So far in the Royal Commission hearings, we have heard about the rorting of customers by AMP and certain major banks; namely, the ANZ, CBA, NAB, and WESTPAC. A veritable smorgasbord of chicanery lies before our eyes Collecting fees for services they haven’t provided, inappropriate financial advice, falsifying documentation, lying to the Australian Securities and Investment Commission to mention a few, have all been on the bill of fare.
The reaction to all this from the general public has been twofold; one of shock horror by those that have never borrowed from banks or have done so but not been duped (to their knowledge) whilst those that have been fleeced are today shouting to the heavens with a renewed voice, “I told you so!” because they now know people are starting to listen at long last. They feel vindicated!
There is no question that the Commissioner Ken Hayne and his young legal eagles have done us proud so far but it may be somewhat premature to celebrate until the Commission has exposed the full facts, or to be more precise, has plumbed the depths of the Banks’ depravity.
One particular topic has yet to be discussed at length though; namely banking loans for investment purposes that were imprudent and should never have been approved under the banks’ own banking codes. If you think what has been exposed so far is shocking, wait until you hear how the Banks go about processing loans to their customers.
When discussing banking loans, two banks must be foremost among those banks interrogated by the Commission. They are the Bank of Queensland and the Commonwealth Bank of Australia who figured prominently in the Storm Financial scandal.
I can only speak about the Bank of Queensland with any authority because Helen and I took out a housing loan with that bank, and I have been investigating that bank for many years. Therefore, I will now take that organisation for this case study.
Deep within ASIC’s warehouse alongside the Ark of the Covenant there lies a crate marked “To be read when we have the time”. Among the more than one thousand documents within it is a report dated 20th July 2013 that I sent to ASIC in relation to the machinations of the Bank of Queensland in North Ward, Townsville. This was one of many about this bank, I might add, but this one will suffice
Here’s a condensed version of my report that will enable you to grasp the essential points.
(Addressed to the Chairman of ASIC)
Report TO THE CHAIRMAN OF ASIC DATED 20TH JULY 2013
SUBJECT: misconduct BY THE OWNER_MANAGERS OF the Bank of Queensland in North Ward, Townsville.
In May of 2010 the Brisbane Supreme Court ordered the BOQ to disclose key documents relating to lending practices in two of its Townsville branches, namely the North Ward and Kirwan branches, which dealt with the bulk of more than 300 Storm clients.
These documents, which included credit risk reviews, compliance checks, audit reports and operational risk reports, are relevant to the bank's compliance with its own lending procedures. They also provide evidence of the BOQ’s awareness and understanding of Storm's investment model.
It emerged that the Bank of Queensland’s head office knew as far back as 2006 that there were numerous lending problems at the North Ward branch. Even so, that bank maintained strongly that there were no faults in its lending practices, even though many of the loans made by Storm Financial were processed through Townsville's North Ward branch of the bank.
An internal report showed that the BOQ’s North Ward branch in Townsville made mortgages to about 260 Storm clients worth at least $110 million.
After the collapse of Storm, the credit managers in the BOQ’s internal credit assessment section in a report to head office were highly critical about the way the BOQ in North Ward went about processing and extending these Storm housing loans for investment purposes. I quote:
"Basically none of the info provided and input on the applicant is accurate... I would suggest that things may unravel at a rate of knots from this point on..."
[Lindsay Johnson - BOQ Risk Assessment]
"North Ward branch had, in many instances, not included Storm client's margin loans as a liability when calculating whether they could afford more debt...
On many referred loans a standard comment ‘no other debts held other than for example credit card etc' despite knowledge of an existing margin loan...
"Income confirmation is based upon a printout of Colonial Geared Investments which indicated that they had a margin loan of $1.453 million. We should have investigated amounts borrowed and included in servicing....
"A print out of Macquarie Margin loan showed a debt of $724,000 however there was "no allowance in servicing for this debt...
"When applying for an earlier loan, in August 2006, the bank had on file a rate notice dated August 2004 which indicated a pension discount for Mr Reynolds, so the $100K income claimed in the application is obviously not true...
"Over and over again Storm had sent the North Ward an initial letter detailing margin loans but that these amounts were "not disclosed" in the Bank's computer system or the loan applications...
"In one case, the report noted that an initial letter from Storm had indicated a margin loan balance of $1,318,402 but that North Ward's co-owner manager "Mr Matthew Buchanan had stated in comments recommending approval ‘No other debts held other than credit card facility...
"Had such margin loan amounts been included in the Bank's serviceability calculations, it's highly unlikely the loans would have been granted...
"Noted that North Ward branch had accepted photocopies of disbursement authorities from clients on Storm letterhead. Best banking practice is that photocopies are not accepted because they are too hard to authenticate...
"Example of one couple who took a $1.168 million dollar Bank of Queensland mortgage. Their disbursement authority authorized the payment of $280,919 directly to Storm in what appeared to be a commission payment. This represents 24% of the loan amount...
"It is noted from review of some of the loan files that it could be construed that income and ongoing commitments may have been manipulated to achieve approval. Should this prove to be the case, then these loans could be set aside..."
[Jeff O'Sullivan, BOQ Senior Manager - Credit Risk Review]
"In the months following the initial 2006 credit risk review, action should have been taken by the BOQ's area manager and state manager to ensure the problem areas were fixed. But there was a recurrence of the same sort of problems identified in the 2008 credit risk review...
"I have conducted a number of credit risk reviews of North Ward's business over the years and have previously questioned the integrity of the data on the files... These credit risk reviews had been conducted in late 2006/early 2007 and another in February 2008. In addition to these two formal reviews of the North Ward branch, there were two or three informal reviews initiated to "clarify some rumours that were going round the bank." [Mr Alan Butler, BOQ Head of Portfolio Management and Financial Crimes]
"Prepare a report in relation to the processes that saw Reynolds (a Vietnam Vet also now mentioned by the ‘Sydney Morning Herald’) receive a loan, whether our processes were followed ... and any remedial action we may need to undertake in relation to customers... The purpose of the review was "firstly potentially being able to selectively use outcomes for external (press) purposes and secondly, whether our process has been followed... Sooner or later we will receive some hard questions about Storm, our relationship and affected customers. While, from what we have seen to date our position is defensible, there remain some gaps..." [Mr Bruce Auty, BOQ Group Executive]
It wasn’t until December 2008, just weeks before Storm failed, that Mr Bruce Auty, BOQ’s Group Director, was alerted to the long history of "anomalies" surrounding "credit risk review" issues at the North Ward branch. Mr Auty was only then told about the Steve Reynolds case mentioned above.
Bruce Auty, (Bank of Queensland's group executive for group risk), told the Storm Financial public examination in the Federal Court in Brisbane that:
• One of his staff called for a review of loan approvals at the bank's North Ward branch, managed by Matthew Buchanan. But two formal reviews and another three informal inquiries failed to change the way BOQ's North Ward branch operated;
• The first review in September 2006 concluded that incomes of Storm investors were routinely overstated. Applications would list 5 per cent of the expected income from total funds invested, meaning pensioners could be shown to have $100,000 earnings;
• investors were not interviewed in person despite that being bank policy;
• it was the bank’s policy to deal only with Storm rather than contact the applicants directly if there were questions regarding their incomes and ability to meet the loans;
• The North Ward branch thought it prudent to rely on a single page of income details sent from Storm to BOQ's North Ward branch because they were financial investors.
• The Bank of Queensland operated by the Code of Banking Practice, but didn't know if it was in accordance with its terms and conditions for home loan documents although its banking code of practice clearly states that it should be. The code further states: ''Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.''
• The ability of borrowers to service loans was identified as a major worry. That issue arose because head office was initially unaware that most Storm clients also had secured multiple margin loans from other lenders to invest in index funds.
The 'North Ward branch boasted at one time monthly lending peaks of more than $20 million; an amount which was described by other owner managers as “astonishing …the evidence is overwhelming that the owner-managers of this Bank manipulated the loan request details so that they would meet the internal credit requirements of BOQ’s head office. Banks should provide the ultimate “checks and balances” because the public expects nothing less…
There is no question that there was an ongoing culture in the BOQ North Ward to push Storm’s clients’ loans through at any price, and those Storm clients were the ones that paid the ultimate price in the end. This was a deliberate ploy by the BOQ in North Ward to circumvent the BOQ’s internal credit assessment department for the sole purpose of increasing loan volume for that Bank with Storm’s being a willing and able partner.
The culprits were the co-franchise managers of the BOQ North Ward, and those people in Storm’s office that had the most to gain in monetary terms; namely certain financial advisers and the directors of Storm. They collectively decided early on in the process that the only way to avoid any credit constraints was to inflate assets and deflate liabilities or ignore them entirely. In order to have control over the system, Storm persuaded its customers to sign blank loan applications and the BOQ North Ward took no steps to verify the details on these applications. In fact, the owner managers of the BOQ in North Ward actively participated in altering documentation when it suited their purposes. It was a partnership in everything but name.
The scheme was simple enough. Get the applicants to sign blank application forms on the pretext that Storm would fill in all the necessary details later. If our own personal experience and the feedback I have received from other Storm BOQ applicants are anything to go by, this is exactly what happened. Storm and the BOQ in North Ward then inflated our assets (house valuations for example) and omitted liabilities such as our margin loans from the application forms.
As far as “income” was concerned we have already heard from Bruce Auty that such would be calculated at 5 per cent of the expected income from total funds invested. If Storm had shown the actual income in real terms, most applications would have failed the litmus test. Strom’s clients were, for the most part retirees, who weren’t earning any income at all. They relied solely on the returns from their investments. In share markets that were on a downward spiral in 2008, such returns became small or non-existent. Indeed, in many cases people had to find additional funds to pay off their loans.
It has been established that most BOQ housing loan applications were showing “incomes” for individuals in the $100,000 or so per year range. We know why! This met the “income criteria” laid down by the BOQ’s internal credit department so ensuring that the loans were approved.
So, how does the BOQ North Ward fit into this deception? Mr Auty defended the bank's unquestioning belief in data provided by Storm about the size of client investments and their assets. "Storm was acting as our agent for those loans. We had no reason to doubt them! A loan was made in good faith by the bank and accepted in good faith by the borrower." He further stated, “The bank provided no advice about investing with Storm and did not "coerce" anyone to tip in money.”
Mr. Auty’s words, "Storm was acting as our agent for those loans” is very revealing. This proposition has been bandied around a lot, and was the basis, I believe, for the CBA’s claim that Storm was acting as an agent for its customers. This attitude is prevalent in S & G’s booklet covering the CBA resolution scheme. Of course, by asserting this, the banks are seeking to mitigate their own responsibility.
The loan agreements that the BOQ and the CBA for that matter extended to Storm’s clients was an agreement between two parties; namely, the Bank giving the loan and that particular Storm client. Storm never entered the contractual equation and acted solely as a go-between. Because Storm was not a party to the agreement, it had no say in anything to do with the actual agreement itself once both parties had signed off on it. This is an important point to remember because the subject of “agency” will come up on a number of occasions in this submission.
It was clearly the responsibility of the BOQ in North Ward to establish the veracity of these applications, and it was grossly negligent in its duty because it failed to do so. What’s far more damning, however, is the part that bank played in falsifying many of these loan applications. That is a criminal act that carries severe penalties under THE CRIMES ACT which I will be discussing later on.
NB: Please note that those aforementioned individuals that have been outlined in ‘red’ are actually individuals that were working within BOQ’s internal credit arm at the time.
It is abundantly clear now that that Bank did not verify anything. Quite frankly, I don’t think it suited their purposes. Furthermore, the co-managers did not meet Storm loan applicants face-to-face, but relied entirely on Storm to do what that Bank should have done itself. By relying on Storm alone, that Bank effectively assigned its responsibility. In so doing, they violated the tenets of “prudent lending” which is a primary condition of conscientious banking practice. What’s more, it breached that bank’s contractual obligations to its Storm customers under the terms of the banking codes the BOQ had signed off on.
Many of the Storm BOQ customers were issued with low doc loans. Low doc loans are designed primarily to benefit those people who have some existing equity or a deposit saved, and have trouble showing evidence of regular income. In the case of the majority of Storm’s customers, nearly all of them had no real income. Another factor to consider is that these customers were not aware that these were low doc loans. No one from that bank ever met with customers to explain the implications of such. For that matter, no one from that bank ever met with customers to explain anything.
It should also be noted that none of the customers concerned ever received original copies of their application forms once such were completed. Why not? The reasons are obvious on reflection. This scam would have been revealed for what it was.
None of the BOQ North Ward Storm customers were ever supplied with these completed documents for verification and therefore they did not have an opportunity to approve them. Signing an incomplete document of this nature may be unwise, but if the intention of the other party was to deceive and the borrower relied on that party’s integrity, the legality of such a document must come into question! In fact, it invalidates it!
Whether this falsifying or distortion of the information contained in the home loan applications was done with BOQ North Ward’s knowledge or not is immaterial. That branch of the BOQ did not exercise its obligatory duty of care, and it failed to protect its customers’ rights. Any prudent Bank would have established the facts first-hand, and would not have placed itself in a position where it relied solely on a third party, who, by the way, was not a party to these housing loan contracts.
There is another factor that needs to be considered. Some of these housing loans were taken out/transferred over to the BOQ North Ward at a time when the share markets were in sharp decline, and it was impossible to forecast what might happen next. In fact, in the twelve months or more, prior to Storm’s demise, all monies paid to Storm’s customers were from their own pockets. Dividends certainly were not paying the bills because the markets were falling continuously. Yet, loans, based on projected dividends by Storm that had no basis in fact, were still being extended to Storm’s clients by the Bank of Queensland in North Ward very late in the peace?
There seems to have been a specific policy by Storm and the BOQ North Ward to keep their clients in the dark. Customers in many cases signed incomplete loan applications because they trusted Storm and the BOQ North Ward to do the right thing. Such documentation, once completed, was never passed back to BOQ North Ward’s customers for verification. The reason why this was never done is now apparent. If the loan applicant had seen the completed form, he or she would most certainly have noticed that the information was incomplete, misleading or had been falsified.
Some copy documentation that the BOQ has since submitted to customers looks suspicious. In some cases the “copy” loan application forms sent on request to former Storm customer is of poor quality. They show signs of being altered and certain details have been obliterated. When documentation is not produced in its original condition or not at all, one must assume that it has been shredded or changed. No one mislays or destroys legal documents unless it has something to hide?
What is apparent in all this is that BOQ North Ward failed to apply the principles of prudent lending when approving housing loans for Storm clients. Even if some of these loans were “low doc” loans, a customers’ assets and liabilities needed to be considered, bearing in mind that all these home loans were linked by Storm with margin loans. A bank cannot completely obviate its obligations in this respect. I believe this is what the BOQ North Ward has tried to do! In terms of a banking institution ignorance should never be used as an excuse. Neither should negligence!
Margin loans were a critical factor in assessing a customer’s overall ability to repay housing loans because all Storms’ customers had margin loans that had to be repaid on a monthly basis. In many cases they were considerable and so were the repayments.
The capacity of the borrower to pay both the housing loan and the margin loan in a decreasing market should have been a major consideration.
Frankly, I believe these two BOQ owner-managers and those other banks associated with Storm were blinded by all the Storm hype, and the volume of business Storm controlled. The banks saw their association with Storm as a golden opportunity to make more money. Standards were poor, procedures were questionable, and sloppy practices were prevalent. No more so than in the Storm/BOQ North Ward connection.
Storm’s plan in the bad times was to get its clients’ to increase their margin loans and seek additional borrowings on their house loans. If the bank that held the house mortgage wouldn’t extend the loan any further, the house loan was paid out by the BOQ North Ward who then took over the mortgage. The customer became worse off because (1) the borrowings included Storm’s fees and (2) it also increased the leveraging of the clients’ assets. The debts simply compounded because no real money was being made by doing this. It was just an additional way for Storm to earn fees and prop up its ailing financial model.
Now, any half-way decent prudent banker should have seen through such a scheme by examining the degree of debt each Storm customer was exposed to when these housing loans were requested. However, it seems, that the owner managers of the BOQ North Ward aided and abetted Storm by doing some massaging of their own. They made sure the internal credit departments within the BOQ at head office would approve these loans once they had gone to work on them.
This wasn’t just a question of Storm’s customers being over-leveraged by the BOQ North Ward. The disturbing part was that by operating in this way, the over-leveraging was being disguised by making the housing loans appear to be acceptable credit risks that were supported by unencumbered assets.
Altering documentation or misrepresenting in this way is a criminal offence with some very harsh penalties under THE CRIMES ACT. The owner managers of the BOQ in North Ward went about extending housing loans to Storm clients when the circumstances of these customers, and the state of the markets at the time demanded that such loans be rejected.
In essence, the Bank of Queensland, North Ward:
• did not exercise prudent banking when extending housing loans;
• used Storm in an agency capacity thereby assigning its obligations;
• failed to supply copies of completed loan applications to its customers;
• did not meet with its housing loan customers face to face to verify facts;
• did not use due prudence when extending house loans to retirees;
• did not verify the total liabilities of its Storm customers;
• did not ensure that assets were as stated;
• did not check that customers’ incomes were sufficient to meet repayments;
• altered housing loan details so that it would be approved by head office
The BOQ North Ward was effectively a rogue Bank that operated outside its own banking code of conduct and also breached a number of statutory acts. The victims of such conduct were the same poor unfortunates that placed their trust in Storm and, as a consequence, took out a house mortgage for investment purposes with the BOQ North Ward.
It has been estimated that about seventy-five percent of Storm’s database of clients were elderly, being past retirement age. Yet, many of the housing loans extended by the BOQ in North Ward to such people were done so without due consideration being given to how they could possibly re-pay such loans if their share portfolios were adversely affected. After all, such people had no income to fall back-on because any spare cash lying around was quickly gobbled up by Storm.
It would, of course, be useful to know what the BOQ head office philosophy was at that time as far as the BOQ in North Ward was concerned. In fact, we do know because I have been able to obtain an insider’s commentary on the methodology and ideology of the BOQ when all this was taking place.
Subject: BOQ - statement to the Ripoll committee in Canberra
Date: Mon, 27 Aug 2012 18:56:30 +1000
Dear Mr. Ainslie,
I have been reading your websites re the Storm fiasco and certain of your comments, including quotes from the Hansard transcript, on Messrs. Liddy and Kangatharan's comments to the Joint-Parliamentary Committee.
I don’t know whether you actually captured the following passage however it very clearly states that the Bank had a formalised policy developed to deal with Storm applications and take into account the earning from the investment funds which were being purchased through Storm via a BOQ home loan. This was to facilitate loan approval and essentially stop the application having to be dealt with at BOQ HO on an exception basis.
CHAIRMAN - If you discount down to four or five per cent, how does a pensioner even cover the cost of the funds? How is that possible? How does that work in numbers? That $104,000 per annum would have been their total earnings from the portfolio
Mr. Kangatharan - To clarify, in terms of that discounting back, there was a policy variation that was applied and approved. Before that approval, if any of the income from the Storm financial plan was to be included in an application it would go through an exception process. That is where the independent head office staff in risk assessment would give authorisation for the inclusion of that income. Where that was the case, it is possible that it is more than five per cent that was actually included. In this particular case, it is quite possible that on a $712,000 investment that the return component was calculated at eight or nine per cent.
In other words the Bank was clearly aware of the North Ward branch's activities and had developed policies to allow them to turn around loans quicker than normally might be the case.
In other parts of the Hansard report Mr. Liddy refers to the Bank's automated credit decision process for home lending as a branch's "delegated authority". A real delegated authority allows the branch to approve a loan without referral to a higher authority regardless of whether or not the loan is approved by the system.”
My wife owned and operated the franchise - I was a financial backer of the venture but never worked in the business.
My wife and other franchisees were told by the Banks that the co-owners of North Ward were the most successful OMB in terms of performance, ie new loan business. It was often the case that these guys were used as the role models for all aspiring OMBs to mimic.
How did they do it?
The Bank said they were always out of their offices visiting clients, getting off and on planes etc etc. Note no substantial reasons for success were ever provided just "fluff". If we did what the boys at North Ward did we would all be rich etc etc.
Our own view, of course, is that this scruffy little branch which wasn't even on street level in Townsville (a small rural city in FNQ), could not have "honestly" produced these types of lending results without bending/shattering the Bank's policies.
For example, irrespective of what Liddy said it was a hard and fast rule of the Bank's that the branch had to interview any borrower on a face to face basis. We know this as the Bank knocked back deals for friends we had interstate as no face to face contact had occurred.
Secondly, whilst the OMB did not have a "territory" as such the Bank was not keen on local branches going interstate to get business.
These rules make good sense from a lending quality perspective.
OMBs were also not supposed to be dealing with brokers regardless of whether or not they received a commission. We were allowed to pay a couple of hundred dollars to introducers, eg real estate firms, accountants etc but were expressly forbidden to deal with brokers for housing loans. NB for certain types of commercial lending the bank still used various brokers to source new business but in mid-2004 stopped using any brokers for home lending applications. Home lending for the purpose of the discussion includes lending against the home for investment purposes. The Bank and not North Ward would have had to formally approve the document (not a Bank form) which the borrower provided to the Bank to allow North Ward to deal directly with Storm and not with the customer. So the North Ward branch breached a number of the Banks prime policies which were enforced against virtually all other OMBs.
It is inconceivable that the Bank did not know precisely what was going on at that branch (and possibly others) as, at least in theory, Liddy stated that HQ had to approve all loans. Kangatharan also stated that they had developed a process to streamline applications so they could be approved by the system.
Almost none of the OMBs we knew had the power to personally approve a loan application. It was punched into the Bank's auto approval system and if it was approved the branch had all the authority it needed. If the system declined the application then the branch could not proceed with the deal unless the defects in the application were corrected.
The system had checks built in to ensure that incomplete applications were not even processed - instead the system would highlight the missing data which had to be inserted before it would fully load up and assess the application.
If the application was declined then it had to be referred to a centralised credit unit, presumably in Brisbane, who would examine the application and revert to the branch for more information.
If the correct application details especially in relation to the borrowers assets and liabilities and income and expenses had been input to the system there is no way it could have been approved under normal circumstances.
For example, the Bank always wanted to know the reason for the loan although Liddy said he wasn't sure. (NB Elsewhere Liddy says he didn't even know what a margin loan was so pardon my scepticism). Good lending practice demands you know why a person is borrowing the money.
If it’s going to be used to repay other debt, buy a holiday house, investment property add an extension etc the Bank wants to know.
In the case of purchasing an investment property the bank wants to know all the details of the new property and discounts the rental flow to add a more conservative view of the additional income which will be produced to balance off the additional loan repayments which are almost always higher if the maximum tax benefits are to be enjoyed. The bank would also want a mortgage over the new property. Even if the borrower already had a home loan with BOQ and wanted to release the equity to make the purchase they would have insisted on encumbering the new property.
In other words a very conservative approach.
Contrast that with the way Storm applications were handled and all the Bank's conservative rules go out the window.
There are a number of questions which need answering:
1. If the borrower owned a home free and clear and came to the Bank and asked for a loan of 80% of the value would the bank have provided it to them if their pension and other income would not cover the repayments? Answer is no.
2. If the same borrower approached with a low doc loan application which allowed 60% of the value of the property to be loaned would the bank do that for a pensioner? Not impossible but many questions would be asked. PS Low doc customers had to have, according to the Bank's own policy, an ABN. How many pensioners do you know who had one of these?
3. If a pensioner rocked up and asked for a $300k loan against their property and told the Bank they were going to invest the funds into shares through a margin lending program what would the Bank do? Whilst it cannot provide financial advice it would have to determine if the customer would be in a position to repay the loan that it was providing. If their pension entitlements precluded their capacity to pay the loan should be declined.
4. Let's say they had the income to repay the BOQ debt then the application passed the first hurdle. The next question would be how high the applicant will gear the $300k loan using a margin facility? Let's say 3 times. The borrower now has a debt of $1.2m and assets of $900k in a share portfolio. The property provides no income). The loan rate is always going to be higher than the deemed earning rate on the funds provided that the funds earning rates are assessed prudently. At that point the income/loan payment ratio fails the test and the loan should be declined. That's before you get into the margin call issues which I would bet were never fully understood by most borrowers.
5. How did the Bank get around this - by using the low doc process in which they had the borrower sign a statement that they had the capacity to repay the debt? This statement however in no way excuses the Bank's lending practices and its implicit requirement to deal with its customers appropriately. We often speculated how North Ward could write this volume of lending as they only had a relatively small staff - obviously if Storm completed all of the applications then all North Ward had to do was input them to the system and also fill in the blanks as required. An interview(s) with a client and preparation of an application and all the other documents is a very time consuming job as the process always never goes smoothly
6. The reason the Bank entered into this arrange with Storm and BOQ did this is that it needed to lend as much money as possible and given that the margins on low doc loans were approx. 1% higher than the more competitive home product types it was profitable and very safe business as they only loaned 60% of the property value. They also knew that the types of borrowers involved were the solid, honest types who would do the right thing by the Bank even if they ate cat food for the rest of their lives.
7. In my view North Ward and the Bank were in this business completely together and both were fully aware of the risks that were being taken. At the end of the day if the share market crashed then they still had a mortgage on the borrowers’ property which they could always exercise and even if the property market crashed they had a 40% buffer.
8. Like most schemes founded on the connivance of the likes of BOQ and North Ward the customer was always the one to cop it sweet with all the other players getting away Scott free. I feel the Bank is the most culpable as it was in a position right from the start to deal with loan applications from North Ward/Storm in a proper manner and introduce policies to apply much more prudent rules to protect the Bank and borrower. That they willingly participated in this venture makes them the prime mover in the scheme and the most culpable.”
Subject: RE: BOQ - statement to the Ripoll committee in Canberra
Date: Fri, 31 Aug 2012
The other point I failed to mention is that it is my understanding that the lending volumes being achieved by North Ward were perhaps as much as 8 or 10 times better than the average lending performance for the balance of OMBs located throughout the country.
That is why Liddy made them branch of the year on a couple of occasions - no other reason. In my experience when you have a branch, or anything else, outperforming the mean by that much you either copy exactly what the staff are doing to roll it out elsewhere so everyone can benefit or if you can’t do that thoroughly investigate why such performance is occurring.
If, upon investigation you determine that the success is based on shonky practice then you either kill it or embrace it and tell no one the truth.
As I say, I think that both the branch and the BOQ are up to their necks in it.
There may have been one other branch in the network that had similarly high volumes and it was very suddenly and very unexpectedly closed without hardly any notice and no fanfare.”
Subject: RE: BOQ - statement to the Ripoll committee in Canberra
Date: Sat, 1 Sep 2012
Can’t help you with a hard copy of any lending manual the Bank may have had in its OMB branches and in any event I suspect that the rules pertaining to low doc loans, under which policy, as I understand it, most of the investment loans were written, were changed as a result of the Storm fiasco.
It's important to note that the prime reason for offering low doc loans, other than the increased margin and lower risk (60% LVR) was to accommodate self-employed customers who hadn't filed tax returns or who couldn't prove their incomes generally due to the nature of their employment and somewhat loose bookkeeping practices.
This is why low doc loan applicants had to have either an ACN or ABN (can’t remember which).
In other words the low doc loan process was bastardised to allow pensioners, who could obviously prove their income with documentation and who certainly would not have not either an ABN or ACN, to borrow money without making a full application. My gut feeling is that the Bank will try to use this line to say that they didn't know either the applicant's current or future income or expenses. That of course falls in a heap with Kangatharan's admission they developed a special policy to streamline these particular loan applications plus the other policy breaches I outlined in a different email.
In my view the North Ward office was in a position of knowledge when it came to understanding why and for what precise purpose the money they were lending was to be employed. Back to the low doc scenario, had they input the pensioner's income (provable) into the system the application would likely have been rejected as the income would have been too low to support repayments and other expenses? The bank's low approval system like every other banks' is a complex algorithm which determines the customers’ ability to make the payments and still have a life. Banks do this to ensure they are protected against risk and are seen to be responsible lenders.
Remember the low doc loan process bypasses all these safeguards.
To answer your question the low doc loan policy was "bent" by North Ward branch with the complete cooperation of the Bank in order to approve loans against real property which would not have been able to have been approved in most cases based on the pensioner's declared income. NB presumably not all applicants were pensioners. It would be interesting to see if the bank used the normal application process (ie not the low doc policy) for working applicants whose income would be sufficient to service the loan - if you could find such applicants it would go a long way towards proving the bank/North Ward was bending their own policies to ensure the loans were approved one way or another.”
I would appreciate your passing this information to your legal team that is presently litigating against this Bank.” [End of emails exchanges]
This gives us an insight into the lending practices of the BOQ that we wouldn’t have had otherwise. It also enables us to establish that there was one rule for the owner-managers in BOQ North Ward and another for the other BOQ owner-managers in Queensland and interstate.
On 25 June, 2009, the BOQ Bank made a statement to the Australian Stock Exchange saying, "Based on the Bank's knowledge and enquiries to date: There is no evidence of improper or dishonest practices or conduct by the Bank in connection with Storm clients."
In his evidence to the Parliamentary Joint Committee, Mr Liddy stated, "If there were wrongdoing in the North Ward branch and we had identified wrongdoing, we would take action." Mr. Liddy’s words do not tally with the facts. There had been trouble in River City for some time but no one at the top did anything about it until the roof caved in. I agree with email comment, “It is inconceivable that the Bank did not know precisely what was going on at that branch (and possibly others) as, at least in theory, Liddy stated that HQ had to approve all loans.” One would have to conclude that Mr. Liddy was either one of the most inept CEO's in the history of banking or he deliberately misled a Parliamentary Joint-Committee. But then he’s a banker so he wouldn’t lie! Incidentally, what are the consequences of someone lying before a Parliamentary Committee? Clearly none, it would seem!
I’ll now reiterate some key points raised by BOQ’s own internal assessment section that I quoted earlier:
"Basically none of the info provided and input on the applicant is accurate.”
"North Ward branch had, in many instances, not included Storm client's margin loans as a liability when calculating whether they could afford more debt.”
“On many referred loans a standard comment ‘no other debts held other than for example credit card etc' despite knowledge of an existing margin loan.
“We should have investigated amounts borrowed and included in servicing.
"Over and over again Storm had sent the North Ward an initial letter detailing margin loans but that these amounts were "not disclosed" in the Bank's computer system or the loan applications.
"Had such margin loan amounts been included in the Bank's serviceability calculations, it's highly unlikely the loans would have been granted.
"North Ward branch had accepted photocopies of disbursement authorities from clients on Storm letterhead. Best banking practice is that photocopies are not accepted because they are too hard to authenticate.
"It is noted from review of some of the loan files that it could be construed that income and ongoing commitments may have been manipulated to achieve approval. Should this prove to be the case, then these loans could be set aside.
“In the months following the initial 2006 credit risk review, action should have been taken by the BOQ's area manager and state manager to ensure the problem areas were fixed. But there was a recurrence of the same sort of problems identified in the 2008 credit risk review.
"… conducted a number of credit risk reviews of North Ward's business over the years and have previously questioned the integrity of the data on the files... These credit risk reviews had been conducted in late 2006/early 2007 and another in February 2008.
In addition to these two formal reviews of the North Ward branch, there were two or three informal reviews initiated to "clarify some rumours that were going round the bank.”
What does that tell you about the way these owner-managers in BOQ North Ward operated? My next question is a simple one. “What has ASIC done about it?” After all ASIC knows about all this because I for one have spent a lot of my time in past correspondence explaining it to you. The perfunctory way the BOQ case has been conducted by ASIC suggests to me that no one has taken the time to read much of what I said about the BOQ?
Why am I raising these points with you now? I’ll tell you why! ASIC has chosen not to pursue the BOQ for compensation despite the many wrongs the owner-managers of the BOQ in North Ward committed. By not acting on behalf of those Storm clients that took out housing loans for investment purposes with that BOQ branch, ASIC has failed to uphold those peoples’ rights under the consumer laws of this country. Instead, it has abandoned them to their fate. They will continue to pay off their BOQ loans because ASIC did nothing substantive to obtain compensation for them.
I’ve reminded ASIC in previous correspondence that it is a criminal offence under ‘THE CRIMES ACT’ to change or alter paperwork such as loan agreements so that they will ‘pass muster’. In this instance, we are not only dealing here with contractual breaches and statutory violations but also criminal acts as well! What does ASIC now propose to do about this? Doing nothing is not the answer!”
Well! There it is! I don’t think I could be clearer than that. What did ASIC do about the two reprobates that managed the BOQ North Ward branch? ABSOLUTELY NOTHING. They just went on shafting customers in the same old way long after Storm’s clients were done and dusted.
In 2015, seven years after the demise of Storm, this article dated 27th April 2015 appeared in the ‘Townsville Bulletin’.
“FALSE WITNESSING ADMITTED
The co-owner of a controversial Townsville Bank of Queensland branch has admitted staff falsely witnessed loan applications regularly.
Declan Carnes, joint owner/manager of the North Ward franchise, told the Supreme Court one of his employees witnessed the signature of a disabled man who was being treated in hospital hundreds of kilometres away.
Justice Jean Dalton said the action was “probably dishonest”.
But Mr Carnes admitted he had never investigated the matter even though he was aware of allegations that the customer’s signature had also been forged.
Under cross-examination, Mr Carnes he said it was not unusual for staff to falsely witness customer documents in the past.
Bank of Queensland has launched an internal investigation.
A spokesman said: “We acknowledge that a number of comments were made during the trial that require further consideration, and the bank is currently undertaking this review.’’
It is the latest controversy for the North Ward branch, which was responsible for 267 of the 319 BOQ loans made to customers caught up in the disastrous Storm Financial collapse.
The Australian Securities and Investments Commission launched legal action against Senrac, the company owned by Mr Carnes and business partner Matthew Buchanan, after the Storm collapse, but dropped it last year when BOQ paid nearly $20 million to settle a class action with former customers.
In the latest case, BOQ sued Mervyn and Pamela Hills, both 70, for hundreds of thousands of dollars owed on a loan to buy the Seashells fish and chip shop, just behind the North Ward branch, in 2007.
Pensioner Mr Hills, who was left paraplegic after a car accident, was allowed to act as a guarantor and put up the couple’s home, which had been specially adapted for his disability, as security against the loan.
The Supreme Court hearing in Brisbane last month heard branch employee Darren Wall witnessed a document in Townsville while the customer was in hospital in Brisbane.
“When we were settling a lot of loans quickly, the loan documents would quite often turn up at the office or be dropped in and quite regularly they weren’t witnessed, and unfortunately we did witness signatures where people weren’t present to enable the deal to settle,’’ Mr Carnes said.
“Documents did turn up regularly in the mail where they weren’t witnessed and we witnessed them.”
Mr Hills gave evidence that the signature on one document was not his.
Mr Carnes said he was aware of the forgery allegation but had not questioned Mr Wall, who still works at the branch.
“I don’t believe Mr Wall would have done that,’’ he said.
Cross-examined, he agreed that the bank’s practices were “not consistent with the standards of a banker exercising ordinary skill and care”.
A settlement reached since the trial requires the couple to pay BOQ $369,012 plus $93,204 in interest. A counterclaim by the couple alleging unconscionable conduct was dismissed.
Lawyer Stewart Levitt, who brought the class action by former Storm clients against BOQ, said the bank itself should refer the evidence to the police.
The case again highlighted ASIC’s “wilful’’ failure to take action against banks and bankers, Mr Levitt said.
Mr Carnes did not return calls. Mr Wall, who was not called as a witness in court, declined to comment.”
Unbelievable! Not only did these jokers not get charged for falsifying Storm clients’ housing loan documentation, but they were allowed to carry on their nefarious ways courtesy of ASIC.
When the BOQ settled with its Storm customers in September 2014 for $17 million, I wrote once again to the Chairman of ASIC.
Here are some extracts from my letter dated 22nd October of that year.
SUBJECT: THE BOQ SETTLEMENT – “A SICK JOKE!”
If ever there were a clear example of a lack of foresight and a failure to meet the needs of those that have been wronged when awarding compensation, it is to be found in the settlement agreed to by ASIC and the Bank of Queensland.
ASIC announced early on in its actions against the three banks, the CBA, the Macquarie Bank and the BOQ, that, “Its end objective in commencing these legal proceedings has always been to obtain compensation for investors for losses incurred as a result of investment through Storm.”
The compensation settlement agreement between ASIC and the Bank of Queensland fails to do this on all levels. Instead, it rewards the Bank of Queensland for its wrongdoings by permitting that Bank to go on making money out of its Storm victims until most of them are dead! The profit the BOQ will make will be in the region of $47 to $50 million dollars or more that it will derive from the interest it will charge on the loans that the Storm clients will be paying off for the next 25 years or so.
Let’s do the sums!
In a statement made by Mr Kangatharan before the Parliamentary Joint-Committee Chairman, in 2009 he said,
“On 25 June we made a market announcement that we had 319 customers. In the submission you will find mentioned that we have 261 current customers. A number of customers have actually paid out their loans during that time.”
(a) 250 housing loans @ $250,000 = $62 million
I have taken a base figure of 250 housing loans by an average of $250,000 to arrive at this amount.
(b) 250 housing loans @ $5% interest over 25 years ($188,000 x 250) = $47 million
This 5% is on the low side.
If you deduct the $17 million from the projected interest earned, the profit to the BOQ will be $30 million. This is not an exact science because the interest rate is a variable. Who knows what the final interest figure will be or the profit that will eventually be made out of the BOQ’s Storm customers? It could double or treble this in the end.
Then you need to factor in the compound interest being earned on all the frozen home loans that will be unfrozen once people have agreed to this settlement.
Whatever, under this compensation agreement the BOQ could earn upwards of $47 million or more whilst we, the victims of this Bank, will end up paying the compensation back to the BOQ from the interest we will be paying on these loans thereby costing the BOQ nothing at all? In fact, that Bank will be making a healthy profit. Who said crime doesn’t pay! It certainly does when there is a lack of forethought about the structure of the compensation package.
“BOQ's compensation is intended to ensure each BOQ investor (or investor group) who takes part in the settlement will be able to get compensation of approximately 45% of that part of their total loss allocated to BOQ under the ASIC compensation model.” [ASIC’s Media release 14-244MR dated 22 September 2014]
Good luck on that one too! How much do you really think that’s going to be once all the deductions under the ASIC compensation model are made, not to mention the deductions that will be come from the Macquarie Bank settlement that is linked to the BOQ settlement?
We, Helen and I, borrowed $344,000 from the BOQ in North Ward. Out of this $344,000, we paid $1,732 ‘Stamp Duty’, $43,438 ‘Storm Fees’, and $38,830 went into our “CMT Account”. That leaves a balance of $260,000 after deducting the $84,000 we paid out.
If the 45% is applied to the balance of $260,000 ($117,000) we are left with $227,000 to pay off on our loan:
$227,000 @ 5% over 25 years “Principal and Interest” = $398,400 to pay off - ($1,328 per month)
Let’s just say for argument sake that the 45% is applied to the total loan (which we know it won’t be), we are left with $189,200 after deducting the 45% ($154,800).
$189,200 @ 5% over 25 years “Principal and Interest” = $330,993 to pay off - ($1,107 per month)
The definition of the word ‘Compensation’ in legal parlance is, “A pecuniary remedy that is awarded to an individual who has sustained an injury in order to replace the loss caused by said injury”. The important words in this sentence are “to replace the loss caused by said injury”. Now you can see why I have said, this compensation settlement is A SIC JOKE!
At this point you may well be asking, “Who are the maniacs that thought this one up? How can such compensation be considered ‘fair and reasonable?’
When you think about it, the compensation offered to the victims of Storm by the three shady banks, the CBA, the Macquarie Bank, and the BOQ, is not really compensation at all.
Those that were with the CBA are getting 52% back which is probably 40% or less once certain deductions have been made. Incidentally, the same principles outlined here can also be applied to the housing loans that the CBA extended to its Storm clients.
We that took out margin loans with the Macquarie Bank are getting 24% back.
Those that took out a housing loan with the BOQ will get nothing back in the end based on my reckoning.
The percentages stated in these compensation packages are deceptive because they are not worked on what we actually lost but rather on selective items only. The wrongdoers readily agreed to pay out compensation based on blanket formulas because they know that the people constructing these formulas have not thought them through properly.
This type of compensation settlement just provides enough money to allow those that have been duped to live on the breadline. It doesn’t address the wrongs that have been done to them, and it doesn’t “replace the loss caused by the said injury”.
This BOQ settlement in no way addresses the wrongdoings of that Bank. Rather, it provides “hardship” payments and nothing more. These hardship payments will just reduce the debts a little but they do not extinguish them. Rather, most people will be paying off these housing loans for the rest of their lives.
In ASIC’s Media Release 14-244MR dated 22 September 2014 we are told:
“ASIC developed a compensation model in conjunction with external FORENSIC ACCOUNTANTS to calculate Storm investors' losses. The model calculated the estimated loss for each investor (or investor group, where two or more investors invested jointly in the Storm model). It allocated each investor's loss between the banks which funded investments in the Storm model.”
This is what I term a “Wally’ statement. Back in the ‘eighties’ I did some consultancy work for the Government. During that time, I encountered quite a few ‘Wally’ theories that had no practicality in the real world. You don’t need forensic accountants to calculate the estimated loss for each investor. Instead, you need to go and find out what these investors actually lost in real terms. I was under the impression that ASIC had done just this but obviously, I was mistaken.
How much did ASIC spend on this Storm exercise anyway! Wasn’t there something like 19 million documents produced? Didn’t ASIC spend nearly 2 years investigating these matters before it decided to prosecute these Banks? Surely enough evidence was produced to paint a true picture or did I miss something here?
The fact of the matter is that is impossible to establish an equitable compensation figure that applies across the board because the circumstances for each Storm client that took out a housing loan are different. Nor, for that matter were these loans treated in the same way by the BOQ when approving them. Therefore, each case needed to be treated on its merits.
The method of calculating compensation that ASIC has adopted in this case demonstrates just how out of touch the ASIC has been when determining compensation for the victims of Storm and the banks. Its lack of insight also reflects badly on the judiciary who tend to give a blanket approval to these agreements without questioning the reasoning behind the methodology employed to calculate the degree of compensation that is deemed sufficient. This type of approach simply doesn’t provide adequate compensation or an equitable outcome.
Since our case against the Banks began, I have never been convinced that the ASIC, the judges, or the lawyers involved have really come to grips with the causes of the losses sustained by the Storm clients or how badly these clients were treated by Storm and the Banks who worked in conjunction with that advisory company. The ‘Storm Fees’ and their insidious effect on the loans taken out by the Storm clients are but one prime example of this.
It doesn’t take an ‘Einstein’ to work out that a blanket compensation figure in cases such as these does not serve justice but rather defeats it. Take the 7 cases mention on pages 9 to 15 in my article as a paradigm.
Should any of the persons mentioned in these 7 cases be forced to pay out loans where duplicity, and fraudulent practices, not to mention breach of contract under the banking code, are clearly evident? Remember some of the observations made by the BOQ’s own credit review people (page 7 and 8) regarding loans such as these…”
I won’t go on because you have probably dropped off by now. You get my drift though. The whole system is shambolic!
The Storm Financial scandal should have been a cause célèbre event for the government and ASIC because what occurred demonstrated just how corrupt our banking system really is and just how much it is out of control. However, that government then (a Labor Government by the way) and this government today just let it all slide. As a result of our Governments’ lethargy (both sides of politics), thousands of unsuspecting investors slid right down the path that the Government had created for them to financial oblivion.
Sure, a few new things were put in place and a number of tweaks were made to the system just to keep everyone happy, but it basically remains the same now as it did then. Imprudent lending by the banks must be discussed in depth by this Commission. If this Commission fails to do that, then nothing will really change for the better. The most important issue in this whole debate, I believe, is the future regulating of the banks. Unless, the control of such things as the banking codes are taken out of the hands of the banks and such are regulated by an effective independent body, then the banks will go on transgressing, and the people of Australia will go on being fleeced.
The defects of our banking system have been obvious to the Australian people for some time. Only the government and ASIC don’t get it. Perhaps we should be electing people that really do have the capacity to think outside the box.
In the past this government has stated that a Royal Commission into banking was unnecessary and ASIC had things under control. We now know that what this Commission has exposed is priceless and ASIC has no control at all over the financial sector.
“The government also referred to the expense of a Royal Commission; some fifty million dollars or so! What the Royal Commission has uncovered so far cannot be measured in dollar value. Therefore, money should be no object. The government didn’t worry about the three billion dollars Storm investors lost back in 2008 or all the monies investors have lost since as a result of recent banking scandals. Why the concern now!”
Whatever, one thing is certain. We not only needed this Royal Commission but we also now need its terms of reference to be expanded and its timeframe as well. So far, only the first layer of deception has been peeled from this maggot riddled financial plum.
The best is yet to come, I feel.Frank Ainslie2nd May 2018