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Economics References Committee
Performance of the Australian Securities and Investments Commission

BRAILEY, Ms Denise, President, Banking and Finance Consumers Support Association (Inc)


CHAIR: Welcome. Do you have some opening remarks to make?

Ms Brailey : Yes. I have a few stats, mainly, which might assist you. As you know, I have been running a grassroots organisation taking in members from all over Australia. It mainly relates to lenders, not so much the brokers. It is the lenders, we have found out, who are the culprits of the sorts of things that have brought us all together here today; and in 85 per cent of the cases it is the four major banks, not the rest of them. I want to highlight that everything is predicated on a service calculator, which there has been no discussion on at all simply because we discovered it and no-one else understands what it is or how it works. The bottom line is this. All 11,000 brokers have a screen in front of them. They must put the base income in the top corner. At the bottom, it spits out a figure. The broker is then taught by the business development managers at bank level. They come out to your office and teach you how to use it. They ask the broker to write that figure on the loan application form in their own handwriting. So he or she writes $180,000, when the figure was $50,000. That, in a nutshell, is how that fudged figure emerges.

The service calculator is a tool—it is a weapon, if you want to put it that way—but it is a very simple method. We now know, as you have realised, that the banks were using computers for full-docs and low-docs to put this thing into action to automatically approve loans. I am talking about the whole of the mortgage industry across Australia. This particular document then gets printed off. In the emails that we have put on our website—and we gave these to the ASIC Commissioner in February last year—it actually says as a matter of process that the service calculator must be pinned to the back of the loan application. It says: 'Without that, your deal will not be processed.' The BDM send emails on bank letterhead, with logo, out to the brokers. The brokers are consistently following a pattern. It is not one or two rogue brokers. They do not know they are breaking the law. They do not know what section 25.1 of the code is. That is the most significant document.

When I mentioned that to Ombudsman Philip Field some 18 months ago, he actually said to me, 'Well that changes things a bit.' That is the point: it changes it because it is attached to the LAF, and if you have signed a loan application form that says 'I have read and fully understood this document,' then that becomes a vital part. But the banks have told the EDRs that this particular document is non-discoverable. But as we do, we have managed to get a few, so we now know what they were doing, and we have put them on our website. The broker had to have a key to get into this calculator. It was not a calculator that ASIC said in their submission to you, 'It is misleading parliament.' It is saying, 'Well, they are just to give you an idea. They are not this calculator. You need a password to get in there.' We have the passwords. We managed to get those from the brokers and, again, we put them up on our website. This is very real and it is the essence of how so many people became a key indicator to causing a parliamentary inquiry into having a serious look at maybe how this is and how widespread it is.

CHAIR: What does the calculator do?

Ms Brailey : The calculator actually produces en globo or futuristic income. If you used the equity in your home to buy another property, then you could expect certain returns. But it is one size fits all. It is a normal, legitimate accounting equation that comes out. It adds on tax relief and government tax incentives.

CHAIR: All the variables that go into it—

Ms Brailey : Yes, but if you are 90 years old and on a pension, how does that apply? But the same form has to be attached and they will not allow us to discover those documents. No-one is using their powers. We have a multitude of wages here, whom you have seen for the last few days, and a multitude of expertise in industry over many years and in other countries. Yet no-one is explaining to you good people what this is all about. It is a calculator to calculate futuristic income. That allows the banks to be able to say that instead of giving you $120,000—which these good people behind me know, if they were to go to the online calculator, ASIC is talking about—you tell them how much your true income is and it will tell you roughly what your borrowing power is. That is not the calculator I am talking about.

CHAIR: So your argument is that the process of using the calculator to work out whether a consumer is capable of meeting the repayments over time in some circumstances is fundamentally flawed and leads to erroneous conclusions. Is that your proposition?

Ms Brailey : Yes.

CHAIR: And are you saying that is a current problem?

Ms Brailey : Endemic.

CHAIR: You are saying there is a large wide scale problem. You have been sitting here for the last two days and, in particular, you would have heard the questions that were asked of the two consumer law centres, who deal all the time with people in the consumer credit, housing and insurance markets. Their advice to us was that the incidence of that type of problem was virtually non-existent.

Ms Brailey : Yes. Very worrying.

CHAIR: So how do you reconcile the reports of those grassroots consumer organisations with yours?

Ms Brailey : That might suggest that one of us is lying!

CHAIR: No, I am not suggesting anyone is lying.

Ms Brailey : Or misleading. They know about this. When I talk behind the scenes they all agree they know.

Senator WILLIAMS: Who is 'they'?

Ms Brailey : Whether I am talking to ASIC commissioners or the Ombudsman, these people know what I am talking about.

CHAIR: That might be the case. They were large consumer organisations and you can see from the quality of their submissions that they are quite intelligent and well-meaning people who are doing a difficult job. But they did not raise those sorts of issues at all. In fact when I pressed them, they said that a lot of the systemic abuses that had been occurring in 2002, by and large are not occurring at the moment. So reconcile those two—

Ms Brailey : I am happy to do that. In 2003 to 2009, there were six cases taken to court—and Karen Cox was quite right, it was very rare to get a case to court. I had a lot to do in 2003 with getting the funding and getting some of those cases to court. The judges found against the lenders. It was not about the brokers; it was about the lenders. Three of those cases actually found the broker is the agent of the bank—which we will not go into now, but that is a fact. The ombudsman should be using the lead of the court. They are, but they are using the lead of court in one set of three or the other set of three and it is not the one that favours the consumers. Why that is, I am not the expert—

Senator WILLIAMS: Are you saying that there are six cases, and that you won three and you lost three?

Ms Brailey : Yes.

Senator WILLIAMS: That explains that, yes. But I am talking about now—

Ms Brailey : For July 2010 I have a whole set of documents here and I can deliver copies to you later. This is about a Mr Wignall—and this one is post-July 2010. But since then we have now got 46 Mr Wignalls on our book. These people are going to ASIC and ASIC is saying, 'We they can find no evidence. Go and get a lawyer. We are not seeing this in the public interest at this time.' One critical thing in the evidence in the last 24 hours has been this: there is not a lot of activity that appears to be coming through the system, but the gentleman here, Mr Brody, alluded to the fact that certain things are going on that he is not sure about at the moment, but he is saying, 'Where is all this information coming from?' I do not know, but it is out there.

What we are talking about is that in 2010 all the six cases I am alluding to were made with the old laws. They won against the banks—we had the laws. We have all been told that the new laws will solve this, the old laws do not. That is wrong to start with.

Secondly, if you have a cut-off point, say, 1 July 2010, in consumer complaints and investigations, what you will find is that the people who qualify within that period—because you have just shut out all the other people from the 2002 to 2009 window—the 2010 people will not know that their loan is fraudulent, toxic, service calculators were used or the same model used by 85 per cent of the major lenders. They have five years. The contracts do not implode for five years.

CHAIR: So you say that there is a future problem?

Ms Brailey : Yes, and some are recognising that it could be.

CHAIR: So you are alerting us to a future problem and, by implication, you say that is why these activist consumer groups are not aware of it, because they are not yet receiving complaints from people who would come in and talk to them.

Ms Brailey : That is right. They are affording their loans. It is back to affordability, the very essence of 25.1 of the banker's code, which nobody has mentioned over the last two days. Section 25.1 is about affordability and, if I stand corrected, isn't it 27.1 now or something like that? It has been altered slightly in the last 12 months, but bear with me on that. It is about affordability, not when the contract is presented to the customer at the very point of signing the loan application form and, as in America, suddenly all these loan application forms are disappearing. All of you could solve this with two or three simple remedies. Demand that the banks give you a copy of your loan application form at the point of signing and before you sign a contract. You will then be able to check whether anyone has tampered with it and decide whether to continue with the tampered document or discuss it with someone in authority. You would solve it in two minutes. I have not got any appetite from either ASIC—particularly ASIC—or FOS to do that. Now, through FOS, we are the grassroots users of the system, which is why, I presume, you have asked me to come today. As users of the system, what we are seeing is all of these things come to fruition.

CHAIR: Okay; I have got where you are at. Are you alleging to us that, currently, the loan application form—which, once it is ticked off on by the lender or the broker, eventually evolves into the contract between the lender and the consumer—is being falsified after it has been signed by the applicant? Or are you simply alleging that the use of the calculator attached to the loan application form is problematic?

Ms Brailey : Both. It has not stopped; we have just moved the deckchairs around a little. There are no phone calls to verify the true income. Why? Because otherwise the banks would be writing $120,000 loans. But what is happening is this, across the board, no matter the age of the people: mostly our members are on $50,000 a year or less; a lot of them are on $20,000 a year; yet they all got, on average—we know our figures—around $500,000 to $600,000 per loan; that is the average loan.

Senator WILLIAMS: Ms Brailey, can I just stop you there. If I were on $20,000 year, why the hell would I want to borrow $500,000? At five per cent interest, for $500,000, you would be up for $25,000 a year. If I have a gross income of $20,000 a year, I would not have to be a rocket scientist to realise that I could not afford $25,000 a year interest as well. If I could be the devil's advocate, why did people apply for these loans?

Ms Brailey : Exactly.

Senator WILLIAMS: Well, why did they apply for the loans?

Ms Brailey : Because they were spruiked. This gets back to what Peter Kell was asked by Senator Cormann earlier, in the estimates committee last year; he asked Mr Kell: 'What are we doing about the spruikers?' And I raised the issue of spruikers in 2003. The spruikers become brokers. It is like a metamorphosis. What has been happening is that the spruikers have been talking to ordinary people, and this is the spiel: 'Don't be silly and leave the money in your house—who does that?'

Senator WILLIAMS: The equity in your house?

Ms Brailey : 'Don't leave equity in your home; take the money out and make it work for you. We can turn you from a pensioner into a retiree within three months.'

Senator WILLIAMS: It sounds like Storm Financial.

Senator BUSHBY: Are we talking here exclusively about money that was borrowed for investment purposes?

Ms Brailey : Yes.

Senator BUSHBY: We are not talking about primary home-loan applications?

Ms Brailey : No.

Senator BUSHBY: So it is exclusively for investment?

Ms Brailey : They are creeping in there. I have one lady in this room now who is a first home buyer, and they have been spruiked into a loan they really cannot afford. They were told, 'We can help you get a home.'

Senator BUSHBY: On that latter point, in my experience, mostly—

Ms Brailey : But most of our members are the ones I have told you about.

Senator BUSHBY: My personal experience with loans, particularly when I was younger, was that I would be going in there cap in hand and hoping that the bank would give me what I wanted: 'I'm hoping to be able to buy this house but it is going to cost $X,' and the bank would tell me they were not going to give me enough to do it. To me, the experience that you are recounting to us today does not fit with the experience that I have had as somebody who has gone in for a first home loan.

Ms Brailey : No, that is right. I understand that. And that is why I am doing my best to make it clear what is going on out there. Why are so many people falling for this ruse? It is a ruse. It is really—

Senator WILLIAMS: What is the ruse?

Ms Brailey : 'I will help you to become more self-sufficient. We will help you to get equity out of your home and invest in another property. And you can afford this.'

Senator BUSHBY: And does that happen?

Ms Brailey : 'How on earth can I afford this on a pension?' Not that they are all on pensions; some of them are on $40,000 a year, but they are all small—

Senator WILLIAMS: Self-funded retirees?

CHAIR: On moderate incomes?

Ms Brailey : Yes, very moderate incomes. They are plumbers and they are teachers. They are from all walks of life. They are not normally people you would think would fall for a scam, but remember the person that is talking to them is either a bank officer or a broker who is using the bank's logo.

CHAIR: So what you are saying is that these people are being persuaded to take the equity out of an existing asset, take the cash from the equity, buy another asset, get an income stream to repay the new asset and that their income plus the income from the new asset is sufficient to fund the repayment due on the equity they have extracted from their home or other asset?

Ms Brailey : And it works—for two or three years it works, or up to five years.

CHAIR: If that is the process, why is that potentially fraudulent or bad?

Ms Brailey : Because from the government's point of view, which I wrote to one of the prime ministers about some 10 years ago, eventually you will have these people thrown out in the street. They will lose their homes, they will lose their unit or whatever investment property they purchased and they will then be a burden on society.

Senator BUSHBY: Can you explain the two to three years or five years? Why does it go sour? Surely capital gains mean—

Ms Brailey : It is part of the plan. It is very clever. It is part of the plan and it is the bankers who came up with this. It is not the brokers. That is what the courts have decided. It is coming from the banks. If I may cut in on that question, when I was speaking to one of the commissioners last year I said to him, 'What—did the brokers and planners all wake up one morning and have an epiphany and make up the service calculator and suddenly they had a lot more clients because they could go and get anyone to sign this up? It all sounds too good to be true but it's the banks running it, so it sounds as though it's all above board.' I said, 'Have they all come up with this thing?' No, they have not. It is in the banking system. It is not the lower level; it is not the middle level. It is at the top. He said to me, 'Denise, you are absolute right. It is the banks.' There is no doubt about it. The banks are the engineers.

CHAIR: Because they borrow the money.

Senator BUSHBY: I still want to know why it goes sour. If they borrow money against their home, they invest it in a second property which earns income, you say it works for a couple of years. Why does it then go sour?

Ms Brailey : The point is that once they get the loan it is on the idea that they are not going to put the money in out of income. Section 25.1 implies you have to be able to afford it from the income that you have, but of course that is not happening. That is why it is maladministration in lending. FOS does not disagree with the maladministration in lending.

The loans are being approved on the idea that you can afford it because you have some money in the bank. So where does that money come from? When the banks set up the loan, they give people $300,000 to go and buy a small property. It is usually $300,000 to $400,000—that is the average. But they give them an extra $50,000 and in some cases $100,000 to afford it. So they are paying the payments with the bank's own money, and the bank approves it. Then you go on for another two or three years like that and that is where the refinancing comes in, which ASIC has been going on about a bit. The commissioner said to me, 'Denise, I can assure you refinances are finished.' They are not. It is still going on. I was seeing it written only six months ago. It is still there.

Senator BUSHBY: So you are saying it works for a couple of years because they give them more money and they live off that?

Ms Brailey : They give them another $100,000.

Senator BUSHBY: In the end it runs out and then whatever inherent income the individuals have plus the investment income is insufficient to cover the costs.

Ms Brailey : Yes, and within five years the actual loan has increased to $800,000 where the original borrowing was $300,000.

Senator BUSHBY: Is that because they are not paying the interest?

Ms Brailey : There are all these fees and charges as well.

Senator WILLIAMS: If the original borrowing was $300,000, it would not go to $800,000 in five years, surely?

Ms Brailey : I am sorry; you are right. It is $500,000 to $800,000 within about five years. They do escalate about $200,000 within a short period of time, especially if you have got defaults on there.

CHAIR: Are you arguing that, when this loan was taken out on the basis of the equity in an existing asset, the continuing refinancing and the continuing compounding interest on the debt is increasing the value of the loan and that is becoming—

Ms Brailey : Yes. It is eating into the equity that is there.

CHAIR: If that is the case, say I have got an asset worth $400,000 and I borrow $200,000 from one of this mob, take out the equity; I can either spend that $200,000 for a party for two years or I can put the $200,000 into a small flat and get some sort of income, which I may or may not use to pay off the loan as adjusted. If I do either of those things, so what? Whose concern is it that I either waste the $200,000 on a party for a couple of years or go into a bad investment?

Senator WILLIAMS: Good party!

CHAIR: You know the point I am making.

Ms Brailey : Yes, I do.

CHAIR: Apart from my own stupidity in doing that, so what?

Ms Brailey : Some did do that—very few but there were a couple out there!

CHAIR: So what?

Ms Brailey : Oh well, we spent the money on something else. The problem is, though, at the end of the day, we have got COSL, as an example, that is sending back letters to our members on a regular basis saying, 'We cannot look at your case because we are not geared to look at matters of fraud, and we have found fraud in your case.' COSL have not given a good finding to any people that we have introduced to them at all that advantages the person—none. That is in the last three or four years. The reason is that they say, if they find the fraud—and because of me they know how to look for the fraud. They look for the service calculator. They look for the loan application form. They know that the actual fraud is not always in the broker's handwriting. It is actually tweaked in the bank at the credit assessment level. Why? We have emails that show they are saying within the banking sector: 'Pump up the volume.' That is the wording the bank is using to say to the brokers: 'We want to pump up the volume.' They are on quotas.

CHAIR: I think we have got a handle on the problem. I am not so sure that we have as yet come to your conclusion. But let us say there is some veracity to your submission. What do you seek us to do in the shape of our recommendations?

Ms Brailey : This is what I have got in mind. With the losses that I have uncovered, I would like to see the service calculator abandoned completely as a way of one size fits all. It is not appropriate. In any case, if I am wrong then they should have no reason why they do not get rid of that system. Secondly, you will stop it tomorrow if you give a copy of the loan application form and the attached service calculator, whether generated by the broker or internal to the banks.

Senator BUSHBY: Will you? These people have actually gone to the bank, whether it is because they been spruiked and they have been convinced of that, but they have gone to the bank and they actually want this loan. If they see the loan application and some of the figures are not what they had on there, if that is what is going to get them the positive result that they are there for—

Ms Brailey : Yes, but they do not know that.

Senator BUSHBY: No, but they are there because they want it. They are not sitting in the bank office about to sign that contract because somebody is twisting their arm behind their back. They are there because they want the approval. Will seeing that loan application stop it?

Ms Brailey : These people, I can assure you, did not walk into a bank one day and wake up and have an epiphany and decide to go and get a loan.

Senator BUSHBY: Regardless of what got them there in first place, when they are there and they have got the pen in their hand and they are about to sign that loan document, they are not going to sign it because somebody is forcing them to; they are going to sign it because, for whatever reason, they want the loan.

Ms Brailey : Well, they have bought the idea and they want it, yes.

Senator BUSHBY: They want the loan. Will the loan application, seeing that that might have some dodgy numbers on it, mean that they will not? I am not arguing with you—

Ms Brailey : No.

Senator BUSHBY: I am just saying that you said it will stop it. I do not know that it will, because those people who are there are there because they want the loan to be approved.

Ms Brailey : No, I disagree. And the banks know that; that is why it is done this way.

It was explained to a few brokers. There was even one in New Zealand I spoke to about 10 years ago, who said, 'Well, we were told if you don't do it this way you don't make any money.' The other thing was that most people are honest; if they think they have to lie to the bank, they know there is a criminal element to that because it is written on the contracts. It is written on the bank stationery that if you give a false set of statements or financial details to the bank you could face a criminal penalty. They know this, and so if 95 per cent of them knew that the banks, or brokers even, were indulging in this—

Senator BUSHBY: Or at least say, 'Hang on a second; what's this?' Let's help them—they might just query it.

Ms Brailey : If they are suddenly told, 'The only way we can do this is by putting up your income as $180,000—

Senator BUSHBY: It would make them think twice.

Ms Brailey : They would most likely say, 'I'm not having a bar of this. I don't like this.'

CHAIR: Let us cut to the chase. Are you seeking that the committee makes a recommendation that there be some form of urgent public inquiry by a reputable senior person into the schema that you have outlined?

Ms Brailey : Yes. And not a banker, preferably.


Ms Brailey : Yes, I am. My opinion for the years I have been doing this is that it should be a royal commission. It should have the full powers to call witnesses and to produce documents, because it is a widespread problem that other countries in the world have had but we think we do not have it here. I know we do; I can see it daily. I have so many documents from so many people.

I can say it this way: when you spoke to me last—some of you—I had—what?—400 members at the time, I think. We have now gone close to 1,200 members, and the LAFs that have come in—I use that word 'LAF' as loan application form for the sake of Hansard—are still all the same model. No-one had a copy to start with. When they see the copy they have there is a wild factor of, 'My goodness me! I didn't know that was there!' and in each case there is fraud, and COSL is agreeing with that. It is not disagreeing. It did not say so here today.

CHAIR: I think we have a handle on the argument, and we will give that consideration. I mean that. With the benefit of the discussion with you and more explanation we have a handle on your complaint. We understand your issue, your complaint, and—

Senator BUSHBY: I did interrupt Ms Brailey when she was talking about producing the LAF, as you referred to it, at the point of contract signing. Was there another—there may have been—aspect that you were going to talk about that would actually help things as well?

Ms Brailey : Yes, there was. Thank you, I appreciate that. We then did our own surveys amongst the members, which I think will be of benefit to the senators. Eighty-five per cent of these involved the major lenders, not the non-bank lenders or the others. There are still problems in amongst those.

This was the shocker: you asked me before about full docs, and 18 per cent of our members have the same model of dishonesty within the documentation—18 per cent are full docs of the total number of loans. And 36 per cent of these loans were written by the lenders themselves—staff within the banking system—and no broker involved. These are fairly high, graphic details of how widespread this may have been.

If we only have 1,200 members and no-one else in Australia has this problem then I am satisfied about why the banks are not dealing with these 1,200 people, making an easy path for restitution and even—dare I ask for it?—a 'sorry' letter of apology. What if it is not only 1,200 people? What if it is a key indicator of something much more systemic? We are only getting these people who have preceded me to say today, for the first time, that there may be systemic issues. They were a little bit ginger about it, but the word came up, and Senator Bishop mentioned it a few times as well. Last time we all grouped together for the banking inquiry post-GFC, everybody was on song: no systemic issues. And I thought, well, if there are no systemic issues, then what am I doing? That is what I think.

Perhaps I could just recap on that: what we want is, in particular, these documents to be discovered. FOS is saying it has had problems with the documents coming through. In terms of my own expertise I was going to also quickly mention to you that—

Senator WILLIAMS: Ms Brailey, we are very short on time. I would like to ask you a question. ASIC representatives went to Perth to meet with you. Is that correct?

Ms Brailey : Yes.

Senator WILLIAMS: And you have all this evidence?

Ms Brailey : Yes.

Senator WILLIAMS: Did you give that evidence to ASIC?

Ms Brailey : Yes, I did.

Senator WILLIAMS: Did you give them loan application forms when you met with them?

Ms Brailey : They did not ask for loan application forms, because they already had those. They had those from the members. The members had posted them into them. He knew that. But when he went there he was after the emails, and the six emails of communication, which I can produce for you, between ASIC and me to make the appointment is only about the emails—

Senator WILLIAMS: We will be meeting with ASIC, and I will have ASIC confirm that or deny that. I think it is only fair that they have their say as well. This inquiry is about ASIC and how it performs, how it carries out its obligations and duties et cetera. My final question to you is: in your opinion, what should be done for ASIC to do its job better and more efficiently?

Ms Brailey : I think ASIC—quite frankly, and I have said this publicly—should be completely transformed from the model it has now. It should not be evolving. The structure should simply be that it cannot look after consumer protection issues. In 1996, when ASIC was being formed for the future of 1998, to decide how it would be structured, Philip Hanratty commented on the obvious conflict of interest in that report.

Senator WILLIAMS: So, you are suggesting that consumer protection should be taken away from ASIC?

Ms Brailey : It should be taken totally away—then I can retire—and a consumer protection bureau should be put on the table to properly protect consumers instead of all these other distractions that ASIC has—

Senator WILLIAMS: Well, ASIC is probably glad to give it away, I think!

Ms Brailey : I would be happy if they did give it away.

Senator BUSHBY: I have just one final question on that. Other submitters have actually suggested that that aspect of ASIC's responsibility should go to the ACCC. Would you be happy with that?

Ms Brailey : It was with the ACCC and Allan Fels, yes.

Senator BUSHBY: Exactly. I am thinking Allan Fels has actually suggested that it goes back to the ACCC.

Ms Brailey : Yes. He was fairly effective back in those years.

Senator BUSHBY: So, rather than a new agency—

Ms Brailey : No, I do not know about that. I would have to think it through clearly. One of the biggest problems we have now is fraud—fraud and forgery. These are criminal activities. In New Zealand, for example, they have this particular unit to deal with this sort of thing. To answer your question, you need a proper consumer protection agency, which I called for in 2001, and that should have a serious fraud office in it, and then you would not have these problems arising.

CHAIR: Thank you, Ms Brailey, for your evidence today. We now understand your complaint, after the benefit of that lengthy discussion. When we come to put together our set of recommendations sometime in April we will give your complaint mature consideration. Thank you very much for drawing it to our attention. That concludes our discussions today. This committee stands adjourned until tomorrow in Canberra, and we will resume work at 3.15 with the ticket scalping inquiry.

Committee adjourned at 14:54