The big four banks, Suncorp and BOQ have been cowed by the Hayne royal commission into confessing fresh examples of poor behaviour including fraud, incorrectly taking the homes of customers, overcharging and hounding customers over debts on the first day of hearings into small business lending.
The admissions were contained in submissions by the banks and were summarised by counsel assisting Michael Hodge QC as he set the scene for a damaging examination of how banks have treated small business operators and guarantors following earlier hearings that revealed abhorrent practices and claimed the scalps of AMP’s chairman and its CEO.
Mr Hodge read from a list of examples of misconduct or conduct falling below community expectations performed by the banks, including the failure to notify ASIC of breaches, failure to complete credit checks, charging for services not provided, incorrect and incomplete loan applications and the failure to provide notice before taking action.
Among the key confessions were ANZ’s admission that a pair of business bankers colluded with third parties to write 47 fraudulent loans, Commonwealth Bank’s charging of merchant fees where the services were not being used, NAB’s failure to provide appropriate warnings and disclosures to guarantors and three instances where Westpac took inappropriate enforcement action against customers where assets, including homes, had been repossessed.
The admissions did not stop with the big four, however, with Bank of Queensland revealed to have been the subject of 3200 external dispute resolution cases since 2009. BOQ also revealed that it had been charging business loan customers incorrect rates and fees. But the bank told the commission it did not consider there to be any systemic issues within its small lending business.
Suncorp made admissions of a similar magnitude including the failure to issue notices to 54,000 customers about changes to their loans which it reported as a breach of the national credit code. A systems error at Suncorp also triggered an incorrect $4 million margin call to some customers.
The inquiry also heard the evidence of disability pensioner Carolyn Flanagan who lost her house to Westpac after acting as guarantor for her daughter’s failed franchise venture. Chronically ill and legally blind, Ms Flanagan said an aide read all her correspondence including bills to her and she needed to be instructed where to sign the Westpac loan documents.
Following dispute resolution with the Financial Ombudsman service, Westpac has given Ms Flanagan use of the property rent free until she dies. When asked details about the nature of the loan agreement, Ms Flanagan said she had suffered several strokes and “I can hardly remember yesterday”.
Legal Aid senior solicitor Dana Beiglari said the circumstances surrounding Ms Flanagan were not unusual and that Legal Aid had a specialised department to assist clients when the bank was threatening to repossess a home. “My clients very often can’t describe the circumstances of signing up the guarantee beyond going to the bank,” Ms Beiglari said.
When asked about the case Westpac’s general manager of commercial banking Alastair Welsh said, “technically there is not a problem” with the process that saw Ms Flanagan, who is unable to read or write, become the guarantor for the loan, however he believed Ms Flanagan’s request for hardship provisions should have been applied earlier.
Mr Welsh did, however, concede that it was hard not to be swayed by Ms Flanagan’s evidence after her appearance by video link when she revealed she was suffering from osteoporosis, pancreatitis, glaucoma and nasopharyngeal cancer, for which she had half her tongue removed. “It’s pretty confronting really isn’t it” Mr Welsh said.
It was heard that no notes were taken at the meeting where Ms Flanagan signed on as guarantor for the loan. At one point Mr Welsh speculated that the loan officer may have had to balance the perception that Ms Flanagan may have been discriminated against if they did not allow her to sign for the loan.
Commissioner Kenneth Hayne noted that internal lending guidelines which stipulated that guarantors needed assets or sufficient cash flow to clear a borrower’s debts in reality meant that Westpac would act to sell those assets if needed.
“The expression resaleable assets means realisable by Westpac,” Commissioner Hayne said.
The royal commission has heard that 87 per cent of small business loans are secured by real estate, 33 per cent by residential real estate.
The commission also heard from former ASIC staffer and consultant Mr Philip Khoury, who was appointed to review the Australian Banking Association’s Code of Banking Practice. He revealed that banks went to some lengths to restrict the definition of a small business and therefore, limit the protections offered to a smaller number of businesses.
After being engaged by the ABA to perform the review, Mr Khoury said his team suggested a cap of $5 million on the size of loans that would be protected by the code. Mr Khoury said the ABA was quick to come back with a much smaller limit of $3 million.
“The industry at that point was pretty keen to rein in the definition of small business,” Mr Khoury said.
Mr Khoury said many small business operators were not sophisticated students of bank contracts and responded with “horror” when confronted with the knowledge the banks can vary the terms of the contract almost at will.
The hearings will also take in the behaviour of Commonwealth Bank in relation to a book of business loans it acquired after buying BankWest from HBOS in 2008. The royal commission will not consider the so called “ulterior motives” the bank may have had for acting in this way, including theories that the bank defaulted the loans in order to lower the price or to improve its capital position.
The royal commission heard these theories were a distraction from the bigger issues at play presented by CBA’s treatment of the business loan customers through Project Magellan and it would examine the project and the defaults in depth later in the hearings.
The inquiry has now received 5540 submissions from the public, around 11 per cent relating to small business lending.
First published in the Australian Financial Review 21 May 2018.