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Parliamentary Joint Committee on Corporations and Financial Services
18/11/2015
Impairment of customer loans

GILBERT, Mr Ian, Director, Banking Services Regulation, Australian Bankers' Association

PEARSON, Mr Anthony, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association

[11:56]

CHAIR: The committee welcomes representatives of the Australian Bankers' Association. We have received your submission, which we have numbered as submission 47. Would you like to make a short opening statement before we proceed to questions?

Mr Pearson : Yes, I would. Thanks for the opportunity to appear before the committee today. I would certainly like to make some opening remarks. Australia's solid, safe and efficient banking system sits at the heart of our economy and our community. Banks help Australian businesses start and grow, be profitable and well governed and create jobs. Banks provide almost one million loans to small businesses.

On occasion, some bank customers find themselves in financial difficulty and unable to meet the terms of their loan agreement. The proportion of business customers with loans in difficulty is very low. For the year ending March 2015, less than one per cent of business and agribusiness customers had impaired loans, and a tenth of one per cent were in recovery action. Banks have well-established practices for helping consumers and small businesses in financial hardship with their credit facilities. There is no financial incentive for a bank to deliberately undervalue an asset or lose a customer. Banks are bound by strict legal and prudential requirements, as well as being subject to legislative disclosure and conduct obligations towards their customers. There have been many submissions to this inquiry covering a range of issues relating to customers' relations with their banks. Only customers and their banks know the full details and history of a given relationship, and the ABA is not in a position to comment on particular customer cases.

During the inquiry, there has been mention of the ABA Code of Banking Practice—the code—and of the role of the Code Compliance Monitoring Committee. These are matters which fall directly within the ABA ambit, and I wish to direct my comments to fleshing out the details of the legal status and operation of the code and of the role and accountabilities of the CCMC. The code is a voluntary code of conduct setting standards of good banking practice for a bank which is dealing with its individual and small business customers or prospective customers.

The main purpose of the code is to provide protection to a bank's individual and small business customers. In many instances this protection will exceed legislative obligations that banks owe to these customers. The code does not apply to businesses that are not small businesses or where a banking service is provided in connection with the business that it is not a small business, such as a corporate group. The customer retains all of its rights which it has under federal, state and territory laws. The code requires a bank to include in its written terms and conditions for its banking services a statement that the relevant provisions of the code apply to the banking services without the need to set those provisions out in the terms and conditions document. Courts have held that those provisions are legally enforceable as a contract.

An independent review of the code has to be conducted every five years and that review must be conducted in consultation with all relevant stakeholders. The next independent review is required to be conducted by 2019. The code provides a package of protection for consumers and small businesses. These include a commitment to communicate with a customer or its representatives in a timely and responsible manner and to act fairly and reasonably to a customer in a consistent and ethical manner, taking into account the customer's and the bank's conduct and their contract.

The bank must have internal complaint-handling arrangements to deal with customer disputes. This ensures small businesses have access to internal complaint-handling arrangements regarding their credit facilities. It must also have an external process available to the customer free of charge and conforming with ASIC's dispute resolution guide or standard for resolving disputes if its internal arrangements are unable to resolve the dispute. Information about these arrangements must be prominently published by the bank, including in branches, on internet sites and in telephone banking services.

The code makes provision for an independent code-compliance monitoring mechanism, which is provided by the Code Compliance Monitoring Committee, the CCMC. The CCMC comprises a consumer and small business representative, a banking representative and an interdependent chair which is supported by its secretariat. The CCMC has power to investigate allegations that a bank breached the code and is able to conduct an inquiry on its own initiative into a bank's compliance with the code. The CCMC's mandate specifies limitations on the power of the CCMC to investigate any allegation that a bank has breached the code. The limitations apply to avoid duplication of process and possible inconsistent findings and to ensure that an allegation a bank has breached the code is made in a timely way.

The CCMC may publicly name a bank if the CCMC is satisfied that the bank has been guilty of serious or systemic noncompliance with the code or has failed to satisfy the CCMC that the breach would not reoccur. The CCMC does not provide compensation, restitution or another type of individual outcome. It does not impose fines or issue penalties against banks or declare the rights and entitlements of the parties. If the CCMC finds that the bank has breached a provision or provisions of the code, the customer may seek to rely on this finding to claim compensation or other remedies for breach of contract, including through a dispute lodged with the Financial Ombudsman Service. The CCMC publishes annual reports of its activities and data relating to code breaches. The CCMC's mandate contains the terms of reference for its functions and is published together with the 2013 version of the code. That concludes my opening statement. I would welcome questions from the committee.

CHAIR: Could I bring you initially to the external dispute resolution method, being FOS. Is it ABA's position that one of reasons FOS exists is to try to overcome the imbalance between the power and funding of a bank, the ability to hire QCs and other people, and the individual consumer who often does not have a great depth of resource to challenge. It is part of the reason of having an EDR that you can then get that independent umpire that provides some redress for the consumer?

Mr Pearson : I might pass that question to my colleague.

Mr Gilbert : The history of FOS goes back to about 1989, following either the Campbell or Martin inquiries into the banking system. The objective was to have a free, easily accessible and simple means of dealing with disputes that customers had with their banks if the banks were not able to sort out those disputes themselves. That was the original banking ombudsman scheme—the Australian Banking Industry Ombudsman. It was later renamed the Banking and Financial Services Ombudsman during 2000 or so, and it is now an aggregation of three separate external dispute resolution schemes formed into one dispute resolution scheme. It now covers general insurance and financial services matters like financial advice and so forth.

CHAIR: In your submission, though, you say that the ombudsman is able to investigate disputes and make determinations that, if accepted by the disputant, are binding on the financial services provider.

Mr Gilbert : That is right. In any dispute that ends up with the Financial Ombudsman Service, if a determination is made by the service and the customer accepts that determination then, as a matter of contract with the FOS, that decision is binding upon the bank.

CHAIR: So what action can the ABA take—as the people who have the Code of Banking Practice, which I assume goes to banks complying with their obligations under things like the agreement with the FOS—if a bank then decides it does not actually want to accept the determination of the FOS and challenges the ombudsman's decision in the courts?

Mr Gilbert : There is no appeal, as I understand it, from the ombudsman's decision.

CHAIR: Well, it is happening right now by the ANZ.

Mr Gilbert : If the customer has accepted the determination of the ombudsman, unless there is some administrative law review of the process of reaching the determination, the contractual arrangement with FOS is that the bank is bound if the customer agrees with that determination. That is my understanding.

CHAIR: In a situation where the ANZ at the moment is currently challenging a decision of the FOS—I do not have the evidence to say whether the customer has actually formally accepted that, but if they do choose to accept that—then what you are telling the committee is that the bank would have no option to challenge it; the bank would have to accept the determination of FOS?

Mr Gilbert : That is my understanding. I have not looked at it any deeper from a legal perspective, but that has been my understanding almost from day one when the scheme was first developed. I am not aware of the circumstances of the ANZ matter, so I do not know what the basis is.

CHAIR: Does ABA have a position if we wanted to extend the remit of the FOS—I think it is a limit currently of $500,000—to represent the values that both the residential property market and also, particularly, small business have? Do you have a position on the viability of extending that scheme to a higher limit?

Mr Gilbert : We certainly do not have a formal position taken with our members on consultation on that. The fundamental principle underpinning the scheme was that it existed to deal with simple cases, disputes, that could be dealt with fairly readily on a no-cost-to-the-customer basis for the dispute. Where a review of the financial cap on the scheme goes, I guess it will need to be measured against the principle that it is for relatively uncomplicated matters. That is what the scheme was designed to do, and not necessarily to replace other tribunals or the court system for the more complex matters which perhaps are better dealt with by courts. We accept that there is an access to justice issue in all of this, but the government has got that—

CHAIR: The challenge the committee has is that evidence provided to us indicates that the easy way out for the banks is to say: 'In our opinion, this is not a simple matter, which immediately takes us out of the remit of the FOS.'

Mr Gilbert : The decision about whether it is or is not a complex matter really has to be one that is not subjective but objective in terms of the circumstances. I do not think a bank necessarily can say whether something is complex or not complex. At the moment, that is not a factor that disentitles a dispute to go to FOS. It is simply the monetary cap that is the limitation.

CHAIR: We have had a number of witnesses who described examples where banks have refused to release documentation to enable the person to go and seek alternative finance. The previous witness wanted to appoint a new builder and banks had delayed that process. We have heard how banks have given quite unreasonably tight time frames in terms of doing things like registering a title, and then they initiated a default when that time frame was not met. In terms of the code, which is the ABA code, where is the threshold in those areas when you start saying, 'That is unconscionable conduct by the bank'. When do you, as the ABA, start taking action without having a consumer who is in the middle of a bankruptcy process, and all the rest of it, walk into a branch to pick up your flyer which is sitting in a plastic container somewhere? At what point do you, as the banking association, take action against a bank to hold them to account for their compliance of the code, or do you always wait for a consumer to go to the CCMC?

Mr Gilbert : The nature of the relationship that the ABA has with the banks is that it does not get involved in disputes between banks and their customers. The whole structure of the code, and certainly in legislation relating to financial services, is that there are mechanisms in place—internal dispute handling arrangements. If they fail then there are external dispute resolution arrangements. Where they no longer apply to whatever rights the customer seeks to take through whatever forum—

CHAIR: Mr Gilbert, the problem I have is that banks come before this committee and tell us that we can trust that their conduct is going to be ethical and in the best interests of the consumer because they are signatories to the code. But what you are telling me is that you, as the owners and enforcers of the code, take no action over incidents of individual or systemic behaviour, because you do not want to be seen to be intervening in individual cases. If I compare that to codes of ethics that other groups or individuals work under, it is not a case of whether it is something between an individual, it is the question of whether the conduct was ethical. What I am hearing is that the ABA and the code do not actually provide the assurance that the banks are telling us they do.

Mr Gilbert : The CCMC is set up to monitor banks' compliance with the code. The code contains a provision—a key commitment that the bank will act fairly, reasonably, consistently and ethically in its dealings with the customer. That takes into account not only the bank's conduct, but also the customer's conduct and what the nature of their contractual relationship is. There is a commitment in the code for banks to behave ethically—if we can put it that way—and there is a further provision in the code to communicate reasonably, decently and in a timely way with customers as well.

On not releasing documentation that the bank holds—there is a provision in the code that customers can ask for copies of documents that the bank is holding. They are certainly documents of the customer such as their contract and other matters that may be held—statements of account and so forth. There is a specific provision in the code dealing with that as well.

Mr RUDDOCK: I am interested in your role in relation to these matters. You have obviously been monitoring some of the issues that have been raised with us.

Mr Gilbert : We have been.

Mr RUDDOCK: Would you be making recommendations to your membership about how your role might be strengthened to ensure that some of these issues are more adequately addressed in the future?

Mr Gilbert : Perhaps Tony might help me with this one. We have had a restructure within the organisation in the last two years. We have taken on a more forthright role—if I can put it that way—in guiding our members to difficult points of decision on certain matters, particularly in relation to the community and so forth. I would say that there is a sense of greater leadership within the ABA in respect of its members, and I expect that will continue.

Mr RUDDOCK: Would you like to help us with some of the recommendations that you are considering so that we can give force to them in our report?

Mr Pearson : Just to clarify questions both from the chair and from Mr Ruddock, the ABA does not have a role as an enforcer of the code, which I think was the chair's suggestion.

Mr RUDDOCK: No, I am interested in whether you have identified weaknesses and are suggesting to your constituent members that you would support reform.

Mr Pearson : The ABA frequently liaises with its members and where there are particular areas where we believe that there are community benefits in industry action then ABA is very active in working with its members to achieve higher standards on a whole range of consumer issues and that is why the evidence is widely available in terms of the actions.

Mr RUDDOCK: If you had a bank and one of your members that had a disproportionately high proportion of impaired loans, would you counsel them about how this may have arisen and the impact it would have on the reputation of banks generally?

Mr Gilbert : We would not know if a bank had a high level of impaired loans unless for some reason the bank wanted to share that fairly commercially sensitive information with us.

Mr RUDDOCK: You are talking to us about issues of ensuring that banks remain sound and the important public interest in relation to those matters. Would proper restitution for those people whose loans have been found to be impaired in circumstances that are highly questionable be likely to impact upon the viability of any bank?

Mr Pearson : I think that is a leading assertion. That is a difficult assertion to address because there is a whole lot of—

Mr RUDDOCK: I was hoping it might be an easy one. I would like to go away and feel that all these people who are aggrieved that are appearing before us may be able to receive some restitution and we could all go away because it would all be fixed.

Mr Pearson : There are a number of mechanisms both in terms of the legal obligations of banks and the obligations of banks under the code for adjudicating disputes between banks and their customers and, again, they have been extensively outlined both in our submission and today. As I said, as to the assertion that there is no mechanism or should there be a mechanism, there are mechanisms already.

Mr RUDDOCK: I am very much concerned that there are suggestions that a customer with one loan has no difficulty in going before the ombudsman and having the issues dealt with. I am told it applies to small businesses and I try to get an idea of what a small business means but I suspect that most of the small business people I have seen before this committee really have no place before the financial ombudsman. I ask myself when we are dealing with a small business that has probably got more than a few employees but certainly some assets and so on, where are they going to get redress when the costs of going through the legal proceedings are so extortionate that they cannot do it? How are we going to provide a reasonable opportunity to resolve those issues? Are you thinking about that in terms of the reputation of your members to ensure that we have a system, for instance, where the ombudsman is able to address not just small businesses but businesses that are not employing hundreds of thousands of people, that are in a position to dispute with banks, where they are in the court system and they are both properly resourced to be able to do so?

Mr Pearson : Again, I think your question goes to the adequacy of current arrangements for dispute resolution.

Mr RUDDOCK: I am. We have got to look at whether those arrangements have been adequate given the nature of the complaints that we are receiving. I am asking whether you can help us in relation to identifying those issues and how we might properly address them in a way that is not going to impair the integrity of the institutions that you represent.

Mr Pearson : There are two responses to that. One is in terms of the dispute resolution mechanism that was set up under the ambit of the ABA, which is the CCMC—that is up for regular review. As I said, all stakeholders are consulted in terms of the mandate of the CCMC. There is a regular mechanism for improving the operation of CCMC, and that is something that should be taken by customers of banks; they have an input into that as well. Would the ABA like to engage further with the inquiry on potential reforms, should they be required, the ABA is always very happy to engage and to pursue—

Mr RUDDOCK: We tell you what we are thinking of and you will tell us whether it meets your approval rather than you suggesting ways in which these issues might be addressed.

Mr Pearson : One would need to be clear what the issues one was addressing were.

Mr RUDDOCK: I think there are numerous issues that have arisen in the course of this inquiry, and banks have told me that they have codes of behaviour. I do not necessarily see them published; I hear about them here. I ask them would it bind any other organisation that takes them over, and nobody can tell me that those codes have any binding capacity in relation to a company or a bank that might in fact be taken over by somebody else.

Mr Gilbert : To the extent that those codes are embedded in the contractual arrangements which the company, yes, they would flow through to and bind the acquiring entity. That would be the normal course. The bank code is one of those codes that has legal effect in the banker and customer contract.

Mr RUDDOCK: Let me deal with a specific question. The Code Compliance Monitoring Committee informed this committee that the Banking Code of Practice does not include any requirements regarding revaluations or impairment.

Mr Gilbert : Correct.

Mr RUDDOCK: It is a fairly significant gap, is it not?

Mr Gilbert : The first allegations about impairment came up as a result of this committee. The terms of the code were settled in 2013 and commenced in 2014, the latest version. If they are matters that the committee feels should be included as recommendations, as Tony said, they are the sorts of things that we would want to have a talk to you about.

Mr RUDDOCK: I was thinking in order to maintain the reputation of your constituent members, you would be giving us robust suggestions as to how we could improve the regime. I look forward to seeing what you might have to suggest.

Senator WILLIAMS: Mr Pearson, you said the CCMC can name and shame a bank; is that correct? Is that what you said in your opening statement?

Mr Pearson : I do not think I said 'shame'; I said 'name'.

Mr RUDDOCK: You could never shame them.

Mr Pearson : I suspect the latter part of that phrase might have been verballing a touch.

Senator WILLIAMS: Okay, just 'name'. Has the CCMC ever named a bank?

Mr Gilbert : Yes.

Senator WILLIAMS: Could you give us an example, Mr Gilbert?

Mr Gilbert : I would rather not name the bank concerned, but, yes, it did about five or six years ago.

CHAIR: It is already on the public record?

Mr Gilbert : Yes.

Senator WILLIAMS: I will get Mr Google out. No, I will not. We will go past it.

Mr Gilbert : It was a quite a clear breach of the code. Let me say this much: there are circumstances in which the power to name arises, and Tony mentioned a couple of them—a serious or systemic breach of the code, and not addressing a breach to prevent its recurrence. There are a couple of other grounds as well. One of them is to not fulfil an undertaking that the bank might have given to the CCMC to do something—those sorts of things, where the behaviour of the bank has gone beyond a simple technical breach, which has not given rise to any material harm as far as the customers are concerned, to things which are very serious: systemic, and where the bank needs to be pulled into line.

Senator WILLIAMS: We have had a lot of complaints and submissions to this inquiry about Bankwest. Have they signed up to the code?

Mr Gilbert : They have. We have a website which shows those banks that have subscribed to the code. Bankwest is now a subsidiary incorporated into the CBA.

Mr WILLIAMS: Was Bankwest a signatory before CBA bought them in December 2008?

Mr Gilbert : Bankwest signed up to the 2004 version of code in April 2005.

Mr WILLIAMS: You are saying that, yes, they were. That answers that question.

Mr Gilbert : Sorry. Actually, it was partial adoption in 2004 and then full adoption in April 2005.

Mr WILLIAMS: This is about being part of that code—transparent, responsible, acting fairly et cetera. There are some questions about that, given the witnesses we have had before this very committee. You said in your submission:

It is not industry practice for banks to use non-monetary processes or triggers such as loan to value ratios (LVR) to impair customer loans or to 'construct a default'.

You stand by that, of course?

Mr Pearson : Yes.

Mr WILLIAMS: That was a yes, Mr Pearson? I am concerned that the suggestion that there is collaboration between banks and third parties such as property valuers to engineer non-monetary default is incorrect. The committee has heard evidence about a valuer who we believe was told to value the property down by a bank. The valuer refused to do that and walked away. We might even call that valuer to see that that statement you have made there is correct, because it would be very concerning if it was not. With FOS, are there amounts of money limits that they can actually review?

Mr Gilbert : Yes.

Senator WILLIAMS: Is there a $650,000 limit on a loan? Fill me on the boundaries of FOS.

Mr Gilbert : The compensation that they can award is, I think, $309,000, and that is reviewed.

Mr WILLIAMS: How big can your loan be if you have a problem? Are there boundaries where you cannot go to FOS if you have a problem with your—

Mr Gilbert : If a small business has a loan exceeding I think it is $2 million, it is not able to avail itself of certain restrictions on enforcement by the bank—clause 13 of its terms of reference.

Mr WILLIAMS: This code of conduct was established to look after customers and the banks—or to work together, hopefully, in a good, transparent and responsible manner. What were those limits again to who the supplier in the code of conduct is? Is it small companies, Mr Pearson?

Mr Pearson : Consumers and small business.

Mr WILLIAMS: How do you define consumers and small business? Would our previous witness be part of that when he is talking about a $15million to $20 million loan?

Mr Gilbert : Any individual is covered by the code except if the individual is acquiring a banking service which is a financial product or service regulated under chapter 7 of the Corporations Act.

Mr WILLIAMS: Basically you are looking at most individuals. What about small businesses?

Mr Gilbert : For small businesses, the definition in the code is the ABS definition, which is if it has fewer than 20 employees. But, if it is a manufacturing business, it is if it has fewer than 100 employees, subject to the retail-client definition in chapter 7 of the Corporations Act, which is probably not relevant here, because we are talking about lending in this particular context.

Mr WILLIAMS: You talk about 420A. I have serious problems with section 420A—receivers and sales to practitioners. We are getting a lot of complaints in this inquiry about the fire selling of assets, if I can call it that. We just had one witness where $17 million or $18 million worth of assets might have been spent on a project. They paid $7½ million for the land. The whole project was sold for $6 million.

Mr Gilbert : Section 420A is fairly clear about what is required. If there is a market for the particular asset, then it has to be sold at the best price.

Mr WILLIAMS: Have you ever heard anyone being punished under 420A—anyone in your life?

Mr Gilbert : I have not researched the point.

Mr WILLIAMS: I have not. I think it is a toothless tiger. I think it really needs addressing, and I think ASIC needs powers to look at the situation if the property was not advertised properly and not put out there for sale to get the maximum value. ASIC should have the power to say, 'We're fining you $1 million, $2 million, $10 million,' or whatever the figure is, depending on the size of the corporation. That person being fined would have a right to go the AAT to appeal it, because we have to clean this issue up about fire selling assets where everyone is a loser.

Mr LAUNDY: Following on from Mr Ruddock, a bank at a point in time makes a commercial decision to lend and charges a margin over and above based on the risk profile at that particular point in time. The life of that loan moves forward. Sitting inside the loan documentation is the ability for the bank to re-rate the risk should they need to. There is a problem, so the bank decides to re-rate that risk by increasing the margin it charges the customer and therefore increases the return that the bank generates from the loan. Meanwhile, the face value of that loan stays as is. We have had plenty of examples of interest rates at levels six, seven or eight times what the cash rate of the day is. I know that is legal because it is in the loan documentation. Do you think it is moral?

Mr Gilbert : I do not want to be sitting on top of the moral heap. Let me say this: we do have, recently passed in the parliament, unfair contract terms legislation to apply to small business which commences in just under 12 months.

Mr LAUNDY: Up to a million dollars.

Mr Gilbert : Up to—

Mr LAUNDY: A million dollars in that.

Mr Gilbert : Depending on the length of the contract term.

Mr LAUNDY: Yes.

Mr Gilbert : For credit, of course, it is more likely to extend beyond one year. I would imagine that, if there are concerns about those types of provisions, they may come under review in the full course of time, and of course ASIC will be responsible in that space.

Mr LAUNDY: Following on from Mr Ruddock again, could I ask your opinion of the suggestion that I have that, in a worst-case scenario, the loan plays out in insolvency, in foreclosure, and the doubtful debt is expensed by the bank and a tax deduction is gained. What would you think of the concept of an amount to charge over and above, in terms of the risk profile, being detailed in loan documentation? The ability of the bank to charge over and above remains, but the additional money recouped by the bank is offset against the face value of the loan, and it is used to reduce the principle of the loan.

Mr Gilbert : So the compensation for the increase in risk then has to be transferred to offset the loan?

Mr LAUNDY: To reduce the principal, the exposure to it.

Mr Gilbert : To reduce the capital matter—

Mr LAUNDY: Yes, and to reduce the exposure of, ultimately, the bank and the shareholders.

Mr Gilbert : I am wondering whether we are confusing two things here. There is a rating for risk, and APRA obviously expects banks to rate lending, particularly to business, for risk and to make the charge for that risk appropriate. It seems to me that there is a capital cost to the bank in the loan anyway. It is basically recovering that cost through a higher rating on risk. To then apply that against the corpus, the amount of debt, I am not sure that works.

Mr LAUNDY: To follow this through, let's just throw some numbers at it. For example, if a loan is issued at three per cent above the bank bill rate—so it is sitting at five per cent, on the back of an envelope—and if default interest rises to 16 to 18 per cent, which we have had detailed to us, and it is accrued as revenue for the bank, they have their cost of capital. That is locked in on day 1 and they can borrow at the rate the borrow at. We have had it detailed to us that, under the terms of the loan documentation, you have to provide profit and loss statements. The banks are smart enough to work out the cash flow of the business that results. We have had detailed to us that, surprise, surprise, rates are increased to a level which soaks up excess cash flow. It sits in the bank's book as revenue whilst the loan value of the original loan sits there unchanged, and when the default occurs the bank pursues the customer for the whole amount of the original loan. Firstly, I do not think that is fair. Secondly, I would suggest that, potentially, loan arrangements could be changed. I am not against the bank having to save customers from themselves at times, and looking at their figures and saying, 'You need to pay down principal,' but, if there is excess capacity in cash flow to do that, I believe it should sit in a reduction of the principal of the loan, not the consolidated revenue of the bank. Do you think I am being unreasonable?

Mr Gilbert : I do not think you are being unreasonable, but I am not sure how well that would work. The other thing is that this is the type of situation where, if a bank is re-rating the loan, there needs to be a dialogue between the bank and the customer about that and options to be put forward. One way of dealing with this is you reduce our exposure to you by selling off an asset. It seems to me that if the re-rating is indicative of a potential financial hardship situation arising, the code talks about that and makes a commitment by the bank to work with the customer to see what they can do to address the situation. Banks want to hang on to customers, not lose them.

Mr RUDDOCK: And every bank observes that code that you have just outlined to us?

Mr Gilbert : Every bank that subscribes to it.

Mr RUDDOCK: And provides options?

Mr Gilbert : I have not been there to see it, Mr Ruddock.

Mr RUDDOCK: There are plenty I have seen where there seems to be only one option, and it is, 'We are going to sell you up.'

Mr Gilbert : The CCMC has done a review of the hardship provisions of the code just recently—it published it on its website on 4 November—and it is quite satisfied to see that banks are reasonably well resourced to deal with hardship situations for both individuals and small business customers. There are a couple of places where they could improve, but they were comfortable that there were adequate arrangements in place to deal with these types of situations. At the end of the day—

Mr RUDDOCK: And if they have not got it—

CHAIR: Gentlemen! Mr Laundy, you have the call.

Mr LAUNDY: My last question is just following on from Senator Williams talking about section 420(A) of the Corporations Act. The person before you submitted an example of where a site was locked up by a receiver and a crane was left being rented at $15,000 a month. I know that, as it currently sits, section 420(A) is an obligation to obtain market value. What would you think of the suggestion of changing that to an obligation for a receiver not to cause unnecessary harm to the interests of creditors as a whole?

Mr Gilbert : We are talking about waste, in effect?

Mr LAUNDY: Yes.

Mr Gilbert : There are probably legal principles that deal with that.

Mr LAUNDY: If you have got the money to pursue.

Mr Gilbert : Yes. Perhaps, as Senator Williams or Mr Ruddock was saying, ASIC needs the tools—if it does not have them already—to ensure that 420(A) is enforced according to its terms. That is what the law is there for, and we support adherence to the law. Banks are very heavily regulated, and they are subject to a lot of laws. If we are subject, so should others be.

Senator WILLIAMS: Liquidators should as well.

Mr Gilbert : I see no reason why not.

Mrs SUDMALIS: I just have a couple of questions. I am a bit perplexed as to what your role actually is. I would have thought that the Bankers Association was actually partly responsible for the moral heights of the banking industry. When you said, 'I don't want to sit on top of the moral heap,' I kind of sat back in shock, because I would have thought that that would have very specifically been part of your role.

As I have said to a couple of people from the banking industry in the last couple of weeks, your street cred for the banking industry at the moment are really not particularly good, and you need to start working on that, because there was a time when the banking industry was one of the most respected industries in our nation. I do not think very many of the people in this room right now would say that that remains the case. We need some of your recommendations that you think would be appropriate for the banking industry to institute. And there is no point in coming back to us with the Code Compliance Monitoring Committee, because from an outsider's point of view—because finance is not my thing—for a watchdog body to have watchdog-ees as part of the watchdog committee seems extraordinary. There is no real responsibility as to who is watching whom and what the consequences will be, and that is really, really disturbing. As for the code of practice being in the banks, we were told by these guys that they had checked out the website and it was perfectly fine. I think they need to get somebody who is not financially literate to go and have a look at that and then decide whether it works or not. That should all be part of your association's activities. People do not understand what is going on, which is why we are here doing what we are doing right now.

Mr Gilbert : We do try, but it is difficult to communicate to a broad spectrum of community. The CCMC, for example, has gone to small business organisations—peak bodies—to talk about the code, to talk about its role as a code monitor. We often refer to the code in media and also places like this to try to get the message out there that it is there, it works, it is real and it is visible.

Mr Pearson : On that point, perhaps there is not a full appreciation of the amount of work the ABA does do in exactly the area that you are talking about to improve interactions between the community and banks and to lift the reputation of banks, but we do an enormous amount of work in that area.

Mrs SUDMALIS: Okay—you are doing lots of work. It is not working.

Mr Pearson : Well, there is a whole lot of work—financial literacy, relations with consumers, Indigenous communities and across a whole range of issues where the ABA does a lot of work with the banks and where there have been a lot of reforms and programs put in place. They are detailed on our website. In terms of the assertion that the ABA does not do anything in that area, there is an enormous amount of work.

Mrs SUDMALIS: No, I asked you to define it.

Mr Pearson : I could sit here for an hour going through all the programs that are currently underway. There is an enormous amount of work underway across a whole range of areas, and the ABA is consistently working with the industry to lift that. If you look at ratings of how banks are perceived, they are in fact very high—if you look at Roy Morgan data and so on. So, again—

Mrs SUDMALIS: No, I listen to the people who come into my office.

Mr Pearson : Again, we do not rely on anecdotes; we rely on metrics, and we can look at these things, and they are—

Mrs SUDMALIS: Perhaps you need to speak to the people.

Mr Pearson : Well, I am just telling you the way we do it. In terms of independent third-party surveys, which we do not have any control over or whatever, they consistently are ranking banks very highly in terms of public perceptions, and in fact it has gone up, I believe, from recollection, over the past few years. Overall, banks are well-regarded. And the ABA and the banks do a lot in terms of identifying issues and addressing those issues, and there is a rolling program of work to do that. It may well be that the quantity of work is not fully appreciated, and we would certainly love to sit down and run through that. But there is an awful lot of work going on right now, and through the past with the ABA, to identify issues, find solutions and get the industry to work with us and with the government and the regulators to address problems and to resolve those problems.

Mrs SUDMALIS: If I can beg your indulgence for just a second: I am an ex-high-school teacher; I taught science, and I ended up teaching literacy for young people so that they could understand science. A third of my seat will probably never hook into the NBN, and you are saying that the websites are the available source of information. I suggest that there needs to be another avenue as well, and it needs to be addressed to people who have an educational level of around about a 13- or 14-year-old. Please look at it.

Mr Gilbert : We are doing a lot of work with ASIC on the financial literacy project that ASIC is working on.

Mrs SUDMALIS: I have seen some of it. That is why I am asking you to re-look at it.

Mr Pearson : There was a conference in Canberra only two weeks ago on precisely that.

Ms OWENS: You said a couple of things earlier, when one of the members asked you whether you did any comparisons between banks of impairments of loans, and you said you would not know. You also said that the only time the impairment of loans had come up really was with this committee. I am accepting absolutely at face value that you have not done comparisons of loans on an impairment basis because it has not come up, but—

Mr Gilbert : Perhaps I could just say that the banks would not be sharing that information with the peak body.

Ms OWENS: I understand that it is in their annual reports, but that is another matter. I totally accept that you did not see that that was necessary—

Mr Pearson : On that point, there is publicly available data on that, though.

Ms OWENS: Yes, and, again, this is not a criticism; I am actually trying to get to the next bit of my question. I accept that. What I would like to know is, further to the question that the previous member asked, what areas you have seen as issues that you did actually start doing comparisons on. Are there areas where you have actually said, 'Okay: some banks are doing well; some banks aren't', and you have actually done analysis across the industry and tried to lift standards of performance generally?

Mr Pearson : Perhaps I could address that question in two parts. In terms of statistics, I would refer you to the APRA quarterly ADI performance statistics. That will give you a time series on non-performing loans by classes of banks. So, that data is out there, and it is available.

Ms OWENS: And the RBA impairment loans.

Mr Pearson : Yes, and all that. If the question is whether we have gone to member banks and told them to publish this data, the data is already there; it is already published.

Ms OWENS: Yes, and I am giving you the opportunity to explain to us why the impairment-of-loans issue has not actually been an issue for you up until this point.

Mr Pearson : Loan impairment now is at quite low levels. If you look at the history, at the moment non-performing loans of the major banks—and I have some data in front of me now—are less than one per cent. So, today, the impairment issue is relatively low. It is not zero, but it is extremely low. And the point of our submission is that it is not a problem today. I think what you are getting at is whether there has been a period in the past when it has been higher. Sure, and, again, this is APRA data. If you go to 2010 or 2011, it was quite a bit higher, and that is on the public record.

Ms OWENS: It peaked at just over one, I think, so it went from well below one to just over one.

Mr Pearson : That sounds broadly right, depending on which class of institution you are looking at, and, again, APRA has those various lines. And then it has steadily fallen since about 2011 and today it is perhaps slightly still above where it was pre-GFC but not too bad. So, in terms of whether we can track it, yes, we can. And is it high today? No, it is not; it is quite low today. But was there a period in the past when it was quite high? Yes, there was, but I think most reasonable observers would say that something happened that would have pushed it up in that period.

Ms OWENS: Okay. That was really my only question. I was just trying to give you a chance to put that on the record, because I think your answers sort of indicated that that is where you were going.

CHAIR: Thank you for your submission and for giving evidence here today. With anything you have been asked to take on notice, perhaps you could respond to the committee by 27 November.

Proceedings suspended from 12 : 48 to 13 : 41