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Economics References Committee
Effects of the global financial crisis on the Australian banking sector

KELL, Mr Peter, Commissioner, Australian Securities and Investments Commission

SAADAT, Mr Michael, Senior Manager, Deposit Takers and Issuers, Australian Securities and Investments Commission

CHAIR: Welcome. I invite you to make an opening statement.

Mr Kell : I would like to make a brief opening statement, if I may. Thank you for the opportunity to come here today and address the inquiry. We are pleased to be able to assist the committee and we have been reviewing the proceedings and some of the submissions received from the community, industry and other stakeholders. I would like to open our comments by providing a quick overview of ASIC's role and the regulatory framework of the banking sector and an overview of the major regulatory changes relevant to ASIC affecting the banking sector that were implemented after the GFC and just touch on some of the work that we have been doing, and I expect that some more of that will be explored during this session.

I will give a bit of context around ASIC's role. We have a particular responsibility associated with the banking sector that includes the licensing of financial services, including deposit taking and payment systems, and licensing in relation to credit, including lenders and mortgage brokers. We have responsibility for regulating the conduct of deposit takers, payment systems, providers and credit providers under the Corporations Act, the National Consumer Credit Protection Act and the ASIC Act. We have responsibility for administering the dispute resolution framework in financial services and credit, which includes the Financial Ombudsman Service and the Credit Ombudsman Service. That is part of our overall objective to promoting a confident and informed participation of consumers and investors in the financial services sector.

As the committee would be aware, as an initial response to the GFC, the government introduce the Financial Claims Scheme, consisting of a government deposit guarantee for deposit taking institutions. ASIC's role in relation to the deposit guarantee is to ensure that there is no misleading conduct, including misleading advertising or marketing about the guarantee, including who and what is covered by the guarantee. We perform this role as part of our work in monitoring advertising.

Since the GFC, as of 1 July 2010, ASIC has become responsible for the licensing and regulation of credit through the National Consumer Credit Protection Act. In other words, since mid-2010 we have been the primary regulator for credit. This reform established a responsible lending requirement for credit providers. As you are no doubt aware, credit was regulated by the states and territories prior to that under the Consumer Credit Code. Phase 1 of the credit reforms introduced licensing of persons engaged in consumer lending—lending and mortgage broking—and reforms included the introduction of disclosure obligations; the regulation of mortgage brokers for the first time at a national level and access to dispute resolution; a new responsible lending requirement; and an extension of consumer protections to include borrowing for residential property investment. Unfair contract legislation has also been introduced and margin loans are now regulated under the Corporations Act.

ASIC has undertaken a number of reviews since the GFC that are relevant to the banking sector, including a review of credit assistant providers responsible lending conduct, including around low doc home loans, and a review of consumer credit insurance—in particular, sales practices by ADIs; a review of term deposits. We are also presently conducting a follow-up review and report on helping home borrowers in financial hardship.

Exit fees are another issue we have been looking at. Exit fees on home loans originated after 1 July 2011 have been banned. For loans prior to that date, the National Credit Code requires that exit fees cannot be unconscionable. In November 2010, ASIC issued a guide to assist industry to understand its obligations around exit fees. We have been undertaking a review of exit fees charged by lenders and will issue a report a little later this year. I might also note that we recently secured $3.3 million in refunds for RHG customers who had been charged exit fees in excess of levels that ASIC considered to be legally permissible.

We have also been involved in monitoring and enforcing the accounts switching initiatives, the prohibition on unsolicited credit card offers, which kicked in on 1 July this year, and key fact sheet requirements for home loans and credit cards. We are active in the advertising areas at the moment and we are continuing to proactively look at the marketing that is taking place in the credit area to ensure there is no misleading or deceptive conduct. Since 1 July 2010, ASIC has taken action against over 150 advertisements that we considered to be misleading, including almost 30 misleading advertisements by deposit takers. We are also finalising relief for deposit takers from the law to facilitate the sale of term deposits that can only be broken with a 31-day notice period. This will help them to meet new liquidity requirements.

That is just briefly touching ASIC's jurisdiction and some of the work that we have been doing. We are happy to take questions.

CHAIR: Thank you, Mr Kell. In relation to the last point you made about term deposits and the 31-day breaking issue, I understand that is necessary for you to look at because Basel III changes will actually have some implications for term deposits. Is that correct?

Mr Kell : That is right. I might ask Mr Saadat to comment on that.

Mr Saadat : That is right. Under Basel III banks will be required to hold more liquidity if their funding is not locked in. If a term deposit can be broken without any notice, as is currently the case, banks will have to hold more liquidity than they would if that term deposit did have a notice period. So ASIC is looking to provide relief to allow banks to issue term deposits that have a 31-day notice period, and they can be sold as basic deposit products as is currently the case.

Mr Kell : We have been consulting around that issue and we are getting very close to finalising the advice to industry on how we are going to treat that relief, the time period for the term deposits in question and what sort of information deposit taking institutions that issue those terms deposits should provide to their customers.

CHAIR: Without talking about the specifics of what you are going to do, how will you actually implement that? Will it be through a regulatory guide or does it require legislative or regulatory change?

Mr Saadat : ASIC will be publish a class order, which is a legislative instrument. That will give effect to the relief.

CHAIR: I note also in your submission that you talked about the fact that Australia does not have a dedicated senior loan officer survey. Could you outline what such a survey is in other jurisdictions and what benefits there would be for Australia?

Mr Saadat : This survey is a survey that other jurisdictions conduct to determine supply and demand conditions in lending markets. What we have observed is that that kind of survey has been useful in researching lending demand and supply for businesses and households. The US Federal Reserve, for example, issues the senior loan officer opinion survey. As a suggestion, we put in our submission that it would be potentially useful to have a similar survey in Australia to provide a bit more data on supply and demand conditions.

Mr Kell : As well as other regulators, we obviously get some sort of sense of market conditions through the information that the RBA collects and through commercial surveys. This would be an addition to that and just help to assist us to further understand what is happening out there in the market.

CHAIR: Would it be of use to better understand practices or potential likely directions that banks might move in with their products and better understand why they might be doing it? I am trying to get a grip on where the benefit would be for a regulator to understand those issues. Obviously it would come at a cost to do this and I am just wondering whether the benefits would justify the cost.

Mr Kell : We have not done a very close study of the costs of these surveys but our understanding is that they are not particularly costly. It is beneficial for regulatory agencies to understand the conditions in the market, what sorts of practices are being pursued by lending institutions and how they are seeing the state of play in terms of the ability of borrowers to repay, what sorts of challenges borrowers might be facing in different economic conditions and that sort of thing. It adds to our understanding of any emerging risks in the market and for that reason it also helps us to, if you like, be a bit more proactive about the regulatory work we could do.

CHAIR: And it might have given you a better understanding of what we have seen in terms of the practices that financial institutions have actually undertaken since the GFC if you had that information to match up with what they were doing.

Mr Kell : That is right. It is a longitudinal issue. It allows you to gather longitudinal information as well.

CHAIR: You mentioned exit fees and RG220, which issues guidance on what is unconscionable in terms of exit fees. As we now know, that only applies to loans that were taken out prior to 1 July last year. As you indicated, you have had some success in recent times recovering exit fees that were unconscionable. That suggests that this particular approach has the potential to be successful in the longer term in terms of those loans that it applies to.

Mr Kell : We have certainly been able to take on some cases where there have been significant levels of complaint. The most recent major case was in relation to RHG, which was formally known as RAMS, where ASIC had concerns about discharge an early termination fees on home loans terminated since 1 July 2010. In that case we obtained more than $3.3 million for over 6,400 customers. Early termination fees have generally been charged by lenders in the first three to five years of a loan to recover establishment costs. ASIC has provided guidance because lenders recover some of these costs as customers make regular repayments. Because of that early termination, fees generally should reduce over time, so ASIC has provided some guidance about what it expects to see in that area. ASIC has been pretty active in monitoring this area because it is one where ASIC and other agencies receive complaints. ASIC is conducting further industry reviews of early termination fees. As I said, it will be looking to provide a report publicly a little later this year.

Senator CAMERON: I am not sure if you were here for the previous evidence?

Mr Kell : Only literally the last two or three minutes.

Senator CAMERON: There have been significant claims made about the behaviour of banks and allegations of criminal behaviour. Is ASIC currently investigating any of these claims?

Mr Kell : If you do not mind, I would not mind providing a bit of a context around ASIC's approach to low doc loans to get to that particular question. Although ASIC was not the primary regulator of credit prior to 1 July 2010, it did have concerns about aspects of the credit market including the low doc loans and conduct by brokers prior to that time. ASIC published reports and took actions prior to that time, most notably it published a report on mortgage broking in 2005 and a report in 2008 called Protecting Wealth in the Family Home, which identified concerns with the abuse of low doc lending and associated misconduct by brokers. The government relied in part on both of those reports, the issues set out and what had been found, to make its decision that credit should be regulated nationally, that brokers should be regulated including through licensing, that the responsible lending laws should be introduced and that regulation should extend to investment loans for residential properties. So ASIC has certainly been on the record very publicly in its arguments for the need for better regulation in this area for some time. That, as I said, helped drive the credit reforms which brought ASIC into play as the primary credit regulator from 1 July 2010.

Although some borrowers have succeeded in court in having a low doc loan partly or wholly set aside, these cases have typically involved borrowers with a special disadvantage or have succeeded because of remedies provided under specific state legislation such as the New South Wales Contracts Review Act.

Senator CAMERON: That is a prepared statement you are reading from. Is it available?

Mr Kell : Some of it is, not all of it.

Senator CAMERON: Can it be tabled?

Mr Kell : I can table the very brief upfront part that I am reading from. Since ASIC became the primary regulator of the low doc sector, which is in effect post-GFC, the number of those loans in the market has substantially dropped. ASIC undertook a review of some of the lending practices in the first six months of its taking on this new jurisdiction with a focus on home loans promoted as low doc loans. The review at that time, which was published in November 2011, found that brokers were aware of, broadly speaking, responsible lending obligations and were taking steps to comply at that early stage. But ASIC did identify some areas for improving industry practice and understands a number of findings led to changes within the industry.

Mr Saadat : The main areas identified for improvement were around the compliance systems used by brokers, the processes used to ensure that borrowers can afford the loan they are taking out and the verification that is used to determine that the borrower has in fact provided accurate information in the loan application. Because it was the first six months of the new requirements, a lot of that was in transition, so ASIC found that brokers were moving to adopt new systems and processes to comply with their obligations. Over that time, ASIC saw improvement, continues to see improvement and is monitoring things. ASIC has followed up individual cases where it felt that the conduct fell short. It continues to be a focus for ASIC given the risks in the market are probably most acute in the market that promotes low doc lending.

Senator WILLIAMS: I will add to Senator Cameron's point here. According to the previous witness, you are shooting the wrong horse. She said it was not the brokers but the business development managers that train the brokers on the whole process to go through. But ASIC, you are saying, is looking at the brokers, their standards and how they operate. According to the previous witness, it is not the brokers who set down the criteria and what they work under, it is the business development manager from the bank that trains them all. I have letters here from a particular bank to those people. Why do you not focus on them instead of the brokers?

Mr Kell : I think it is safe to say ASIC focuses on both. Given ASIC's analysis of the market over many years, it does need to focus on the brokers because it has seen misconduct there over time. But it also looks at the practices lenders are pursuing as well. Again, if material is brought to ASIC that indicates there are problems, it acts on it. I would dispute the notion that ASIC is only looking at the brokers and ignoring the lenders. That is not ASIC's approach at all.

Senator CAMERON: When you say ASIC will act on issues if they are raised, the evidence we had from the previous witness was that correspondence had gone to ASIC seeking some support on the FirstMac and Streetwise issues and no support was forthcoming. Is that correct?

Mr Kell : I am not in a position to comment on individual matters. What I can say is that ASIC had some complaints brought to it about low doc loans. These instances have almost exclusively, from my understanding, all concerned loans made prior to the GFC and prior to the introduction of the national consumer credit protection regime in July 2010. In some cases they involve matters where a finance broker has been charged by the police, so another agency is taking action. In some cases ASIC sought follow-up information to these complaints, but I am not in a position to comment on the particular matter that you have raised. If you want us to take a question on notice, we are happy to do so.

Senator CAMERON: You are not indicating to me that you would comment on a specific matter; you just want time to have a look at the question that is raised.

Mr Kell : I would have to understand whether it is a matter ASIC has looked at, whether it is still looking at it or whether it might face confidentiality constraints. I am not able to provide that sort of information at the moment.

Senator CAMERON: What I am interested in—and there might be other views on this—is you said if matters are raised with ASIC then ASIC would deal with them. That is contrary to the evidence we had in this particular matter. If you could, have a look at the Hansard on that matter from the previous witness and come back to us, firstly, with what steps ASIC took in the matter and, secondly, what steps as an institution ASIC has put in place to deal with any forthcoming issues of that type. Is that clear?

Mr Kell : I am very happy to do that. I think that would allow a more considered response to those issues.

Senator CAMERON: I have had correspondence from one of my constituents in relation to an ANZ product called ING Property Securities Trust. Are you aware of that trust?

Mr Kell : I am aware of the trust but not of the details.

Senator CAMERON: What the constituent raised with me was they had been advised by a relationship manager, an assistant manager of the bank at Forster and the financial planner northern region on some financial transactions they were going to take out. To make a long story short, they borrowed $2 million on this advice. They are saying that there were bullying tactics, high-pressure tactics; they had their funds all go into debt reduction; they were asked to sign blank documents; they were told not to date documents; they were advised that they could not change any of the conditions they were not happy with, were told 'just sign them and the bank would fix them up'. The bank told them that if they did not sign the documents that the bank would bundle the file up and send it to Melbourne and then they could deal with Melbourne but would not get as good a result. The proposition is that it was common. The allegation from my constituent is that it was common for the ANZ Bank to send blank documents to them to sign and then they would be filled in later. I am not trying to justify people signing blank documents but this seems to me to be to be consistent with the type of behaviour that the consumers group, the Banking and Finance Consumer Support Association, described in their evidence. Does ASIC receive complaints of this type about the Australian banking system?

Mr Kell : Not in any significant numbers. ASIC does hear these types of allegations occasionally raised in public. It needs further information to pursue action than those sorts of general descriptions you have just provided. If ASIC is to take an action it needs specific evidence and that is not always forthcoming. No, ASIC does not have widespread evidence presented to it of some kind of systemic criminality of that sort, if that is how you characterise it, in the Australian banking system.

Senator CAMERON: No, I do not think I said systemic.

Mr Kell : In some ways I think that is what you are suggesting. Is ASIC getting a lot of complaints about that across different banks, across different areas of that sort of systemic behaviour? The answer to that is no.

Senator CAMERON: Whether it is systemic or not, the behaviour is not behaviour that ASIC would tolerate in one incident if it was correct, would it? What role would ASIC play in these types of allegations?

Mr Kell : It is difficult to comment without further information. ASIC does take action—and I can give you examples—against lenders and brokers that engage in unconscionable conduct. There was a case this year involving the Australian Lending Centre. I would be happy to run you through that. It demonstrates where ASIC does take action when brokers have sought to engage in actions that are significantly detrimental to their clients and that is exactly the sort of thing ASIC will take up if it comes across it.

Senator CAMERON: We would be happy to receive some documentation on that rather than spend much more time on that issue. So if that individual raises that with ASIC then would ASIC investigate the claims?

Mr Kell : ASIC certainly considers carefully every matter that is brought to it.

Senator CAMERON: I have seen your careful consideration before. Careful consideration is not consistent with dealing with the issue.

Mr Kell : I used the word 'consideration' because the information that is provided to us does not always necessarily provide enough basis for a full-scale investigation. Do we very seriously consider matters like that, especially the sort you are describing? We certainly do.

Senator WILLIAMS: When you say you carefully consider matters that come to ASIC in the way of complaints, I have a lot of problems with that. For four years, complaints went to your office about the infamous Stuart Ariff and the way he was robbing people. Now he is in jail where he belongs. The only reason you acted was because it went to the media. I know people send you emails and complaints. I have taken complaints to you myself. I want to take you through a couple. When a receiver is sent onto a farm—and this is post GFC—does that receiver have the right to sell the grain on that property if the bank does not have a lean on that grain?

Mr Kell : I cannot answer that question right now. I will take that on notice.

Senator WILLIAMS: I put this to Mr Marcelis, who I believe is no longer with you, but I never got a reply.

Mr Kell : I am very happy to chase that up as a matter of urgency.

Senator WILLIAMS: Please do and please come back to my office about this: if a receiver goes in for the sale of a farm and sells the property, has that receiver got the right to sell the grain in the silos on that farm when there is no lean on that grain to the bank, who sent the receiver in there?

On the Bankwest problems, a receiver was sent in to a hotel and sold up two hotels. The bank was paid in full, about $24 million, and a receiver was paid in full, and $1 million was left over. The bank would not give the million dollars back to the bloke who owned the pubs because that bloke was suing Bankwest. The bank said they are going to keep the million dollars to pay their legal fees in the situation with the bloke who is suing them. Is that acceptable practice? When someone is cleaned up and everyone has their money, shouldn't anything that is left over go back to the owner of the assets, when all creditors have been paid and the receiver has left the operation?

Mr Kell : I understand the question you are asking but I am not in a position to comment on a particular matter.

Senator WILLIAMS: I put it to Mr Marcelis, who said he would get back to me in two days, but I never heard from him again. He frustrates me enormously. I have asked to meet with your boss, Mr Medcraft, but he will not meet with me. At least Mr D'Aliosio used to come to my office and we could go through issues.

Do you have oversight of unconscionable conduct when it comes to the banking system?

Mr Kell : Yes.

Senator WILLIAMS: How do you define unconscionable conduct?

Mr Saadat : Generally unconscionable conduct is conduct that is considered to be against good conscience or raises significant questions of moral obloquy, as the courts put it. It is normally very serious conduct. Historically it has involved conduct against individuals in particular who are at a disadvantage either from language or from other social disadvantage, and the advantage that has been taken by the other party over that person.

Senator WILLIAMS: I brought a case of unconscionable conduct to your attention. It is about a person who got done over and is claiming unconscionable conduct by a bank. Would you put some money up to fight the case for that bank customer?

Mr Saadat : It would depend on the circumstances. ASIC has taken action in relation to unconscionable conduct.

Senator WILLIAMS: ITSA have as well.

Mr Saadat : It is a very difficult area of the law because of the court's reluctance to find that their conduct was unconscionable. We intervened in a case recently of Tonto Home Loans.

Senator WILLIAMS: Is that in the document you circulated here?

Mr Saadat : Yes.

Senator WILLIAMS: I saw that.

Mr Saadat : The court, at the first instance, held that the conduct was unconscionable but on appeal it was held that the conduct was not unconscionable. The borrowers were given relief under the NSW Contracts Review Act.

Senator WILLIAMS: I have more cases. A 98-year old lady was signed up a bank manager to a 30-year loan and was lent $440,000 to invest in a company. The company went broke and she did the lot. Another bloke died at the age of 95 and four years previous he had been signed up to a 30-year, $800,000 low-doc loan. Another bloke who was 88 was signed up to a low-doc loan and invested in a company that was being promoted by one bank manager. Going around to people up to the age of 98 to sign them up for loans, would you call that unconscionable?

Mr Saadat : Potentially it could be unconscionable given—

Senator WILLIAMS: I would call it bloody disgraceful.

Mr Kell : We do not have the circumstances of those particular cases in front of us—

Senator WILLIAMS: You are going to get them.

Mr Kell : That is what I was about to ask. Would you be happy to provide them?

Senator WILLIAMS: Happily, and I will take the bank through it on Friday.

Mr Kell : That will put us in a much better position to respond rather than having things thrown at us.

Senator WILLIAMS: When it comes to ASIC funding the downtrodden to try to get some justice, I just make the point about Stuart Ariff. The liquidator went through his company. There is still a Mercedes Benz, a Holden Statesman. They do not know where they have gone. The liquidator cannot get any funds off ASIC to search for it. There is a property that was sold off to Mr Ariff's sister at a fire sale price, but there is no search for that because there is no money. Perhaps you are a bit gun-shy from the OneTel operations, but I think you need to step out and try to help pursue some of these wrongdoings to bring some justice around the nation.

You would be familiar with securitisation and selling of packages of home loans?

Mr Kell : Yes.

Senator WILLIAMS: Do you have any oversight on checking the quality of those loans? The previous witness raised the fact that billions of dollars of bad loans have been sold off to the Australian Office of Financial Management—the government, the taxpayer. Do you have any oversight of those loans?

Mr Kell : That is not generally for ASIC. If an investment is ultimately going to be marketed to the public then there has to be disclosure about the nature of that investment and the risks and costs and so forth. We have responsibilities in that area. I am not sure it would cover the scenario that you have just described.

Senator WILLIAMS: Section 420A of the Corporation Act—selling assets at around market value. When a receiver is sent by a bank in to a private home, a block of land with a house on it, it is not a company. Does the receiver still have to abide by the Corporations Act and section 420A?

Mr Kell : I should double-check on that but my understanding is that they do.

Senator WILLIAMS: Pay attention to Mr Jim Neale's submission to this inquiry. He is a privateer not a company. His $3.8 million or $4 million property was sold for $635,000, and a valued afterwards at $3.8 million. There should be some questions asked there. The Financial Ombudsman Service is under the control of ASIC—is that correct?

Mr Kell : No, I would not characterise it like that. It is a licence condition for those holding a financial services licence that they belong to a dispute resolution scheme that is approved by ASIC. The dispute resolution scheme, the ombudsman scheme, is not part of ASIC; it effectively is funded by industry but with independent governance and has to meet a series of standards that ASIC sets out in its policy before we will approve it. It is not an arm of ASIC but we do have overall responsibility for dispute resolution schemes in the financial services industry. There are two main ones: FOS and the credit ombudsman.

Senator WILLIAMS: I have a lot of complaints from Cairns. It appears to me that banks panicked from the state of the economy in Cairns after the global financial crisis. Tourism had dropped off and so on. Units were sold up way below market value. Even when the owner of the business had contracts for $275,000, they were sold for $209,000. The bank would not accept $275,000. It caused the destruction of the business. Another big business that employed 700 people are also claiming unconscionable conduct. If they want to pursue that through the courts, which they have the right to do, they do not have any money. We all know what it costs to go to court. How can these people ever seek any justice without any money under this system? Is ASIC prepared to look at the situations if I bring them to your attention?

Mr Kell : Is that related to the question about the ombudsman service?

Senator WILLIAMS: It is a separate thing. People have given me their statements. One is CEC, a huge publicly listed company in Cairns that employed 700 people and had $168 million of debt. In three months they had to reduce it to $120 million, which they did. Then they were given five months to reduce it to $80 million, which they did. Then the receivers were sent in and there was a fire sale of assets and 700 jobs were lost et cetera. How banks operate is their business as long as there are rules, but when they start throwing people onto the unemployment heap it becomes government business. I think these are matters involving unconscionable conduct. Is it worth bringing to your attention, or is it that it cannot be looked at because it is prior to 1 July 2010 under ASIC's regulations?

Mr Kell : It depends on the matter and I heard you talk about several different types of matters in that question. It sounds like a reasonably large company and some investment regulation. The regulations covering investment loans for residential property came in on 1 July 2010. Some of those loans, if they involve small businesses, could be heard by the ombudsman. If they are very large commercial loans, however, they may not come under the ombudsman's jurisdiction. It is difficult to comment when there is a set of different circumstances there, but we are happy to look at any information you want to present to us.

Senator WILLIAMS: Who do I deal with you in your office now that Mr Marcelis has gone?

Mr Kell : I will volunteer Mr Matthew Abbott for that.

Senator WILLIAMS: Thank you.

Senator CAMERON: Is he the go-to man for me as well?

Mr Kell : In the first instance, yes. We will funnel it through Matthew.

Senator EGGLESTON: I have some questions about Bankwest. Have you undertaken an investigation into various allegations about Bankwest customers with commercial loans having been treated unfairly since Bankwest was acquired by the Commonwealth Bank?

Mr Kell : We have received a small number of complaints relating to Bankwest and the matters that have been raised publicly in recent times. ASIC has not received any evidence to suggest some sort of systemic misconduct by Bankwest in relation to these matters. Commercial lending arrangements are not regulated under the consumer credit protection laws. The government is currently considering whether to extend consumer credit protection laws to commercial lending and in particular small business lending and in what form. Some of those matters would not be directly within our jurisdiction in relation to the consumer credit protection laws in any case. We have not at this stage received anything that warrants further pursuit.

Senator EGGLESTON: How many complaints have you received about Bankwest?

Mr Kell : I am happy to say that in relation to the sorts of matters that have been raised recently about Bankwest—we do get complaints about other matters in relation to banks as well—we have received four complaints.

Senator EGGLESTON: Have you met with any of the submitters who have been to this inquiry, or their representative groups such as the Unhappy Banking group, headed by Geoff Shannon?

Mr Kell : My understanding is that we have received complaints from some of those individuals. As to whether we have met with them directly, I would have to check. I would have to check as to the nature of our communication with them.

Senator EGGLESTON: It would help for the information of the committee if you could give a list of the names and the individuals and the numbers. Does ASIC consider that the allegations of various kinds could indicate a potential breach of the unconscionable conduct provisions of the ASIC act or other legislation that ASIC administers? You have limited it somewhat by what you said earlier.

Mr Kell : The matters we have seen to date do not at this stage suggest to us that pursuing an unconscionable conduct case would be appropriate.

Senator EGGLESTON: In your view what justification can there be for charging penalty interest to small business borrowers of around 18 per cent, as commonly occurred?

Mr Kell : Again, it is somewhat difficult to answer questions like that in the abstract. There are different sorts of penalty clauses that may attach to different loan arrangements at different points in time that could be regarded as quite high in some circumstances, but it is a little difficult to comment on that in the abstract.

Senator EGGLESTON: Victor Seeto submitted that he was issued a notice of demand which required $21 million to be repaid within 24 hours. Would ASIC be of the view that demanding a borrower to refinance their facility within 24 hours is reasonable or unreasonable?

Mr Kell : Again, on the face of it that seems a tough call but I do not know whether there had been a series of previous requests, over what period of time, and therefore where those negotiations were up to. It is a little hard to comment without knowing more details about the facts of the case.

CHAIR: Would you like to know more if that was put to you? Would that raise your interest to say, 'ASIC wants to know more about this'?

Mr Kell : Again, we are very much prepared to hear about these matters. In relation to some of these cases, it is clear even from the amounts of money that you are talking about that some of them would not fall under the consumer credit protection laws, because they are in the business space, so we would not have the powers under that legislation to look at it. I am very much prepared to consider any evidence you might put to us.

Senator EGGLESTON: I am sure you are. There are a number of rather unusual occurrences which are troubling. One of the submitters stated that in the second half of 2008, 'There was enormous pressure placed on us by Bankwest which involved multiple daily phone calls, demands for repayment, requests for figures and demands for meetings which culminated in the appointment of Ferrier Hodgson to undertake an internal assessment'. A number of submitters have raised similar issues. Are you able to offer protection against such conduct?

Mr Kell : 'Offer protection'? I am not sure that that is the phrase I would use in that circumstance. It would depend on the circumstances. I might note—and I am sure the committee understands this—that negotiations that arise when businesses get into difficulties are rarely happy, pleasant negotiations. They can involve very difficult and emotionally difficult financial discussions and difficult calls by the parties on both sides. That context needs to be taken into account here when you are looking at some of these issues. But, allowing for that, if matter falls on the wrong side of unconscionable we will look at it.

Senator EGGLESTON: Thank you. I suppose questions of unconscionable conduct arise and possibly with that kind of behaviour. The last matter I want to raise with you is that a number of submitters referred to having to sign a deed of forbearance after running into problems with Bankwest. The deed included a large fee, an interest rate of up to 18 per cent and a confidentiality clause. Firstly, why are deeds of forbearance necessary and what restrictions exist on what may be included in a deed of forbearance? Secondly, in some cases the only way the negotiating position of a borrower can be strengthened is through public exposure of the situation, such as through the media. One must question whether a confidentiality clause is appropriate in these sorts of circumstances. Would you like to comment on those points?

Mr Kell : It would be more appropriate to respond to some of that on notice rather than off the cuff.

Senator EGGLESTON: We would quite like to hear your point of view because it is not as though you are going to look up records or pull out figures. We would just like to hear your general views on these sorts of issues.

Mr Kell : Again, in these sorts of situations lenders and borrowers enter into arrangements, if you like, to resolve outstanding issues. My understanding is that in some cases they do involve confidentiality agreements so I am not sure that that is unique to this circumstance. Ultimately, these are commercial terms at one level and ASIC is not in there trying to dictate how those commercial terms are arrived at. Beyond that, I will restrain myself from commenting further.

Senator EGGLESTON: Could confidentiality clauses not be used to disguise or cover up unconscionable conduct, however.

Mr Kell : If we saw evidence of confidentiality clauses being used to hide misconduct or actions that were in breach of the law I do not think ASIC would look very favourably on that at all.

Senator WILLIAMS: If someone, whether it be a banker, a receiver, a liquidator or whatever breaches section 420A of the Corporations Act, what action is taken?

Mr Kell : The judicial consideration, as I am sure you are aware, of 420A tends to focus more on what was the process taken, rather than focus on whether the best possible price was achieved, so: what sort of process was undertaken by the receiver?

Senator WILLIAMS: So if it did not go to auction, they sold it cheaply to a mate, what action would ASIC take?

Mr Kell : You are asking: would we go the CALDB 6 and disciplinary action—that sort of thing?

Senator WILLIAMS: No, I just want to know any action. If I was a receiver and if a house was worth $3 million and I had a mate down the road who had plenty of money and I said, 'Listen, I will sell you this house for $300,000. We won't put it to auction; we will just bypass any looking for market value', what action would you take against me?

Mr Kell : It would depend again on the circumstances in each case. We can take action against the receiver for a breach of 420A.

Senator WILLIAMS: That is what I am asking. What action would you take?

Mr Kell : We have civil remedies available to us but it is actually not an area where we receive large numbers of complaints around seriously grievous misconduct.

Senator WILLIAMS: I gave you an example, Mr Kell. Now it is as clear as mud. Thanks for the answer.

CHAIR: We have gone over time. I will not ask a question, just comment that, Mr Kell, you were talking about when businesses get into trouble they have conversations which are not particularly pleasant with their financiers. The allegations here are that the trouble the businesses have got themselves into are solely arising out of the bank acting on the terms of the agreement with businesses that were otherwise not in trouble.

Mr Kell : I understand that those were some of the allegations that were put forward but thank you, Chair, for clarifying that issue.

CHAIR: Thank you to ASIC for assisting us today.