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Wednesday, 27 September 1995
Page: 1873

Mr BRAITHWAITE (10.01 a.m.) —Mr Deputy Speaker, it is with particular pleasure that I speak on this report on reviews of the 1993-94 annual reports of the Reserve Bank and the Insurance and Superannuation Commission, because I was one of the original members of the committee that produced A pocketful of change and the resultant report from that, Checking the changes.

Mr Price —You did a good job, too.

Mr BRAITHWAITE —I believe we did a good job. What we are doing here now is checking those changes again. Members would appreciate that in the original report the committee recommended a couple of things. One was that the Westpac letters should go off to the National Crime Authority. That was done, but it refused to look at them. The second was to recommend a type of mediation process that could be proceeded through without the excessive costs that are normally involved in litigating these cases.

  I believe that in this respect the banks have failed completely to mediate appropriately. They are taking advantage by using their funds to litigate matters, which eventually drives customers into bankruptcy because they just cannot match them. I just heard this morning that Westpac has made a claim that it spends $120 million in legal expenses—I am not sure over what period that is. When you consider the tax effect of that, one-third of it at least is being picked up by the taxpayers of the country. They can prosecute propositions in cases where a client eventually falls out of the litigation process because the client cannot fund it.

  One of the recommendations that comes through in this report is very important, I believe—that is, recommendation 4.16:

That the Treasurer provide the Standing Committee on Banking, Finance and Public Administration with terms of reference for an inquiry into the effectiveness of alternative dispute resolution in the banking industry, including the role played by the Australian Banking Industry Ombudsman.

We are aware of the Westpac letters, called the French letters. I believe that they were an indictment against one bank in this country that was never appropriately followed through. The Westpac letters were tabled before the original committee by the then general manager, Mr Stewart Fowler. I can remember the occasion well. What brought this about, as far as the overseas borrowings are concerned, was evidence that, because of the record interest rates being paid in the mid-1980s, people were wanting to go offshore to pay the lesser interest rates. Those borrowings are still having an effect on our overseas debt.

  I believe that recommendation 4.16 is absolutely critical. As I said, it endeavours to follow through recommendations of earlier reports that have not yet really come to grips with mediation. I am going to talk at this time about one particular bank, Westpac. Westpac, I believe, has done all it can to avoid its moral responsibilities for the bank's fiascos since deregulation. An alternative dispute resolution mechanism has not been properly put into place and the mechanism under the present system is just not working.

  The problems, of course, are not just for foreign currency borrowings. Complaints against major banks are being given to me on a regular basis. It is also a fact that, while these banks are operating within their legal responsibility, they are also entering into possession on security prior to giving customers sufficient warning that they are going to do so. We have had matters referred to our committee which, although the committee did not resolve them, were handed on and resolved. I believe that the banks are not treating those people properly.

  There has been the experience, I understand, in South Australia, where one bank said it was borrowing offshore; eventually, the litigant was able to demonstrate that the bank had never gone offshore at all and there was a settlement at the court gates for a forgiven debt. We are still getting complaints on these matters from farmers and small business people and, in its own way, the committee has raised the prospect of removing the tax deductibility for litigation expenses in the hands of the bankers because they are the ones who get the full benefit; the customer is not able to get the benefit under the tax act.

  I want to give a particular example which is important because it is typical of many cases with different banks across Australia at the moment. In 1985 Colin John Donkin and Heather Kay Donkin, conducting a business as hoteliers, were approached by AGC Advances Ltd to borrow money in the form of an offshore loan. On 28 April 1986 the documents were executed and the borrowings of $1.5 million offshore and $0.5 million onshore were concluded.

  AGC Advances Ltd claimed that the Donkins defaulted under the provisions of the offshore loan securities. Proceedings commenced by the Donkins in the Federal Court of Australia in respect of the offshore loan, claiming damages for negligence. The trial judge found that AGC was in breach of its duty to advise the Donkins of the steps available to a borrower but also concluded on the evidence that no damages were sustained by the Donkins.

  An appeal to the High Court against the no-damage decision was withdrawn on the basis that AGC-Westpac was prepared to enter the mediation process with a view to providing the Donkins with a fair and equitable settlement to their claim. Despite protracted wavering by AGC-Westpac, a mediation was eventually attempted before Sir Laurence Street, with the mediation proving unsuccessful. It had been obvious that there had been no genuine intention by AGC-Westpac to mediate the issue and that it had been a tactic of the bank to delay justice long enough to have the appeal withdrawn so that it might just win out eventually by procrastination.

  The Donkins continued to seriously question and could not accept the method of assessment of damages by the trial judge, Mr Justice Beaumont. Experts on foreign currency borrowings advised the Donkins that the method of calculation of damages by the trial judge, Mr Justice Beaumont, was incorrect.

  Mr Donkin eventually approached Professor Jeffrey Carmichael of the Bond University and obtained a report from him. That report indicated that there had been serious miscalculation of damages by the trial judge, who had followed the calculations provided by KPMG Peat Marwick, chartered accountants, they say, at the instructions of Mr Stuart Fowler, Chief General Manager of Westpac. Peat Marwick's was not an independent calculation but was severely compromised and prejudiced by the Westpac action.

  Westpac, through AGC Advances Ltd, was originally found to have been negligent in that it failed to advise the Donkins of ways to minimise the risk inherent in foreign currency borrowings. As has been the case in each subsequent court action, Westpac, through its subsidiary, has never challenged the findings of negligence. In other words, negligence has been proved; it was a matter of quantifying the amount of damages.

  It was during the term of management of Westpac by Mr Stuart Fowler that the infamous Westpac letters of November 1987 were written by Westpac's solicitors, Allen Allen and Hemsley. Collectively, they became known as the `French letters'. These letters were tabled by Mr Stuart Fowler as chief general manager at the time of the inquiry before the House of Representatives parliamentary committee on banking, finance and public administration. I can remember that occasion very well.

  One of the original recommendations by that committee in its report was for the Attorney-General (Mr Lavarch) to refer these letters to the National Crime Authority. The National Crime Authority did not proceed with that referral, and I still believe that some government intervention could have taken place on those letters to indict the Westpac management of that time.

  The major flaw in the original calculation by KPMG Peat Marwick was to assume that an offshore loan, with a 10 per cent stop loss in place, would be effectively brought onshore when an adverse currency fluctuation exceeded 10 per cent. However, this ignored the fact that it was impossible to bring this offshore loan onshore between interest periods. Internationally respected financial experts, such as Professor Carmichael of Bond University, Professor Valentine and Dr Hunt of Sydney University of Technology, have said that it is wrong to assume that an offshore loan is automatically brought onshore when an adverse currency fluctuation occurs. Some of that has been sworn on oath.

  The evidence of KPMG Peat Marwick relied on by Justice Beaumont assumed the opposite and thus affected any financial calculation. Westpac-AGC Advances would have known that the finance facility deed of AGC Advances Ltd specifically prohibited a loan coming onshore between rollovers, yet this has not even been mentioned in the Peat Marwick report. Calculations quite the reverse of those were made on the premise that when a stop loss cover was triggered, the loan would have been brought onshore immediately.

  In spite of the committee's original recommendation No. 60 for mediation, it is evident that this process has not been pursued by Westpac and some other banks with the good intentions that the committee intended. That is the reason that I fully support the committee's recommendation No. 4.16. It appears to me the only way in which the committee can ensure justice for all at minimum cost.

  In connection with the Donkin case, I know that AGC-Westpac intervened by taking up their security on a vessel, which was later proved in court to have been the incorrect manner of taking possession. Yet all the constitutional rights which a citizen of Australia would expect have been denied these people in this case because, I understand, Westpac has outlaid $1 million in litigation expenses, for which they have had a tax recovery, and the Donkins themselves have paid out $300,000. One of the partners has now been bankrupted and the bank, without any mercy whatsoever, is pursuing the bankruptcy of the other partner when, they assume, the whole thing will just fall over and collapse.

  I believe this is a matter where no justice has been done and that if a full mediation process had been put into place, where people genuinely came to that mediation before Sir Laurence Street, for whom I have a lot of respect, some answer could have been given. But it is obvious that the bank will do anything to fight to prevent a successful application by the litigant, because if that does occur a whole lot of other cases are just waiting to be stacked up to follow the precedent that would be set. I also want to say that in the course of a lot of the court processes, one witness of the banks was said to have been unreliable and not truthful, and in another case I understand that the judge declined to take the evidence of Stuart Fowler as being truthful.

  We are dealing in this debate with the Reserve Bank of Australia's position and I really believe that we should get some justice through the Reserve Bank. The Commonwealth government and the Reserve Bank give banks the licence to operate. In situations such as this, where we find that the banks are abusing their power and abrogating the trust that should exist between bank and customer, then perhaps their licences should be reviewed and if, on an annual examination, a bank is not playing its part as a proper moral corporate citizen of Australia, its licence should be revoked. I do not believe a licence should be allowed to be open-ended and it should not be used as a power to prosecute ordinary Australians.

  I have details of another case where, through the mediation process, a judgment was given by Sir Laurence Street in favour of the litigant, but the bank instructed Sir Laurence that he could not assess the claim for damages. I understand that is now rocking backwards and forwards between the bank and the litigant, the litigant is getting poorer and poorer and poorer, and the bank is just continuing it on in an effort, perhaps, to make it fold over. I have given the example of Westpac and I understand there are other banks—

Dr Theophanous —Did you raise those issues with the Treasurer?

Mr BRAITHWAITE —Yes. In fact, that is what we are trying to do now. I believe the cases that I have are well publicised and well known. At last, I am hopeful, if the Treasurer (Mr Willis) allows us to operate on this particular recommendation, that we can go from there. Another recommendation I want to quickly deal with is the bankers' submission on the alternatives of the retirement savings accounts. I do believe that superannuation in Australia is grossly over-claimed to be savings but it does strike at the heart of investment money for Australia. I ask that the Treasurer look very closely at the bankers' proposition as an alternative to retirement savings accounts.