It will be interesting to see in the next round of hearings whether the Royal Commission exposes the banks’ property valuation rorts that have been going on for years now, despite the many submissions to government about this underhanded practice.
Here’s what Mr. Archer Field, BEC, MBA had to say in his report entitled ‘Banking Code’ (Part 2) dated 19th August 2015 to the Tasmanian Small Business Council, about this, and the government’s continued failure to do anything about it.
“Standard form banking contracts.
“The banks make use of such to abuse their disproportionate power with small businesses, farmers, and individual customers who are unable to seek redress.
Significant problems exist in the terms set out by standard form banking contracts. These contracts contain numerous areas of concern, outlined in the submissions received by the 2014 Competition Policy Review, commissioned by Treasury.
In particular, as has received significant coverage by the media, serious issues exist with regards to ‘constructive default’, which banks can use to deliberately engineer a customer’s default. Banks do this by lowering their assessed value of a security, thereby raising the loan-to-value ratio and impairing the loan.
This concern arises due to the definition of ‘default’ and the banks’ ability to conduct their own property valuations under their General Standard Terms.
Section 9.1 of the Banks’ General Standard Terms states that:
“We [the bank] may obtain a valuation report of any secured property at any time. You must pay us all costs in connection with the valuation”.
Section 9.4 states:
“Any report we obtain from the valuer, investigator or consultant is for our use only…You cannot sue us, the valuer, investigator or consultant if the report is wrong.”
The General Standard Terms state in section 10:
“You are in default if: (k) in our opinion, the value of the secured property materially decreases from its value at the date of this facility agreement or it becomes less saleable than its sale ability at the date of this facility agreement.”
Where a customer is in default, the General Standard Terms provides in section 11.1:
“(a) We [the bank] no longer need to provide any facility; and
(b) the sum of the total amount owing for all facilities is payable on demand.”
As a result, Australian banks are legally allowed to re-value a secured property at the customer’s expense. If the valuation shows that the secured property has fallen in value since the loan was agreed, then the bank has the right to default the customer and demand full payment of all amounts owing. This is known as a ‘non-monetary default’.
As a result, even if a customer has made all repayments on time and in full, a bank has the right to call in its loan if the “sale ability” of the held security falls at any time below its initial level. The consumer cannot challenge the default, nor has the right to challenge the valuation on which the bank has relied. This is the case even where the valuation is wrong, as outlined in this section.
Furthermore, where a bank defaults a loan, leading to the forced sale of secured property, numerous cases report property being sold at values far below the valuations. In particular, Australian banks have been accused of selling farms in default during periods of drought, resulting in sale prices that do not reflect the true value of the property.
The 2014 Financial System Inquiry, the Murray Review, raised these issues. Recommendation 34 of the review called on government to extend unfair contract term protections to small businesses, and also “encourages the banking industry to adjust its code of practice to address non-monetary default covenants”. The review suggests that the Code be expanded to require banks to give borrowers “reasonable time” to obtain alternative financing if the bank intends to enforce a non-monetary default.
Even with these changes, it is clear that with their standard form contracts, the major Australian banks are abusing their power against customers. Small businesses, farmers, and individual customers are disadvantaged by their unequal relationship with the banks, and are not protected by contracts with such unfair terms.
Extending Unfair Contract Term Provisions
In accordance with the 2014 Murray Review, Federal Treasury recently released its proposed extension to existing unfair contract term provisions to include small businesses as well as individual consumers.
However, the Tasmanian Small Business Council (TSBC), in its submission in relation to the proposed extension, writes:
“The proposed changes, in the view of the Small Business Council and TSBC, are insufficient to address the issues that have arisen from the misuse of market power by large businesses, i.e. banks.”
Despite “such misuses by large business and financial institutions” being widely reported in the media, the proposed changes are simply not adequate:
“The proposed amendments leave small businesses and farmers at the mercy of the courts, which, according to the 2001 Martin Committee Review, favour large financial institutions due to their vastly superior resources.”
Thus, while appearing to act on the recommendations made in the Murray review by amending the legislation, there are two major limitations placed on the definition of “small businesses”, which mean that government still fails to protect small businesses.
Firstly is the fact that the proposed legislation:
”Restricts the definition of a small business to such an extent that the unfair contract term protections will cover only the smallest contracts of the smallest businesses.”
This is done by introducing financial limits on the ASIC Act’s definition of small business contracts, to include only those contracts of $100,000 to $250,000. This means that mortgages, most leases and the vast majority of farming contracts in Australia will not be given the necessary protection by the proposed legislation changes, as recommended in the Murray Review.
Secondly, is the limitation placed on the definition of small businesses to mean those businesses with less than 20 employees? This, the TSBC believes, “fails to take account of the nature of small businesses in Australia” and therefore does not protect the majority of small businesses many of which employ more than this amount on a casual basis.
By significantly narrowing the definition of “small businesses”, the proposed extension of unfair contract term protections to small businesses in fact does very little in actually providing much-needed protection for small businesses and individuals. Instead, the changes are an attempt by the government to appear as though addressing those problems identified in the review, without actually providing the protection recommended by the Murray Review.
Both state and federal governments have accepted, particularly following the Financial Systems Inquiry in 2014, that the self-regulatory system in Australia does not sufficiently protect consumers and provide avenues for redress for breaches under the Code.
However, successive governments continue to fail to introduce the necessary legislative amendments that would protect the rights of individuals and small business.
In light of these facts, it is clear that the state and federal governments, the banking regulators, as well as the FOS (Financial Ombusman Service) and CCMC
(Code Compliance Monitoring Committee) have all played a part in the misleading and deceptive conduct of the major banks against their customers.
By failing to provide adequate protection either under legislation or by the state and federal regulatory bodies, and by failing to address issues regarding penalties and avenues for redress for breaches of the Code, the government has assisted in creating a code of practice that provides merely the facade of consumer protection. All the while, the leading banks continue to profit at the expense of their small business, farmers, and individual consumers from dishonest and unconscionable practices.”
The major Australian banks claim that they are bound by a ‘world class’ Code, monitored by the CCMC, supported by the FOS, and approved by ASIC. It is evident, however, that the Code of Banking Practices is unclear and ambiguous. The Code Compliance Monitoring Committee is unknown, unused, and ineffective, severely restricted by a hidden constitution and damningly criticised by its own staff. The Financial Ombudsman Service Limited is an unaccountable, bank-reliant, private company that is limited by its Terms of Reference to the detriment of small businesses, farmers, and individual customers.
That ASIC has approved of this arrangement is indicative of the degree to which banking regulation in Australia is a bank-run affair. Banks set the rules of their own game and have the financial resources to outgun any legal efforts made by consumers to bring the banks to account for their abuse of power.
Both the Campbell Review and Martin Committee endorsed deregulation of financial markets on the precondition that consumer protections were put in place to protect individuals and small business.
The Martin Committee stated that government must ensure:
“Adequacy of redress available to [consumers] in cases of dispute with their bank”.
However, this has clearly not been the case.
By limiting alternative dispute resolution mechanisms and the power of compliance monitors, the Australian banks have denied individuals, farmers, and small businesses necessary consumer protections. Banking regulation in Australia has failed, despite recommendations made in both the Campbell Review and Martin Committee. Both reviews endorsed stronger alternatives to court action for breaches of the Code. However, under the present self-regulation system, there is no alternative for the majority of bank customers than to go to court to bring banks to account.”
[End of extracts from Mr Archer Field’s report.]
Because the banks include a number of one-sided conditions in their contracts, the banks would seem to have the law on their side. No, they don’t, just might! Try suing a bank on your own and you will soon run out of money. That’s why the banks in this country have been able to ride roughshod over the contractual rights of their customers for so long. Even when the banks’ customers to get to sue the banks in a class action, nothing is established in law because the banks always settle before any decisions are handed down, and any precedents established.
For far too long now, we have been the victims of fallacious propaganda disseminated by both the banking fraternity and governments.
Take margin loans as a prime example. Before the collapse of Storm Financial, the banks had a field day with margin loans because they weren’t covered in a statute, and the banks therefore felt that they had carte blanche to construct margin loan contracts heavily in their favour. The banks’ margin loan agreements were conditioned in such a way that the common law rights of the borrowers were subjugated in the process.
The government actually went along with all this by never seeking to challenge the banks! Finally, after the Storm Financial fiasco, the government decided that margin loans needed to be included in statutory provisions. However, what everybody seemed to overlook was that the customers of the banks that extended margin loans have always been protected under the common law and equity.
It’s a misnomer to believe that the contractual rights of individuals are negated if a contract is not covered by a statute. In fact, statutes can actually muddy the water at times because there are so many of them and the whole process has become far more complicated than it need be.
Whatever, the government and the banks, for far too long, had everyone convinced that contracts don’t carry any weight unless they are covered somewhere in a statute. It didn’t help that no one has been able to use our legal system to establish their contractual rights with regard to banks because it’s all just too damned expensive. Under our legal system, everyone’s innocent until they run out of money. The banks get off because they have all the money!
The government in its wisdom has now sort fit to lay down laws for margin loans and standard form contracts following the Storm Financial disaster, as if to say, “Well we’ve got you covered from now on!” The fact that the Australian Government has now seen fit to pass them into statute law (“Unfair contract term protections for small businesses”) doesn’t mean that these rights never existed before this occurred. Of course they did! It just that no one’s been listening before. Let’s hope they are listening now!
In round 3 of the Royal Commission Hearings, these matters are due to be discussed. It will be interesting to see just how far the Commission is willing to go because this could be the round where the knockout punch is landed or the banks will survive with just a bruising. The Code of Banking is also due to be discussed and that should be a real eye opener for the public at large. Here’s a taster that demonstrates just how low these banks have been prepared to go in order to suck money out of their customers:
In his submission to the Parliamentary Committee the pensioner, one Mr. wrote:
(sic) On the 5/12/06 Storm Financial signed me up and took out a loan with the Commonwealth Bank for $460,150 (house loan. The bank used the equity in my home and a block of land that I owned for this purpose.
It took Storm eight month to sign me up and I only signed up with the guarantee that I will not lose what I already had.
I had asked to be put in low risk and to leave enough money in the fund to pay out my loan. I was told that I would never lose as long as I did what storm asked me to do. And I was told that they had insurance to cover me if any advice they gave me went wrong. I would then get back what I lost.
Both Storm and the Commonwealth Bank knew that I was only earning around $500 dollars a week, and that there was no overtime to be had to increase my wages. They had copies of my pay slips. Storm also knew that I was injured and could not do heavy work like I used to do, Storm always asked me how my health was and reassured me that it should not take to long before I can retire. Also I was no good at a desk job.
I had also told them that I would never be able to pay this loan off, as the interest on the loan was higher that the money I earned in a month. And the wages that I was earning was barely enough to live on as it was. And I was told that all I would have to do is pay $500.00 a month to help out for the first year or two and the fund will take care of the rest. Well it has been more than two years and now there is no fund left and the banks are after their money.
Well I kept up with my part of the loan agreement paying $500 a month for over two years and believe Storm and the Commonwealth Bank should pay the rest as they said the fund will take care of it and knew my position as far as health and work and finance goes. I believe that I have been used, lied to and cheated.
Even the Howard Government was asking people to invest and take the pressure of the economy by becoming self funded retires as there was not going to be a pension later in life. Or was the Howard Government part of this plan as well to gain the trust of hard working loyal people who have paid their taxes all their lives and have now been stripped of their life savings and are being punished for trusting the people we were told to trust in the first place.
If we cannot trust the Government the banks and other people we turn to for advice or help who can we trust? I guess we should stop calling this Country the lucky Country and call it the Country of Louses, (Liars, Rip-offs.) My health has suffered and I cannot see any reason for me to carry on. And to think my Dad helped to save this way of life by enlisting in World War 2.
I first became aware of this when I rang home to check my answering machine on the 10/1/09 and there was a message from Andrew Leece from Macquarie Margin Loan telling me that if I do not pay out my loan (margin loan) within the next 4 or 5 days I will have to pay around $5000 dollars a month in interest.
I cut my holiday short and came back home to see if I could fix up this mess. I rang Storm a number of times during December and the first week of January as their was a lot of stories in the paper about Storm, and I was told not to believe everything I here or read and that I was in a good position to ride this out and not to worry as they had everything under control. Storm told me they were a little disappointed that I did not trust them to the fullest, and told me to enjoy my holiday and not to worry.
I hope that you can restore what little faith I have left in this country and put this right sooner rather than later.”
I only hope that blatant examples of the banks’ ripping off their customers, like the one I have just mentioned, are highlighted during the Royal Commission hearings. What we don’t want is for the Commission to get bogged down with cases where the banks can argue that they were in any way justified in extending these loans.
The cases I have listened to in the last two days of hearings are bad but they aren’t “Bloody Hell!” ones.
The examples the Commission selects will make or break this inquiry. I’m therefore keeping my fingers crossed that there are some revealing ones to come. There are thousands to choose from so the Commission should have had no problem finding them.FRANK AINSLIE - 23rd May 2018