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Standing Committee on Economics
04/09/2020
Australia's four major banks and other financial institutions: four major banks

ELLIOTT, Mr Shayne, Chief Executive Officer, Australia and New Zealand Banking Group Ltd

HAND, Mr Mark, Group Executive, Australia Retail and Commercial Banking, Australia and New Zealand Banking Group Ltd

Evidence was taken via teleconference—

Committee met at 09:20

CHAIR ( Mr Tim Wilson ): I declare open this hearing of the House of Representatives Standing Committee on Economics for the review of the four major banks and other financial institutions. Representatives of ANZ and Commonwealth Bank will be appearing today, and representatives of the National Australia Bank and Westpac will be appearing next Friday. These hearings provide an important mechanism to hold the banks and other financial institutions to account before the parliament and the people of Australia, particularly because of the concentration of their economic capital and power. It is crucial that financial institutions are held accountable and that they are treating consumers fairly during what is a very difficult time for many Australians and their families.

Since the four major banks appeared before the committee in November 2019, the COVID-19 pandemic has had a significant impact on the Australian economy. The Australian government has introduced a range of measures to support Australians who have been affected by job losses or other economic impacts caused by shutdowns and social-distancing requirements due to COVID-19. The government has also implemented a range of support measures for the financial sector and has deferred the implementation of the royal commission recommendations in order to allow the sector to focus on supporting consumers during this difficult and challenging time. Banks have implemented support measures for customers affected by the pandemic. These differ from bank to bank and include measures such as interest rate cuts, repayment deferrals for a range of loans and credit card assistance, as well as various measures to support businesses.

The committee has been following the four major banks' response to the COVID-19 pandemic, receiving monthly updates from the four banks since April 2020 as part of an understanding between the committee and the banks about a deferral of these hearings so they can focus on their core job at a critical time. All of these updates are available on the committee's website at aph.gov.au/economics. The committee will scrutinise the banks on these measures as well as the consequences of mortgage and small and medium business loan deferrals. We are also interested in hearing where there may be opportunities for reform of responsible lending laws in light of the RBA governor's recent evidence to the committee that that is important. In addition to COVID-19, the committee will examine the four major banks' progress in the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The committee will scrutinise the banks on how they are improving their practices and rebuilding trust in the financial sector. Of course, that has come under scrutiny recently because of what's been happening at AMP and QBE. In particular the committee will question banks regarding compliance issues that have continued to come to light, such as Westpac's compliance failings in relation to its transaction-reporting system. Failures of this type have once again shaken the community's trust in financial institutions, and these hearings give the committee an opportunity to follow up on how they can be prevented in the future so that the industry can regain the community's trust.

I would like to outline a number of matters related to the conduct of today's hearing. The hearing is being held by videoconference, with members and witnesses appearing together online from across Australia. The hearing is being broadcast and can be viewed by members of the public from the parliament's website. The proof and official transcripts of proceedings will be published on the parliament's website. I remind members of the media of the need to fairly and accurately report the proceedings of the committee.

This morning we have representatives from ANZ appearing. I remind you that, although the committee does not require you to give evidence under oath, hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. I now invite you to make an opening statement.

Mr Elliott : Thank you for inviting us to appear today. This has been a year in which your communities, and our customers, have faced significant loss and uncertainty. The bushfires and the pandemic have profoundly disrupted lives and livelihoods. In particular, our thoughts are with those families who have lost loved ones, including in ANZ's home state of Victoria. While there have been challenges and distress, recent months have also seen resilience, patience and support. Communities have worked together, businesses have adapted and government policies like JobKeeper have been enormously successful.

This is also our moment to help where we can, and I want to highlight two of the ways in which we are doing this. Firstly, we are offering customers breathing room on their loans. We are deferring payments on $9.5 billion in business loans held by our commercial banking customers and $31 billion in home loans. As those deferrals finish, we believe that most will resume paying down their loans and, encouragingly, we have already seen a number of customers make some kind of repayment.

However, the reality is that some will need further help. I receive daily emails from customers telling me their stories, and I've listened to check-in calls with customers about their deferrals. Those have reinforced to me that the pandemic has impacted people in very different ways. Some, like a business owner that I listened to, have seen trade decline and will need more time before returning to full repayments. Others, like home loan customers being supported by JobKeeper, may benefit from financial counselling.

It is because people's situations differ that we will need to work with our customers on the solutions that are fair and appropriate for them. It might involve paying interest-only for a while, changing the length of their loans, consolidating their debts or even a further deferral. Of course there may sadly be cases where we need to help customers wind up their debts. Where this happens, I want to assure the committee that we will be ethical and sensitive in our actions. We stand ready to help, and I would encourage any customer of ANZ who needs further assistance to contact us.

The second way we are helping is by funding business. While the crisis has hurt many, some will come out of this stronger. Times like this offer opportunities for new markets and new ways of serving customers. It is, of course, unsurprising that demand for credit has dropped as business waits to see what the future holds. Our job is to make it as easy as possible for those small businesses that reasonably need new funding. For example, we have increased maximum interest-only periods for business to 10 years and we've pushed loan terms out to 30 years. And, to support small businesses that are growing, we have launched a new online lending tool. That will give roughly 1.5 million new and existing small business customers the ability to apply for conditional approval of a loan for up to $200,000 in just 20 minutes and access those funds in less than four days. Together with the government's second guarantee scheme, this will get capital to Australia's small-business sector to grow and employ more people. These measures build on our initiative at the start of the crisis, including the offer of pre-approved limit increases to our commercial customers with overdrafts.

But, while we are supporting small business, our expertise at ANZ and our balance sheet is weighted towards larger companies. Banking for these companies that employ millions is where ANZ can help the economy the most, and in March alone we provided $7 billion to our largest institutional customers. That's about the same as we provided in net new lending over the entire previous year.

We've been able to help in these ways because the bank is in a strong position. We've built the capital to give customers breathing room, to keep lending and to avoid potential losses. The strength of our balance sheet has also allowed us to pay a prudent dividend, because we know that many retirees and others rely on dividends and we're pleased to be able to declare one while balancing our customers' interests.

The bank is also stronger because we've learnt lessons from the royal commission. A sense of fairness and purpose is informing how we help our customers. And by being a simpler bank, without advice, without superannuation and without insurance businesses, we are better able to focus on delivering what our customers really need at this time.

If we look ahead, we remain cautiously hopeful about the economy. Even though the streets of Melbourne are empty today, there are emerging bright spots around the country, like agriculture and resources. We've also seen how quickly businesses can adapt, particularly when supported by effective policy. For example, governments have temporarily aided the electronic signing of contracts and mortgages, and these reforms are very welcome. They help keep commerce moving when we can't be together physically. Making changes like these permanent would provide a basis for the kind of innovation and growth that will aid recovery.

To finish, we recognise that supporting our customers and the economy through the coming months will be one of the most significant challenges that our industry has faced. We are, however, ready for the work ahead. Reforms to our capital and culture over recent years, together with today's government policies, have given us the right settings to absorb some of the economic shock and help provide a path to growth. Thank you and we now look forward to your questions.

CHAIR: Thank you very much, Mr Elliott. You, as a bank, do regular economic assessments of the state of the economy and where you see it going, and you've just made some reflections on that. Could you give us an outline about what you see as happening in the economy over the next 12 months?

Mr Elliott : Sure. I would just preface it by saying that this is clearly a very difficult time to make any predictions about the future, because there's the great unknown of how the progress is made on the bigger issue of public health. We understand that that's a very difficult thing to predict. And it is because of the federal government's and state governments' willingness to be responsive and act with speed that it is very difficult to understand what future policies may be. But having said all of that, our current assessment is that, while there's still much concern about the future state of the economy over the next 12 months, it is looking less bad than it did in March when we reported our half-year results. At that time, prior to really understanding the extent and the scale of government support, we were looking at an outlook where unemployment, we thought, might hit 13 per cent, for example. Yet, today, we're a little bit more optimistic. It's still bad. We think that unemployment will reach high single digits. So it is very difficult to say—

CHAIR: High single digits at this point in 12 months, or high single digit at the end of this calendar year?

Mr Elliott : In the next 12 months—in the second quarter of next year is roughly where we think the peak is.

CHAIR: Where do you expect it to be at the end of the calendar year?

Mr Elliott : I'd have to come back on what our team prediction is. I don't have that off the top of my head by month. But it's less bad. It's continuing to move around, as you can rightly imagine.

CHAIR: On the point of the royal commission, what have you done since you last appeared before this committee, in terms of implementation of the recommendations? I know you're waiting on some legislative instruments to pass the parliament, which have obviously been deprioritised in favour of measures around COVID-19, but that doesn't change the fact that there are issues around banks and bank culture, which are done regardless of legislative arrangements. That's obviously come to the fore because of AMP and QBE.

Mr Elliott : A totally fair question. If I just step back a little bit, as you know, while there were a number of recommendations, well over 70, it was only a relatively small number of those—well, a lot, but a number to those that applied to banks as opposed to the broader sector. Of those, there were about 16 in particular that related to us. Of that 16, 11 of those we could achieve on our own and we've closed those and we've made the progress where we can sit there and say that we've done what was required. Another four do need some legislative help, and one in particular around culture will be an ongoing one—exactly to your point. What we've done since then is continue to implement the recommendations of the Sedgwick review, which strengthened our accountability and consequence management framework, as per the recommendations. We've continued to make progress helping credit card customers who have persistently high debt, to offer them alternatives. We've removed fees and charges on basic accounts, particularly for vulnerable Australians, and we've made further changes around our remuneration structures, over and above what was in the Sedgwick review. Then there are some actions we've taken around the way that we behave with and treat and work with those in the agricultural sector. So, I think it's really good progress. I don't see it as a plan that says, 'Hey, we're finished.' To your point about culture, that's an ongoing work and the board has increased its oversight around the broader areas around culture—

CHAIR: The board is getting regular reports from the executive group on culture, or is there a new group?

Mr Elliott : That's a good question. The culture, if you will, and conduct—we have an ethics and ESG committee of the board, which most of the board members attend. Conduct is a fixed item on that. That's when we update the board about whistleblowing accounts, any sort of behavioural issues we're seeing, any changes we are making to policy and processes et cetera. It's a regular item there. We've also put in place some executive committees that oversee things like the implementation of the royal commission recommendation, but also other recommendations that we've seen from the APRA self-assessment that we did, for example, which are closely aligned to some of these changes.

CHAIR: You touched on credit cards and the fact that you're providing, out of the royal commission, assistance to people who face challenging debt positions as a consequence of credit cards. I'm assuming that means that you're helping them either to move over to some sort of personal loan that has a lower rate. Westpac has provided assistance to customers who are under stress as a consequence of COVID-19, particularly either unemployment or having a lower income. Has ANZ done anything to help customers who are struggling with credit card debt as a result of COVID-19?

Mr Elliott : Absolutely. We don't think that a blanket deferral approach is appropriate for customers. It may be appropriate for some but it's really not appropriate in general, because of the higher interest rates that accrue on credit card debt as opposed to home loans. It's worth noting that if you defer a home loan, the average home loan that's on deferral in Australia at the moment, the incremental interest that accrues because of the deferral is around $50 for that borrower over six months. That would not be the case on a credit card. It would be a much higher amount. We don't think that that is appropriate. But what we do think is appropriate is to take a bespoke approach. I listened to a call the other day where a young lady who was a hairdresser lost her job. She is a very responsible person. She had a credit card debt of around $2,500 and had always made the payments. As a result we were able to offer her an approach where we would freeze her card. She would move to a much lower rate of interest, and she would also get a deferral on her payments. So, we take a more bespoke approach to those, absolutely. And we've been able to offer thousands of credit card customers the appropriate kind of assistance that they need to get through.

CHAIR: Can you give us some data on notice on the number of people who have applied for assistance through your various credit card facilities, the number that have been granted and the average of benefit, for want of a better phrase, that's been provided, either through deferrals or reduced payments, so that we get some understanding about what measures you're taking?

Mr Elliott : Sure, I'm happy to do that. I would just make one comment if I may. What's been very interesting is that, as opposed to what we've seen in other parts of the world, notably the United States, and also based on our history here in Australia in previous economic crises, Australians are behaving remarkably prudently, which is a good thing. There's been much comment about the increase in savings rates, but we've also seen quite a significant increase in people paying down their credit card debt, which is absolutely the right thing to do—pay down your most expensive debt. The average balances on cards at ANZ, in total, prior to COVID—we would have had lending of about $7 billion to $7.5 billion in our credit card portfolio. That is down in the $5.5 billion at the moment. That is because—

CHAIR: A $2 billion drop in credit cards over the COVID-19 period?

Mr Elliott : Yes, and that's because people are not going out and racking up more debt on the credit card, and they are paying down. I think—

CHAIR: That's quite a significant shift?

Mr Elliott : It's a massive shift. Just to give you a sense of history, that $7.5 billion hadn't really moved much over the last 2 or 3 years, so it's a massive shift and it is a prudent and conservative action by our customers.

CHAIR: I look forward to getting that data. On the royal commission, and the issue of culture, we've seen particularly QBE and AMP—some issues we've had. The organised capital of representative bodies of industry super funds calling for non-disclosure agreements relating to sexual harassment and other matters. How many non-disclosure agreements does ANZ have at the moment?

Mr Elliott : I'm not aware that we have any, but I would need to go and—I'm happy to take that offline. I'm not aware of any. It's not a normal process for us. There will be non-disclosure agreements we have around commercial issues, but in terms of staff conduct, I'm happy to come back and provide the detail.

CHAIR: Yes, it would be good, thank you, if you could do so. Banks are obviously going to be a critical part of the economic recovery for Australia and particularly around your capacity to lend for small and medium businesses, but also for people who want mortgages and the like. How many customers have been onboarded, since the COVID-19 crisis, for SME lending?

Mr Elliott : That's a good question, and I'll defer to my colleague Mark, who looks after that business. Before I do, though, I'll just make the opening statement that we have not shied away from lending. Clearly, there is a high risk profile in the economy, and particularly for a customer who we would say is new to the bank. For people we already know well and have had a relationship with us—we know what they do and we know their character—we've been able to very, very quickly provide them with new funding. I mentioned that in my opening—the numbers are reasonably significant. I think it's fair to say, though, for somebody we don't know, who turns up to ANZ for the first time, we do have to be prudent. It will take a little bit more time to assess a company's business, their business model, their character, and the risk profile of that business. But we haven't said anywhere in our policies or processes that we will not take on new customers. We actually see it is an opportunity to do so. We've certainly done that in the home-lending space. We've seen quite a massive uplift there. But, Mark, you've probably got closer data in terms of new-to-bank customers in our SME portfolio?

Mr Hand : We do continue to take new customers in. I'll have to take on notice the number and the quantum of those. The platform that Mr Elliott referred to in his opening, which is linked to customers' accounting packages, that we've launched recently looks at a customer's most up-to-date financials, because we get a one-time access to their online accounting package. What that means is that we have financials for that customer and we can see how they've traded through recent months in the COVID environment. In any economic circumstances, there are always companies that will do well. So we will find customers that are doing well in this environment, and we'll continue to extend credit. If you have a look at the recent APRA stats, our credit growth for the business community has grown above system. It's the fastest growing of the majors, and in our small-business space our balance sheet has grown more in the last six months than it did in the previous six months. So we've put a lot of facilities and offers in the market to help our customers. But, importantly, our new online platform is aimed at both existing and new-to-bank customers.

CHAIR: You'll get me the data on how many SME customers have been onboarded. Could you add to that data on how many have been requested versus how many have been approved? I guess the question that sits at the back of that is: has your risk profile or your risk appetite changed as a consequence of the circumstances, acknowledging Mr Elliott's correct comment, which is that it is a dynamic environment at the moment and it's not totally clear how you should weight risk? Has it changed at all?

Mr Elliott : I'll answer that. In aggregate, no, we haven't changed our risk appetite. What's happened, of course, is that the nature of risk or the risk characteristics of many customers have changed—for example, because their revenues are less certain. I think what's an interesting data point is the rate of approvals. If you look at how many applications get approved at ANZ for SME lending, that rate of approval has broadly stayed the same through COVID; it's the same number as it was pre-COVID. So there's no evidence that we are approving materially fewer applications than we used to. I think it's fair to say, as I said, that we see the reductions in SME lending as much more to do with there being less demand—we are absolutely getting fewer applications in total, which I don't think is terribly surprising. But we're continuing to approve at about the same rate. You would expect, I think, that we should be more prudent and ask more questions at a time like this than in normal times. We need to understand the sustainability of people's businesses and how exposed they are.

CHAIR: How much capital did you allocate towards SME lending in the last financial year?

Mr Elliott : Mark might have some numbers here—certainly on the loan volumes. Mark?

Mr Hand : In the SME space, our balance sheet, if you like, is up around about two per cent on the previous six months. So, since COVID hit, it's about a four per cent annualised growth rate. It's about a $1.2 billion increase.

CHAIR: Just for clarity: so that means you had about $60 billion last financial year or last quarter?

Mr Hand : Roughly, at March, it would've been around $55 billion, and it's a little over $56 billion now.

CHAIR: So you've increased it, but not substantially?

Mr Hand : No, but we had been shrinking prior to that.

CHAIR: You had been shrinking prior to that?

Mr Hand : Yes.

CHAIR: Let's compare it, then, to mortgages. Obviously one of the things that's going to concern a bank, as well as Australians, is what's going to happen in terms of house prices. I've no doubt you've done some modelling. What is ANZ expecting in terms of adjustments in house prices over this financial year?

Mr Elliott : What we expect is that there will be a reduction in house prices, and that's already evident. I think it's important to say that, as you know, Australia's not one market. So there's a danger in looking at averages, but, on average, I think, from memory, our latest forecast was something around the 10 per cent number from peak to trough—somewhere between 10 and 15 per cent.

CHAIR: But that will be weighted in different markets.

Mr Elliott : Yes.

CHAIR: What are you expecting in Sydney and what are you expecting in Melbourne, as averages?

Mr Elliott : I can get you the data. We've published those data. The only reason I'm hesitant is because they keep moving, quite understandably, as the health impacts shift. From memory, it was somewhere in that 10 to 15 per cent bucket, but I'm happy to provide the state-by-state and city-by-city projections that we have, which we do with CoreLogic.

CHAIR: Have you done any modelling or assessment of what you think is going to happen in terms of rental income for investor properties?

Mr Elliott : Yes, and that's in that same report, and, again, we would say that that's going to be under pressure, and the simple—

CHAIR: So when you say 'under pressure', how much of a drop do you expect there?

Mr Elliott : I will get you the data. The simple reason is: sadly, the most impacted members of our community, as a result of this downturn, have been those that are employed in retail, tourism, hospitality et cetera. Sadly, those, generally, have tended to be lower income. They tend to be younger people. They, sadly, tend to be more female. And those are more of a renter population than they are necessarily a home-owner population. It is our view at ANZ that that will have an impact on the rental market because of people's inability to continue to pay rents at the current rate, and therefore there will be a reduction in the value of those assets.

CHAIR: To the government relations person at ANZ: I'd like that data before the end of this hearing, so perhaps you could get it and give it to Mr Elliott to present before this committee before the end of the hearing. I'm assuming there's a government relations person listening.

What is the expectation in terms of the default rate for mortgages? You outlined at the start, in your opening statement, that you were expecting some people to no longer be able to afford their mortgages. What is the expectation there, both for owner-occupiers and investors?

Mr Elliott : The reality is that we don't know. What we can do is narrow it down to a range. Prior to COVID, roughly one per cent of all people with a home loan in Australia were struggling with their repayments. The technical definition that we provide to APRA, ASIC and others is 'people who are 90 days or more behind their normal payments'. That might mean they're paying something, but not everything, and they're struggling over 90 days. That was about one per cent of all borrowers. That was prior to COVID.

At the moment, we are in a bit of an artificial situation where many of our customers have got a deferral. So we don't really know—it's not like they're not paying it back—

CHAIR: No, but you must have done some sort of stress test. I accept that rationale—that it is a difficult time to assess—but you say there is a certain percentage who have money in their offset account. Some people are obviously relying on JobKeeper, and therefore it's not totally clear what's happening with their employment. What does the stress test show?

Mr Elliott : We have about one million home loan customers. About 130,000 of them spoke to us and wanted to hear more about the deferral options. About 20 per cent of those people, when they heard what it was about, decided they didn't really want one. At the beginning of this period, a lot of people thought that you just didn't pay, that somehow you just never had to pay. So there was a misunderstanding. As of today, about 84,000 of our customers are on home loan deferrals. That is a little bit higher than eight per cent of our book. About 10 per cent of those people have actually seen their incomes go up over this period. So there does not appear to be any stress. You might say, 'Why do they have a deferral?' It's because they saw it as an insurance policy. Remember that we have had to check in, speak with or write to every single one of those customers, which we've done, to see how they are going. About 15,000 of those people are saying: 'I'm really uncertain. I've lost my job. I'm really not confident about my ability to resume payments anytime soon. I really don't know. And I'm probably going to need more help.' Those are the people we are talking to about extending that help. The rest of them are essentially saying: 'I don't know. I'm hopeful. I think it will work out.' We can run some models. It is going to be devastating for anybody, but thousands of people are going to be in a struggling position. The good news here is that we have the capacity to help those people through.

CHAIR: How many SME coronavirus loans have you written and what is their total value?

Mr Elliott : What do you mean by coronavirus loans?

CHAIR: Loans that have been issued in the SME space in the time since the coronavirus hit.

Mr Elliott : We can get you the data. Mark might have it at hand. There are a number of different things that come into it. Many of our SMEs have not had any impact from coronavirus. In fact, they are doing very well. So we continue to lend there. There are others for whom, just during the normal course of business, we have been able to pre-approve overdrafts and they utilise those to pay wages and others. There are some who took the instant asset write-off loans. There are some who went onto the SME guarantee. It's a broad—

CHAIR: Can we get the disaggregated data on those different areas—

Mr Elliott : Yes.

CHAIR: particularly in relation to the SME facilities that have been provided. Has there been any restriction on you issuing more?

Mr Elliott : No. I don't feel restrained in that. Beyond just going through our day-to-day prudent business practice, I don't think there is any restraint.

CHAIR: Has the Victorian lockdown produced a different outcome than in the rest of the country for ANZ in terms of loans for either mortgages or SMEs?

Mr Elliott : Actually, it was surprising and not as material as you might think. Despite the most recent lockdown, we haven't really seen a surge in people applying for deferrals or stress payments. There is a little bit, but it's not as material as one might imagine.

CHAIR: What about in terms of the geographies within the Victorian market?

Mr Elliott : Again, not that I'm aware of. Mark, do you have any insights as to any notable or material differences across the state?

Mr Hand : Not within the state, but, as you say, we've seen virtually no change in the SME market. We still get a handful of inquiries every day from customers looking to go onto a package. We've seen a slight increase in Victoria in the home loan space, but not in the SME space. We'd have to get down into the data to see if there are any significant issues in pockets of Melbourne.

CHAIR: I have a final question before I hand over to the deputy chair. I've submitted this to you in writing, but I'd be interested in your comments. You've no doubt reviewed the RBA governor's reflections at his most recent appearance before this committee.

Mr Elliott : Yes.

CHAIR: He made a particular point around responsible lending, and Mr Falinski will no doubt ask further questions about that today. In the context of responsible lending laws and whether they create barriers to lending, the RBA governor's reflection, if I can paraphrase him, was that it was more about guidance notes that were issued rather than the structure of the law. Do you share that view? Are there some issues around the guidance notes provided that make it more difficult for ANZ to loan?

Mr Elliott : I do broadly share the views. I don't think there's a fundamental issue with the law as it stands. No-one wants to be irresponsible. It's not in our interest either. Like everything, I think the devil is in the detail, and it always comes down to interpretations of phrases, terminology et cetera. That's where the guidance notes, particularly from ASIC and APRA, are very helpful to clarify how some of these are intended to be interpreted. The recent RG 209 from ASIC was a step forward and provided greater clarity. I want to assure the committee that ANZ does not sit here today bemoaning the responsible lending laws and in some way implying that they are restricting our ability to go about doing our job well and prudently in supporting customers. Of course, there are always going to be technical issues that we need to work through, and we work through those with the regulators appropriately, but I don't see it as a barrier to us supporting the economy, in terms of what this committee would be interested in, and making sure that we're out there and able to lend to the right segments of the economy.

CHAIR: Alright. I will hand over to the deputy chair for 25 minutes.

Dr LEIGH: At the outset, I should say that I was disappointed, Mr Elliott, that our hearings were delayed by the chair for three months. I think it would have been appropriate for us to hear from the major bank CEOs as scheduled at the beginning of June, but the government made a decision to delay those hearings. Here we are today.

I want to start with the issue of sexual harassment and gender diversity within ANZ. We know overall that about a quarter of women say they've been harassed at work, and the AMP scandals have flowed out to the loss of a number of talented senior women at AMP. Your gender diversity report last year reported that you'd missed your target for increasing the share of women in leadership. You were aiming to hit 33.1 per cent. You got to 32.5 per cent. How has the AMP scandal changed the way in which ANZ deals with sexual harassment? What are you doing to increase the share of women in leadership?

Mr Elliott : Thank you for the question. First of all, I'm actually very proud of the progress we've made in terms of diversity, and I would just like to point out a few factors. At my executive committee, which are the most senior, powerful people in the company, we have 50-50 gender diversity. At our next level, what APRA call key management personnel—the people who make the biggest decisions in the company, who go down to another level—we're at 50-50 gender diversity. Our pay gap has reduced substantially. In fact, on a like-for-like basis today—same role to same role—it's actually slightly in favour of our female employees. So we've made enormous progress when it comes to diversity. You're right: we missed our target in terms of the broader definition of leadership, but actually the 32½ is still a substantial improvement over many years, and it is a longer-term ambition. We have a range of companies where we have directors that have to represent ANZ, and, again, we've moved that from having a less than 20 per cent representation of women to now broadly 50 per cent in those important roles. So I think we've made lots of progress, but we've got more to do, and there's no doubt about that.

In terms of harassment, I think it's a very important issue, particularly around the sexual harassment allegations. We need to make sure that we have the right culture that encourages all our people to speak up. We have seen significant improvement in our speak-up scores. We surveyed and asked people, 'Do you feel you can speak up?' We've seen significant increases in that because we've worked hard at it, and we provide a lot of channels for people to do that. Obviously, we prefer them to come to me or other people in the company, but we always have independent whistleblower channels that people are able to call, and we promote those numbers very, very heavily across the company. If you feel uncomfortable, you can call these people, and those reports go to me, obviously anonymised, and to the board very regularly. It's not just data but any particular cases of note. They're investigated by an independent group. We have a group investigations team, which is largely made up of ex-investigators from the police and other professional services who investigate those cases and make recommendations. That goes up to the consequence review group I mentioned when talking about the royal commission. We then make sure appropriate action is taken, and that action has a range of outcomes.

What we do in relation to something like the news around other companies, irrespective of what it is, is we always take that as a learning opportunity. We review it. To be fair, we only have access to publicly-available information—that is, what we read in the newspaper—but nonetheless we use it as a test case. We say: 'What would happen if this was at ANZ? Are we comfortable our people can speak up? Are we comfortable we've got the right governance, the right independent voices and the ability to act appropriately?' In fact, given some recent news, we have already started another review to look at those as test cases, and that will be discussed at our next board meeting.

Dr LEIGH: If somebody accesses their superannuation early without any drop in income—as we know is true of four out of 10 of those who've availed themselves of the government's super early release—could that adversely affect their ability to get a loan with ANZ?

Mr Elliott : No, that's not to my knowledge something that we take into account. I would note that we don't run a superannuation business anymore; we sold that, so we don't provide that service. If you apply to us for a loan, it's not always evident to us, if you have money in your account, where exactly it came from. I'm not aware that we interrogate people to ask those sorts of questions. Mark, do you have any further detail on that?

Mr Hand : Yes, that's correct. We don't ask the source of those funds. What we do is seek to establish a savings history. For a deposit the equivalent of five per cent of the purchase of the property, they need to demonstrate a savings history for that five per cent. If they top that up with a gift from a parent or superannuation, that's not a factor we take into account.

Dr LEIGH: You spoke to the chair about credit card debt. ANZ offers an ANZ First for Students card, which is carrying an interest rate of 20.24 per cent. With the cash rate at 0.25 per cent, do you think it's appropriate to charge students more than 20 per cent on credit card debt?

Mr Elliott : We have a range of credit cards, and we've discussed this at this committee a number of times. The average rate on our cards that we receive across that portfolio is, from memory, more like 11 or 12 per cent. We have low-rate cards, which are single digit interest rates. We have low-fee cards for people who don't like to pay fees, and then we have the higher rate, higher service, higher added-value cards with benefits like Frequent Flyer points and other things. I think the credit cards are a very different business to most loans because of the package of benefits that come with them and the convenience. They are an unsecured credit loan. The credit losses on cards are much higher—much higher—than they would be on secured credit like a home loan. They also have a reasonable amount of fraud that has to be paid for. So we think the pricing is appropriate. I think it's a fair question, Dr Leigh. I might just ask Mark. I have to say, sadly, I'm not actually aware of the student card per se and whether that's still a product that we offer, actively. Mark, are you aware of that?

Mr Hand : It's not a product we offer actively. As you suggested, we have a range of cards, depending on the situation. A student can take a low-rate card if they think that's the right card for them.

Dr LEIGH: I'm not sure what it means to 'actively' versus passively offer credit cards. But let me move to a related issue, which is credit card insurance, often described as junk credit card insurance. In New Zealand, you've compensated customers around half a million dollars for credit card insurance. Frequently it's been pointed out that the profits on this product are very high because people simply aren't able to claim in circumstances in which they've suffered hardship. Why do you continue to offer junk credit card insurance?

Mr Elliott : We no longer offer insurance products in terms of any sort of credit insurance products. We've ceased selling those.

Dr LEIGH: So credit card insurance isn't sold at all by ANZ?

Mr Elliott : I just might ask Mark. Is there any—

Mr Hand : No. We ceased—

Mr Elliott : We stopped.

Mr Hand : Yes. In March 2018, we ceased the product.

Mr Elliott : And we have a review underway. The reason I was hesitant is that there were a range of similar types of credit insurance products, but all of them have been ceased over the last three years, including some home loan insurance products more recently. There may well be some of those that are subject to an ongoing review, in terms of any potential for remediation, if we felt that any of those sales were inappropriate et cetera. But we don't sell those products anymore.

Dr LEIGH: I'm very pleased to hear that. There is a report from the Banking Code Compliance Committee which tabulates the number of breaches per billion dollars of household deposits. In that report, at page 8, chart 1 shows the number of breaches by each of the four major banks, but they're only identified as 'major bank 1', 'major bank 2', 'major bank 3' and 'major bank 4'. Which one are you?

Mr Elliott : From looking at the data, I believe we are bank No. 3.

Dr LEIGH: That is the third-worst of the majors. What are you doing to reduce your number of breaches next time such a report is prepared?

Mr Elliott : First of all, nobody takes any pride in any breach. But I would just point out a few factors. I think this is an early stage development, and we welcome it—having the report. I think it's fair to say that, because it's early stage, there is not a sufficient level of consistency and clarity of reporting across the banks—not just the majors, but including others—and I think the banking code people would acknowledge that. There has been an increase, partly because there have been new clauses put into the code. So we're now required to report breaches on things that we weren't in the past. I think the good news is that we take it far, far more seriously than we have in the past and we're really getting into the right place. Finally, while there's been a significant impact on a number of customers, from a financial perspective, the average financial impact of those code breaches is $15. I'm not diminishing that. I'm not saying that that in any way excuses it. But I think it's important to put that into some form of perspective.

Dr LEIGH: Is that the mean or the median?

Mr Elliott : That's just the raw average. On your question about what we are doing about it, this has become far more prevalent—in fact, we had a meeting, I think, two weeks ago, virtually, over video, with the compliance committee, just making sure that we really are adopting best practice in terms of not just reporting things but actually stopping them from happening in the first place. I'm confident that, over time, we'll see a significant reduction in our breaches.

Dr LEIGH: There's around $3 billion in remediation that Australia's banks have yet to pay people. That's $3 billion sitting on the balance sheets of banks rather than being in the pockets of households as they go through the worst downturn since the Great Depression. How much money does ANZ expect to remediate to customers; and what are you doing to make sure that you pay it out more quickly—rather than engaging consultants to find ways of paying it out more slowly?

Mr Elliott : Before I answer that, I just want to make a correction to my previous statement. For clarity, we are 'major bank 3' in chart 1, but in the table we're actually 'major bank 4'. The BCCC have actually apologised for the confusion from not maintaining consistent coding. So we're No. 3 in the chart and we're No. 4 in the table.

Dr LEIGH: Thank you.

Mr Elliott : First, can I just say that we have no interest in slowing down payments—none whatsoever. It's not in our interest to make those payments slower. We get no benefit. In fact, it comes at a significant cost to us. We have over a thousand people at ANZ working on remediation to get our customers' money back to them as quickly as possible. We've already taken the charge for that; our shareholders have already taken the accounting hit and made a reserve for that. So we've already taken the pain. It's in our interests to get it behind us. So there is nobody who is more interested in getting that finished than me and my team. We do not have 'rafts of consultants' working on it. At the last look, I think we may have 10 individuals and, by the end of September, that will be reduced further. So we are not employing large numbers of consultants today. And we're certainly not, in any way, doing that to slow it down; we're doing that to speed it up.

The reality of remediation is that it's complicated, and the reason it's complicated is you are going back through an individual's account over perhaps five, seven or 10 years. You have to go back and get all the data. Ten years doesn't sound like a long time, but we didn't have the same systems and data aggregation tools. We have to re-create that person's account and then run through that entire 10-year history and re-create it as if the right levels of fees, the right charges, or whatever it might be, applied. That has to be done literally name by name. So—sadly; we're not proud of it—we're having to remediate millions of customers and we're getting it done as quickly as we can. We've really made big progress. We invested heavily early on to make sure we had the right tools to do it properly, because the last thing we want—and we saw this at the royal commission: if banks act quickly and don't do things properly, they can end up in a mess. So we've been trying to make sure we don't have to re-remediate these things. I think we've made really good progress, and you can see that in the fact that the amount of money we've been getting back to customers more recently is starting to increase at sort of a geometric rate, and that will continue.

Dr LEIGH: An article a month ago reported that normal waiting times for getting home loan approvals had blown out from a few days to eight weeks at ANZ. That seems like it could cause significant hardship or angst to households, given the current economic circumstances. What are you doing to reduce those approval times?

Mr Elliott : They've already reduced. In fact, we have a plan—a work in progress—to get those approval times down to a handful of days and we've already made significant advances. I'll ask Mark to comment on that in a minute, and he can give you the latest data. So it's much, much lower than that today.

I would just comment on the terms used about the potential for harm. I'm not excusing it, but the reality is that the vast bulk of those applications are refinancing. These are not people needing the loan to move house or buy their first home. These are people who have already got a mortgage with somebody else and who decided to come and join ANZ for the first time—and that's a good thing from our perspective. What happened was that, early on in COVID, we came out with an incredibly aggressive, sharp, competitive price: a fixed rate loan of 2.19 per cent. It just seemed to be the right product for the time. We got swamped, with volumes we've never seen before—up to three times or four times our normal daily application rates.

What we had misread was that a number of Australian families were sitting at home, worried about the future of COVID—this was early on, in March—and looking to get a better deal on their home loans, and they were attracted to ANZ. We just weren't prepared for the volume, and that's why they blew out. But we got on top of it. We hired hundreds of people to help in these assessments. We reoriented many of our staff to help—to get in behind that. We worked overtime. We had our colleagues doing everything they could to get that backlog down, and, as of today, we have removed the backlog, and we're back down to a more business-as-usual situation. Mark, do you want to very quickly give Dr Leigh the latest approval time status?

Mr Hand : Yes, sure. I know it was an industry phenomena; it wasn't just us that were impacted. There was significant activity by customers seeking better deals to try and get some certainty over their cash flow in the coming 12 months or so in particular. If you submit a deal with us today, there is a 10-day turn-around time. That stacks up very well in the market. We've still got work underway to bring that down further, and we're targeting to get back to our preferred operating model of around two to three days before the end of September.

Dr LEIGH: Mr Hand, you were quoted in the Financial Review at the start of June as saying:

For some business owners, the smartest thing for them to do is to wind it up now, and walk away with some equity.

Are you concerned that some small businesses are hanging on too long, and what to do you anticipate in terms of a spike in insolvencies when the laws snap back to normal at the end of September?

Mr Hand : It's probably too early to say with businesses still finding their feet coming out of some form of lockdown in much of Australia and obviously still being in lockdown in Victoria. Our concern is that it is very easy for a customer to continue to dig a deeper and deeper hole because they believe things will return to normal. But we've seen, even in our own business, some fundamental shifts in behaviour in our customers' appetite for digital solutions and their willingness to buy online where they may not have had that before and cash usage down by 25 to 30 per cent. These changes in customer behaviour that impact us are also impacting a lot of other industries and a lot of our customers. So I have no doubt that, having worked through the 1992 recession and seen this kind of thing play out, there are customers who will believe—because a lot of small business customers are entrepreneurial and optimistic by nature—that they can trade out of this. My message is to make sure they have a very realistic view of the future—what's changed and how it's going to impact them. They should speak to people like their accountant to understand the viability of their business going forward, and they should consider that they may need to do something different going forward. In terms of spikes in insolvency, it is too early to tell. We have not yet seen a spike in our flows into what we call lending services—the division of the bank that helps manage customers that are in financial difficulty—that is out of the normal, so it's too early to tell, I think.

Dr LEIGH: Mr Elliott, I want to ask you about remuneration at ANZ. What does a starting teller began at?

Mr Elliott : Our lowest-paid branch staff, which I think would be in that category, at the lowest end of all of our staff in Australia are on about $52,500 on a full-time equivalent basis. The reason I say 'full-time equivalent' is that many of those people start on a part-time basis.

Dr LEIGH: What was your remuneration package last year?

Mr Elliott : My fixed remuneration—my base salary—is $2.5 million.

Dr LEIGH: When we include superannuation, shares and options, what does it come to?

Mr Elliott : My actual received remuneration last year, from memory, was $4 million.

Dr LEIGH: Does it strike you as appropriate that your remuneration is something in the order of 80 times that of somebody who starts at ANZ?

Mr Elliott : I can understand why that's something that people look at. I think there's obviously a lot to consider when making those sorts of comparisons. All I can say is that I don't determine my own pay. That is determined by the board, and it's subject, every year, to our shareholders' approval. As you know, in Australia, shareholders have a right—if 25 per cent of them don't agree with the remuneration packages, they get the opportunity to vote that down.

Dr LEIGH: But does it feel fair to you?

Mr Elliott : Again, I understand the concept that it looks like an unfair balance there, but, as I said, my own pay is not something that I determine. Clearly, the board looks at it, and they look at relativities and what's fair for somebody leading a bank or a company of this scale versus others. What we try to make sure is that our people are paid well and fairly for the work they do and that they are paid at market or perhaps a little bit better. I think it's also important to say that it's not just about the money—I know that's easy for me to say, because I earn a lot—but really about our employee value proposition. We've got terrific people at the bank who stay with us for long periods of time because they enjoy the financial benefits and also the non-financial benefits that we provide.

Dr LEIGH: But for most of the time since ANZ was founded in 1835, the ratio of pay between the CEO and the lowest-paid worker was much less than what it is now. Does it trouble you that that gap has grown so wide?

Mr Elliott : I think we'd have to go and look at the data. I don't have data about that at my fingertips. I understand why people are concerned about that. With respect, I don't think that's an issue particularly around ANZ. What we do know is that, in my time at ANZ—and I'm not talking about just the CEO—the relativity between the most senior people and the most junior people has reduced. My pay—and, again, I acknowledge that it's a lot of money—is substantially less than my predecessor's was. Everybody that has joined my team, which are the most senior people—and we've had significant turnovers; we've built a new team—have come in at less pay than their predecessors. In fact, if you look at the total cost of senior management over time, it's actually been on a downward trend. I'm sure there would be many who would prefer it came down faster. Again, what a fair and reasonable compensation for management is is an issue for the board and for our shareholders to determine.

Dr LEIGH: I've got a large number of other questions, but my time is at an end. So let me hand back to the chair.

CHAIR: Thank you, Deputy Chair. Just out of curiosity, before I hand to Mr Falinski, how many years have you worked at the bank, Mr Elliott?

Mr Elliott : I joined in June 2009.

CHAIR: How long in terms of the banking sector?

Mr Elliott : Thirty-something years.

CHAIR: So you worked in the banking sector for 30-something years?

Mr Elliott : Yes.

CHAIR: What's the average age of a bank teller?

Mr Elliott : At a junior level, they're literally in their late 20s. That would be entry level, generally.

CHAIR: Late 20s?

Mr Elliott : Even younger. The reality is that one of the great things about banks is—and we still do it—a lot of people who come to the branches are actually university students. They work there one day a week or 12 hours a week while they're at uni. They're 21 or 22, and it's great way for them to earn some money while they're studying, and many of them stay on and go on to other things. But—

CHAIR: I take it there's a, shall we say, experience difference, knowledge difference and responsibility difference between the CEO and a bank teller.

Mr Elliott : Yes. I think we could assume that that's the case.

CHAIR: I thought so. Mr Falinski, I'm in a generous mood—15 minutes.

Mr FALINSKI: You will come to regret that, Chair! Mr Elliott, how are you today?

Mr Elliott : I'm well, thank you.

Mr FALINSKI: That's good. By the way, have you got any data demonstrating that CEOs know more than bank tellers?

Mr Elliott : It's a good question! I tell you what, all things aside, our front line have skills that I don't. I will acknowledge that. They have to put up with all sorts of things in branches like customer behaviour, and I applaud them and thank them for it every day. To be honest, they are our front line, and they do an enormously good job for our customers and for the bank.

Mr FALINSKI: I actually do appreciate you making that point, so thank you very much. I was wondering, given we are in somewhat unusual times, do any of your framework models rely on any previous events or are you currently flying by the seat of your pants?

Mr Elliott : No, we're not flying by the seat of our pants. Models are an appropriate thing. Let me go back to first principles. We have a very large, complex organisation. Our balance sheet is around $900 billion. It's incredibly leveraged. Our capital base is somewhere in the $50 billion to $60 billion range, so we're much more leveraged than a normal company. We need, to some extent, to be able to model, to stress test our organisation to know, if a bunch of things happen, what's our ability to absorb pain, if you will. The best way we can do that, because we have eight million customers, is to run models. Inherently, those models have assumptions built into them. They assume things about riskiness, they assume things about outcomes et cetera. So they're very, very powerful. In my life, in my 30 years in banking, those models have become far more sophisticated than they ever used to be. These are not just a spreadsheet; these are highly complex. In many ways, they're using some of the most up-to-date technology or artificial intelligence and other bits and pieces, but they're a model, and the model's only as good as its core assumptions. I think what really works well is the combination of both. Yes, we should run the models—and APRA to a great extent approve and look at those models and suggest adjustments—and then we have to add judgement. It's for the board and the executives and our risk people to add judgement and testing to that model to say: 'Does that make sense? Can we really pull it apart and say, "Yes, look, this hangs together, and I can see sense in these outcomes?"' So a lot of science and a little bit of art needs to be applied. Then we have to add judgement. It's for the board and the executives and our risk people to add judgement and testing to that model to say, 'Does that make sense? Can we really pull it apart and say, "Yes, look, this hangs together, and I can see sense in these outcomes?"' So a lot of science and a little bit of art needs to be applied.

Mr FALINSKI: I've read Ray Dalio's book Principles. Essentially, he built his models and then went back and looked at past events to see whether they would have predicted the outcomes of those events. I assume your models and the assumptions underlying them are based on his historical data.

Mr Elliott : Both. We run our models based on the future as we see it and on some assumptions. You're quite right; we run back tests. We run things like: What if the Great Depression happened? What if the GFC happened again? What if the '92 recession happened? So we do run scenario analysis. We also run scenarios we make up, frankly, sometimes without risk guidance. We say: 'What if house prices fell 30 per cent? What if unemployment hit 20 per cent?' We do a range of testing to make sure that our capital levels, our liquidity levels, our provisions are appropriate.

Mr FALINSKI: Do you believe this to be a black swan event or do you have a scenario that you've tested that took account of a global pandemic?

Mr Elliott : I don't think it is a black swan event in the technical terms of a black swan. The reality is that in our industry, in banking—and, again, I'm putting a global lens on this, and Australia's been remarkably fortunate and well managed to avoid much of this over time—financial crises come to our sector every seven to 10 years with remarkable regularity. You can think back to the GFC, the Asian financial crisis, the internet bubble, the '92 recession and the '87 sharemarket crash. While the causes look different and might appear like a black swan, the fundamentals, in many cases, are the same: people lose their jobs, people lose their income, people are unable to pay their debts et cetera. I don't want to be dismissive, and this is very unusual, but, with some of the fundamentals, it is appropriate to use previous history to apply to this.

Mr FALINSKI: I've got to say, that is an extraordinarily interesting insight. Is it the view of ANZ per se that, what we're going through at the moment, we've been through this before? Is that kind of what you're saying, that the actors might be different, but the play is the same?

Mr Elliott : Yes, and I don’t mean to be dismissive. I'm talking from a bank's perspective. Obviously, the community impact is very different, but, from a bank's perspective, we have a bunch of customers who, through no fault of their own in most cases, have lost income and are now sitting there. We need to work that through with them. So what we been able to do—Mark, my colleague, is a good example; he's been at the bank for over 30 years—is draw on people in the bank who were here in '92, '99 and in the GFC. We can say: 'Hey, forget the models; what actually happens? What do customers do? What's their behaviour change at a time like this?'

So I think there are lots of similarities. I don't think that you'd want to push it too hard, because it is different. One of the big differences this time is that it is far less discriminating. What I mean by that is that this virus is non-discriminatory. It has impacted, essentially—with some exceptions—right across the country, right across segments, right across sociodemographic levels as opposed to what we might have seen in, say, the GFC, which was a little bit more narrowly focused. So that's one difference. The other one here, of course, is that you've got this almost random player—the virus—and it is so difficult to predict its impact on the future. The governments in Australia in particular but also in many parts of the world have to be applauded. The speed at which governments responded here is much faster than we've ever seen before. It is much faster than in the GFC and much faster than in '92.

Mr FALINSKI: And you think that that speed has been helpful in terms of economic outcomes?

Mr Elliott : Enormously helpful.

Mr FALINSKI: Okay. One of my concerns is that in the great recession of the early 1990s a particular bank had extended itself quite a long way on commercial property on the underlying assumption that commercial property never went down and that, if it when down, it would bounce back shortly after. One of my concerns in this particular set of circumstances we're facing at the moment is that banks are heavily extended into the residential property market and that one of the underlying assumptions is that you may see price decreases for a short period of time but they always come back. Is it your evidence today that, while the actors are different, the plot is the same: that there may be a decline in home prices but they will stabilise and return to normal growth?

Mr Elliott : There's a lot in your question there.

Mr FALINSKI: Sorry.

Mr Elliott : No, it's good. It goes to the issue, which is that this is complex and there are a lot of moving parts here. I want to say from the beginning that we never assess a home loan or make a loan on the basis of the value of the home loan and the potential capital gain. That is not what we do. We always assess a loan on the ability of somebody who is borrowing money. We want to make sure that they can responsibly and reasonably afford to pay that money back over an extended period of time. The security of the home, in banker language, is a second way out. It's not our business to predict the value of homes. Our business is to say this individual has a good job, they have good prospects and they're able to repay this debt in a reasonable period of time. We take comfort from the value of the home, but it's not the reason that we lend. Our view at the moment is that Australia still has good prospects as an economy. There is no reason to believe that unemployment won't reduce again or that people will not be gainfully employed. We know that Australian families are good people who pay their debts responsibly and that, if they can pay for their loans, they do. It's not a matter of what my house is worth. We see people with negative equity whose house is worth less than they borrowed, and they still pay because they're honourable people. That's what we assess as opposed to the value of a home.

The only other point I would say is that we also know that the people who have asked for deferrals—so the 84,000 people who self-identify as being a bit worried about the future—have, on average, a loan-to-value ratio of about 65 to 66 per cent. So actually their debts are lower than the value of their homes. I share the concern. Part of the burden of having been around for 30 years is that I share the concerns about commercial property. I've worked in different markets around the world and I've seen that movie many times. It is a concern. ANZ has the lowest exposure to commercial property in the market.

We also are more concerned—and I don't want to sound alarmist—about the investor property market, because of the dependency on rentals and people being able to pay rent, than about owner-occupiers. We have by far the highest allocation of our home loan books to owner-occupiers, and in total we have the smallest home loan book. So we have a more diversified portfolio partly because of the risk conservatism that's inherent in our business.

Mr FALINSKI: Do you have any emerging data in your risk models about investment property loans being more at risk or being more volatile than they have been in the past?

Mr Elliott : I'll ask Mark to make some comments, and we can try to get the data. I note that, up until now, history would tell you that, actually, investor loans were slightly less risky than those of owner-occupiers. Now, in Australia all home loans are remarkably low risk—incredibly low risk. The number of people who actually default and can't afford their home is unbelievably low. It was like two basis points—0.02 per cent—which is remarkable in itself. But history would say that, actually, investor loans are slightly less risky, and the reason is that mostly—it's not always true—people who have an investment property have multiple sources of income. They've got their job and they've got rent, so that gives them a little bit more cushion. What will be interesting through this period is how significantly rental income falls, what kind of pressure that puts on and whether people will seek to liquefy their investment properties. Mark, have you seen any data that suggests that that's already occurring?

Mr Hand : If you have a look at our total loan portfolio, you see that about 68 per cent of them are owner-occupiers. With the deferred population, it's about 73 per cent to owner-occupied, so in fact investors are less represented in our deferred population than our general mortgage book.

Mr FALINSKI: So I understand that correctly: you're saying that people who have borrowed for investment properties have not asked for deferrals as much as people who are—

Mr Hand : Yes.

Mr FALINSKI: Okay. And what would be indicative that there is less financial stress in that sector than for home—

Mr Elliott : I'm not sure that it's less stress. I think they just had more sources. They had more ability to absorb loss, because they probably have got a job. They may not be getting paid rent, but they can afford to pay the mortgage, because they can draw down on their other income—that is, their salary. So, in general, they've just got more flexibility in their financials. That's not always the case, but in general that's the theory.

Mr Hand : One more factor is that, when we do an investment loan, we shade the rental income, because you assume that at some point there will be a vacancy level, So it is a more conservative lend to start with.

Mr FALINSKI: Alright, thank you very much for that. In terms of your risk model at the moment, I've got two questions, so I'll ask them at the same time. What areas are you seeing most under stress? And you've seen the analytical properties that your model has. What areas do you think are most likely to expand coming out of the closedown and the border closures?

Mr Elliott : I don't think any of this will be a surprise to you. The areas where we're seeing the most stress are the ones which have been most impacted by any sort of closure, so they are accommodation, hospitality, retailing and tourism. Then, of course, there are the ancillary people who are the property providers for them. That's where the stress is. And it's dramatic because in many cases people have literally gone from okay to zero.

So those are the areas of concern. We're not seeing that expand beyond that sector too much. Everybody's under pressure—there's lots of pressure everywhere—but they're the spots. Again, the problem with this and trying to understand the future is that a lot of it is dependent on government policy. I don't mean to be glib, but what we've seen is that many of these customers were running perfectly well and have been shut down by government policy, which we all understand, but they've done nothing wrong. It all depends on: when are they allowed to operate again? That's where we've seen the stress.

In terms of the rebound, it will depend on government policy, but the second point is: what we're seeing is actually really strong performance in a number of sectors, particularly those exposed to servicing the new needs of customers. Those needs, unsurprisingly, are the digital needs, so it's people who are able to service people shopping from home, eating at home, working from home and all of those things. We get remarkably rich data through our credit card business, which we're able to see in real time, on how people are spending their money. We share that with the government on an anonymised basis. It shows which sectors are doing incredibly well. Again, unlike in most crises, there is dispersion. Some industries have completely tanked, like entertainment. Others are up 30 per cent or 40 per cent, based on where they were last year. We recently saw a massive surge in homewares: people buying things for the home. Some of it is was because they're working from home and they wanted new computers. Some of it was just people spending more time at home, so they're buying new furniture. So it's a very unusual impact when you look at those spending patterns. And, therefore, the impacts on customers are equally dispersed.

Mr FALINSKI: Shayne, you previously said that with the models you have about what is going to happen next you draw on people's experiences. The government has been pretty transparent. I think even the Victorian government now is talking about Christmas being more fully open. On the basis of that, where do your models show the Australian economy heading over the next 12 to 48 months?

Mr Elliott : We've never bought the V-shaped recovery argument that people have. And the reason for that is that Australia, for good reasons, is an open, liberal economy and is dependent on the reasonably free flow of goods and people. It's almost impossible to imagine that that totally free flow of goods and people will resume in the short-term, particularly with the obvious ones like tourism and students. So, without them and without immigration, it's very hard to imagine a V-shaped recovery. We imagine it will be a lot more gradual, like a grind out of the recession. We think that GDP in absolute terms—

Mr FALINSKI: Sorry to interrupt. Could you possibly predict when you think that the bottom will be?

Mr Elliott : I will get our economists to come back to you. I think the latest is that we think that the bottom, from an economic point of view, is between now and the end of the year. From the banking point of view—from when do the problems start emerging and people start finding their businesses aren't able to operate?—we think it's probably more like the middle of next year when the crisis will start to hit the banks. We think that GDP recovers, in an absolute sense, at some point in 2022.

CHAIR: You said 'GDP recovers'. Is that back to where we were pre-crisis, or is that where you're expecting a positive quarter?

Mr Elliott : That's back to where we were pre-crisis, in terms of nominal GDP numbers.

CHAIR: I have some anecdotal evidence. Rental income for an investment property that I have in Melbourne has dropped by 15 per cent, which shows how much movement there is—in answer to your question, Mr Falinski.

Dr ALY: Picking up on a line of questioning that Dr Leigh was pursuing around sexual harassment, I want to ask about the structures that you have in place. Do you have contact officers in place within your organisation at various levels who are trained to take confidential complaints and pursue investigations around allegations of sexual harassment and also other forms of harassment like bullying and discrimination within the workplace?

Mr Elliott : Yes, we do. At a simple level, in terms of the confidential approach, if people don't feel confident to raise it more publicly in the company we have two. We have a whistleblower program and we have designated whistleblower protection officers who are very senior people, including our chief risk officer, our head of audit and others, who have been trained from a legal perspective in terms of their obligations around confidentiality et cetera but also in how to deal with those complaints and maintain appropriate process. And then we have a completely independent channel, if our people prefer, which is run by one of the professional services firms. So there's no ANZ involvement, if they go that way, and those people have been appropriately trained as well.

To your point about the investigations, we have professional investigations team, which are part of our risk team. As I mentioned before, these are generally people with a police or similar background. That's what their core skill is, and they have been trained in how to be empathetic, how to maintain confidentiality and investigate those claims thoroughly, and then report to management at the appropriate level to decide the appropriate level of consequence.

Dr ALY: And are all your employees made aware of the fact that they don't need to pursue an internal process—that they can go directly to an equal opportunity commission or equal opportunity agency within each jurisdiction, should they have a complaint?

Mr Elliott : We very much promote our whistleblowing channels, as I said, which is either internally, or if they feel uncomfortable they can go externally to make a formal complaint or allegation—that's across all 33 markets in which we operate. To the specifics of your question about the equal opportunities area, I'll just have to check. I'm sure that that is the case, but I will check to make sure that we promote that appropriately.

Dr ALY: And could you also please check—and perhaps this is a question on notice—how many contact officers you have within your organisation who are fully trained to take complaints and be points of contact for complaints of various natures within your organisation, please?

Mr Elliott : Sure. I will get you that data. As I say, we also report all of that data, and not just the number of people who take the complaints but the number of complaints, the nature of the complaints, the nature of the consequences and how long they take to investigate et cetera. All of that data is made available to our board at a regular level.

Dr ALY: I just wanted to clarify one thing about superannuation that Dr Leigh raised. When somebody is applying for a home loan, is their superannuation not taken and calculated as part of their asset pool for determining how much they can take out as a loan?

Mr Elliott : No. We generally look at your ability to repay, and we absolutely assume you're not going to repay by drawing down your superannuation. We look at your income levels, your savings and those areas. I think it's also important to note that at ANZ we've never had a product that allows people to borrow or take a mortgage within their self-managed super either. So I think we're the only major bank that doesn't do that, but we've always thought that that was inappropriate.

Dr ALY: Wonderful. Thank you for clarifying that. I want to ask—and, again, this may have to be a question on notice—how many of your home loan deferrals are taking the interest-only option?

Mr Elliott : That's a good question. At the beginning of the deferral, they've all just got a deferral. Remember the deferrals started in March-April, and that was when we had the spike of requests. We check in with them all at three months and then at six months, which is about now, and those customers will decide whether they want to resume payments or take another option. So it is too early to tell; we probably won't know that until around November when we've worked through all of those customers and then decided what—or what they think—the appropriate choices for them are.

Dr ALY: So you'll have those figures around November is what you're saying?

Mr Elliott : Yes. And remember that at this point, when we check in with a customer they've essentially got a few options: (1) they can just say, 'I want to start repaying again'; (2) they can ask for a further deferral out to March, and in reasonable circumstances that might be the right thing to do; (3) they can ask for different kinds of assistance—to your question, perhaps that is moving to an interest-only facility, and we can offer that. That is, 'I can pay something but I am unable to repay the full amount; or (4) there is the more extreme sort of hardship which says, 'Look, I don't think I can pay and giving me more time is not going to solve this problem,' so we need to put them into our version of intensive care. That's when we would sit down with that customer, have a discussion about their circumstances and agree together what the best course of action is for them. There is a range of things that we can do for that customer at that time.

Dr ALY: Do you recommend one line of action over another? For example, I've read reports that other banks recommend to people that they go interest-only. Is that something that your bank is doing?

Mr Elliott : No. I know this sounds hokey, but every customer is unique and I don't think it's for us to tell our customers what the right thing is for them. There is a bit of a challenge here. I heard a customer the other day—I listened in—he was a really decent guy from up in Queensland, a builder. We were talking through the options with him and what was interesting is that he said to our contact centre person: 'Look, I don't know what to do. You do this every day, can you tell me what to do?'

The reality is that a lot of our customers do feel overwhelmed. They're not bankers and they're looking for guidance, but I don't think that the right answer is that we know best. Our customers know best. Our job is to give them reasonable options and time to consider those so they understand the ramifications of what they're doing. So I think it's really for our customers to decide. Our job is to give them full information so that they understand what their options are and they understand the implications, but it's really that they're in the best position to make that decision.

Dr ALY: Do you agree with S&P, who claim in their report that deferrals mask COVID's true impact on arrears because lenders aren't including loans under COVID-hardship arrangements in traditional arrears reporting?

Mr Elliott : I think that's a technical question. I think we've been incredibly transparent about people on deferrals. At one point, that is technically correct; but it's not a masking, because we've told everybody. We've put $31 billion of home loans for 84,000 customers in Australia on deferral. I don't think there's any attempt to hide anything et cetera.

I don't think it's fair, personally, to categorise all of those as the same as being in arrears. We know that a lot of those people are not in arrears. They continue to pay, actually. They took out the deferral as an insurance policy if things got worse. Transparency is always helpful, and I think we've been very transparent about this.

Dr ALY: If I may just clarify: your argument here is that deferrals due to COVID are very different to traditional arrears?

Mr Elliott : Yes. An arrear is that I've been unable to make my contracted payments on time. That's the definition. A deferral is different. Again, with government help and regulators we offered this to customers, essentially, on a no-cost or no-fault basis. There's no shame in taking a deferral, none whatsoever. You're not going to be judged because you took it and it's not going to impact on your credit history, which is really important. So it's a very different outcome from a traditional arrears and therefore I think it's important that we keep the two reported separately.

Dr ALY: Would it not be true to say that in areas where there have traditionally been high arrears performance—for example, Western Australia has some of the highest levels of arrears—that they're more likely to shift to undertaking the deferrals offered during the COVID period?

Mr Elliott : That's a good question. All of the banks have treated this slightly differently. We took a very what I think is appropriate but what others might say is conservative approach. If you were already in arrears or already struggling before COVID, we did not offer you that deferral. If you were already having trouble, we didn't think that the right thing to do for you was to kick the can down the road and give you a six months deferral. We should work with you and figure out what is the right approach, but we did not think that was right. So we only offered deferrals to customers who, at the time, were in good order, who had not been in arrears. Those are the people that got deferrals. Then I think that argument, with respect to S&P, has a point: if I was already struggling in January and then I got a deferral, that's sort of masking a problem. We didn't do that at ANZ.

Dr ALY: Thank you for clarifying that. I'm not sure if you're aware of the article in CHOICE that described a particular case—granted it is not with your bank—of somebody who lost their job during COVID, re-examined her home loan options, decided that she should move to the lower rate that was offered but then was told that because she was on a fixed home loan she would have to pay a breaking fee of $13,000 to go on the lower rate. Is there a breaking fee associated with people transferring home loans to take advantage of lower interest rates, particularly if they've been impacted by COVID? And, if there is, has ANZ looked at these breaking fees associated with this during the COVID period and looked at implementing some change to that as part of their COVID response?

Mr Elliott : I thank you for the question because I think it's a very good point and it's a point of increasing concern amongst customers. There are two perspectives I want to share. The first one is, to your second point first about COVID, if a customer is struggling because of COVID and is unable to pay and is really in a distressed situation and it's not about deferrals, then absolutely it is an option for us to sit down with that customer and say: 'The best thing for you to do is to restructure your loan. We'll move you from whatever arrangements you have today perhaps to a lower-rate, perhaps to an interest-only, perhaps to a longer-term et cetera.' In a restructuring like that, there would not be that fee, that breakage cost that would apply because obviously we're dealing with somebody in distress.

If it is the case that somebody in the normal course of business says, 'Look, I entered into an agreement with the bank to borrow money for three years or five years at a fixed rate'—and let's not forget the reason that they chose the fixed rate is because generally it's lower than paying the standard variable rate. They wanted to get a lower rate, and in return you lock that rate in for three years. As a result of that—this is a little bit theoretical, but it's true—we go off and borrow money for those three years at a fixed rate. We go and get deposits from another person so that we have matched funding. If that borrower then turns up halfway through and says: 'I've changed my mind; I'd like to go to a low rate,' we have to go and unwind that deposit. We can't just turn up to that depositor and say: 'Sorry, we've changed our minds. When we told you we'd pay you two per cent for six months, we changed our mind and we only want to pay you one.' We can't do that, so there's a cost associated with that. That break fee is not a fee; it is the cost associated with us having to change the funding arrangements. That's what that is, and so, in the normal course of business, if people want to break the terms of their agreement, there is a cost associated with that and it's only reasonable that people should pay that cost.

Dr ALY: What's the break fee for ANZ for someone to go from a fixed rate?

Mr Elliott : It's not a fee. It depends. Again, it basically says: 'I have to go and unwind the funding arrangements I've put in place to offer you that fixed-rate deal that you wanted. I have to go and unwind that deposit, and that comes at a cost.' At the same time, as I said, that person—I'm making the numbers up—to who I promised to pay that two per cent on the deposit will say, 'Hang on a minute, if you break my deposit I can only get one per cent, so you have to compensate me for the lost income.' So that's what that fee is. It's not a fee.

Dr ALY: Okay. Let's call it a charge to customers. So what is the charge—

Mr Elliott : It's a cost.

Dr ALY: or cost to customers if they move from a fixed to a variable rate?

Mr Elliott : As I said, it depends. Let's remember what's happening here. These are people who previously agreed to a fixed rate. When that fixed rate was low, they didn't want to have a variable rate. As rates have fallen, they've lost the benefit of falling rates and they've changed their mind and have said, 'Now I'd like the lower rate.' It's a little unfair to say, 'I want the best of both worlds.' The people who chose floating rates paid higher at first but they didn't go for fixed and have the benefit. So it's a very different product. It's not a charge. We don't make a profit out of that. That is just the cost recovery that we have. As I said, when people are in distress and it's an agreement we make with the customer, that's a very different situation.

Dr ALY: If they can prove that they are under hardship due to COVID and it's part of a COVID arrangement there is no charge for them to move—or it doesn't cost them.

Mr Elliott : It's something we consider in the totality of that customer, yes. We look at the entirety of their situation and do what's right for them.

Dr ALY: Right. Thank you.

CHAIR: We're about to take a break, but I'm just going to ask one question because it's come up contextually from two members, and that is around people accessing early release superannuation. If people access it and, say, take out $20,000 in cash—we know that super balances, as you've outlined, aren't considered in terms of access to mortgages. But, if they took the $20,000 out in cash and had it as equity towards buying a home, it would be considered as ordinary cash and would increase the chance of ANZ providing a home loan.

Mr Elliott : In broad terms, yes, it would increase the chance, but I think my colleague made the point that in order to get a home loan, irrespective of how much equity you put down and where it comes from, you must show that you, the borrower, have the ability to save on your own at least five per cent of the home loan.

CHAIR: Understood.

Mr Elliott : The difficulty for us is money is fungible. At the end of the day, we can never to the nth degree decide where money comes from, so we have to take it at face value from our costumers.

CHAIR: Thank you. We will now take a break.

Pr oceedings suspended from 11:02 to 11:13

CHAIR: We shall resume the hearing.

Mr CRAIG KELLY: Mr Elliott, you mentioned earlier that you were in the banking sector for 30-something years. Was that with the ANZ bank or with different banks?

Mr Elliott : That was with different banks. I spent about 20 years with Citibank across a number of countries. I've been at ANZ for 11 years.

Mr CRAIG KELLY: What was your first position in the banking sector?

Mr Elliott : I was a trainee at Citibank in Auckland, which meant a rotation of various roles. My first serious job, if you will, was in their finance department.

Mr CRAIG KELLY: What was your starting salary in your first job?

Mr Elliott : It was a long time ago. I believe it was $12½ thousand.

Mr CRAIG KELLY: A year?

Mr Elliott : Yes.

Mr CRAIG KELLY: Getting on to the credit card reductions that you've seen at the bank, earlier you said it was $7.5 billion down to $5.5 billion. There's $2 billion less that you're loaning on credit cards at the moment. Is that correct?

Mr Elliott : Yes.

Mr CRAIG KELLY: What interest rate would that have been at?

Mr Elliott : As I said—

Mr CRAIG KELLY: Just on an average?

Mr Elliott : The average rate, from memory, is about 11 or 12 per cent. I couldn't tell you whether the $2 billion that's been reduced would skew into higher or lower rates but 12 per cent is probably a good benchmark.

Mr CRAIG KELLY: That would come at fairly significant cost to the bank?

Mr Elliott : Yes.

Mr CRAIG KELLY: Are you replacing that lost revenue with other streams of revenue? How are you compensating for those losses? Is that enabling more funds to be loaned in other sectors? Again, if you are loaning just at the housing rate you'd have to loan multiple times of that to make up that lost income. Is that correct?

Mr Elliott : That is correct. In fact, our total lending hasn't really reduced. It's up little a bit. But there's obviously a shift within there. It's a bit little more to home loans, a little bit more to small business, a little bit more to big business, a little bit less to credit cards. But the net result of that, you are correct, would be a revenue reduction for the bank. That was evident in—not the same thing—the bank's most recent results, that revenue is absolutely under pressure in our sector.

Mr CRAIG KELLY: Where did customers get that money from? Did some of it come from the superannuation drawdown that they would have made?

Mr Elliott : We can't know. We don't know where that money comes from. I think it's part of the overall significant increase in household savings we've seen over the last six months. At the same time as repaying their debt—and Mark might correct me—we've seen about a $12 billion increase in customers' savings balances and we haven't seen a drawdown on their offset accounts. So people are being cautious and prudent. They're hoarding cash and putting it aside for a rainy day and paying down their most expensive debt. But I can't tell you where that comes from, per se.

Mr CRAIG KELLY: Anecdotally we've heard cases of people taking $20,000 out of their super and using it to pay down their credit cards. That would be a potential, but you're not sure exactly how much?

Mr Elliott : Yes, as I said, potentially that is true. I have no way of knowing.

Mr CRAIG KELLY: Do you have any idea if the other banks are seeing similar reductions in total credit card debt?

Mr Elliott : Yes, they are. In fact, APRA provides data which suggests that at the margin our reduction is probably a little bit less than others, but, yes, there's been a significant reduction across the industry.

Mr CRAIG KELLY: If someone took 20 grand out of their superannuation account and used it to pay off some of their credit card, and that credit card debt was at 12 per cent, I'd imagine they'd be unlikely to be getting a 12 per cent return on their superannuation?

Mr Elliott : As I said, we don't run a superannuation fund, so I don't know. Perhaps that's true, yes.

Mr CRAIG KELLY: Unless your superannuation account was earning 12 per cent a year, these people that drew their money out of their super account to pay off their credit card are probably in an overall better financial position?

Mr Elliott : They could be. Every circumstance is different. It's worth noting that the average balance on a credit card is substantially less than $20,000. In your hypothetical example, perhaps people use some of that money to repay their credit card.

Mr CRAIG KELLY: You were talking earlier with Dr Aly about how you calculate someone's assets, income and savings ability when they apply for a housing loan. So I'm clear on that, if I have $100,000 in a superannuation account, when I go to apply for my housing loan does that get any consideration?

Mr Elliott : No. And the reason it doesn't—we have an obligation, under responsible lending, to take reasonable steps to verify your financial situation, so we do ask about it. But it's not a source of repayment. We have to assess: 'Does Mr Kelly have the ability to repay us?' In normal circumstances, you can't access your super to repay your home loan. So, no, it's not relevant.

Mr CRAIG KELLY: Okay. I'm not criticising; I was just inquiring. So if there's a legislative change that requires people to put more of their income into superannuation, that almost by necessity means they have less ability to take out a housing loan.

Mr Elliott : All else being equal—so, assuming that it's the employee who funds the increase—that is, there's no corresponding increase in pay from their employer—all else being equal, that would be true, because people would have less disposable income; yes.

Mr CRAIG KELLY: So therefore, with the superannuation system that we have at the moment, you can say what you like about it helping people's retirement incomes, but the reality is that it makes it harder for younger people to take out a first home loan and get into the housing market.

Mr Elliott : I think there's lots in that question. But, as I said, the way that a home loan works is that it's on your ability to repay. That ability to repay is largely dependent on your uncommitted monthly income. Anything that reduces that income—taxes or other obligations—will reduce your ability to borrow. That is true.

Mr CRAIG KELLY: But there's also the deposit aspect of it as well.

Mr Elliott : Yes.

Mr CRAIG KELLY: As a government, we're actually forcing people to put money into their superannuation that could perhaps otherwise go into a deposit for their home. As I said, you can't spend the money twice, so, simply by default, the more we force people to put into superannuation, the less ability we have for them to get into their own home, firstly on the deposit side of it and secondly on the ability to make repayments.

Mr Elliott : Again, I would say that on a very simplistic basis, all else being equal, that may be true. What that doesn't account for—and I'm certainly not the right person to ask—would be at a bigger scheme level, at a system level, whether those changes would impact things like house prices themselves. So it may well be—and, again, I'm not the expert here—that be making those changes actually would reduce overall house prices and that net affordability may or may not change. I don't know. We'd have to really consider that. Because the superannuation industry also, as you know, doesn't just sit on that money in a box. It deploys that money. And so it will depend on the net effect of the economy, which I'm sure Treasury and others are well equipped to comment on.

Mr CRAIG KELLY: But for the individual, say with a credit card debt, you're saying that if the credit card averages 12 per cent, they'd be far better off paying that credit card down to zero. I don't think there are many superannuation funds giving a 12 per cent return, not over a consistent basis. So it harms people there, and it also makes it difficult on the repayment side and more difficult on the deposit rating. Moving on, are you finding any difference at the moment in state versus state situations as far as debt referrals and credit card reductions? Or is it pretty similar across all states?

Mr Elliott : It's remarkably similar. I think, again, I made comments about it. It's not a discriminating sort of impact. It's remarkably similar. There are some differences, but they're pretty difficult to see, to be perfectly honest.

Mr CRAIG KELLY: And do you think that will be the case going forward?

Mr Elliott : Not necessarily. And I think the reason we're not seeing that is that the government's, appropriate, response has been of a scale, and not really discriminating either. Deferrals have been available to, essentially, anybody who asked for one. We didn't ask where you were and how many cases were in your postcode. We just said, 'Look, if you need one, we'll give you one.' Similarly, JobKeeper has been broadly available, as have other supports. So I think the real differences will emerge once some of these support packages start to be more targeted or slowly removed et cetera. I can't tell you when that will be or what that will look like, but that's when the differences will really start to emerge.

Mr CRAIG KELLY: Are you deferring all repayments or part-repayments? How are you structuring those deferrals?

Mr Elliott : We defer everything. Hypothetically, if you had a home loan and you were supposed to pay $1,000 a month—principal and interest, or whatever—we just said, 'You don't have to pay anything for the next six months.' It was a very simple program and that's why it was effective. What did happen was that a number—not a lot—of customers, even though they asked for the deferral, continued to pay something. So they got a deferral, a waiver, for paying the $1,000 but they said, 'I'm still going to pay $200'—or $300 or $800. But it was very simple.

Mr CRAIG KELLY: But the interest was still accruing at that particular time.

Mr Elliott : Correct.

Mr CRAIG KELLY: So you're effectively loaning more money out. Is that one way of looking at it?

Mr Elliott : That is one way of looking at it, although to give a context: the average deferred home loan amount was about $371,000, and, on that, the cost of that extra loan that you're talking about—so how much more did the customer end up owing at the end of six months versus at the start, when you think about all the principal and interest owing—was about $50.

Mr CRAIG KELLY: Would the $2 billion reduction in credit card loans offset the additional amount that you've effectively loaned out through deferrals?

Mr Elliott : No.

Mr CRAIG KELLY: Which way would the balance fall?

Mr Elliott : The amount of deferrals that we've granted has almost no impact on the balance. In theory, okay, when that person was paying something, some of it was principal and they would have paid it down and it's not paid down, but it's relatively—remember most mortgages are very, very long, so over a 20- or 30-year mortgage the amount of principal you're paying in a six-month period is pretty de minimis. So, no, it wouldn't have offset it, no—nowhere near.

Mr CRAIG KELLY: So the deferrals, without wanting to downplay it—I'm sure they've been an absolute lifesaver for some people—haven't been a great significant cost to the bank?

Mr Elliott : It hasn't been a cost in that sense. I think that's fair. It hasn't been a cost at this point. There are two costs. There has been an operational cost. We've had to rally our troops to be able to go out and provide this in really, really quick time and we've had to contact all those customers continually. So we've hired hundreds of people in contact centres. We've redirected our staff to be able to do it. So it's come at a cost of that, and that's fine. That's what we do, and I'm not complaining about it. But the real cost of all of this will be at the end of all of this, and it is: how many of those people come out on the right side of it and how many people are still struggling? The banks, including ANZ, have made significant provisions for the potential future credit losses that may come when all of this unwinds.

Mr CRAIG KELLY: Looking forward, have you made any analysis of what might happen to house prices?

Mr Elliott : Yes, we have, and I think Mr Wilson asked that question. The issue is that it continues to change. In fact, we've just sent to the secretariat of this committee a short report which answers Mr Wilson's question, which has the latest forecasts in there. But, yes, we do. Broadly, we see house prices falling. From memory—and I'm sure I'll get this wrong—it was somewhere between 10 and 15 per cent, depending on the state and the city.

Mr CRAIG KELLY: If that happens, is it likely that, where people have small business loans and have leveraged their house as equity, they may be required to come up with extra equity or the amount that you loan them will decline?

Mr Elliott : I don't know that it's likely. It's possible. The SME situation on deferrals is much more complicated. But, yes, you're right to point out that many—not all but many—small businesses use their home as collateral, or their business premises or something else, to get their businesses started. There is a risk that that's the case. I will say, though, as I said before, the average loan-to-value ratio—so the average security value, if you will, for our deferrals—is much higher than people's loans. There are bound to be people where it's closer but, on average, it's not an issue that people have negative equity. We're a long way from that being a major issue.

Dr MULINO: I want to follow up on Mr Kelly's questions, with one additional scenario in relation to superannuation. If somebody's superannuation guarantee contribution increases by, say, 0.5 per cent and their pay remains the same, would their capacity to borrow be unchanged?

Mr Elliott : I just want to clarify, when you say their pay—

Dr MULINO: Their take-home after-tax pay.

Mr Elliott : If their take-home pay remains the same, it doesn't impact their ability. We assess your take-home pay—we look at your after-tax pay—and the other thing that we do is we remove any commitments that you have. The technical term is your uncommitted monthly income. That's what we look at in terms of your ability to service. You'll have other commitments within there, for example, that we would take into account. But, yes, I think I understand your question.

Dr MULINO: The question is simply that if somebody's super guarantee goes up half a per cent, and nothing else changes, their capacity to borrow is completely unchanged.

Mr Elliott : If they used to take home $1,000 and they still do, yes, nothing changes.

Dr MULINO: I just want to revisit remediation, please. I was just wondering how much has been paid out and how much is outstanding, as of your latest data?

Mr Elliott : I'll ask my colleague who is closer to this. Again, we'll talk about the bank remediation. I'm happy to add some comments on wealth, but the bank remediation is probably the one that's more important, and we've made really good progress. Mark, do you have that data at hand?

Mr Hand : The most recent data I have, which is our estimation to roughly now—towards the end of the year—is that we're over halfway through. It's around $225 million of a provision in the order of $410 million.

Dr MULINO: I was just curious as to the average length of time that those monies have been, in a sense, under dispute or potentially owed. You would have become aware of that at the royal commission—some might have been matters that you were already aware of at the royal commission. I'm just wondering what the distribution is, both in terms of the average and also the distribution of the length of time that those matters have been under consideration.

Mr Elliott : Unless Mark corrects me—I'm not sure that I have that data at hand—the reality is that it's just too long. In many cases, it takes a number of years. All I can say is that that is unacceptable, and that we've been working really hard and investing a lot. That's why we have a thousand people working on it and have invested a lot in technology to make sure that is much faster. So we're clearing out the backlog. The other thing point I would make is that we have a detect-and-prevent program in which we actively go looking through our products and processes to see where there are issues that need remediating—not just the things that came out in the royal commission, or things that have come through some sort of investigation—and to get on them as quickly as possible. But it's too slow. I'm happy to give you the data, because we do have it, but I just don't have it at hand.

Dr MULINO: It would be great to get some summary statistics. Going to your point, I acknowledge that you've got a lot of staff and resources going into this, but I'm interested in your approach. Obviously, a lot of organisations will adopt an approach when it comes to dispute resolution—it might be something along the lines of model litigant, depending on the context. In this context, I would have thought, at least in relation to some cases, you might get to the point where you say we're going to err on the side of just paying out, rather than trying to get every single dollar and cent absolutely, perfectly correct. How would you describe your overall approach to remediation?

Mr Elliott : I think that's a very good question. There are a couple of things in there to unpack a little bit. So we are a model litigant, and that is part of our processes in terms of the more complex things that go to litigation. But if you're talking about complaints, essentially, there are two types of remediations. There's the day-to-day, which is somebody comes in and says, 'I don't think I got the right frequent flyer points on something,' 'That fee you charged me, I'm unhappy about' or 'I didn't realise when I bought something what the implications were.' Those things, and we have a big complaints team, get handled to the extent on the spot and our people have the discretion to be able to fix those. In some cases, we will give people what we call a goodwill payment. It might be: 'We'll waive the fee and we'll give you $500 because we put you through undue stress.' So we encourage people to be tolerant, pay those things, move on and try to learn from them.

Dr MULINO: It's partly a quantum issue.

Mr Elliott : Yes, and, sadly, we've got too many of those, but we do that. The second is about remediation and is a bit more complicated. Remediation is actually when we have failed to meet the terms and conditions of a product or a contract that we made with a customer: we said we would charge you on this basis and we did something wrong. I don't mean to diminish it but, for example, some of our products said we would charge interest on a monthly basis and in the details it said that a month was 30 days, not actual days—or something like that. So, on that one, we actually have an obligation by law not just to roughly estimate; we must—and this is with ASIC guidance—go back and precisely calculate what that is almost to the cent. It's not quite to the cent, but we have to have a high degree of confidence that we've calculated it correctly and that takes a little bit of time, as you can imagine.

Dr MULINO: Can you make ex gratia payments along the way, resolving the dollars and cents, but have a high degree of confidence that it's above a certain amount, for example?

Mr Elliott : We've looked at that. It doesn't necessarily work because you end up with a chicken-and-egg situation. Until I've analysed everybody's accounts, they don't know what the minimum payment might be because every case is so different. It's very rare that we end up in a case and say that all customers remediated are all due $100. Some will be due $12. Some will be due—

Dr MULINO: I'm not staying standardised, but I mean in each case.

Mr Elliott : No. Can I just point out that the average remediation that we're talking about for our customers is $100. And, again, I'm not diminishing that, but they're $100. And so, sure, we could perhaps, in some cases, in your case, give you $50 now and $50 later. That makes it even more complicated and could actually stand in the way of just getting it done.

Dr MULINO: Thank you. I look forward to the data on the length of time and characteristics. I was interested in the discussion you had earlier in relation to some of the modelling challenges, and I totally agree with you that macroeconomic modelling is a combination of science and art. In a sense, you plug in a bunch of assumptions and then you need to see if the output makes sense, firstly, and secondly, what the sensitivity is to some of the assumptions. Is it fair to say that we're also living in a world where there are some discontinuities, you might say, which make it additionally challenging? For example, does a state go into lockdown or not? Or when does a vaccine arrive? And, I suspect, that's what's leading to all of your various scenarios.

Mr Elliott : Yes. You're absolutely correct. The three most important inputs in our models that history says are the ones to look at—maybe four—are in no particular order: unemployment, GDP, house prices and a distant fourth could be commercial property values. Those four things are the most impactful assumptions we make. We'll just look at the first one—unemployment. The problem is that models never really thought about something like JobKeeper. Is a person on JobKeeper unemployed?

Dr MULINO: Can I just ask a quick question on that? Is a fifth one in the current environment the level of government support?

Mr Elliott : Yes. And what I'm saying is our modelling, historically, hasn't had that fifth one. Because of the breadth and impact of government support—and it's come in so many different flavours and it's been incredibly positive from our point of view—it's very hard to model the impact of those things, I think. We don't have the time necessarily to do a really good job in terms of modelling, so it comes down to a little bit of judgement as an overlay that we would put in place.

Dr MULINO: Is it fair to say that in some of the extreme scenarios you might have a risk of higher levels of mortgage default or SME stress? Is it also fair to say that in those kinds of extreme environments there's a complementarity between you giving flexibility and deferrals in what you offer to your clients and what they're receiving from the government by way of support and that essentially your support is going to be more effective the more support is given by the government in those extreme scenarios?

Mr Elliott : Yes, that's a very accurate statement. The other thing that I would add to that, which is very different this time from the GFC or previous crises, is that we live in a world of extremely low interest rates—for all intents and purposes close to zero. That says that the time value of money is very, very low, and so time is cheaper than it used to be. Therefore, the cost of giving you one month, three months, six months or 12 months to get your position in order is much, much lower for the bank and for a customer. So we actually do get that benefit this time. If you ran a model today and said, 'What if everything were the same but interest rates were 10 per cent?' you wouldn't have that time, because that time value is so high—and this goes to Mr Kelly's previous question—that debts start accruing at an unaffordable rate, and therefore you get forced to act soon. So I think in this case—

Dr MULINO: But that also, I think, is relevant to government support, isn't it? This goes to the RBA's point, which is that low cost of money means governments should be more willing to borrow in that scenario.

Mr Elliott : Yes.

Dr MULINO: I have just a couple of quick final questions on a related theme. It's following on from some questions from the chair early on in relation to it SME borrowing and SME stress, which in a sense are possibly different sides of the same coin. As you've said, this is an unusual recession in that the variability across different sectors is probably larger than usual. There are obviously a lot of measures in place from the government to try and encourage lending to SMEs, but in a sense the demand has to be there, ultimately. I think you've said that total lending to SMEs has increased a little bit—I think a couple of percentage points, a couple of billion.

Mr Elliott : Yes.

Dr MULINO: Can you give us a sense of how that varies across sector and geography? By 'geography', I don't mean just states but even potentially within states.

Mr Elliott : Sure. I'll actually pass that to my colleague, who will be in a better position to give a sense of the sort of sectors that are more inclined to borrow and where they might be. Mark?

Mr Hand : Yes. Around 30 June, due to the instant asset write-off, we saw increased volumes taking advantage of that opportunity. Our volumes were up about 60 to 65 per cent on the same time last year, so we saw a peak around that. We've seen strength amongst customers in the industries that Shayne outlined earlier—for example, health industries, home goods, and office goods that are helping people to get set up to work from home and the like. So we've seen benefits in those sectors, and in this environment we've been able to support customers from those sectors that were seeking to expand their business. I think you'd find that the industries that we have been supporting have been intuitive: rental and holiday accommodation, cafes and restaurants. There is typically lower demand in those sectors at the moment.

Dr MULINO: I'm curious about the feedback that you're getting from SMEs that are in the sectors doing relatively well and, therefore, are more likely to want to borrow. Is there a sense of the likelihood of continuing government support for people who are unemployed or on JobKeeper? Is their sense of increasing confidence that that's going to continue going to factor into their willingness to borrow?

Mr Elliott : I'll get Mark again to give some personal flavour; he's closer to it. But in my interaction, which would be more limited than Mark's, I think that's true. Businesses need confidence, obviously, so the more they are confident that the government will be there for them—and they accept that things change. They understand that the world's changing and that the nature of support will shift from one month to the next. But the concept of knowing that there's a support and there's an overall strategy about supporting the economy is critically important—and it does give people confidence, even if they don't particularly avail themselves of that support. So, again, just because I haven't drawn down on the SME government guarantee scheme, it doesn't give me comfort to know that it's there. I think you've got to look through some of the data and the usage to say there has been a confidence given to SMEs, to know that support will come in various packages. Mark, you probably have a better insight though.

Mr Hand : We have hundreds of thousands of customers. I have conversations every day with small-business customers, but it's a small sample by nature. But we also talk to industry bodies such as COSBOA and the like. The message we seem to be hearing is that what businesses are looking for—and, remember, the disposition for your average small business is quite an optimistic entrepreneurial 'I'll be right' sort of attitude. What they are talking to us about is how we can help give them certainty, about what the path outlooks like, about what comes next.

Customers in Victoria are really keen for the road map. Customers in Victoria ask us a lot about what we have seen in other states. How quickly has a Western Australian business community or a South Australian business community—are they showing signs of recovery that would be a cause of optimism for Victoria? For us, the feedback has been, 'We need some certainty about the way forward. We're entrepreneurial and we'll reassess our businesses models, the way we focus on our customers and make a go of it.' But the confidence is down at present.

Dr MULINO: This has a yes/no answer, I think. As much as forward guidance from the Reserve Bank matters in financial markets, in a similar way, as much forward guidance as possible from the federal government on the fiscal grant would matter, or business confidence and small-business confidence and willingness to borrow.

Mr Hand : Yes.

CHAIR: We like those simplistic answers, for brevity!

Mr SIMMONDS: Thanks, Mr Elliott, and thanks for your evidence so far. One of the issues that particularly concerns me is the report of people using online banking almost as a messaging platform. These small transactions they then use to transmit vile and bullying messages, particularly around Family Court disputes. I want to understand if your bank has a handle on that problem within your service.

Mr Elliott : First, can I say, it's a really distressing trend. I wasn't aware of this until some months ago, when it was raised through the ABA, that it occurred to me it was even an option available. So I am aware of it, and I know the ABA has been working at an industry level to try and understand what we can do about it. Clearly, it's a misuse and abuse of a very sensible functionality, which allows you, when you're making payments, to get some context—when I'm paying the plumber, to explain who I am or whatever it's for—and it's really sad that people are abusing it. The difficulty here is what can be done about it? It's not an easy thing for us to manage, because I'm not sure it's appropriate that we monitor customers' communications. I don't think I'm throwing my colleague under the bus here, but, Mark, you sit on the ABA working group. Have you got any update on our approach to this particular issue?

Mr Hand : Just from our perspective, what we do do is we will block payments where the message contains swear words. That's just a computer monitoring of what goes on. There are key words that will identify and block that payment. So the customer will make that payment a different way or reprocess that payment without that type of message. We can't stop all of them, but that's one measure that we have put in place. Anything that we deem inappropriate language will be filtered out.

Mr SIMMONDS: So you can search for key words, for example, and currently you just do it for swear words. How many transactions would you block in a year where somebody has put inappropriate language in the messaging?

Mr Elliott : I'd have to come back to you on the number.

Mr SIMMONDS: That would be great. If you're searching for these keywords, do your algorithms show you customers who are using vile and inappropriate language frequently and are having their messages blocked frequently?

Mr Elliott : We could find that, yes.

Mr SIMMONDS: If you have numbers, it would be great if you could pass that on. You might be able to give a perspective from the ABA's working group as well, but, if you then identify these customers, what is your understanding of the powers you have to then, say, refer them to police, who might then investigate if it's part of a Family Court or domestic violence matter or something like that? Are you referring it to police or are you just taking your own action to block their accounts or something like that?

Mr Elliott : My understanding is that we block. It's a fair question and I'll need to take that on notice. Again, I don't mean to diminish it, but the difficulty is: sending an abusive text—I'm not clear in terms of our responsibilities to report that to the police. It's different if there is some sort of threat of violence or something else, but, again, if you permit us, I'll take that general subject on notice and we will come back to the committee with a report on what we do—

Mr SIMMONDS: That would be great. Let's just take a threat of violence, for example. If they're not swearing in the message but they're writing, 'I will kill you,' would that be picked up by your algorithm currently?

Mr Elliott : I'm not sure. It's a good question.

Mr SIMMONDS: Take it on notice for me, because I've got some other topics to cover, but, if somebody is doing something like threatening to kill someone—'I will kill you'—and it's part of an ongoing domestic violence matter, then I would like to think that that would be referred to the police. It would be good to get an understanding. If you think that those requirements aren't there for you to refer, or the police don't have the appropriate power at the moment, then we could consider what legislation we have to put in place around that.

Mr Elliott : Sure.

Mr SIMMONDS: There is another topic I want to cover in the time I have. Obviously we as a government have made changes around the insolvent trading rules and so businesses are able to continue trading. What preparations are you making for if those rules for insolvencies transition out, down the track?

Mr Elliott : We think those changes are appropriate and we think there's a logical reason to see those changes maintained for a further period of time that is more aligned with the extension of deferral periods and other government support—it should be part of that overall package. That would seem to make sense, from our perspective anyway. We do believe that there will be, sadly, a pick-up in insolvencies probably at some point in the middle of next year, as some of these packages start to be removed. What we're doing is making sure that we are resourced appropriately to deal with that. Mark mentioned before we had a team called lending services, or a collections team, that handled those cases. We've been making sure that they're already preparing, from a resourcing point of view, adding people; preparing from a cultural point of view, to make sure they're thinking through how they would deal with these people, who are always in stressed circumstances; and we'll be working with them just making sure we have the policies in place too, in terms of how we get our own policies appropriately set for what actions will be appropriate at the time. That discussion about that actually has been both at my executive team and also with our board as we prepare for that reality.

Mr SIMMONDS: I understand that you would be preparing for it. What I was trying to get a handle on was a bit more detail around what your preparations are. You're saying that those policies have been discussed at your level. What kinds of policies are you considering? What kinds of policy changes are you considering? Are you setting up teams? Are you talking about what level of bad debt you're prepared to accept? I want to know those kinds of things.

Mr Elliott : The reality is we deal with this every day. We have a team of people who deal with customers, sadly, whose businesses have failed, in particular. That happens all the time, sadly, so we have a team of very, very experienced people, and that's what they do for a living, and they're on alert. What is interesting is, at the moment, new files going into that group are at incredibly low levels because actually a lot of companies are not going into insolvency because of all the support packages; nonetheless, they are doing an assessment right now about how many people are they likely to need; where would those people come from? We are not radically looking to adjust policy process or approach or anything. As I said, we have really well thought out ways of dealing with customers in difficulty; it is just a question of scale. We are preparing to scale it up and make sure that we can do so in a sensitive, ethical but appropriate way. There is no real change in policy or saying, 'Because of COVID we are going to shift our approach on bad debts are other things.' We always try to be ethical and sensitive but now we have to do it at a little bit higher scale than we have been used for some period of time.

Mr SIMMONDS: What scale are you modelling at? How much what scale would you need to increase it by?

Mr Elliott : That's a really good question and a very sensible question. Sadly we don't know, so what we've got to do is say to our teams, 'It's literally a bit of a model that says: what if this, what if that? We're going to have to go through a bunch of scenarios to say: 'How much can we cope at this level? What if it were double or triple?' We don't know. We have the benefit of history in looking at loss rates and things over 30 years. We don't predict their future; we prepare for all eventualities and that is exactly what we're doing here as well.

Mr SIMMONDS: In saying you're not looking at any policy changes, are you going to deal with COVID-induced insolvencies exactly as you would any other insolvency that would have come up in previous years?

Mr Elliott : More or less, yes. It is a really interesting question because it is an ethical question. If my business failed because of COVID, should I be treated differently than the person next door whose business failed for some other reason? I am not sure. And is that treatment worse or different? I'm not sure. I think all customers deserve to be treated fairly and they deserve to be treated with empathy but it should be on some sort of consistent basis. The sad reality also is I don't know which uses simple as saying this business failed because of COVID; that one failed because of something else. These are complex businesses. Sometimes COVID is just exposing fundamentally risky or broken businesses that were in trouble anyway and COVID has sadly tipped them over the edge. I don't know that we can just have two-lane highway where there is a COVID lane and a non-COVID lane. I'm not sure it's a simple as that.

Mr SIMMONDS: Thank you for that. Just change tack, this might have been in the stats the chair asked for initially, but how many government backed SME guarantee loans have you done as an organisation?

Mr Elliott : Mark, do you have the data there on that government SME guarantee loans, the number and the amount?

Mr Hand : I'll have to come back to you on the current numbers. The pack I have is somewhat out of date and it was a small number. I'll source the current number for you.

Mr Elliott : Can we take that on notice?

Mr SIMMONDS: Yes, that would be great to take it on notice. How have you been promoting it? How have you been going about it? How you pushing it out to SME's that might benefit from it?

Mr Elliott : We have perhaps taken a slightly different view than some others. We've seen it is a tool in the toolkit. We have gone about lending prudently and appropriately for our customers without the need to draw on the government guarantee. So if we can lead to company A in the normal course of business, we do so. As Mark mentioned, we've been able to grow our SME lending just by doing what we do every day. We've been able to get preapproved loans, we've got that new online lending tool, we have increased overdrafts and we've actually increased our loans. For some customers, where it is a bit more of a struggle, where they may not make it through the normal process, we can draw on the SME guarantee scheme. We've taken that sort of an approach. It is a bit of a backstop for companies that don't get through the normal process, but we much prefer that we can get people through the normal process. We think it's healthier than just automatically going into an SME guarantee stream.

Mr SIMMONDS: Okay, so you've been suggesting it to customers only as a last resort?

Mr Elliott : I don't know if it's a last resort. The customer doesn't get a benefit. There's no benefit. If I lend you money, whether or not it's half guaranteed by the government—from the customer's point of view—isn't really terribly relevant. The point is, can they get a loan, and is it on the right terms and conditions? So it's not a last resort, but, for customers who don't get through the normal process: yes, we can offer that and say, look this may—because what does it do? It essentially reduces the risk profile from the bank's point of view. That's ultimately what that program does. It says, 'Okay, the risk was too high, but, with the government's help, we can get you across the line.' So we see it as a back-stop facility, yes.

Mr SIMMONDS: Much appreciated. As much information as you can provide me about the messaging coming through on your digital platforms, and your reaction to it and what approach you're taking, would be appreciated on notice.

Mr Elliott : Yes.

CHAIR: Can I say there were some very interesting questions there, Mr Simmonds, for your inaugural appearance before the House economics committee, and thank you for those answers.

Mr SIMMONDS: My maiden appearance!

Dr LEIGH: In July, NAB announced that it would be the first of the Australian banks to cease dealing with unlicensed fee-charging debt-management providers, so-called 'debt vultures'. They felt that that was an appropriate decision in the context of the COVID crisis. Will ANZ follow their lead?

Mr Elliott : I'm going to have to defer because I'm not up to date on this one. Mark, do you have any comments on that?

Mr Hand : Just to say that I'm not actually sure how NAB will operationalise that, because the firms that are used are at the customer's choice. Customers make a decision as to who represents them. We can't refuse to deal with the customer or their representative if they want to deal with us. We obviously see players in the market that we think are better players to deal with, but we have no influence over which representation a customer chooses.

Dr LEIGH: So you don't have any plans to cease dealing with debt vultures?

Mr Elliott : I think, Dr Leigh, what my colleague is suggesting is that the customer chooses to work with one of them. If we then refuse to work with them, we're essentially refusing to work with our customer. So it's sort of a circular question. We preference that they don't use those people, but it is their choice. Maybe I don't understand particularly what NAB are saying, and maybe it's worth us having a look into the detail precisely of what they are suggesting. We do know that AFCA have banned at least one of those representative firms. They will not deal with a certain firm. But I'll take that away and just look and see if I rightly understand what NAB is doing.

Dr LEIGH: I'd be grateful if you would. It doesn't strike me that refusing to deal with debt vultures necessitates refusing to deal with the customer. Can I move to the RBA's term-funding facility which offers funding at a fixed rate of 0.25 per cent for three years. How does that compare to your private sources of funding on similar terms?

Mr Elliott : Well, it's lower cost—

Dr LEIGH: How much lower?

Mr Elliott : I'd have to get you to talk to Treasury. The system today is flush with liquidity. The reality is, as I mentioned, we got, I think in Mark's business alone we had something like $12 billion of new deposits, and most of those deposits go into operating accounts which are essentially zero-cost. So it depends what you're comparing it to—now, they're not for three years, and I accept that. And I can get you the technical answer on it. But it's cheaper funding than we would otherwise be receiving, and that's the purpose of it. The purpose is to lower the cost of funding so that banks take advantage of it and continue to lend into the system.

Dr LEIGH: Yes, I'd be grateful if you could get me the details.

Mr Elliott : Yes.

Dr LEIGH: The term funding facility offers five times as much funding for credit with businesses with less than $50 million in revenue, yet we've seen an eight per cent drop in small business lending this year compared to an increase in large business lending. Have you been lowering spreads disproportionately on small business loans?

Mr Elliott : When you say 'disproportionately', no. We take a view that we should price appropriately for risk and for the market. There has been a shift in credit demand. I don't think it's a surprise that small businesses are reluctant to borrow. It's not entirely clear to me, on average, what a small business would be borrowing for at the moment. Big businesses—certainly early on in the crisis—have many more needs, and they did borrow, largely just to shore up their own balance sheets and to hoard a bit of cash so that they were secure for the future. What we've seen since then, though, is actually that big business lending has started to come down quite dramatically, and in fact, as they become more confident about the future, they're repaying debt rather than borrowing.

Dr LEIGH: But, Mr Elliott, I asked you about the supply of credit, and you immediately moved to talking about the demand for credit.

Mr Elliott : Well, there would be no change in the supply.

Dr LEIGH: What I'm interested in is why this RBA term funding facility, which was designed specifically to encourage lending to small businesses, hasn't led you to make lending more attractive and why it hasn't shrunk the spreads disproportionately for small business.

Mr Elliott : First of all, I think the facts speak for themselves: we have increased our lending to small business. Not only have we increased it in aggregate terms but, as my colleague mentioned, we've increased it faster than the market average, and, of the majors, we've had the fastest growth in that lending. So I think that speaks for itself. Part of that is spreads. You were talking about spreads in particular. I don't know that it was disproportionate. Perhaps it was, and I'll have a look at that. But we price appropriately for the market risk.

CHAIR: This is your final question.

Dr LEIGH: We've been through the details of the government's small business loan scheme. Given that it was a $40 billion loan pool and only $1.7 billion was used—not even a five per cent uptake—is it reasonable to think of that scheme as being a failure? If not, why not?

Mr Elliott : No, I don't think it is a failure. First of all, the government has acknowledged and made some changes to it, extending the terms, and I think those are beneficial. As I mentioned before, with a lot of these programs—and that one in particular—it's about confidence. Just because I haven't drawn it down to date doesn't mean that I don't know that it's there and that if I need it I can call on it. So I think it's been enormously important to provide confidence to the small business sector and to some extent the banking sector to say, 'Hey, look, if you need it, it's there.' I think it's far too early to call it and say that, just because only $1.7 billion is drawn, it's a failure. I don't think it's a failure at all. I think it's been an enormous confidence booster to the small business sector to know that the government is prepared to provide that level of support on short notice.

Mr FALINSKI: Shayne, I'm going to ask you about responsible lending obligations and responsible lending laws. I understand that any bank is obviously reluctant to be critical of a regulator, but I'm going to ask you to do that at this point in time, because I think that, for the parliament, it's important that we realise the adverse impacts that responsible lending obligations are having in the lending market. Other representatives of ANZ have told us that, when responsible lending first came in, it had a marginal impact on your processes within ANZ, but over time, as ASIC and AFCA and the court imposed more obligations and interpreted the law differently, as opposed to its principles, the time it took for you to assess loans blew out from five working days to over a month. Don't you think that that would have an impact on your capacity to lend money?

Mr Elliott : It's a fair question. If I may, I think the way that I would describe this is that we all want to do responsible lending. It's in our interest, so nobody disagrees with the intent. The issue here is in the interpretation. When the law first came to be—and it came out years ago, by the way—it's fair to say it was principles based. It was a bit grey around the edges and, by the way, it wasn't clear where the lines were and if you crossed the line the penalties were not extreme. What has happened over time is that the penalty regime has increased. We've seen banks being hauled in front of the royal commission, quite rightly, and questioned about their actions. We've seen actions in the court. We've seen personal reputations damaged et cetera. Fine. So you've now said: 'It's grey. It's not clear where the line is, but if you cross it the penalty is extremely high.' The only rational response to that is to stay away from the line. So you just stay away from the line; you build a buffer. So, yes, we have become more and more cautious. The more the line can turn from grey to black the better, and the closer we can get to the original intent. We are all for greater transparency, greater clarity and greater guidance from our regulators.

The only other thing I would say on this is that it's easy to talk about ASIC as the only responsible agency. There are also the sister effects. APRA also has regulation. It's not called responsible lending, but it's about how we make important credit decisions. They're very, very similar. We have to navigate between both of those. I'll give you an example. ASIC, quite helpfully, have said, 'By the way, if Jason has a loan with you and it's principal and interest and he wants to turn it into interest only, you don't have to go through a responsible lending review, because the total amount being borrowed hasn't shifted.' Okay; fine. That's good; that's really clear. However, APRA say that converting from principal and interest to interest only is what they call a credit-critical event, and it requires us to do essentially a soup-to-nuts review of that lending relationship. So we're also trying to navigate that, and then, without going into detail, AFCA have a slightly different approach again to their definition of responsible lending. So part of it is the navigation between the various agencies and their interpretations, which are all, on their own, not unreasonable, but we are stuck in the middle having to navigate those.

Mr FALINSKI: Of course, this adds considerable cost to undertaking that transaction, and otherwise viable loans become unviable because of the cost of conducting them. That's a statement, but, theoretically and in principle and in actuality, that's what's occurring, isn't it?

Mr Elliott : I would say yes. In theory that is true. We can argue about the materiality of it; I think that's fair. Again, I go back to the principle. I am not here in front of this committee today, saying, 'I would like permission to do irresponsible lending, please.' That is not what we're asking for. What we're asking for is clarity, alignment and coherence of these. By the way, I get no sense from our regulators that they disagree. But they are encumbered by the laws that they're asked to uphold.

Mr FALINSKI: I strongly disagree with you, to be honest. Was it not the case that ASIC actually entered your premises on numerous occasions and visited bank officials at home?

CHAIR: We have silence. Is Mr Elliott clarifying? Or have we lost Mr Elliott?

Mr Elliott : No, I'm here. Can you hear me?

Mr FALINSKI: Yes. ASIC disconnected you!

Mr Elliott : Yes. ASIC interfered; it was Mr Shipton on the phone! Sorry, you said ASIC entered the premises.

Mr FALINSKI: We know, because there were reports, that ASIC sent their officials to interview bank officers at their residences and entered your premises, as they are legally able to do, without telling bank officials that they were going to do that. Is that not the case?

Mr Elliott : I'm not aware that that is the case actually. I've never heard of ASIC interviewing anybody at their residence. I'm not aware of that. In all cases, to my knowledge, when ASIC come on our premises, it is well advised in advance and it is with total protocols and all of that other stuff. We've never had an issue with it—not to my knowledge.

Mr FALINSKI: Okay. Well, we've run out of time.

CHAIR: A final question, Mr Falinski.

Mr FALINSKI: I'll make this statement and I'll allow you to reply, Shayne. How can a loan officer, when they are interviewed by ASIC and told the implications of them not complying with the responsible lending obligation [inaudible] bankruptcy, not then find that a culture of great caution and would be very reticent to make loans?

Mr Elliott : I understand that, and there is always a risk of that. However, that is no different. If we just park ASIC for a second—

Mr FALINSKI: Yes, absolutely.

Mr Elliott : we've got a bank to run.

Mr FALINSKI: I understand that you have to work for ASIC and maintain good—

Mr Elliott : No, I'm not worried about that. I'm just saying that if this was just Shayne Elliott's bank, we have rules too, and we ask our loan officers to be prudent and thoughtful, and, hey, there are consequences for making bad decisions. My old boss at Citi used to say, 'It's okay to lose money as long as you do it properly.' As long as you followed a process—if you were a loan officer and you went through process; you asked the right questions, you were thoughtful, you used judgement—there's no harm in that. That's exactly what ASIC want as well. Where we let ourselves down, as I mentioned, is that sometimes these rules are grey, and all that people are asking for is clarity. 'Just explain it to me.' People are smart and well-meaning at ANZ. They're just saying, 'Give me clarity.' So, in my analogy, I'm happy to go all the way up to the line, but I'd really like to know where the line is. I'd like to know it in some level of specificity, and that's exactly what we're working on with ASIC. The last regulatory guide really helped, actually, but there's still more to do.

Mr FALINSKI: Thank you, Shayne.

CHAIR: Thank you, committee members. Mr Elliott, I had other questions but I forwent them for Mr Falinski. You will have noted that I have submitted a series of questions over recent months related to low-cost merchant routing.

Mr Elliott : Yes.

CHAIR: I'd stress that, because of the higher volume of transactions that are now being done through swipe of cards, there's a very keen interest from this committee, or at least from myself as chair, on low-cost routing and making sure that it's competitive and that businesses are getting best value, particularly in the recovery phase, as I'm sure you can understand. Obviously, the committee continues to be quite interested in issues around access to credit. Both Mr Simmonds and I put questions on notice in the context of data around SME lending—that backed up by the government's facility. The more information you give us about that the better, because, frankly, that's going to be critical for economic recovery. I'm sure other committee members may submit further questions on notice. Thank you for your attendance here today. The committee secretariat will be in touch with you in relation to any matters arising out of today's hearing. You'll be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact. I now suspend proceedings.

Proceedings suspended from 12:17 to 13:15