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.
Change in the scope of Round Four hearings: National disaster insurance case studies delayed until September
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's opening comments: CBA takeover of Bankwest and the work of the commission more generally.
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.
- Commissioner Hayne said that some communications received had asserted that witnesses had not been given the opportunity to cross-examine bank witnesses (where banks have been allowed to cross-examine consumers). The Commissioner said that 'the opportunity for cross-examination has been available [to witnesses]' though it hadn't been taken up.
- Some communications had said that witnesses had not been given sufficient time to brief lawyers and/or that witnesses had been given no access to financial assistance to secure legal representation. Commissioner Hayne said that consumer witnesses are being given sufficient time to brief lawyers to represent them at the hearings and that there is a process available for consumer witnesses to seek financial assistance to legal representation. He added that 'The Commission is not aware of any instances where a consumer witness has not been able to cross-examine due to lack of financial assistance'.
- CBAs conduct after its takeover of Bankwest in 2008: Commenting on the question of CBA's conduct after its takeover of Bankwest in 2008, Commissioner Hayne emphasised that 'the work of the Commission regarding the CBA takeover of Bankwest…had been intensive and was not limited to consideration of the circumstances of the four witnesses who gave evidence'. He added that in his view, proceeding by way of case study is the best approach. The Commissioner went on to say that any additional information received in relation to the CBA takeover of Bankwest would be carefully considered, but that the Commission would 'derive most assistance if those who take up this invitation focus on identifying matters which have not already been raised with us and identifying evidence, not mere assertions and conjecture, that is said to be relevant to the consideration of these matters'.
- Role of the commission: Commenting on the role of the Commission, the Commissioner said that the Commission's role is not to 'advance the interests of those who describe themselves as Bankwest's victims', but 'to inquire, without fear or favour, into matters falling within the terms of reference. Neither I, nor Counsel Assisting, or the solicitors assisting the Commission, carry any brief for those who assert a grievance arising from the takeover of Bankwest or, indeed, any other issue. We are here to inquire' he said.
- No findings have been made: 'Another misconception which has appeared in many of these further communications is that findings have already been made by me. They have not. Counsel Assisting has made submissions as to the findings that they submit are open on the basis of the evidence heard during the course of the third round of hearings, but I have not yet made any findings. My findings about these matters and my reasons as to why those decisions are ultimately made are matters to be dealt with when I report in accordance with my terms of reference, a task that remains some time away, and in the meantime, the Commission continues to consider, and will keep under constant review, how best it should execute the tasks committed to it by the Letters Patent' the Commissioner said.
Lending to small and medium agricultural businesses
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.
Issues most commonly raised public submissions
Ms Orr said that the following key issues had emerged from public submissions and submissions from rural financial counsellors who represent farmers.
- Non-monetary default related issues: A number of submissions involved banks initiating non-monetary defaults through a revaluation of property or security assets which altered loan to value ratios. Banks then relied on these lower loan to value ratios to trigger non-monetary defaults. Ms Orr added that submissions relating to non-monetary default issues also referred to customers being given unreasonably short timeframes to repay substantial proportions of their loans.
- Issues with access and support: A number of submissions involved difficulties with farmers accessing appropriate banking services and support due to distance from local branches, and difficulties contacting their business manager, particularly during times of financial hardship Ms Orr said. She added that some submissions also 'highlighted the failure of financial services entities to take into account the cash flow impact of seasonal productivity and drought or other natural disasters on agribusiness ventures when making decisions about calling in loans or acting upon loan defaults'.
- Issues related to changes to lending conditions: A number of issues raised in submissions related to changes to conditions of lending (eg changes to interest rates, access to facilities such as overdrafts or trading facilities) in a way that was unfavourable to the customer Ms Orr said. Ms Orr added that a number of submissions referred to modifications in lending conditions as a result of structural or ownership changes to the lending institution which had resulted in financial hardship to the borrower in some cases.
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.
Common issues for farmers: Evidence from ASIC, the Rural Financial Counselling Service in Western Australia and Legal Aid QLD
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).
- ASIC's role in the regulation of farm finance: The Commission heard that ASIC's role is currently limited, but there is 'an argument' for extending it. 'Farm finance is, in some respects, a subset of small business lending and the Corporations Act effectively has very little coverage, if any, of – in relation to small business lending and farm finance, therefore. The only real provisions are in relation to unfair contract terms, which are quite recent… so limitations in those types of spaces is – is really what we're dealing with' said Mr Day (ASIC). Asked whether ASIC should play a greater role in the regulation of farming finance, Mr Day said that 'there's certainly an argument for that' 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.
- Farm debt mediation process: Asked to comment on the effectiveness of the voluntary farm debt mediation scheme in Western Australia, Mr Wheatcroft (Rural Financial Counselling Service in Western Australia) said: 'The most effective aspect of it is that it's early' in the process and 'it starts the conversation'. This is important, Mr Wheatcroft explained because in circumstances where farmers are 'toughing it out' and under stress, there was often a lack a communication with the bank and that the process whereby banks communicate via letter was not always effective. 'From the farmer's point of view, the bank sends a lot of letters of which none of them really seem to matter. That's incorrect, because the bank is following a legal process that has an end point, but I think very often – the bank's views are somewhat dismissed by the farmers, because it's not part of – behaviourally, they've had letters that don't matter' he said. On this basis, the mediation scheme was effective in starting/restarting communication between the parties he said. Mr Day (ASIC) commented that ASIC 'supports external dispute resolution at all times in these types of matters. We can see from farm debt mediation it has a number of strengths' including that in circumstances where mediation is unsuccessful, there is recourse to the ombudsman scheme.
Farm Finance Case Studies
A high level overview of some of the issues emerging in the Landmark case study (ANZ) and the Brauer case study (Rabobank) is below.
Landmark case study (ANZ)
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.
Two sides to the equation: The meaning of acting 'fairly, reasonably, consistently' in the Code of Banking Practice
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'.
Issues for investigation: Rabobank, BankWest and NAB case studies
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:
- 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.
Brauer case study (Rabobank Australia Ltd (Rabobank))
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]