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Parliamentary Joint Committee on Corporations and Financial Services
16/10/2015
Impairment of customer loans

FADER, Mr Geoffrey C, Chair, Tasmanian Small Business Council

FIELD, Mr Archer, Research Manager, Tasmanian Small Business Council

Committee met at 13:50

CHAIR ( Senator Fawcett ): I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. Today the committee is taking evidence as part of the committee's inquiry into the impairment of customer loans. This is a public hearing, and a transcript is being made by Hansard. The committee prefers to hear evidence in public. We may agree to take evidence confidentially if it is relevant. The committee may publish confidential evidence later, but we would try to ask before doing this. It is important that witnesses give the committee notice if they wish to give evidence in private. In addition, if the committee has reason to believe that certain evidence may reflect badly on a person, the committee may direct that that evidence be heard in private.

I remind all witnesses that in giving evidence to the committee you are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. If they did, the action would be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to the committee. You should be aware that, if you make adverse comment about another individual or organisation, that individual or organisation will be made aware of the comment and given a reasonable opportunity to respond to the committee. If you object to answering a question, you should state the grounds of the objection, and the committee will determine whether or not we insist on an answer.

The committee welcomes the Tasmanian Small Business Council to the hearing today. Thank you for attending. We have received your submission, which we have numbered as submission 61. Would you like to make a short opening statement before we proceed to questions?

Mr Fader : On behalf of the Tasmanian Small Business Council, I formally thank you both for receiving our submission, which you have noted as submission No. 61, and for inviting us to come before you today to speak to that submission. I am accompanied by Mr Archer Field, who has researched the main content of the submission. His work has taken more than six years, and thus he has a greater in-depth understanding of the practices being adopted by the offending banks and the Australian Bankers' Association than perhaps any other person in Australia.

We believe that it is important to point out that the responses by bank customer service employees to possibly 400,000 complaints referred to banks each year appear to be excellent and clearly focused on achieving good outcomes for banks and their customers.

Among the topics which you have chosen to investigate—and I note the heading of our letter of invitation today is 'The impairment of customer loans'—is the activity undertaken by bankers called 'constructive default', a practice where banks choose to demand the repayment of money from a borrower who is in no way in breach of their loan agreement. The most important questions that arise in that situation are, 'Why?', 'How?' and, 'If the borrower is meeting the terms of their loan agreement, how can this be legal?' The answer as to why, frankly, is, 'If the mood takes the bank to do so.' The answer to 'how' is in fact set out in comprehensive detail in our written submission, No. 61, which you have before you. The answer as to the legality is because the major banks have worked together with their trade association, the Australian Bankers' Association, to create what in the language of the board game Monopoly is called a 'get out of jail free' card.

The focus of the submission that you have before you is to explain what we now believe to be the web of deceit which is carefully orchestrated by the CEOs of the 16 major banks in league with their association, the Australian Bankers' Association. The banks have also relied on other third parties to achieve their sophisticated arrangements.

These 16 banks use the much-publicised Code of Banking Practice—'the code'—which is a document that purports to provide a guarantee of fairness to small businesses; primary producers, like farmers; and home loan customers. However, in fact, it advantages the banks at the expense of customers, who are the very people that the code publicly claims to protect.

This is a very serious issue, in our view, as it affects customer groups supposedly protected by the code: around 2.5 million small businesses in Australia, more than 130,000 primary producers and millions of homeowners who have mortgage finance from their bank. That is, it affects almost every member of the public who is a customer of these 16 banks.

The Tasmanian Small Business Council's fully referenced submission traces the origin of this deceit, the application of the practices and the manner by which they have been executed. This reveals how the banks have deceived hundreds of thousands of customers without any semblance of natural justice and fair play. In summary, the submission demonstrates that the banks convinced the Australian Competition and Consumer Commission, the ACCC, of their wish to introduce a standard form agreement—an agreement that it is harsh and unfair and which provides the 16 banks with total power over the borrower.

The ACCC, it seems, has agreed to the standard form contracts on the basis that there is an effective dispute resolution mechanism to protect the customers. The banks, through their association, the Australian Bankers' Association, devised the modified Code of Banking Practice, which claims that 'any and all disputes' can be taken to the code compliance monitors for investigation and that the banks which breach the code can be named and shamed publicly.

Unbeknownst to the customers, and apparently unrecognised by the ACCC, the Australian Securities and Investments Commission and, possibly, the Australian Prudential Regulation Authority, the banks and the ABA dishonestly failed to disclose the terms of the appointment of the monitors. These terms limit the monitors' power and allow the banks to deflect any complaint by disbarring the monitors from undertaking their publicly advertised responsibility to investigate all complaints. In fact, any of the 16 banks against which a complaint has been lodged can refer the complaint to 'any forum', meaning they can commence an action in the court, refer customers to the Financial Ombudsman or, as has recently been the case in drought-affected farming areas, force customers into mediation. In each of these cases, customers' rights to have the monitors investigate the code breaches are dishonestly taken away.

Through these actions, the banks and the ABA have created a process which subverts the specific condition under which the ACCC approved the standard form of contract, whilst it provides the banks carte blanche to operate under the terms of agreements which are unfair, deceptive and unconscionable. It is noted that the final report of the 2014 financial systems inquiry, the Murray review, recommended that the government extend unfair contract terms protections to small businesses and also 'encourages the banking industry to adjust its code of practice to address non-monetary default covenants'—clause 34. Though not specifically argued in the Small Business Council's submission, these actions by the 16 banks and the ABA may have also nullified the bank lending agreement, as the terms have been varied without the knowledge of the customer or their lawyer. Thank you.

CHAIR: You have made some significant statements there about the Code Compliance Monitoring Committee and their conduct. Could you talk about Tasmanian small business? You have given some—

Mr RUDDOCK: Before you do, I do not mean to distract you, but factually I think I would like the submission to be referred to the ACCC so that we know whether they have a view on the points you have made. I thought that the ACCC had no engagement in relation to these matters and that it had all been transferred to ASIC as the principle monitor of the banking consumer protection arrangements. Before we start to deal with more detailed issues, I would like those matters clarified, if you could.

Mr Fader : If I understand your question, you have asked: have we discussed this with the ACCC?

Mr RUDDOCK: No, I am saying we should ask the ACCC to comment on the points you have made, because I do not know whether we have, in fact, done that and brought it to their attention. I want this to be an evidence based inquiry.

Mr Fader : Most certainly.

Mr RUDDOCK: And you make certain allegations. I want those about whom they are made to be able to comment and deal with them for us. But I will go back. My understanding was that back in the late-1990s the ACCC no longer had responsibility for the consumer protection issues involving financial institutions. It went to ASIC, as I understood it. So I was surprised to hear your assertion about the ACCC.

Mr Fader : The ACCC, in the understanding of the Tasmanian Small Business Council, is responsible for supervising standard form agreements for various situations, be they landlord and tenancy and other such arrangements, where there is a dominant, major party and a lesser, minor party with minimum power in the negotiation of those agreements. I might add that the preparatory information for this submission has, over a number of years, been referred to the ACCC, and in our opinion no satisfactory response has been received from them. In recent weeks it has also been referred to ASIC. It was actually referred to ASIC at attendance at the ASIC Tasmanian advisory committee, on which I serve as a Tasmanian representative, in terms of: are the senior officers of ASIC aware of the terms and conditions and, specifically, the instructions given to the monitors of the Code Compliance Monitoring Committee Association in respect of those matters which they can and cannot hear and, if our assertions in submission No. 61 are correct, is it the practice of the Financial Ombudsman Service and ASIC, who refer complaints to the Financial Ombudsman Service, to provide a warning to anyone who is referred that, by taking that course of action, they will have debarred themselves from being heard by the code compliance monitors?

At this stage, I have no satisfactory responses from either of those organisations. The latter I have asked to be formally placed on the agenda for the next meeting of ASIC's advisory committee.

CHAIR: Could you clarify how long ago it was that you asked ASIC to respond to that? Did you say it was six weeks ago?

Mr Fader : It was in the last fortnight. That was the first occasion the committee met after your committee had chosen to accept our submission, at which time I believed it was appropriate to make it available for their consideration. I specifically referred to submission No. 61 in the formal question that was placed before them.

CHAIR: You make the claim in your submission that for some 2½ million Australian small businesses and 130,000 primary industry enterprises the banks have avoided their legal obligations toward them. I am assuming that in the large part you are relating that to the constitution behind the Code Compliance Monitoring Committee. Other than counting the number of businesses in Australia, do you have evidence for particular businesses where it can be demonstrated that that is the case? The second part to the question is: are you aware of any businesses where that code monitoring committee has in fact intervened to help a business?

Mr Fader : Yes, we do have examples. I will call on Mr Field to provide you some of those examples. There is a farming property which is a business in Queensland.

Mr A Field : I have recently joined a group of people dealing with matters which have been put to the banks, the ombudsman or the CCMC where the system fails. I can say with absolute certainty that ASIC was fully briefed on this four years ago, and subsequently in a number of cases more recently. I am not here to make a statement but I would like to say that it is my experience—or the experience of the people I work with—that this problem is well-entrenched.

Currently, the company I am working with is dealing with a complaint that was put to the financial ombudsman—initially, to the bank and then to the FOS at the bank's recommendation—from an intellectually disabled couple that are unable to work; they live on a small pension. I am fairly familiar with their circumstance, and I have read their contracts. When they entered into the contract with the major bank they had no prospect of being able to comply with the contract. The contract which they signed the bank induced them to sign without a solicitor, based on the words of the senior bankers that it would be okay. Now they are faced with the financial ombudsman saying, 'It is our recommendation that, because you are disabled, you should transfer it to your son and he can pay the debt. We would give you a small discount if you would agree to that.' In other words, whatever the bad things I read—and when I read it, I thought it was fictitious. I only got it three or four days ago, and I get quite a few of these things on a regular basis. When I read it, I thought it was a Tom and Jerry cartoon. I read it and then I read it again, and then I rang up a couple of case workers and asked them to read it. They then contacted these people and said, 'Would you like us to review it for you?' They said, 'Yes.' Their telephone does not work, but that would not surprise you.

It is very hard to put yourself in the mind of a person who suffers from a disability like this, but they are in a state where everything that they own that they live in is their house, they owe a relatively small amount of money on it but still more than they can afford to pay, and the ombudsman is saying, 'This is the best deal you'll ever do. If you don't do it by five o'clock tonight, the ombudsman is going to send you back to the bank, and then you will go to the enforcement group and you will lose your house.' That is not the style of practice that I am used to in the businesses that I have been in, and I do not think many people would approve of it. I guess the key issue is that the bankers have a duty to ensure they use sufficient care and skill—this is under the contract—of a diligent and prudent lender when they loan you the money. To make a suggestion, 'You do not need a lawyer but sign at the bottom line,' goes well beyond most of the people that I have done research for in recent times.

CHAIR: That, obviously, goes to the issue of the standard contract. On the claim that you made here about 2½ million Australian small businesses, and 130,000 primary industry enterprises, what is the basis for those numbers? Is the context that you believe they have all used a standard form of contract and that is why you are saying the banks have avoided their obligations?

Mr Fader : Dealing with small businesses first, the 2½ million, or thereabouts, is a varying figure. If I want to use the data from the Australian Taxation Office, it is 4.7 million small businesses in Australia; the ABS—Australian Bureau of Statistics—currently have a figure of 2.3 million. It is somewhere between those figures; no-one actually knows, because there are some 40 different definitions of small business in Australia. Any one of those businesses who has borrowed from their bank for the operation of their business—there may be an exception—is required to guarantee their borrowings for their business by a mortgage over their household property—their home. It is standard practice of the banks to require a guarantee in the form of a mortgage. I believe it is a reasonable figure and a reasonable assertion to say that the majority of small businesses who have borrowed have become subject to this harsh and unconscionable contract.

ABS advised that there are about 130,000 farm properties in Australia and in terms of home loan borrowers there are multimillions; sorry, I could not swear on the Bible that it is 2½ million or whatever that number is. But I can tell you that everybody who has entered into a standard form agreement with any of the banks—and that is a point of its own; they are fundamentally identical agreements—

CHAIR: The point I am trying to elicit here is that the 2½ million is merely your best estimate based on various reports of the number of businesses that are most likely to have a standard form contract; it is not representative of businesses who have suffered some kind of action like a constructed default of a loan?

Mr Fader : I agree with that, but the point we are seeking to make is that this is a systemic position and any business that enters into such agreement is going to find themselves at a disadvantaged position. I was not aware that this committee was specifically looking at individual cases, but I believed that in bringing the submission forward we were identifying a systemic problem which could be addressed.

Let me go back to the fact that in the Murray review—the 2014 Financial System Inquiry—it is pointed out in recommendation 34 that the inquiry recognised that, in their view, there was a problem. We are emphasising and endeavouring to demonstrate that it is a systemic problem and it is very significant in terms of the far-reaching impacts.

Senator O'NEILL: Can I thank you very much for your submission and say that I am a reasonably good reader but I do not think, until I read your submission, I was aware of exactly what I signed, and I expect that is the situation for many Australians. I take you to page 14, where you spoke about a booklet called the Banking Services Terms and Conditions General Information, which is available on request. In your commentary on it and in the dot points that follow on attachment 2 on page 14 of your submission, is your contention the problem section in the dot points?

Mr A Field : The problem section in the document probably comes in a later part. We refer to that as the fourth document paper. The fourth document is where the problems are kept.

Senator O'NEILL: When I read this, it said:

The aside is provided at the end of the document where the customer signs and it suggests that the code of practice is little more than helpful information that might be of interest to the signatory.

But then you say:

This is not the case as clause 35 ensures that the code of banking practice is a legal contract as relevant section of the code apply to the contract.

Mr A Field : That is correct.

Senator O'NEILL: The lack of awareness as people sign this document is a critical part of where it falls apart, isn't it?

Mr A Field : Yes, definitely.

Senator O'NEILL: You have made a number of points of that significance throughout your documentation.

Mr A Field : I have looked at so many cases in recent times. The general practice of the bank is not to give the customer this part of the contract. There are four parts to a contract and that is why we call this the four documents paper. There are four documents that are relevant. The facility offer, everybody sees. It says when you read this you are bound by the general standard terms. When you read the general standard terms, the statements made by Mr Fader would concern you if you believed the bank would do it to you but you do not believe it; you think they would not do it. Then you read the second document and go to clause 35 of the second document. It says 'by agreeing to this we are bound by the code of banking practice'. So then you go to the code of banking practice and when you read that it makes no reference to the fourth document. The fourth document means that you effectively have no rights.

When Mr Fader talks about 2½ million complaints having been involved with this, I think he could have put it another way in a different context. We know there were 2 ½ million complaints over a period of about eight years. Of those 2½ million complaints, I am told, and I think the facts would confirm this, hardly any were ever found where the bank did anything wrong, so the system failed. The structure of the system does not work and that is the point that Mr Fader is trying to make.

Senator O'NEILL: You go on in this detailed documentation to explain the bank's capacity to simply advise that it has decided that it is basically no longer of interest to it and it has incredible power just to sell people up. And people have signed this inadvertently by agreeing to the first document, unaware of the status of the loan in the context of the second, third and fourth document.

Mr A Field : There is another technique which I am sure you will find out about in due course. When you complain to the bank, like these disabled pensioners I am talking about did, the first reaction to that is: 'Well, we do not agree with you.' There is nothing wrong with that because there may be good reason. The bank refers to complaints in clause 35.7 of the code of banking practice, which says it will investigate all complaints. But if I say, 'I do not agree with you', then we have got a dispute. If you read the fine print at the back of the document, the moment you have got a dispute, the bank does not have to investigate unless it is a financial dispute. So if it is a dispute in relation to its practices or the way it has treated us or the fact that we did not have a barrister, the answer to that is: well, it is not a financial dispute the fact that you did not have a lawyer check the contract.

Senator O'NEILL: You have some language here about the fees and charges regarding valuers, investigators and consultants. The funding undertaking you have is at box 9.1 in attachment 2 on page 7. It says:

We may obtain a valuation report on any secure property at any time. You must pay us all costs in connection with the valuation.

Then you go on to 9.2:

If we reasonably believe you are or may be in default or we reasonably the circumstance exist which will lead to default, we may appoint a person to investigate whether this belief is accurat e . You must pay us all costs in connection with this investigation.

It does not explain anywhere what triggers would make a bank believe that you might default.

Mr A Field : There is no trigger. It just believes your house price has gone down.

Senator O'NEILL: This is arbitrarily at will by the bank. The bank can say it has decided it wants a valuation on your property and make you pay for that. It can do it at any time it desires. It goes on to say that a valuer, investigator or consultant is an independent contractor and not an agent or employee so it can claim that it is not responsible for any representational action.

Mr A Field : And you cannot take any action against that person or the bank in relation to it.

Senator O'NEILL: You cannot even sue the valuer, the investigator or the consultant if the report is wrong, it says at 9.5.

Mr A Field : The problems we have seen in Queensland with farmers have been disgraceful. As far as I can see, there were a number of banks involved in it. I come from the land. I grew up in the bush and I am not much good at anything except farming but I can tell you now that when my father died, I spent eight years with sheep on the road as a young man married with little kids trying to save my farm by the road paddock—I just kept doing it. But under this contract, our farm might have been worth, say, $100—independently valued by the bank at $100. In the middle of that drought, my farm could not be sold so what was it worth? The best a valuer would give me was probably $60. By $60, it means the bank can ask me for the money back as and when it likes.

What has happened in recent times is several of the banks, when they buy other banks' books of loans, which they do—banks trade in these loans—clean out all the loans that they want to get repaid. If my farm was worth $100, they would not close me down because, if they did, it would cost the bank money. If my loan is only $50—and I have done several of these projects in recent times—the bank is likely to tell me to pay it back because now my farm is not worth $100. It seems to be the norm, because then the bank can charge you 24 per cent or 20 per cent penalty interest whilst you are in breach of the contract.

I have just completed some work on one last week. I will not tell you the numbers—but I will say that the property was worth $10 million or so, the people owed $5 million or so, the bank sold it for $8 million or so and the bank charged them $3 million or so in penalty fees. The people now have no money left. Then the bank will take you to court, and see how well you will you get on. The people in this case filed complaints, by the way; it did not go through the system. They were just thrown out the door.

Mr Fader : There was a much publicised case of a farmer in North Queensland covered by 60 Minutes. Senator Fawcett, I see you are nodding your head.

Senator O'NEILL: Yes, I saw that too.

Mr Fader : Ultimately, the CEO of ANZ travelled there with TV cameras and, in the course of the interview, announced that they were returning the ownership of the property and also advised that they were paying some restitution in the form of money to the owner. The explanation provided—please do not hold me exactly to the words; I am trying to recall from memory—was, I think, 'Our legal department perhaps got ahead of us in some way.'

Mr Field, you have another case that you told me about—what is the one you gave the numbers on a moment ago?—where those sorts of things have happened. In that particular case with ANZ, there may not have been an acknowledgement of error, but there was certainly an acknowledgement that something had gone wrong. That is a case where the farmer had never been in default with their payments. The farmer concerned made that abundantly clear, and the bank did not disagree. That is an example of the systemic nature of the issue that we are raising, and we hope that the wisdom of the committee will lead to some recommendation following similar recommendations that started back when—Mr Ruddock made a reference to the early 1990s. Was that the Martin committee?

Mr RUDDOCK: Yes, it was the Martin committee.

Mr Fader : The Martin committee made recommendations that there needed to be some fairer way for banks and their customers to deal with issues of disagreement and concern. To my knowledge, there have been at least three separate recommendations to governments between then and now, and the situation still exists.

Mrs SUDMALIS: Gentlemen, I have one question. You mentioned that the Code of Banking Practice was modified and that you believed that the monitoring bodies were not aware of the change. Did I understand you correctly?

Mr Fader : I did not understand the question.

Mrs SUDMALIS: At one stage, you mentioned that the code of compliance was modified and that you felt that neither the ACCC, which Mr Ruddock mentioned, nor APRA nor ASIC were aware of the implications of the changes, and it meant that those monitors were then barred from investigating all complaints. They could only basically do sample complaints.

Mr Fader : It is the terms under which the monitors were appointed.

Senator O'NEILL: It is the CCMA.

Mr A Field : The CCMC, yes. The monitors represent three different sections in the community. I will not go through that. It would be easy to argue that these three regulators were not fully briefed on this at some stage. But I think the problem, as I pick up from Mrs Sudmalis, is that no-one, in terms of the regulators, seems to want to grapple with it. As Mr Ruddock said, in recent years—and I do not know how this was ever orchestrated—Fair Trading agencies in all the states were transferred to ASIC in 2010, only four years ago. We have now seen that ASIC controls what you might call the fairness issues, but it does not have any influence over the issue of large corporations vis-a-vis the small customer.

One of the recommendations that came out of the financial systems inquiry is the prospect of having what I refer to as an over regulator which says, 'I have looked at this and I think that this particular organisation should deal with it.' Right now, if I am answering your question correctly, all three organisations are aware of the problems and nothing seems to have been done to date.

Senator KETTER: In your submission you say that the change to the CCMC's constitution, which subsequently became the mandate, has not improved the effectiveness of the CCMC. In fact, you point to further inadequacies that have arisen. Can you elaborate on that. Have I understood that correctly? Has there really been no improvement since we have gone to the mandate?

Mr A Field : Can you just take me to the page you are on, please.

Senator KETTER: I think it is on page 17 of your submission. It is under the heading 'regulatory failure'. I just want to clarify that the mandate that the CCMC operates under now appears to be in a worse situation than under the so-called wicked constitution, as you refer to it.

Mr A Field : I cannot comment on that. The fourth version of the code came into effect last year—2014. I have not looked at it because the number of issues that are currently in place for the 10 previous years will keep me going until I am at least 1,000 years old! There are quite a lot. The answer is that I believe that the new mandate that they have come up with is a lot more transparent, but I cannot comment on how good it is.

Senator KETTER: Okay. I am not sure if you have access to this, but I am looking at the annual report of the CCMC of 2013-14. Have you—

Mr A Field : I have looked at it; I just cannot—

Senator KETTER: There is an interesting case study on page 19 of that which talks about the 12-month rule. Are you familiar with the 12-month rule?

Mr A Field : I am quite familiar with it, yes.

Senator KETTER: The case study talks about the fact that a couple contacted the CCMC to raise concerns about the steps that their bank had taken to repossess their home. It quite clearly indicates that the ABA did not provide permission for the CCMC to investigate the matter. Then it goes on to talk about the fact that, despite that, the CCMC wrote to the bank in question. Are you familiar with that particular case study?

Mr A Field : I am not familiar with that particular case. I have read the annual report; I just do not have that particular—

CHAIR: Senator Ketter, perhaps if there is an aspect of that case you would like comments on, the gentleman can take it on notice and provide that back in writing.

Senator KETTER: Yes, I will put something together on that.

Senator O'NEILL: I have some questions to put on notice, too.

Mr Fader : I think the germane issue is the status of the Code of Banking Practice in legal terms. The Australian Bankers' Association say publicly that the Code of Banking Practice is part of the lending agreement which customers enter into. Few, if any, banks actually provide a copy of that code to the customer when the time comes to sign the documentation, although it is referred to consistently through the lending agreement. Over a number of years, various courts—and I would be able to find the examples of these—have made comments when people have tried to use the code to defend themselves in a court of law that there is a question mark about the code because it is written in language which is ill-defined. An example is a word like 'fair' when they say, 'We will treat you fairly.' That and other such language in the code mean that it cannot be relied on.

It is interesting that a few months ago in the Victorian Supreme Court a judge brought down a ruling against a bank on the basis that the code was, in fact, a part of the lending agreement. In that case, the opinion of the judge was that the banks had acted inappropriately and the decision was made in favour of the appellant. Interestingly enough, despite the fact that the Australian Bankers' Association say the code is part of the agreement, National Australia Bank, who were the bank involved in that, have since lodged an appeal with the court on the basis that, in their opinion, the Code of Banking Practice is not, in fact, a part of the agreement.

If, for no other reason than that lack of clarity about the relevance of the code or otherwise to a bank-lending arrangement or agreement, this matter, in my humble opinion, needs to be resolved. Because, if that doubt exists, what status does a customer have when the bank has total power over the loan under the lending agreements? The answer is: the individual is entirely at the mercy of the bank.

CHAIR: Thank you for that. That is a good summary of your case. You may have heard earlier that we had a long discussion with ASIC about the interaction of agencies with banks and codes, so we will certainly be coming back to it. We will be providing you some questions on notice that we would ask you to come back to the committee on. We would ask to have those responses back by 6 November. Thank you for your evidence today.