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Wednesday, 28 November 2018
Page: 11902


Mr CHRISTENSEN (Dawson) (17:58): I rise to speak in support of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. This legislation will enable tougher penalties for misconduct in the corporate and financial sector by amending the Corporations Act, the ASIC Act, the National Consumer Credit Protection Act 2009 and the Insurance Contracts Act. The legislation is responding to a recommendation from a task force that was itself created from a Financial System Inquiry recommendation.

The intention is to deter misconduct and, by doing so, improve community confidence in the corporate and financial sector. There has long been a lack of community confidence in that sector, especially in the banks. That is why the community called for a royal commission into the banks, and that is why I supported a royal commission and fought to convince the government that a banking royal commission was the only option. I'm pleased to say that fight was successful, with the establishment of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, or what is better known simply as the banking royal commission.

The royal commission submitted an interim report in September, with the final report due to be submitted by 1 February. The community expects bankers to act in respect of customers financial affairs with the utmost integrity. Importantly, the community expects banks and bankers who engage in illegal and criminal conduct to be held to account, facing significant penalties and jail terms where appropriate. As has been highlighted by the royal commission, the entire industry has been plagued by extensive, serious misconduct which is extremely harmful to the affected customers. The royal commission highlighted how regulators have failed to effectively identify and prosecute breaches of the law under the Corporations Act and the Criminal Code.

The community has told me overwhelmingly that they are sick and tired of bankers getting away with white-collar crime without consequences. For most victims, achieving redress against a bank that has acted improperly towards them is impossible. People lose their businesses and they lose their homes. Marriages are torn apart and families are torn apart. Some people have taken their own lives, and most are left in a situation where they are bankrupt and can never start again. I welcome any efforts that provide a genuine improvement to legislation and that provide a strong deterrence against bankers breaking the law in the future.

However, I do hold a concern—and, I've got to say, a bit of disappointment—about the outcome of the royal commission in respect of small and medium enterprises and farmers. Small businesses are vital to our local economy, and they're a significant source—the biggest source—of jobs in this country. Many businesses rely on borrowing to sustain and grow their operations. A bank is supposed to be a trusted business partner that supports business borrowers. However, since the GFC there has been a dramatic increase in complaints about mistreatment of these business owners by the banks.

One of the most serious complaints has resulted from the practice of banks foreclosing upon large volumes of customer loans where customers were meeting their repayment obligations and were not in any financial trouble. The bank simply changed its mind about its lending strategy and forced these businesses into extreme financial hardship, and, almost inevitably, insolvency because the bank wanted to get out of lending to those customers as quickly as possible. Inquiries to date have revealed complex, one-sided business-lending contracts that allowed the banks to act unilaterally against a customer without recourse. Businesses do not have the same legal protections as retail consumers, and most cannot afford to litigate against a bank even when they have a strong case. The resulting social harm is immeasurable.

Unfortunately, I have to say that the royal commission has failed to adequately investigate systemic foreclosures of small and medium enterprise businesses and farmers, which was the ultimate catalyst for that royal commission. After reviewing volumes of evidence supporting the ballooning allegations of systemic misconduct, in 2017 my National Party colleagues and I—most notably, Senator Barry O'Sullivan and Llew O'Brien, the member for Wide Bay—drafted these terms of reference for an inquiry into the practices of banks foreclosing on regional small businesses, farmers and city based businesses who were meeting all of their contracted repayment obligations. The stories we heard were shocking. Evidence was reviewed of receivers engaging in selling properties drastically below fair market value; not correctly accounting for asset sales; cattle duffing—cutting tags out of livestock to hide the true ownership of cattle—and falsely signing that cattle were chemical- and disease-free. Evidence was also received of banks altering loan documents and other relevant customer file documents used in court, forging signatures on documents used in court and withholding relevant documents from courts during the discovery process.

The terms of reference for the National Party's inquiry—the one that we were going to put forward—included investigating the use of unfair non-monetary default covenants in loan contracts; the role of receivers in systemic misconduct; serious biosecurity breaches resulting from receivers' misconduct; the role of valuers in overvaluing or undervaluing a property to meet the bank's desired objectives; and serious misconduct by banks in court, including the use of forged documents in court cases. Unfortunately the former Prime Minister, Malcolm Turnbull, rejected the National Party's thorough, detailed terms of reference, instead adopting a broadbrush approach, leaving it fully open to the royal commission to determine how to address misconduct in the entire banking sector in just 12 months. This is simply an inadequate time frame to investigate the extent of misconduct across the banking and financial services sector.

The royal commission received more than 10,000 submissions, yet only heard from 27 witnesses who were victims of the banks. Less than 10 small-to-medium business performing loan foreclosure case studies were examined in the small-to-medium enterprises round of hearings. Submissions offering to provide documentary evidence of serious misconduct were not followed up by the commission. Bank victim witnesses were heavily influenced by counsel assisting the royal commission to forego their right to cross-examine bank witnesses—I have that testimony that's been given to me. This further compromised the inquiry, I believe. This was in stark contrast to the sexual abuse royal commission, where more than 8,000 private sessions were held with victims and more than 2½ thousand referrals were made to authorities, including police. Victims and their legal counsel were also allowed to cross-examine churches and other relevant institution witnesses.

In the case of Bankwest, counsel assisting the royal commission did not test any proposition of systemic misconduct. This is despite the commission having received a brief prior to the small business round of hearings detailing that a credible ulterior motive existed that drove deliberate dodgy behaviour. In 2009 McKinsey & Company published a bad-bank strategy template, which detailed the rationale, benefits and processes for the banks to simply dump unwanted performing business loans. The benefits included: maintaining investor confidence; optimising economic capital; and reducing management time taken up managing large or complex loans.

The Commonwealth Bank clearly adopted such a strategy in respect of Bankwest, with a very senior executive stating, when updating the market:

The Bankwest story is very much an intentional one. We have quite deliberately got out of low credit quality lending in this space and on an annualised basis in fact our reduction in the target, low credit quality space is well over 20%.

That's a quote from a senior executive at CBA about Bankwest.

Counsel assisting the royal commission failed to put this to the CBA or explore whether ulterior commercial incentives drove the systemic foreclosure of performing loans that were at play. Documents cited by the CBA during the royal commission confirm that the CBA considered the merits of, and ultimately adopted, a bad-bank strategy. Expert analysis highlighting areas requiring further investigation was provided to the royal commission by the CBA after the small business round of hearings. How can the royal commission rule out systemic misconduct if it does not consider credible, independent expert research and advice which was strongly supported by primary documents from within the CBA? In those circumstances, the findings of no misconduct by the royal commission cannot stand and need to be revisited urgently. Compounding the problem, the royal commission did not look at receivers, valuers or misconduct by banks before the courts. The small business round of hearings was the only round not to find serious, systemic conduct despite extensive complaints and evidence supporting the proposition that banks had engaged in systemic misconduct.

Although a 12-month time frame is extremely tight, the government has repeatedly stated that the royal commission will be extended if Commissioner Hayne feels it necessary to request more time. When I learned that the commission had not adequately investigated the small business and farming issues, I wrote to Commissioner Hayne, advising that he had my full support and urging him to request more time to allow the royal commission to investigate the relevant issues more thoroughly. I note that the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, who has conducted an extensive review of these issues, also urged Commissioner Hayne to request more time to allow a more thorough investigation of the matter. It appears that Commissioner Hayne did not heed this request. Around that time I also wrote to the Treasurer, seeking an extension of time for small business, as well as additional terms of reference, to allow misconduct by relevant parties such as valuers, receivers and lawyers to be reviewed.

This leaves both the government and small business borrowers in the unfortunate position that misconduct of the past will still not be addressed. It also leaves all small business and farming borrowers exposed to the very real risk in the future that a bank will change its view of lending risk to an entire sector of loans and aggressively move to foreclose on those loans, even when the borrowers are meeting all of their repayments and aren't in financial difficulty.

A once-in-a-lifetime opportunity to properly review and move to redress past conduct has been wasted, as has the opportunity to effect change to protect borrowers in the future. The risks are real. The risks remain. Small business around the country should be outraged. Farmers and all those communities that rely on farming should be up in arms. Generations to come are likely to be more harmed by unethical bankers than by economic downturns or drought. No matter how much positive work was completed by the royal commission, we cannot allow the failure of the small business round of hearings to go unnoticed or unchallenged. The findings of no misconduct resulted from a rushed, flawed inquiry that did not consider all evidence available to it and did not afford procedural fairness to at least some victims. This does not mean misconduct did not occur. We must continue with a better process to properly investigate the matter that ultimately triggered the royal commission.

We rely on small business to contribute to the local economy and employment in North Queensland and right around the country. As a result of the disappointing failings of the royal commission to adequately investigate this area of misconduct, we owe it to small business and farmers to address this conduct satisfactorily. The Small Business and Family Enterprise Ombudsman has the power, resources, budget and motivation to conduct an investigation into the actions of third party agents of the banks, like valuers and receivers. Whilst the ombudsman can commence an own-motion investigation, the most thorough and effective investigation possible would result from a proactive direction from the Treasurer to conduct such an investigation. When the Treasurer directs the ombudsman to conduct an investigation, the action actually triggers the ombudsman's notice-to-produce power, an important and necessary power not available in an own-motion investigation. I have written to the Treasurer and spoken with him, imploring him to instruct Kate Carnell and the office of the ombudsman to conduct this important investigation into the role of third parties, such as valuers and receivers, foreclosing on performing business loans.

As a practical measure, I also call on the government to ban banks from acting upon non-financial covenants to trigger penalty interest and foreclosure proceedings on small business and farmers who are meeting their repayment obligations and are not in financial difficulty. I understand significant work has been undertaken by government to achieve this outcome, but banks are strongly resisting. The key question is: why are the banks resisting this initiative so strongly? The obvious answer is that the banks want to retain the unfair contract conditions and the ability to exit a loan at any time, no matter what cost this action has on the customers who are meeting their repayment obligations. How many more hardworking small-business men and women who punch above their weight every day must suffer life-changing, catastrophic losses because of unethical bankers and their deliberate dodgy behaviour? How many farmers must face that?

While I commend the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018, it does seem somewhat a redundant move if the unethical practices of the banks are not properly investigated in the first place. How are the strengthened and increased penalties to be applied if misconduct is not properly investigated? The real fear is that nothing will change and the bankers will remain untouchable, immune from prosecution for their illegal and criminal conduct, and honest, hardworking Australians will keep getting ripped off by those big banks who continue to put record profits before people. In closing, I really do call on the royal commission, while there's still time, to look deeply and thoroughly into this area.