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Parliamentary Joint Committee on Corporations and Financial Services
16/02/2016
Impairment of customer loans

GREGSON, Mr Scott, Executive General Manager, Consumer Enforcement, Australian Competition and Consumer Commission

JONES, Mr David, Director, Mergers and Authorisation Division, Australian Competition and Consumer Commission

[14:37]

CHAIR: Welcome. Thank you for attending today's hearing. Would you like to make a short opening statement before the committee proceeds to questions?

Mr Gregson : Given the time, I will be as quick as I can. We will do our best to assist the committee today. We note our role is probably less than some of the other regulators you may have spoken to. At a higher level, the ACCC is responsible for the competition and consumer protection provisions of the Competition and Consumer Act, as well as, within it, the Australian Consumer Law. These are relatively general provisions applying across the economy, not specifically to the banking sector. At the highest description, they prohibit anticompetitive agreements or conduct involving misleading or unconscionable behaviour. While applicable across the economy, it is important for the purposes of this committee to note that the Consumer Law does not apply to financial services, which are within the specific remit of the Australian Securities and Investments Commission—ASIC—and accordingly the conduct of banks, insofar as it relates to consumer protection, is most likely within the realms of ASIC and not the ACCC.

We have been given notice that the committee might be interested in discussing our role with mergers and acquisitions. Mr Jones in particular can assist with that. Our role in relation to mergers and acquisitions is to prevent mergers or acquisitions that would have the effect or likely effect of substantially lessening competition. To provide some confidence and certainty for those parties who may be involved in mergers or acquisitions, we operate what is referred to as the informal merger clearance process. That involves a nomination by the parties of their proposed acquisition, and, where appropriate, it involves consultation, setting out a statement of issues and then moving to the final decision.

The ACCC's decision is either not to object to an acquisition or merger; to not object, based on undertakings or other measures taken by the parties to lessen our concerns; or ultimately to object to that acquisition. Where we do object, the recourse available to us is to the courts, where we believe that a party will otherwise proceed.

I should note that that mergers-and-acquisitions role again is economy-wide, not banking-specific, but, as the committee would be aware, we have had some involvement with the financial sector in years gone by. We would be happy to assist to the extent that we can.

CHAIR: Thank you very much. Can I go to the issue you said was in your remit, of unconscionable conduct and misleading behaviour. One of the things that has become clear in evidence we have received is that the banks essentially have two faces to the customer. One is the friendly lending face who will give a high valuation and is incentivised by remuneration structures to win business—and we see advertising campaigns by NAB, for example, at the moment, talking about the targets they are setting for the amount of lending they want to do. The customer builds a relationship with that person, and often there are assurances given about rolling-over facilities or other such things. But then the credit-management side of the bank speaks with a different, and overriding, voice. So the customer is often given assurances in one direction, and then the bank has a different authority who uses a different valuation method to set LVRs and put people into administration. Has the ACCC ever looked at that in terms of misleading behaviour or unconscionable conduct, or have you just accepted that that is part of the standard terms and conditions that Mr Murray calls 'unfair'?

Mr Gregson : First of all I would note that, obviously, unconscionable conduct, with respect to financial services and the conduct of banks, is a matter for ASIC, so we have not had any recent consideration of those issues. I am happy to talk from a general unconscionable-conduct perspective, based on our experience with other matters. Unconscionable conduct allows us to take into account a non-exhaustive list of factors. We would think that if there are inconsistent messages being given in the course of a transaction, particularly where there is disparity in bargaining power, they would be relevant matters to take into account. It is difficult to be broad with our comments because considering unconscionability requires the individual circumstances to be taken into account, but certainly if there was a practice of speaking with different voices at different points in a transaction that would be relevant to unconscionable-conduct considerations.

CHAIR: In terms of your mergers and acquisitions, one of the complaints that has frequently been raised with us is that somebody has opted to go for a second-tier bank because of their lending criteria and their approach to dealing with clients. That bank has then been taken over by a larger bank—one of the prime banks—and, without their consent, if you like, they have now entered into a new agreement which has a different approach. Has ACCC ever done any work in looking at the mergers and acquisitions, and at options to provide to people who are bound to subsequent conditions options to refinance and move out of that, as a matter of course?

Mr Jones : I suppose the consideration is a little bit broader than that. The test we have to apply is a competition test: will the merger substantially lessen competition or is it likely to substantially lessen competition? That is a broader question, of who is competing in the market, who will be left in the market afterwards and what sort of competitive constraint they will apply. But I suppose where it might be relevant to your question is that those customers will face a different set of choices after the merger, and so we would look at what choices would remain available to customers of the existing bank and ask, 'Does that set of choices after the merger represent a substantial lessening of competition compared to the choices before the merger?'

Mr Gregson : I would add: part of that question, I think, might relate to the extent to which loan agreements provide for changes in terms and conditions, including in situations where there has been a change in ownership. Again, they are probably matters for ASIC to answer.

Senator O'NEILL: Can I just ask the question I just asked APRA with regard to the evidence from Dr McGovern that we received this morning. I am not sure, gentlemen, if you were there in attendance or not.

CHAIR: That was difficult to hear.

Mr Gregson : Earlier this morning? No—we have only been here recently.

Senator O'NEILL: Not to verbal Dr McGovern, but, in essence, he indicated that, in Australia, banking is an oligopoly, and that there are few suppliers—that it is not genuinely a competitive market—and he talked about antitrust and credible threat positions. We have heard evidence in the course of this inquiry that people on that transition back from tier 2 to tier 1 takeovers found that they simply could not get anybody else to take over their loan. Do you have any comment about any of those matters I have just raised there?

Mr Gregson : Reference to antitrust, as you probably know, is a general reference to competition laws internationally. They stretch from prohibitions on anticompetitive conduct, cartels, through to the merger provisions, which Mr Jones will come to shortly. On the former ones, we continue to have a remit and to look to see whether there is anticompetitive conduct between banks or in the way they behave, but I am not sure they are going to be entirely relevant to the matters that Dr McGovern may have been referring to. Mr Jones may comment further. The concept of oligopolies, while it is an economic principle we are all familiar with, does not have a foundation in competition or antitrust law per se. There is a spectrum, obviously, in which markets operate. Certainly there is a degree of concentration in financial markets and the banking sector that we take into account when we consider mergers and acquisitions. Mr Jones might expand further on our consideration.

Mr Jones : It is correct to say that oligopoly is not part of the test, but the test is a competition test, and so we look at who the competitors are in the market currently and how that will change as a result of the merger and the effect on competition.

Senator O'NEILL: If you only take one player out the small market in Australia, it does not seem very much, but the evidence that we have heard of people unable to get payouts from the banks and unable to go to another bank and get a hearing raises great concern for me, as a member of this committee, about your assessment of choices that are left to customers after mergers. Have you been following the evidence that we have received with some intensity or is this beyond your consideration at this point in time?

Mr Gregson : I would note that, while we keep a broader interest in what is happening in marketplaces, to assist with future considerations or potential conduct that we should look at under the competition laws, our merger-and-acquisition consideration is necessarily a transaction based consideration, so, when matters are raised with us in that context, we have further intensity in our look at that time and we would reach out to the material that has been provided in forums such as these. I should note that the test that Mr Jones's area needs to consider is not whether there is a lessening of competition but whether there is a substantial lessening of competition. That is the statutory test that we must apply. While I understand we hear anecdotes about impacts—in fact more than anecdotes; they are obviously real situations; I am not diminishing those—about individual consumers having some difficulty with loans in the situations you refer to, overall the assessment we have made in matters that we do not object to is that there is still a level of competition in the marketplace. It has been a few years since our last consideration of a merger in the banking sector.

Mr Jones : That is right. There were a couple of bank mergers considered in around 2008, and I do not think there have been significant ones since. But I imagine there will be questions about the Commonwealth Bank and Bankwest, because I know that has been a focus of this inquiry. In that case, the same test applied, which was: would the transaction substantially lessen competition as compared to what would be likely to happen without the transaction? And of course the circumstances there were particularly unusual.

Senator O'NEILL: If there were another bank acquisition to occur in the near future, has anything changed, as a result of what you have seen and the reports in the market, to protect bank customers from the kind of situation that arose with Bankwest? While that might be on the edge of your remit, have you had discussions with ASIC about the matters that are at the heart of this inquiry?

Mr Jones : In terms of the question of whether anything has changed since 2008, I think there will have been changes, and there have been changes, in competition in the banking sector since that time, and, if any banking merger were proposed to the ACCC, we would certainly take that into account. We said publicly at the time of that 2008 Bankwest decision that, if different circumstances were to apply, it is very likely the ACCC would have made a different decision. There were considerations about the ability of Bankwest to continue to compete that would be unlikely to apply at this stage to a proposed merger, and the ACCC would be, I suspect, looking particularly closely at any banking merger.

Mr Gregson : Senator, the second part of your question was whether we have had discussions with ASIC about some of the matters arising in this inquiry. If you are referring to the question of the constructive defaults, I am not aware of us having any discussions. As I said, they are not really within the remit of the ACCC. Matters to do with the conduct of banks are really matters for ASIC in that regard.

Senator O'NEILL: Matters of financial services are shifting into ASIC. I understand they were with the ACCC at one point in time.

Mr Gregson : That is exactly right. Certainly prior to the Wallis inquiry, which pretty much came into effect in 1999, the ACCC had responsibility for consumer protection in the financial services sector, but that is some years ago now.

Senator O'NEILL: Was there a rationale at the time for that move to shift into ASIC that we should be aware of?

Mr Gregson : There certainly was. Those matters were considered, as I said, within what is referred to as the Wallis inquiry. They went through the usual list of considerations of the benefits and detriments of specialist versus generalist regulators.

CHAIR: Senator O'Neill, I am going to shift to Mr Ruddock now, so one last question, please.

Senator O'NEILL: In light of that, given the current situation—where it seems that there is a wide gulf and very little service for people between ASIC and the ACCC—people who are coming to our inquiry, I would argue, are looking for somewhere to have their issues ventilated and some response. What discussions have you had about the gap between what the ACCC and ASIC seem to be able to do for this particular group of people?

Mr Gregson : There should be no gap. The laws that we administer across the economy are effectively the same laws that ASIC can administer with respect to financial services. That was the intent of the reforms in 1999, and in practice we see that. There are occasionally matters that involve definitional issues as to where they sit, and we have a pretty good practice of working those out with ASIC, including the use of delegations to assist where necessary.

Mr RUDDOCK: I should first declare, as you probably know, an interest in that my daughter has worked with the ACCC. She has not spoken to me about anything that I am likely to raise with you; she is probably glad of that.

I then move to your role in terms of competition, which brought you to look at this Bankwest matter. Were you consulted by other government bodies or ministers in relation to the acquisition of Bankwest?

Mr Jones : The ACCC did consult other government bodies, including at least the Reserve Bank and APRA as far as I am aware.

Mr RUDDOCK: Did that consultation lead to the offering of advice?

Mr Jones : Yes, it led to the offering of advice or submissions—information about what would be likely to happen if the merger did proceed and if it did not proceed.

Mr RUDDOCK: I gather that you, in your public competition assessment, examine national market share for deposits, term deposits, home loans, personal loans and credit cards.

Mr Jones : Yes, that is correct. Each of those markets is dealt with in the public competition assessment.

Mr RUDDOCK: Did you consider what Bankwest's market share might be and whether it was reasonable or otherwise?

Mr Jones : The market shares were certainly considered. The question is not really whether the market share is reasonable or not; the question we are looking at is whether the merger would substantially lessen competition. So how big the change in market concentration is is certainly a relevant consideration in answering that question.

Mr RUDDOCK: And the potential vulnerabilities of loans?

Mr Jones : As far as I am aware, the potential vulnerabilities of loans—

Mr RUDDOCK: Risk factors?

Mr Jones : As far as I am aware, that was not relevant to the competition assessment. That would go to, I guess, areas outside of a competition test.

Mr RUDDOCK: I see. Did you have any understanding of the level of impaired loans in the Bankwest commercial loan book when you conducted that assessment?

Mr Jones : As far as I am aware, that is not a subject that was material to the assessment, and I am not aware of it having been raised. A much more important issue at that time was the standing of the parent company of Bankwest and its financial difficulties.

Mr RUDDOCK: Did you consider the potential impact on consumers of the Bankwest price adjustment mechanism to leave a significant number of troubled loans without resolution and proper determination?

Mr Jones : I am not aware of that having been specifically considered. The test that is applied in looking at a merger is whether the merger is likely to substantially lessen competition. I am not aware of the policy that you refer to having been considered as part of that consideration, or having been brought to the attention of the ACCC at that time.

Mr RUDDOCK: In relation to the takeover, was the ACCC aware of who first proposed the Commonwealth Bank acquisition? Was it government or the bank?

Mr Jones : To the best of my understanding, it was first proposed by the bank.

Mr RUDDOCK: Were you involved in any consideration or discussion with the parties to the transaction, or Treasury, APRA, ASIC, regarding the acquisition?

Mr Jones : The ACCC did. I personally was not, but the ACCC did have discussions with Treasury and APRA.

Mr RUDDOCK: I just want to go to this policy of ambitious growth which you may have heard referred to earlier. What was your awareness of the lending practices prior to 2008? If the bank was observed to be pursuing a wildly ambitious growth strategy, was that of concern to you? If it was not then, would it be now in relation to any other organisation?

Mr Jones : In looking at the merger, we became aware that Bankwest had been competing vigorously and had been looking to expand its market share—so by opening outlets in the eastern states and by offering low rates on some of its products, or high rates, as the case may be, to attract more customers, and doing things like changing its opening hours to be more attractive to customers. But, as far as I am aware, we did not receive any information that it was lending inappropriately.

Mr RUDDOCK: Given that we may have to make recommendations in order to protect customers, can I just ask you this question: if another bank acquisition was to occur in the near future, has anything changed to protect customers from the kind of situation we saw with Bankwest?

Mr Jones : If you are referring to the mergers test, I do not think the merger—

Mr RUDDOCK: Not the merger test; I am looking at the outcomes that led to, particularly, action against borrowers.

Mr Gregson : At their heart, the merger provisions do look to protect consumers through providing a restraint on anti-competitive mergers. Beyond that, that is probably not the area to deal with the matter you have talked about. To the extent that there is improper conduct not caught by the regulation of ASIC or APRA, they are not matters that we have a familiarity with, or can assist you with. They would be the areas, in my view, to look at if you felt there was a gap.

Mr RUDDOCK: If you had to deal with these issues now and provide the regulatory supervision necessary to protect consumers—i.e. borrowers—and if it was to be taken away from ASIC and returned to your organisation, what would that involve? Would you be able to absorb it within your existing structures, or would we have to transfer resources or find new resources?

Mr Gregson : From a legislative perspective, the changes would be as they were on the way in—that is, we refer to a carve-out of financial services from the Competition and Consumer Act—now the Australia Consumer Law—to the ASIC Act. That would be a relatively straightforward return. I think many of the synergies that went with that transfer would be the difficult matters to deal with. Now, there are many regulatory responsibilities of ASIC that relate to financial services, and they have significant synergies in the way they operate—for example, the credit codes, et cetera, now with that agency. I think it would be a significant exercise to deal with an unwinding of those changes 1999.

Mr RUDDOCK: Thank you.

Senator WILLIAMS: Mr Gregson, were there any other banks looking at purchasing Bankwest besides the Commonwealth Bank? Was the Bank of Queensland interested in it, do you know?

Mr Gregson : Of course, we deal with the transaction that is put to us, but it is often relevant for us to know those matters. I will let Mr Jones answer that.

Mr Jones : We certainly looked into that, and there was no other bank that was seeking to purchase Bankwest, as far as I know—and I know that that question was put to other parties as well.

Senator WILLIAMS: Thanks.

CHAIR: Gentlemen, I want to ask about your definition of anticompetitive behaviour. We have had evidence that a number of lenders have chosen to not provide their customers with the documentation they need in order to leave the lender. So customers may have given all of their business documents to the bank as part of having their affairs managed, but, when they have indicated they wish to seek an alternative source of finance, the bank has refused to return the documents or refused to provide them with a payout figure so that they can finalise their affairs. In some cases, it has been put to us, there has been a split between the loan and the security of the mortgage such that, at any given time, there is no natural break point for that customer to be able to move to a different provider. Would any of that fall into the category of anticompetitive behaviour?

Mr Gregson : The prohibitions on anticompetitive behaviour are a bit more specific than those I gave in my introduction. There are various provisions. At their broadest, they prohibit agreements that substantially lessen competition, but they also prohibit the misuse of market power. Where there are practices specifically designed to prevent switching or prevent sufficient information being provided to allow switching and, therefore, enhanced competition, they may be matters that we would be able to consider. It would not be on a case-by-case basis; it would be more if it were a systemic practice that we would be able to look at.

There is a reason why the ACCC has both competition and consumer protection. You could also consider individual elements as to whether they are unconscionable—although, with the carve-out of financial services, they would be matters for ASIC in this instance. But, certainly, behaviour about withholding information that would otherwise be reasonable to provide to assist a customer would again be something relevant to take into account in unconscionability.

CHAIR: Okay. Thank you for attending today's hearing and providing evidence. Could you provide any information you have been asked to take on notice for the committee by 8 March. Thank you.