The next few weeks are critical to Commonwealth Bank’s efforts to contain the fallout from the parliamentary inquiry into bank loan impairments.
To the surprise of no one, the inquiry, which was granted a broad industry mandate last June, has quickly narrowed into a searching examination of the treatment of a select but extremely persistent group of Bankwest commercial customers who defaulted after CBA’s $2.1 billion takeover in late 2008.
Questions on notice have piled up for CBA, and after a gruelling December 2 examination of the bank’s two Davids — chief financial officer David Craig and chief legal counsel David Cohen — a third David in the form of committee chairman David Fawcett foreshadowed another round in the new year.
That’s before the committee reports by March 31.
In the meantime, CBA is expected to seek out influential Liberal MP Philip Ruddock on the bombshell he dropped in the final half-hour of the appearance by Craig and Cohen.
Until then, all had gone well for the bank.
It had made several concessions to address some key concerns in the business community, proposing a month’s grace from default to any requirement for full repayment of a loan, an industry standard for default interest rates, and equal access to security valuations that have been paid for by customers.
CBA also had strongly rebutted some of the allegations of poor treatment claimed by customers — but then Ruddock intervened.
Clearly taken aback by the Liberal elder’s proposal for a “fallback strategy” of independent mediation for long-running Bankwest disputes, Cohen asked for clarification of the “universe” of customers Ruddock was thinking about.
Was it the 40 or so who had made submissions to the inquiry, the 182 Bankwest business customers to which receivers had been appointed in the 2009 and 2010 financial years, or the 1958 commercial loans where Bankwest had suffered losses from December 2008 until June last year?
It was a reasonable question because the size of the exercise would range from manageably small at the low end to a repeat instalment of CBA’s sprawling open advice review program set up to compensate victims of poor financial advice.
Ruddock, however, gave Cohen short shrift. “Perhaps if you could take (my proposal for independent mediation) on notice, because I suspect the way in which you’ve dealt with it encourages me to look at what more robust approach we should take.”
While there has been no contact between Ruddock’s office and CBA since December 2, a meeting will occur at some point.
The bank will have to give Ruddock’s proposal careful consideration, even though the MP’s thought bubble on independent mediation is his alone with no input from the committee.
Just as Ruddock was professing to compromise, after floating a couple of harsher alternatives including a Bankwest royal commission, CBA could offer something along the lines of an independent review of an agreed group of files. Mediation could then occur if new information has emerged to make it clear that the treatment of some customers fell short of best industry practice. This is well short of what the “victims” want.
For years they have been pushing for a remediation process outside CBA’s direct control, based on allegations that the bank manufactured defaults to reduce the $2.1bn Bankwest purchase price through a “clawback” or price adjustment mechanism.
CBA has categorically rejected the allegations, pointing to court cases where the claims have been considered and rejected. The bank, as well, has been encouraging the committee to conclude that the clawback allegations have now evolved into more general claims of mistreatment.
No doubt CBA will argue that an endless process of reviewing commercial decisions, some of which date back eight years, creates the danger of moral hazard for the banking industry; in other words, the longer and louder you protest, the more likely it is that a decision will be overturned.
CBA’s base position over the years has been that it would reconsider cases where it can be demonstrated that the bank has done something wrong, either legally or in terms of the demands it has made of customers.
Ruddock said on December 2 that he didn’t like the term “wrong”, effectively because it has a legal meaning that sets the bar too high. Customers who received poor advice from CBA’s financial planning arm would agree with him.
A large part of the committee’s work in gathering evidence is done. Now comes the hard part: consideration of the evidence and coming up with recommendations.
This article was first published by www.theaustralian.com.au
Richard Gluyas Business correspondent Melbourne @Gluyasr