Financial Services Royal Commission Round 4 Week 1: 25-29 June 2018.
Farm finance (lending to small to medium agricultural businesses) was the focus of Financial Services Royal Commission Round 4 week 1 hearings (25-29 June 2018). A high level overview of the Commissioner's opening remarks, the issues highlighted for investigation over the course of the hearings in Counsel Assisting's opening statement; evidence heard from ASIC, Legal Aid QLD and the Rural Financial Counselling Service Western Australia and farming finance case studies: Landmark case study (ANZ) and Brauer case study (Rabobank) is below.
The focus of hearings over the course of week 1 was on lending to small to medium agricultural businesses (farm finance). The three key issues/themes highlighted in submissions received prior to the commencement of the hearings were: issues relating to access/support; non-monetary default related issues; and Issues related to changes to lending conditions.
The meaning of acting 'fairly, reasonably, consistently' in the Code of Banking Practice: Commissioner Hayne queried whether there are 'two sides of the equation' questioning whether 'the community expects that banks will act fairly – fairly to their customers' but also that the community 'accepts also that banks have got to act fairly for the bank'.
A larger role for ASIC in farm finance? Though ASIC's role in farm finance is currently limited, ASIC witness Mr Warren Day said that 'there's certainly an argument' for extending it on the basis that non-bank lending in this context has many of the features of a licensing regime, but without the 'minimum standards of responsible lending' in place and that perhaps this should be considered.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) commenced its fourth round of public hearings on 25 June. This round of hearings, which will run until 29 June, will focus on issues affecting Australians who live in remote and regional communities relating to farming finance, and on interactions between Aboriginal and Torres Strait Islander people and financial services entities.
Though originally included in the schedule of case studies and topics to be covered in Round Four hearings, the topic of natural disaster insurance will now be covered in Round 6 (September) to ensure adequate time is allocated to farm finance case studies.
Possible extension of time? Commenting on the change, The Australian has suggested that it may 'add pressure' on the government to extend the timeline for completion of the inquiry (under the current timeline, the Commission will submit an interim report no later than 30 September 2018 and a final report by 1 February 2019). Separately, The AFR reports that the senate passed a motion on 28 June, calling for the government to extend the inquiry by 12 months
[Source: [registration required] The Australian 27/06/2018; Financial Services Royal Commission Round 4 hearings: Experiences with financial services entities in regional and remote communities; 25 June 2018 – Draft Transcript for Day 30; [registration required] The AFR 28/06/2018]
Commissioner Hayne said that the Commission had received a number of communications since the conclusion of the Round 3 Hearings 'by persons seeking to agitate for the Commission to devote more attention to the investigation of the CBA takeover of Bankwest, either generally or in relation to particular cases'. He said that a number of 'misconceptions about the Commission's procedures', had emerged from these communications and briefly outlined and explained why in each case, the issues raised were misconceptions.
In her opening statement, Counsel Assisting Rowena Orr QC, provided an overview of the agricultural, forestry and fishing industry and its significance to the Australian economy and identified challenges faced by agricultural businesses in Australia. She then described the main types of agricultural finance in Australia and the key features of the legal framework governing the operation of loans to agricultural business. Ms Orr then identified the forms of dispute resolution accessible to agricultural businesses before summarising the key concerns raised in public submissions and the information provided by financial services entities.
Ms Orr said that the following key issues had emerged from public submissions and submissions from rural financial counsellors who represent farmers.
Ms Orr explained that another issue, the conduct of receivers, was also raised frequently in submissions, but explained that this would not be inquired into because the conduct of receivers is not within the Commission's terms of reference.
The Commission heard concurrent evidence from three witnesses with experience in rural and agricultural finance: Mr Denis McMahon of Legal Aid Queensland, Mr Warren Day of ASIC, and Mr Chris Wheatcroft of the Rural Financial Counselling Service in Western Australia. The witnesses largely reconfirmed that the issues raised by Ms Orr in her opening statement (see above) are prevalent in their experience.
Other issues raised by Ms Orr included the following (among others).
A high level overview of some of the issues emerging in the Landmark case study (ANZ) and the Brauer case study (Rabobank) is below.
The first case study considered by the Commission concerned ANZ's conduct in connection with the acquisition of the Landmark loan book. In her opening statement, Counsel Assisting Ms Rowena Orr said that of 6892 submissions received by the Commission ahead of the hearings, 268 related to agricultural finance and that of these, 32 related to the ANZ acquisition of Landmark in 2010. Ms Orr went on to say that in its submissions, ANZ accepted that in certain respects its management of some former Landmark customers, 'fell below community standards and expectations'. In addition, Ms Orr said ANZ acknowledged in submissions that in a small number of cases its conduct in relation to former Landmark customers may have constituted a breach of the obligation in the Code of Banking Practice to act fairly and reasonably towards its customers and that it 'should have been more responsive and empathetic' given their difficult financial circumstances.
Mr Benjamin Steinberg, head of lending services at ANZ, was questioned in relation to the way in which the transfer of customers to ANZ systems was handled. It was alleged that ANZ did not have sufficient systems in place to manage the transition smoothly (and that errors occurred as a result); that aspects of a due diligence report warning of poor risk controls were not addressed; and that a letter sent to former Landmark customers after the takeover advising that current relationship management visits would continue was not reflective of the changes the lender was making to staffing levels and to loan facilities.
Mr Steinberg was also questioned in relation to ANZ's handling of complaints received from former Landmark customers and the lender's approach to debt recovery generally and in relation to a number of specific cases. The Commission alleged that in some cases ANZ's actions fell short of community expectations or breached the Banking Code of Conduct in some instances. For example, the refusal by ANZ to accept a request from the Harleys (farm owners) (after Mr Harley had suffered a heart attack) to delay selling their properties and instead proceeding with the sale at what was alleged to be less than market value, was put forward as an example of falling short of community expectations/breaching the Banking Code of Conduct. Mr Steinberg maintained in this case, 'I agree the story is a sad one, but nonetheless, what we were doing here is pursuing our…contractual rights to get…paid…managing money that belongs to our…depositors. And whilst it's a very sad list of events to read out and to listen to, I think the community would expect us to do whatever we can to recover the money that's owed'.
The question of whether sufficient weight was given to behavioural factors in assessing performance at the bank was also questioned. Changes implemented to ANZ systems and policies, and the setting up of the ANZ Landmark Taskforce, was also explored. The Commission asked whether the changes to systems and policies were indicative of systemic issues, which Mr Steinberg denied was the case. Asked whether 'ANZ's policies and processes for dealing with agribusiness customers were now reflective of the community's expects about how a bank will treat customers in financial difficulty' Mr Steinberg said that they are.
Commenting on the nature and content of community and expectations, Commissioner Hayne suggested that there are 'two sides of the equation'. The Commissioner asked Mr Steinberg 'And in your view, when the Code of Banking Practice speaks, as it does, of fairly, reasonably, consistently, in ethical manner – so fair, reasonable, consistent, ethical – is that adding anything of real substance to the notion of fair to both bank and customer? That is, is it just a longer way of saying that the community expects that banks will act fairly – fairly to their customers – but the community accepts also that banks have got to act fairly for the bank?.'
Mr Steinberg agreed with this adding that 'one of the things that I take into account when I do the work that I do is the fact that the money that we are managing belongs to people, it belongs to our depositors, and it belongs to the – the people who we borrow money from, and it belongs to our shareholders. But the – the stakeholders that I have the most concern about amongst those three are our depositors, and our depositors expect that every single day when we deal with their money, that we deal with their money in the way that I would want my money dealt with, and I want to be sure that every day when I turn up to my bank to withdraw money as a depositor that my bank is able to meet those commitments'.
Three case studies considered the conduct of Rabobank (Brauer case study), Bankwest (Ruddy case study) and NAB (Smith case study) in connection with loans made to cattle farmers. In her opening statement to the Commission, Counsel Assisting Ms Rowena Orr QC said that the issues experienced by these cattle farmers 'expose a number of the difficulties faced by Queensland cattle farmers in the past 10 years' including difficulties were triggered or exacerbated by a series of external factors eg a decline in property prices, a decline in 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 the following:
Rabobank's submissions to the Commission did not include any reference to the Brauer case study. Following the delivery of Mr Orr's opening statement (25 June), Ms Orr said that Rabobank's lawyers sent the Commission a letter saying that Rabobank now wished to add its conduct in relation to the Brauers to the acknowledgements that it had made in submissions.
The Commission heard that in this case a Rabobank manager contacted existing Rabobank customers the Brauers (cattle farmers) while they were in the US, to alert them to an opportunity to purchase another property (which would enable them to expand their cattle business) and offered them a loan with which to do so. The Brauers understood that the manager also offered them funding to purchase cattle (on their return to Australia) to enable them to stock the new property, as the income from the lease on their existing property would be insufficient to enable them to service either loan in its entirety. They went ahead with the loan for the new property and purchased the stock on the strength of the manager's assurances. However, the Commission heard that the manager in question made various miscalculations in the loan assessment process, which raised internal questions at Rabobank. Rabobank ultimately did not to fund the purchase of the cattle, and required the loan to be repaid within two years. Rabobank made this decision immediately after the 2011 floods when income from the Brauer's existing property (and primary source of income) was nil and they were unable to service their loan repayments. The Commission heard that, due to financial pressure, the family was forced to move back to Australia, and after a lengthy mediation process with Rabobank, sold the new property and paid down their debts losing an estimated $1m in the process.
Ms Brauer said that in addition to the financial loss, there had also been an emotional cost: 'It nearly wrecked us…They put us backwards. They came hunting for us. They came looking for us to buy this block. And 12 months later they wanted us to pay them back more than we had borrowed. I don’t understand.'
Counsel Assisting Ms Rowena Orr QC questioned Rabobank as to the circumstances in which the Brauers were offered the loan in the first instance, its assessment of the serviceability of the loan (alleging that the loan should not have been granted); the approach taken by the bank to hardship; and the approach taken to recovery of the debt. Ms Orr also questioned the bank's 'reluctance' to admit misconduct/falling short of community expectations in this case, alleging that the misconduct would not have been admitted but for the Commission's investigation. The bank denied that this was the case.
The remuneration practices at Rabobank were also questioned, in particular the link between loan sales and remuneration. Questioned as to whether the remuneration practices at Rabobank were consistent with the Sedgwick Review recommendations, Mr Bradley James (Rabobank) said: 'rural managers, they are still incentivised to grow our business through loan sales.' He added that 'rural managers are also disincentivised to write loans that aren't sustainable, and from that I believe there's a balance within our discretionary system'. However, Ms Orr alleged that 'the balance isn't enough' because the exercise of the discretion is 'predominantly driven by sales' and that on this basis, the remuneration practices at Rabobank are 'not consistent with the position that Mr Sedgwick requires all banks to move to by 2020'. Mr James agreed that this is the case and said he was unsure what changes would be made to current systems to bring remuneration practices into line with the Sedgwick recommendations by 2020.
[Note: An overview of the Bankwest and NAB case studies will be considered in the next issue of Governance News which will be available on 9 July.]
[Sources: Royal Commission into misconduct in the banking, superannuation and financial services industry: Round 4 hearings; 25 June 2018 – Draft Transcript for Day 30; 26 June 2018 – Draft Transcript for Day 31; 27 June 2018 – Draft Transcript for Day 32; 28 June 2018 – Draft Transcript for Day 33]