions of their income on bank fees.

ASIC and Financial Counselling Australia

ASIC and Financial Services Counselling Australia representatives identified examples of common issues impacting remote Indigenous people. In the main, they expanded on the issues highlighted above giving examples from their own experience of their work with Indigenous people.

• Banning overdraft facilities on 'basic accounts?': The Commission heard that both Mr Boyle (ASIC) and Ms Edwards (Financial Services Counselling Australia) would support the banning of informal overdrafts on basic accounts (ie no-fee accounts).
• Financial service provides should adopt a more 'proactive approach': Asked how interactions with Indigenous people could be improved, both Mr Boyle and Ms Edwards suggested that (among other things) a financial service providers should adopt a more proactive approach in their dealings with Indigenous people. Speaking specifically in the context of funeral insurance, Mr Boyle suggested that that providers should be required to provide a list of recurring payments to policy holders, rather than the onus being on policy holders to request the information, to make policy holders more 'aware of what direct debits they are paying'. Speaking more generally, and echoing Ms Edwards, Mr Boyle (ASIC) said that he would like to see 'a concerted effort to make sure that all…of the members of that [financial service] service right down to the coalface, to the people who are on the telephone or who are dealing face-to-face with Aboriginal and Torres Strait Islander people…are aware of the policies that have been agreed to by the industry. And what I would really love to see is more executives from banks, and more policy makers from banks and from financial services institutions who are making these policies, to go out to Aboriginal communities and to see how the policies are actually working on the ground'. Increased funding for financial counsellors from the industry was also flagged by both Ms Edwards and Mr Boyle as being of potential benefit.

Funeral Insurance case studies

The Commission considered two case studies, the Walsh case study (Aboriginal Community Benefit Fund (ABCF)) and the Marika Case study (Select AFSL (Select)) which examined issues arising in relation to the sale of funeral insurance to Indigenous people. In particular the Commission questioned the sales practices employed by Select and ABCF, including the alleged targeting of Aboriginal people in marketing material (eg use of the Aboriginal Serpent by ABCF) and the sale of allegedly unsuitable policies in circumstances where the policies were unaffordable, the use of sales-based incentives; the practice of allegedly encouraging staff to sign up the children/grandchildren of policy holders and the opacity of information regarding the policies.

Banking fees and practices case studies

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.
• Overdraughts: The second case study examined the conduct of ANZ in connection with the provision of formal and informal overdrafts to customers living in remote communities, including Aboriginal and Torres Strait Islander customers. Mr Phil Bowden, a financial counsellor at Anglicare Northern Territory, gave evidence about the experiences of Aboriginal and Torres Strait Islander customers who have been granted overdrafts by ANZ.

[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: 28 June 2018 – Draft Transcript for Day 33; 29 June 2018 – Draft Transcript for Day 34; 2 July 2018 – Draft Transcript for Day 35; 3 July 2018 – Draft Transcript for Day 36; 4 July 2018 – Draft Transcript for Day 37; 5 July 2018 – Draft Transcript for Day 38]