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

FIELD, Mr Philip Andrew, Lead Ombudsman, Banking and Finance, Financial Ombudsman Service Australia

[14:38]

CHAIR: Thank you for attending today's hearing. We have received your submission, which we have numbered submission 46. Would you like to make a short opening statement before the committee proceeds to questions?

Mr P Field : Yes, thank you. The Financial Ombudsman Service is an independent dispute resolution service approved by ASIC which resolves disputes between individuals and small businesses and financial services providers. In 2014-15, FOS was referred about 32,000 disputes of which about 1,000, or three per cent, related to business finance products. Disputes in this category covered a wide range of issues, including lending and enforcement.

I would like to make the following observations about the matters being considered by the committee. In the cases we see it is unusual for a financial services provider to rely on a non-monetary default alone in calling in a loan. It certainly happens from time to time, but it is more likely that a bank will rely on a payment default to call in a loan. Where a default notice is served, there is usually only a short period of time given to comply with the notice. However, in most cases this follows a longer period of negotiation.

I support the introduction of unfair contract terms for small business, but at the higher threshold of $1 million for a product lasting longer than 12 months, as recommended recently by the Senate Economics Committee. However, the introduction of the legislation may not address all of the concerns being considered by this committee. For example, if there has been a significant fall in the loan-to-valuation ratio, it may be fair and reasonable for a lender to require that the level of borrowing be reduced rather than repaid, in order to meet the lending-to-value ratio requirements. That may not necessarily be an unfair contract term in itself.

In relation to the appointment of receivers I have noticed a small but growing trend amongst some financial services providers to appoint receivers over residential properties mortgaged by individuals who guarantee business loans. As a receiver acts as an agent for the borrower, even though appointed by the lender, this has the potential to reduce avenues for address when there is a concern about, for example, the under-sale of a property. However, it may be an issue that needs to be addressed by the respective state parliaments, because it relates to the sale of land.

You will hear later from representatives of the Code Compliance Monitoring Committee, but I wanted to clarify that the Code of Banking Practice is not an approved code by the ACCC or ASIC, under relevant legislation. It is a code that was introduced by the banks themselves, and it sits above the legal requirements that are imposed on financial services providers.

Mr RUDDOCK: What do you mean by 'sits above'?

Mr P Field : Well, sits alongside. The code itself has a provision that, where there is a requirement in the code that a bank needs to comply with that is greater than the legal standard, they will comply with the code rather than the legal standard, provided they do not get into a breach of the law if they do that.

Mr RUDDOCK: But you cannot enforce it?

Mr P Field : Cannot enforce the code?

Mr RUDDOCK: Yes.

Mr P Field : I think you can. Certainly, in our decision-making our terms of reference say that we will do what is fair and reasonable in all the circumstances, having regard to a number of things, including relevant industry codes, and the Code of Banking Practice is certainly something that we do take into account when reaching a decision in the individual cases.

CHAIR: Would you like to complete your opening statement.

Mr P Field : Certainly. Although, I would point out that there are perhaps some small pockets in some banks' small business recovery areas where some refresher training in relation to provisions of the code would not go astray. In fact, I think there are provisions of the code that are of great benefit to individuals and small businesses, particularly those relating to lending standards, the taking of guarantees, and hardship. In fact, if there was a mechanism to do so those sorts of provisions should be extended to all lenders and not just to banks and mutuals, who subscribe to a code of practice. I am happy to answer your questions.

Mr RUDDOCK: Can I ask you to clarify your own role. I listened to your introduction and I was not certain how you asserted your independence, because I did not know who was paying you.

Mr P Field : The Financial Ombudsman Service is approved by ASIC under regulatory guide 139. It is governed by a board of industry directors—four directors who are representative of industry, four directors who are representative of the consumer interest, and it is chaired by Michael Lavarch, as an independent chair. The board does not play a role in the day-to-day decision-making of the service. The funding of the service is by charging fees and levies to the various financial services providers: banks, insurance companies, superannuation funds, advisers—fees for services.

They are charged a levy based firstly on their size and then a separate levy based on the number of cases they have had in the previous year. Then, for each dispute that comes into the office they are charged a fee, depending on where the case closes in our system. The longer it takes to resolve and the further it goes, the greater the charge.

Mr RUDDOCK: In your introduction you made some comments, ones that troubled me a little, in relation to the loans that are in default. What you asserted, I think, was that it was mostly monetary default.

Mr P Field : Yes, so, monies that were due and payable but have not been paid.

Mr RUDDOCK: You asserted, I think, that people were given more than sufficient time to be able to deal with these issues.

Mr P Field: Not always more than sufficient, and in some cases that we see that is not always the case. But, generally, what we do see is that banks have been working with the customer for some time before default notices are served, so they have been trying to work with them to solve the problem, whether it is through the sale of assets, or refinancing, or restructuring—whatever options might be available to the parties to assist them to overcome their financial difficulties.

Mr RUDDOCK: What I would like to get from you is an understanding as to whether you may have in fact seen the nature of the problems that are being brought to our attention, because I am told that in relation to the loan books of most financial institutions, the number of defaults is relatively small. Even during the global financial crisis most banks did not have a significant number of loans that were brought into default. I am just speculating about the figure, but it may have been as low as about four per cent. Yet we have had brought to our attention particular situations that seem to be very different to what you are citing as being the average. In other words, what has been brought to our attention in relation to the Bankwest commercial loan book was that there were defaults, and a significant number of defaults, where there was not a failure of meeting payments. In other words, the failure was because of a revaluation of assets rather than any other default. Your experience, I am wondering, in the context of something like the Bankwest issue, which has been put to us specifically, seems to be at odds with the evidence that we are starting to receive.

Mr P Field: I was talking my experience across the industry.

Mr RUDDOCK: Across the industry?

Mr P Field: Across the banks—

Mr RUDDOCK: So it may not be reflective of what was happening in relation to, say, specifically the ANZ situation with rural loans, or the Bankwest issue following the Commonwealth Bank's takeover?

Mr P Field : Quite possibly. A lot of those reported cases are probably matters that would not come within our jurisdiction for a number of reasons, so we may not have seen those sorts of cases.

Mr RUDDOCK: It clarifies it for me that your evidence deals with financial institutions generally and, potentially, not the issues that are being brought to our attention in which there is a view that they may require additional remedies.

Mr P Field : Quite possibly.

Senator O'NEILL: I would like to ask a question following on from that. How long have you been in the role, Mr Field?

Mr P Field : I have been ombudsman since 2008. I had been working at what was previously the Banking and Financial Services Ombudsman since 2002.

Senator O'NEILL: Over that period of time, have you seen any clustering of particular bank practices around organisations? How many did you say came in this year—32,000?

Mr P Field : That was 32,000 across our whole service, half of which relate to credit disputes, and the vast majority of those credit disputes are individual consumers as opposed to small business cases.

Senator O'NEILL: Yes. And you said that you actioned about 1,000 of them?

Mr P Field : Yes. That is related to business finance products.

Senator O'NEILL: It seems to me, as a real-life, active researcher, you would have, over that period of time, a purview of how things are going. Do clusters of aberrant behaviours by particular providers become apparent to you at any point in time?

Mr P Field : Yes.

Senator O'NEILL: Could you expand on that?

Mr P Field : It depends on the institution. They all sort of go through peaks and troughs—they get better at things and then they drop the ball. In consumer cases involving financial hardship, banks and other financial services providers have vastly improved the way they deal with their customers. That has been driven by the code in the first instance and by the National Consumer Credit Protection Act more recently. What we are not seeing is the same level of improvement in relation to small business customers, yet the code obligation still exists. Even though there is no regulation about assisting small business customers in hardship, if you are a subscribing bank you do have that obligation and it does form part of the contract.

Senator O'NEILL: Before you go any further, the regulation that gives rise to the service you provide for individuals has no parallel in terms of a service for small businesses?

Mr P Field : That is correct. It is a bit of historical anomaly, if you like, that when the first Code of Banking Practice was introduced in 2003 the jurisdiction of the ombudsman's office was increased to match that in small business cases. When the National Consumer Credit Protection Act came in 2010-11, we still had that broader jurisdiction, even though the regulation does not cover it. If an organisation joins our service because they, for example, need a consumer licence—an Australian credit licence—we would also cover their small business products as well.

Senator O'NEILL: So that is a kind of accidental coverage.

Mr P Field : That is an accident, but for banks it does not really make a difference, because we have been covering their small business disputes since 2003.

Senator O'NEILL: You made a comment about the appointment of receivers over property used for security and business in your opening remarks.

Mr P Field : Yes, about residential—

Senator O'NEILL: I am thinking of small businesses in the area that I come from, and in my own family experience of small business, where to buy major equipment for construction or for farming—if that were the case—you take out a loan to purchase that piece of equipment but your house is the collateral for that loan. So this is where housing gets involved pretty significantly in small business.

Mr P Field : Yes.

Senator O'NEILL: But you are saying that there is a separation and a differentiation in the way the banks interact with those loans?

Mr P Field : Sometimes they will appoint a receiver over the property that a guarantor lives in, as opposed to appointing a receiver over the company, which, I image, are most of the disputes or the matters that have been raised with this committee. This is a slightly different issue where it is a residential property. The usual process would be that you would serve a demand on the guarantor, then you would issue legal proceedings against them and eventually, I would imagine, you would get a judgement for possession and sell it. That is the usual way you deal with loans in default over residential property. But some banks have provisions in their agreement to appoint a receiver over the individual's property so that the receiver controls the property and takes the actions to remove the people who are living there from the property in order to sell it.

Senator O'NEILL: It sounds a bit like the bus lane on the Sydney Harbour Bridge to me. Instead of staying in the traffic and having to go through a degree of protection that has led to the business, the bank gives itself authority not to go through those sorts of processes and immediately appoints a receiver over the property. Then they can act fairly quickly, according to the evidence we have heard this afternoon.

Mr P Field : Except, of course, with the receiver being the agent of the customer it means that if you want to complain about the receiver's actions you have nowhere to go. We can only consider a dispute between the customer and their bank. In those circumstances where a receiver has been appointed over the house, the bank is not the one you can complain about; it is the receiver. So it leaves a gap.

Say, for example, that the receiver undersold the property and you wanted to complain about that—and we do deal with those sorts of complaints—we could not consider it because the receiver is not part of the Financial Ombudsman Service scheme. That is my concern.

Senator O'NEILL: Right.

Mr P Field : It may be quicker. Personally, I do not think that it is appropriate. I think there are fair mechanisms—you can issue a writ, you can come to our service up to a certain stage or you can defend it in court. But this process does not really allow a person those opportunities.

Senator O'NEILL: What is your recommendation, Mr Field, based on what you have seen in this context?

Mr P Field : As I said, this could be a state matter, so maybe this is not the right place to raise it. But it seems to me that what receivers in those circumstances are doing is acting as an agent for the bank or acting as an agent for the mortgagee, and that should be recognised as such so that if a person wishes to lodge a complaint about whatever it is they are or are not doing they can still have redress through our service by lodging a complaint against the bank, because the bank is responsible for its agents.

Senator O'NEILL: Have you seen clusters of this type of behaviour with particular banks?

Mr P Field : Yes.

Senator O'NEILL: Could you name them, please, Mr Field?

CHAIR: We can go in camera, if there are things you would like to tell the committee that you would prefer not to do—

Mr P Field : Yes, I think that would be preferable.

CHAIR: I ask anyone who is not associated with the committee or this witness to leave the room, and we will go in camera.

Proceedin gs suspended from 14 : 57 to 15:19