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TOPIC: Jennie Paluka says "report McGarvie to IBAC"

Jennie Paluka's case with reformer Suzi Burge 2 years 1 month ago #3880

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Class Action by British etc 2 years 1 month ago #3882

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Those who have entered into loans with banks to purchase residential properties since 2011, are about to encounter difficulties. Since 1995 banks in the United Kingdom, Ireland, Australia and New Zealand, have been making massive and obscene profits from providing finance to property purchasers. These banks have cared little about the lending practices adopted by them, and reckless lending has brought about huge and unsustainable increases in property prices.
These lending practices are now leading to problems for both intending buyers and existing owners of property, which will show through:
Real reductions in the realistic market values of residential property, due to market forces.
Increasing interest rates caused by world-wide credit squeezes on banks and the economy.
Difficulties in obtaining finance due to changes in the attitude of banks as well as credit shortages.
Variations to mortgage terms and conditions required by banks or regulators.
We believe that the banking industry and it's regulators have intentionally turned a blind eye to the irresponsible lending that has been taking place.

We also believe that lawsuits will now emerge as a consequence of lending practices in recent years, and we will be making bank customers aware of their rights in any proceedings. Our own bank customers that follow us through our Twitter account @bankcustomers are aware of our activities on their behalf.

All bank customers are invited to become subscribers to our regular information bulletins that will be available through email to our subscriber base. There are no charges or obligations to any of our subscribers to participate in receiving facts and information from us. We are not lawyers and we do not represent any parties other than bank customers that join our subscriber base.

For Australian bank customers that have entered into mortgage finance agreements with banks since 2012, we have appointed the leading Canberra based law firm of Chamberlains to act in the planned class action lawsuit . The partner in charge is Mr.Stipe Vuleta.

Email us - This email address is being protected from spambots. You need JavaScript enabled to view it.
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Dr Evan Jones talks to Jeannie's customer Suzi 2 years 1 month ago #3883

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Jennie Paluka says "report McGarvie to IBAC" 2 years 1 month ago #3884

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Don’t miss this latest #bankingRC investigation by Nathan Lynch. Nathan has kindly allowed us to publish outside Thomson Reuters’ paywall in the public interest.

When the HBOS Group collapsed in 2008, UK taxpayers were left to fund a £17 billion bank bail-out. It was a prudential disaster that contributed to the break-up of the UK’s Financial Services Authority (FSA). In Australia meanwhile, Bankwest’s “appalling lending record” was even worse than in Dear Ol’ Blighty. During the $2.1 billion Bankwest takeover, APRA ensured this fact never came to light. Unfortunately, someone had to foot the bill for Australia’s biggest prudential regulatory failure since HIH Insurance. Please read this story in conjunction with his earlier investigation, ‘Smart Laundromat: the inside story of CBA money-laundering scandal’.

BRENDAN STANFORD IS A TOUGH GUY. A classic law enforcement character. He’s sociable, friendly, funny, but with the kind of tenacity underneath that’s forged in the furnace of the Australian Federal Police. Brendan’s what you’d call a salt-of-the-earth bloke. He’s a former pub owner, a father and a leukaemia survivor.

Brendan has seen a lot during his working life. But the toughest thing he’s ever had to endure was watching the decline of his brother Michael, his business partner, following the Commonwealth Bank’s takeover of Bankwest in 2008.

The Stanford brothers had gone into business together, with the aim of buying and resurrecting country pubs. They believed that historic pubs were the lifeblood, the town square and the social heart of rural communities. Without good pubs, country towns could be lonely places.

The brothers’ first foray had been a success. Brendan bought the pub, in Cessnock, NSW, and Michael worked there. They ran it for five years and sold at a profit. Soon after Brendan and his brother saw an opportunity to buy the Coronation Hotel, in Portland, as partners.

In 2006, Brendan and Michael made the fateful decision to finance their purchase through Bankwest. The Perth-based bank had recently been taken over by HBOS and was on an aggressive east coast expansion campaign. The bank’s goal was to grow quickly and challenge the four pillars, making it a serious player in Australian banking.

The bank was offering attractive terms to win new business customers. The Stanfords signed up to a $1.2m business loan, secured against a hotel valued at $1.6m, at an 80 per cent LVR. The loan term was 20 years.

The day they signed up for that loan was the day they, unwittingly, lit a fuse that would lead to their financial and emotional destruction.

“A tale they won’t believe …”

As Brendan bravely recounted his story before the royal commission yesterday, the pain of recollection was written across his face. Despite the difficult memories, he stayed composed. Stayed strong.

Brendan told of how his brother handled the negotiations with Bankwest in 2009, while he was undergoing treatment for leukemia. He told of how his sister-in-law offered to provide $400,000 to “de-risk” the loan to prevent a fire sale of their underlying asset. He told of how there was no market for pubs like his, despite an extensive marketing campaign, as savvy buyers were holding out for the next distressed asset sale from a former Bankwest customer. He told of how the bank eventually moved in and sold the pub, along with its pokie licences, for $525,000 — after costs, it was a pittance more than they had offered to tip in to keep the facility open.

It wasn’t until the counsel assisting asked about the impact on his brother, however, that Brendan choked up. Commissioner Kenneth Hayne requested a break.

When they returned 10 minutes later, he was asked the question again.

“From the time this was instigated I saw him struggle. Even after it all happened I saw him depressed for a few years.

“That’s why I’m here today because … he couldn’t come in,” Stanford said, trying to paper over the cracks in his voice.

A “troublesome” business

The financial services royal commission’s hearings into the treatment of Bankwest customers have been particularly emotional. The bankruptcies, the suicide attempts, the family breakups and the impact on children are all reminders that banking collapses do not just rip up balance sheets. They destroy real people’s lives.

Australia may not have nationalised its banks, like the UK did.
But in the gross mishandling of the Bankwest collapse,
it certainly nationalised the trauma.

This week’s hearings have also raised serious questions about the integrity and performance of Australia’s prudential regulator, the secretive Australian Prudential Regulation Authority (APRA). The commission heard on Tuesday that Bankwest’s level of impaired loans and “troublesome loans” had rocketed prior to its acquisition by Commonwealth Bank in October 2008. The HBOS-owned authorised deposit-taking institution (ADI) was sold to CommBank for A$2.1 billion — half of its pre-crisis valuation — at the peak of the global financial crisis.

For the sake of confidence in the banking system, however, APRA never disclosed just how bad things had become at Bankwest.

The royal commission heard that CommBank launched an internal review shortly after its acquisition to determine Bankwest’s level of impaired and “troublesome” loans. The review, dubbed Project Magellan, was set up to get a clearer idea of the quality of the loan book that CBA had taken on. CBA had assumed liability for these loans when it acquired the bank. The sale was expedited in a de facto bail-out approved by APRA, the ACCC and the federal government. They had little choice.

The prudential regulator set a number of conditions on the acquisition, such as surrendering the Bankwest ADI licence back to APRA as soon as possible. As with Westpac’s “takeover” of St George, the deal was structured to conceal any concerns over the institution’s solvency. It was also structured to provide the maximum reputational protection for APRA.

Around the same time in London, the parent bank HBOS was being folded into Lloyds. This was part of a £17 billion bail-out that left the UK government holding a 43.4 per cent stake in the new entity.

The deal-making with CBA was, by comparison, an act of genius. At CommBank it was overseen by some of the institution’s rising stars, including general counsel David Cohen and the new head of strategy Ian Narev, among others.

The rescue of Bankwest was executed exceptionally well. The deal was done swiftly, discretely and without resorting to a taxpayer-funded bailout. The transaction was approved by Wayne Swan, the federal treasurer, on the Thursday before Christmas, 2008.

“I have taken this decision after a comprehensive assessment of its impact on the national interest, with conditions that support a strong and competitive Australian banking system. These conditions will also ensure the best possible outcomes for both customers and employees of CBA and Bankwest,” he said at the time.

That same week, as pre-Chrissy beers flowed in the Coronation Hotel, the Stanford brothers had no idea they would soon come to embody the hollowness of the government’s assurances.

New chief in town

On that same day, one week before Christmas in 2008, CommBank named its new captain at Bankwest. The acquirer had appointed Jon Sutton, the former head of agribusiness lending at CBA, as Bankwest’s national managing director. Sutton understood regional customers deeply and was given the public mandate of “enhancing and developing the Bankwest brand”. It all sounded very promising for the once-proud Western Australian bank and its customers.
It soon became apparent that the “acquisition” was
not destined to go as smoothly as the media releases
(dropped a week before Christmas) had suggested.

Soon after joining Bankwest, Sutton sent an internal memo lamenting the quality of its business lending book. It was “poorer than original expectations and we are … actively de-risking the exposure,” he wrote in a memo to the CBA board risk committee.

Under Project Magellan, CommBank raked over the Bankwest portfolio. It was looking for loans that were not yet in arrears — but likely to run into trouble.

Cohen, who went on to become the chief risk officer at CommBank, told the royal commission that Project Magellan set out to review at least 60 per cent of Bankwest’s business customers.

“It was a combination of internal people and external people seconded in to assist,” he said.

“Broadly speaking, each of the reviews uncovered some concerns around the level of provisioning.”

In an unusual move, the project team also included receivers, members of the profession that stood to win lucrative work if people defaulted on their loans.

Back in August 2012, Cohen appeared as the face of CBA at the Senate Inquiry Into the Post-GFC Banking Sector. At the time he was confident that there was no misconduct on CBA’s part. In December 2015, he appeared before the Parliamentary Joint Committee and again asserted that Bankwest and its new owner had acted fairly (cf video below).

Recently, however, his views have changed. Cohen told the royal commission on Tuesday he had recently discovered that the bank lacked the skills at the time to make proper risk assessments in relation to “troublesome” loans. This had become apparent during his preparation for the royal commission, the CBA senior manager said.

In cases like the Stanfords’, he said CBA now recognises that the customers were mistreated.

“In this case, the lack of discussion with the borrower, the lack of explanation about why a sale was the only option, I think that was not reasonable,”

he said before the Hayne Inquiry.

Reducing exposure

In 2009, it must be remembered, there was a very different banking climate. Major banks around the world had collapsed under the weight of high-risk lending.

In response to Project Magellan’s findings, the CBA executive risk committee decided to reduce its commercial property exposure by A$1.8 billion. This was largely achieved by “de-risking” the Bankwest commercial property book, which had represented more than half of its lending activity under HBOS.

Cohen said, with hindsight, the credit processes that Bankwest used were “not as diligent” as those that Commonwealth Bank applied. It also discovered the continuing management of business banking customers throughout the life of their loans was out of kilter with CommBank’s day-to-day management of business relationships.

Dr Andy Schmulow, a regulatory specialist, academic and consultant, said the royal commission was offering an unprecedented insight into the dangers of light-touch prudential regulation.

“It’s unacceptable that APRA allowed Bankwest to get to the point it was at prior to the CBA takeover. My sense is that they covered themselves by offering Bankwest to CBA on preferential terms so there wouldn’t be an Australian bank default at the height of the financial crisis. That refutes the whole narrative that Australia did incredibly well and our banking system was so well regulated,”

he said.

Dr Schmulow, who is a leading authority on prudential regulation, said the arbitrary targets for “de-risking” the Bankwest commercial loan book were a significant concern. He said this suggested that the bank may have acted unreasonably, or even unconscionably, when terminating some of these banking relationships to reach a predetermined figure.

Dr Schmulow believes there needs to be an inquiry into the apparent failures at APRA during this period.

Australia’s own sub-prime disaster?

APRA never revealed how bad things had been at Bankwest. But four years after the collapse of HBOS, the UK Parliamentary Commission on Banking Standards inadvertently blew APRA’s cover story to pieces. The UK inquiry conducted a sweeping inquiry into the group’s international activities. It found that HBOS’s impaired loans in Australia had reached a staggering 28 per cent (adjusted for currency). This was higher than the HBOS default rates in the UK and among the highest rates for the group internationally.

The Bankwest impaired loan rates were appalling even by the standards of Ireland, which had suffered a catastrophic financial crisis. When compared with Ireland’s banks, Bankwest’s default rates were exceeded only by Anglo Irish Bank and HBOS itself. Bankwest’s impaired loan rates would have exceeded those of Allied Irish Bank (22 per cent), Bank of Ireland (9.4 per cent), Danske (17.9 per cent), ILP (6.1 per cent), KBC (6.7 per cent) and Ulster (17.5 per cent).

The inquiry heard evidence that, in Australia, HBOS sought to double its national market share. It wanted to become a new rival to the “four pillar” banks that dominated the market.

“In Australia, the impairments … totalled £3.6 billion, equivalent to 28 per cent of the value of the loan book there at the end of 2008, an even higher loss as a proportion of loans than incurred by the corporate division in the UK. This loss is all the more striking in view of the comparative resilience of the Australian economy in the global downturn. In this period, the Australian banking sector remained profitable and no entities received any public capital support during the crisis,” the UK report said.

James Crosby, then head of HBOS, said at the time the losses in Australia were indicative of an “appalling lending record”.

The UK report found HBOS Australia took the “relatively quick and easy path to expansion without acknowledging the risks inherent in that strategy”. With Bankwest’s rapid expansion plan, it concentrated on sectors such as pubs, clubs, hotels and property development in regional areas that exacerbated its default rates.

Audacious expansion, aggressive contraction

Professor Justin O’Brien, head of financial regulation at Monash University, said the royal commission had shone a light on APRA’s failure to rein in Bankwest during its aggressive expansion in the lead-up to 2008. The unspoken question at the Hayne Inquiry, which lies outside the royal commission’s scope, is how and why the Bankwest loan book could become so impaired in the first place, he said.

“The answers were not provided at the time by APRA, which had primary regulatory oversight. Instead the evidence comes from overseas through the British Parliamentary Committee on Banking Standards, which raised significant red flags about APRA’s capacity and complacency. As is so often the case, it was ignored … given the apparent success of the Australian housing market,” he said.

O’Brien said it was important now for the government to conduct an independent review of APRA’s level of knowledge, or consent, in relation to the de-risking of Bankwest’s “troublesome” customers.

“The unanswered question is, in aggressively de-risking the Bankwest loan book subsequent to its purchase … did either Bankwest or CBA discuss its strategy with the prudential regulator in advance? If so, did it receive an implicit or explicit undertaking that such a strategy made sense prudentially — both for the institution and the market as whole?” O’Brien said

Dr Schmulow said it was unacceptable that that APRA had engineered a bailout of HBOS-owned Bankwest in 2008 without ensuring customers would be explicitly protected. He said there were mechanisms such as the Council of Financial Regulators to ensure that conduct regulation and prudential regulation were handled collaboratively to protect all bank stakeholders, including business borrowers.

Dr Schmulow said the Bankwest case highlighted the need for an oversight body to ensure that regulators are working effectively and in the national interest.

“ASIC comes in for a lot of criticism because it is a public-facing agency. APRA, on the other hand, is shrouded in secrecy and often hides behind the Banking Act to shield itself from scrutiny. When you pull back the curtain you find a regulator that is at least as incompetent and as captured as ASIC,” he said.

“This says a lot about the flaws in our regulatory model. It confirms the recommendation from the Murray Inquiry that we need a Financial Regulator Assessment Board,” Dr Schmulow added.

The Murray Inquiry recommended that the government create a new Financial Regulator Assessment Board to report annually on how financial regulators have implemented their mandates. The inquiry said the independent oversight board should “provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.”

“The Bankwest debacle suggests that a decade after the HIH Royal Commission, which came close to recommending APRA’s disbandment because of incompetence, little if anything has been learnt,” Dr Schmulow said.


As all of this regulatory drama plays out, Brendan Stanford leaves the royal commission quietly. He isn’t escorted by a phalanx of silks. He doesn’t give a doorstop interview. He just has to compose himself, take a few deep breaths of crisp Melbourne air, and drive back to his day job.

Brendan’s a hospitality contractor these days, keeping his family afloat by working in someone else’s business.

He really doesn’t like the limelight. He didn’t want to appear before a royal commission. He certainly didn’t want to have his sorry story plastered all over the nightly news.

But he had to do this for his brother Michael. Who couldn’t make it along himself.

Author’s note:

The above report is the “alpha” to the “omega” of the Smart Laundromat story.

To truly understand the predicament CBA finds itself in today, you have to go back to December 2008, when the bank’s rising stars pulled off the deal of the decade.

After outsmarting APRA, the mighty HBOS, the Treasurer and two parliamentary enquiries, was it any surprise they became complacent? Seven years later, the architects of the Bankwest takeover were running the bank. It was the height of the “risk on” era at CBA. They turned a conservative bank into a profit-generating powerhouse. The dividend was sacrosanct.

But … it’s the “black swans” that always bring banks undone. In this case, they underestimated a little intel agency run by Paul Jevtovic, a former AFP officer, who’d dedicated his life to rooting out organised crime and corruption.

The rest, as they say, is history. If not for management hubris, the AML/CTF failures would have been fixed quietly and resolutely. Just as other “pillar” banks had done in the past.


Nathan Lynch is the Asia-Pacific Bureau Chief, Financial Crime and Risk at Thomson Reuters.

A slightly different version of this report was published by Thomson Reuters and is republished with their permission.
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Hodge QC says charges can be laid on banks 2 years 1 month ago #3887

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Banking royal commission day 29: ASIC

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Senior counsel assisting Michael Hodge, QC, has closed the royal commission's hearings on SME lending. He set out possible breaches by ANZ, Westpac, CBA, NAB, Suncorp and BOQ. Earlier, the commission said ASIC needs to get tougher on banks. Catch up on the day here.

That's a wrap

04:06 PM

That's it for today and for this third round of hearings.

Thanks for joining the Financial Review over the past fortnight. We trust you have found our live coverage informative and insightful.

The fourth round of hearings - which will focus on experiences with financial services entities in remote and regional communities - will kick off on June 25 in Brisbane.

See you then; Goodbye for now.


04:00 PM

Finally, Mr Hodge is summing up on the dispute between ASIC and the Australian Banking Association on the definition of small business.

The issue will define how broadly the Code of Banking Conduct will apply. ASIC and Phil Khoury said it should apply to businesses with $5 million of bank credit, whereas the ABA wants it limited to $3 million.

A broad definition could restrict credit, Anna Bligh told the inquiry on Thursday. "It is likely that banks are concerned that, the lighter the covenants, the more likely they are to have to price in the cost of that increased risk they're taking, or be less likely to want to take on the loan," she said.

Mr Hodge also referred to the evidence yesterday and today relating to banks implementing unfair credit term regime.

Mr Hodge wants submissions to be filed to address these questions relating to the code and UCT provisions: Is ASIC approach to UCT provisions appropriate and moulded to the risks of the contraventions? Has ASIC approach been effective to ensure compliance with the UCT provisions and ASIC Act? And is the proposed code adequate and does it need ASIC's approval?

Commissioner Hayne tells the banks that saying Yes or No, or saying they don't have anything to say, won't help him - he wants them to argue for the position they want to adopt.

"I know what I am asking for is difficult. But the questions are difficult."

Anna Bligh, ABA CEO, at the commission on Thursday.
Anna Bligh, ABA CEO, at the commission on Thursday.
NAB misled Dillon

03:51 PM

It is also open to Commissioner Hayne to find to National Australia Bank might have engaged in misleading and deceptive conduct by not informing one of its customers, Ross Dillon, a music retailer, that it required the possible to use the proceeds of the sale of his house to retire his business debts.

It was also a breach that NAB had no lawful entitlement to the proceeds of a property sale that was used to pay down the debts of Mr Dillon's company, National Music.

NAB's conduct also fell below community expectations, despite NAB general manager of strategic business services Ross McNaughton that the bankers had acted within policies.

Ross Dillon, a former NAB customer, giving evidence earlier this week.
Ross Dillon, a former NAB customer, giving evidence earlier this week.
Bank of Melbourne deceived

03:45 PM

Now to the Bank of Melbourne. Recall Brad Wallis and his wife took a 30-year, $516,000 loan from Westpac subsidiary Bank of Melbourne to buy a cafe and five- star B&B in Northern NSW.

After they sold their investment property for $760,000, suddenly the Bank of Melbourne decided it would hold on to $100,000 of the proceeds and demanded Wallis restructure the loan for the B&B from residential to commercial.

By retaining $100,000 from the sale, Mr Hodge said it's open to the commission to find a breach of the Banking Code of Banking Practice by Bank of Melbourne because it failed to act reasonably and fairly.

He also said it is open to find Westpac engaged in misleading and deceptive conduct, after it withheld the funds to rectify its own security shortfall, and this fell short of community standards and expectations.

More broadly, Mr Hodge said he is concerned about banks focusing on "relentlessly acquiring new business". He wants submissions to address questions the various case studies have raised about sales culture.

Bankwest - no misconduct

03:37 PM

Mr Hodge now turns to the Bankwest case studies. Even though the commission will find no issues with Project Magellan at a macro level, were their problems at the level of the individual borrower?

A quick recap. The first case study was Michael Kelly, a Perth property developer who had a couple of "landbanking" syndicates that CBA supported through the global financial crisis, although it did increase the interest rates as the loans were rolled.

The second case study was Stephen Weller, a publican from the mid-north coast of NSW. He hadn't missed any repayments. But Bankwest failed to provide a valuation and reduced the term of his facility as the business deteriorated.

The third case study was Michael Dohery, the Hobart property developer. His property was valued on an "in one line" methodology that Mr Dohery disagreed with. That led to a lower valuation which contributed to its decision not to roll the loan, even though it was close to being finished.

Then there was Brendan Stanford, the Bathurst publican. He also hadn't missed any repayments and Bankwest failed to provide him with a valuation or communicate its position on his non-monetary defaults. The bank called in a receiver and sold the hotel.

Mr Hodge said it is not open for the commission to make any findings of misconduct relating to these case studies.

But he said there could be errors relating to various communications which fell below community expectations.

He said some broader open questions include whether it is appropriate to take enforcement action when there have been non-montary defaults, and whether investigatory accountant valuations should be provided to customers.

Commissioner Hayne also calls out a disconnection in what banks say in their advertising, annual reports, other public documents - and their conduct.

Bankwest review

03:14 PM

We are now turning to Commonwealth Bank's dealings with Bankwest.

Mr Hodge said the evidence from the case studies earlier this week showed there were problems with the quality and diversify of the Bankwest loan book, problems with its business functions and with provisioning.

He said David Cohen's evidence that "CBA took steps to address the risks" was consistent with the commission's investigations. He said it is open to find nature of Project Magellan was necessary for CBA to address the risk. It said concerns were valid and reviewing the loan book to determine if further provisioning needed to nbe made "seems bot prudent and responsible".

"And it may be required to file accounts that give a true and fair view... you have to look at your provisions," Commissioner Hayne adds.

Mr Hodge said there is no evidence to show Project Magellan was part of any process to "deliberately default customers".

Suncorp Lowe loan

03:03 PM

It's open to the commission to find Suncorp failed comply with the Banking Code of Practice over its treatment of the Lowe's.

The loans were granted to Peter and Jennifer Low of Healesville and following Peter's unexpected death in a workplace accident, the Low family attempted to work with the bank to resolve the outstanding debts on which interest was accruing at a rate of $1200 a week.

Mr Hodge said Mrs Lowe's offer to continue repayments was reasonable.

He also said the case suggested that FOS had not functioned as an effective method of redress.

He wants to know if FOS can improve is processes for loans effected by maladministation and wants to know of the government's new Australian Financial Complaints Authority should adopt a different process.

Westpac's guarantee

02:54 PM

It's open for Commissioner Hayne to find Westpac contravened the ASIC Act because it acted unconscionably by accepting a guarantee from frail pensioner Carolyn Flanagan.

Mr Hodge said Westpac was in a stronger bargaining position and noted that she was in very poor health. Bank records showed it made inadequate efforts to identify her interest in the loan to her daughter's pool franchise. There were questions raised in evidence about the use of pre-witnessed and undated documents.

"No reasonable person could have been satisfied Ms Flanagan had any meaningful direct or indirect interest in the business," he said.

More broadly, Mr Hodge said legal protections relating to guarantors operate after the event and require courts to intervene. He said it was fortunate Ms Flanagan got a result from Legal Aid but said many guarantors would not be able to benefit from such advice or run to run a case against Westpac.

He said also said the requirement in the law for a direct benefit to flow back to the guarantor might not be suitable and a requirement to get legal advice may not be enough.

He wants submissions on the difficulties that will be created if more requirements are placed on the process for guarantees before they are signed.

Carolyn Flanagan during her appearance last week. Mr Hodge said Westpac's conduct could be seen to be unconscionable.
Carolyn Flanagan during her appearance last week. Mr Hodge said Westpac's conduct could be seen to be unconscionable.
CBA overdraft breach

02:42 PM

Mr Hodge said it is open to Commissioner Hayne to find CBA had contravened the ASIC Act after it overcharged overdraft customers.

The royal commission presented evidence last week that showed CBA had known about a system problem as early as 2013, however the initial and partial fix for the problem would not be found and implemented until May 2015.

The failure to notify ASIC of the issue as soon as possible and within 10 business days could be seen as a breach.

CBA charged an interest rate of 34 per cent, about twice the proper rate, impacting around 2,800 customers. Mr Hodge said the commission could find that sending bank statements with the wrong price could also have breached the ASIC Act and it was open to ASIC to fine it for this.

Supply of credit

02:33 PM

Mr Hodge said bank "slogans" about being customer centric are not legal obligations, although they do contribute to the expectations about the nature of a bank and its relationship with a customer.

Mr Hodge tells Commission Hanye that in all three case studies relating to responsible lending, there may have been breaches of the code of banking practice. But nevertheless, in all three cases, the small businesses had failed not due to some technical flaw in the bank's loan assessment, "but rather the businesses failed because, fundamentally, the performance of the business did not live up to the projections presented to the bank and the hopes and aspirations of the borrower."

He said that any call for increased regulation needed to be premised on the fact that banks are too willing to lend to small business but the case studies and work conducted by the commission outside the hearings did not suggest this to be the case.

He said that calls for the National Consumer Credit Act to be extended to small business is not necessary. He wants the banks to make submissions on the impact this would have on the supply of business credit.

Commissioner Hayne reminds the banks that the commission has not yet made a decision on this. Rather, it is raising questions for a response. "They are not interrogatory statements of opinion," he said.

Breaches of code

02:22 PM

Mr Hodge said it is open to Commissioner Ken Hayne to find ANZ, Westpac and Bank of Queensland breached the Code of Banking Practice by failing to exercise reasonable care, skill and diligence relating to their respective case studies presented by the commission last week.

ANZ's failure related to its dealings with a gelato chain, Westpac's related to its failures banking a Pie Face franchise, and Bank of Queensland's related to its funding of a Wendys franchise.

All the banks have been invited to provide written submissions to respond to the commission's findings.

Mr Hodge noted that ANZ's previous general manager of small business banking Kate Gibson and Westpac's head of business banking Alastair Welsh were credible witnesses and had made criticisms of the FOS approach.

Mr Hodge also called out problems with BOQ's owner manager model and called for it to respond to compliance with the Sedgwick report.

No additional regulation

02:09 PM

From the early remarks of the closing address, the banks are not going to face more onerous regulation relating to small business lending.

Mr Hodge is going through the case studies presented last week relating to responsible lending in SME lending, including the lending to franchisees.

He tells Commissioner Hayne that it is the view of counsel assisting the inquiry that "no additional statutory obligations should be imposed with respect to the making of loans to small busineses."

Closing address

02:06 PM

We are back after lunch and in the final stretch for Round 3.

Senior counsel assisting Michael Hodge, QC, is summing up. He has controlled these hearings; we only heard from Rowena Orr, QC, very briefly.

Mr Hodge said the commission reviewed 630 submissions relating to small business, consulted widely, sent 164 notices to produce and reviewed 75,000 documents.

He said the case studies selected have demonstrated "the dealings between any small business borrower and a financial services entity are almost always complicated".

Small business performance depends on many factors, including economics conditions. He said many "problems had their roots in the performance of the business, rather than anything else."

No preference

12:33 PM

With a looming criminal cartel action against ANZ, Citi and Deutsche Bank the talk of the market on Friday, the royal commission has been exploring all morning whether ASIC has been too soft on banks by not taking enough litigation against them.

In his final line of questioning before lunch after an aggressive morning, Mr Hodge wants to know why ASIC doesn't bring more actions for pecuniary penalties against banks in court as opposed to allowing them to make small donations to resolve matters.

Penalties would result in "exponentially more" fines which would act as a great deterrent, he suggests.

"Does ASIC recognise that obtaining declarations and pecuniary penalties from the Federal Court is a significantly greater deterrent when compared with infringement notices and enforceable undertakings?" Mr Hodge asks.

"We recognise it certainly is a deterrent.... having the courts determine these issues is a mater that is significant and sends a message to the market, definitely," Mr Mullaly said.

He said ASIC's decisions on which approach to take involves looking at the nature of conduct, the seriousness of conduct, whether it is deliberate, their level of cooperation, and its own resourcing.

He said ASIC is currently studying the deterrent effect of EUs and more evidence is needed to determine whether court action or an EU has a bigger impact.

Asked whether ASIC has a view on whether it it preferable to take enforcement action against banks or engage with them.

"I don't think ASIC has a preference for one or the other," Mr Mullaly said.

The commission will resume at 2:00pm AEST for Mr Hodge's closing address.

Penalty v 'donation'

12:21 PM

ASIC is not off the hook yet. Wants to explore when ASIC will go to court and when it will proceed via an infringement notice (which typically results in a low payment being made).

The commission wants to know how it determines when to make a bank pay a "community benefit" payment.

Mr Mullaly has said in his statement that over the past decade ASIC has procured $54.3 million in "community benefits payments". Some of these have been made under enforceable undertakings and some voluntarily.

Mr Hodge wants to know if these are used to "resolve a moment of tension" by allowing a bank to agree to make a "donation".

Mr Mullaly said that is not an "apt description".

He said a payment can't jus tbe made to "revolve an investigation - that is suggesting a payment can make something go away, and that is obviously not the case".

Mr Hodge turns to a donation Westpac paid relating to providing inappropriate credit card limit increases as explored in the first round of hearings. WBC agreed to improve its practices and to may $1 million over four years to support financial literacy and counselling. The payment "finalised that particular matter with ASIC," Mr Mullaly said.

Now Mr Hodge is looking at the litigation statistics. Over the past 10 years, ASIC has brought just 10 legal proceedings against the six largest banks.

Five of these allege contravention of the ASIC Act (four are the BBSW cases and one relates to BOQ and Storm Financial). The other five cases involved: CBA/Storm, ANZ/Esanda, a second case involving BOQ and Storm, and two cases against Westpac including the one alleging irresponsible lending breaches currently before the courts.

Over the decade there have been 45 infringement notices that have delivered $2.1 million in payments.

ANZ update

12:03 PM

Here's an update on the other banking sector story today - the expected criminal cartel conduct case relating to a $2.5 billion share placement for ANZ in 2015. ANZ said this morning it had been contacted about the case by the Commonwealth Director of Public Prosecutions late yesterday

It is believed JPMorgan - one of the three investment banks that worked on the ANZ capital raising in 2015 the subject of the action - has been granted immunity after acting as a whistleblower on the matter. Citigroup and Deutsche Bank are facing charges and both said they would vigorously any proceedings. Read the latest here.

Chanticleer says ANZ's revelation that it is facing criminal cartel charges out of the handling of a 2015 capital raising will send the world of investment banking into a spin and could change the way big institutional capital raisings are handled. Read it here.

Meanwhile, here is Street Talk's take on the case. The Financial Review's deal experts explain how regulatory scrutiny on "book messages" - communications between investment bankers and fund managers - has been increasing in recent years.

ASIC stats

11:54 AM

The senior executive lead of the financial services enforcement team at ASIC, Tim Mullaly, is in the box talking about ASIC's approach to litigation against the banks.

He was asked to break down for the commission all of ASIC's legal proceedings since January 1 2008.

There have been 1,102 proceedings, under various laws including Corporations Act, the ASIC Act, the National Consumer Credit Protection laws and state crimes acts.

Of these cases, 238 have been criminal proceedings, 277 civil proceedings, and 587 administrative proceedings. There have been 370 infringement notices. It has also accepted 194 enforecable undertakings.

Dim view

11:43 AM

It is clear the commission holds a very dim view of the way ASIC has enforced unfair contracts laws changes in the banks.

Mr Hodge suggests ASIC could have commenced legal proceedings seeking declarations that the terms in a particular bank contract were void. He said this would have both invalidated the term and set a benchmark for the industry.

But Mr Saadat says contract terms differ from contract to contract, so "what we find form litigated outcomes is the outcomes don't necessarily have a broader applicability".

Mr Hodge reminds Mr Saadat that ASIC hasn't had any litigated outcomes from unfair contract terms regimes. He says he is talking broadly.

He said he expects any litigation would have been fought by the banks and would have slowed down getting changes to have been made because the banks would have waited for the outcome of the litigation.

Now Mr Hodge wants to know about ASIC's respond to Suncorp's evidence yesterday. Suncorp's . Steven Kluss said it still hasn't completed its review of its contracts.

"Does it concern you now - on 1 June 2018 - that Suncorp still has not completed its review to determine whther the terms of some of its contracts were unfair?"

"Yes," said Mr Saadat.

Mr Hodge asks if he was aware of that before yesterday. Yes, he responds, members of his team had raised that in the last couple of weeks.

What about other banks, like Bank of Queensland, Mr Hodge asks.

"We have a concern more broadly other institutions may not have made the changes that are necessary," Mr Saadat said.

He said ASIC has commenced a review of banks and non-bank lenders to again check the changes as set out in ASIC's report 565 on the issue have been made.

Mr Hodge wants to know if the Suncorp example points to any failing at ASIC, in the way it has gone about ensuring the UCT regime has been implemented.

Mr Saadat defends ASIC's approach. He said the "strategy we embarked upon to make sure the big four banks had changed [the contracts]...was the right way to go".

The big four's compliance was a "good outcome", because now the Suncorp "will be held to a much higher standard than the law requires". He said ASIC will make sure others are "doing the right thing".

Asked if ASIC could have done a better job in this area, Mr Saadat does admit ASIC could have moved faster to work out what changes to contracts were required and to have got this position out into the market faster.

That's it for Mr Saadat. He has had a pretty challenging morning.

Another ASIC witness, Tim Mullaly, is being sworn in.

Michael Saadat from ASIC was under pressure on Friday about a slow approach to enforcing contract law reforms.
Michael Saadat from ASIC was under pressure on Friday about a slow approach to enforcing contract law reforms.
Too close

11:25 AM

Now the royal commission is suggesting that ASIC is getting pushed around by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).

Mr Hodge has pointed to the documents tendered by Westpac yesterday. These show ASIC believed Westpac was not compliant with the UCT laws, including the application of 'material adverse change' in condition clauses. ASIC told Westpac specifically in April 2017 it needed to improve.

But Mr Saadat there was no reason to single them out because all the banks weren't compliant. He said he doesn't remember Westpac being any less compliant than other bank.

Now Mr Hodge calls out a another media release made by ASIC on May 16 2017. It talks about banks "needing to lift their game".

He suggests that's not a normal expression for ASIC to use and Mr Saadat agrees.

"Is ASIC in a position where the ombudsman is pushing it and the language it is using in relation to UCT," asks Mr Hodge.


Why not sue?

11:11 AM

ASIC is under growing pressure on its apparently soft approach to enforcing the government's unfair contract laws applications into banking.

Mr Hodge wants to know why ASIC has taken no court actions relating to the UCT. He suggests ASIC may have a softer approach towards litigation than the ACCC.

Mr Saadat disputes this. He says litigation strategy is the same "to the extent that if we encounter businesses including terms that are unfair and they don't change them, we would commence proceedings against those businesses in appropriate circumstances".

Mr Hodge takes Mr Saadat back to his answer to Commissioner Hayne's question that the banks' were slow to adopt the UCT changes and this wasn't a surprise to ASIC.

So Mr Hodge suggests: "So why not take the position of saying, we are not satisfied with your terms and if you haven't improved by November 12 2016 (given the legislation comes into effect on November 13), we are going to go the Federal Court and seek a declaration."

But ASIC thought it was an industry wide issue so didn't want to single out any bank with litigation.

"We saw this as an industry wide issue not confined to one institution and were seeking industry wide outcome as to how banks and financial apply UCT laws," Mr Saadat said.

But Commissioner Hayne appears unimpressed.

He wants to know if ASIC was "seeking industry wide agreement or industry wide compliance: the two are radically different, I would suggest."

Mr Saadat said both. ASIC wanted the banks to "modify contracts to comply with the law and potentially go beyond the law".

The commission is also querying ASIC's with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) on the issue.

In March 2017, ASIC and the ASBFEO released a joint media release, saying lenders had been found not to have complied with the UCT laws and that ASIC wanted to banks to "move quickly" to make the changes.

"Why work with the lender? Why not just say: 'Do it?'," Commissioner Hayne said.

Mr Saadat said engagement can sometimes get a faster response and taking court action can be slow.

But Commissioner Hayne pushes on this.

Rather than ASIC saying "We will work with those not complying", it should say "Those not complying should do so", he suggests.

Mr Saadat acknowledges ASIC's language might be circumspect. But he said it doesn't have the power to direct a business how to operate.

Mr Hodge says he is struggling to understand the strategy being pursued by ASIC.

Commissioner Kenneth Hayne wants to know why ASIC wouldn't insist on taking action against a bank that hadn't complied.
Commissioner Kenneth Hayne wants to know why ASIC wouldn't insist on taking action against a bank that hadn't complied.
Banks' 'minimalist approach'

10:50 AM

ASIC now reveals the banks were recalcitrant in making changes to their small business contracts to make them compliant with the unfair contract term (UCT) changes.

The banks started to respond to ASIC's September 2016 letter saying they were looking into their contracts but ASIC became concerned the banks were taking a "minimalist approach" to compliance with the law.

Only a few changes to contracts, those that were deemed "absolutely necessary", were made to the standard contracts, Mr Saadat agreed.

Some banks merely inserted the term "reasonable" into terms that might be unfair to qualify them.

"Does it follow such changes were not sufficient?" Mr Hodge asks.

"We were concerned that they weren't sufficient," Mr Saadat said.

Commissioner Hayne asks if the banks' approach surprised ASIC.

"No," said Mr Saadat.

So when the new UCT law came into force at the end of 2016, Mr Saadat is asked whether ASIC knew a number of contracts could be unfair and not in compliance with the law.

Mr Saadart qualifies "potentially unfair". He said it is not for ASIC to determine if actually unfair - that is a matter for teh court.

Commissioner Hayne interjects. Would ASIC consider expressing tis view a term was unfair? he asks. "We could express our view," said Mr Saadat.

"No doubt you could, but would ASIC tell a bank... 'Clause X of Contract Y is unfair because...' ," Commissioner Hayne wants to know.

Mr Saadat said Yes, but only if ASIC had had formed a view that it would be willing to take the matter to court and get a declaration on that basis should the bank not accept its position.

ASIC's Michael Saadat is having to defend ASIC's approach to enforcement of new laws.
ASIC's Michael Saadat is having to defend ASIC's approach to enforcement of new laws.

10:31 AM

As today's bombshell cartel case against ANZ indicates, there is a bit of overlap between the ACCC and ASIC when it comes to enforcing the corporate law.

The commission is pressuring ASIC this morning about why it appears to have moved more slowly than the ACCC when it comes to enforcing the unfair contract terms (UCT) laws.

We haven't really seen the regulators put under pressure by the Hayne inquiry until this point.

The ASIC and ACCC had a phone call in August 2016, where the competition regulator indicated it wanted to issue a joint media release relating to banks' adoption of UCT. The ACCC had been on the front foot, writing to industries across the economy asking them to review contracts for unfair terms.

Mr Saadat acknowledges the ACCC was doing more than ASIC at this point in time. The ACCC had realised some banks were in breach of the UTC.

ACCC had received additional funding from government to conduct enforcement work on UCT and Mr Saadat said he expects that partly explains why they were more active.

But towards the end of 2016, ASIC started to get more aggressive. In September, it decided to obtain copies of bank contracts and start to revue them. It had previously thought it would wait until the law came into effect in December.

ASIC wrote to all the major banks on September 7 2016 saying it wanted to review standard form contracts.


10:12 AM

Mr Hodge has moved onto unfair contract terms (UCT) laws. The law was changed in late 2016 to make banks adopt new protections for their business customers previously introduced in the consumer laws. These removed certain clauses giving banks asymmetric, excessive power over their customers.

We heard from the ACCC yesterday about how it it reviewed consumer credit contracts in the consumer space and then began a process of enforcement to ensure compliance with the new law.

ASIC also adopted an education and then enforcement approach. It first raised this internally in July 2015 but decided to wait until the banks had made the revisions, which they intended to do during a one year transition period. The new laws came into effect in November 2016.

ASIC published an "information sheet" at the start of 2016. Mr Saadat is talking through various planning documents that led ASIC to increase its focus on UCT.

Guarantees survive

09:59 AM

With the commission focused during its first week on the information banks provide to guarantors backing the loans of their parents.

Phil Khoury recommended that such guarantees be void if the banks don't meet their requirements under the code, including relating to is disclosure.

But the banks did not this recommendation into the code.

But it appears that ASIC is not fussed about this. Mr Saadat says it is not one of the points of ongoing contention.

Michael Saadat, from the ASIC, in action on Friday morning.
Michael Saadat, from the ASIC, in action on Friday morning.
APRA nonplussed

09:46 AM

Mr Saadat said ASIC is concerned about the banks' position of wanting a $3 million cap for application of the code.

ASIC agrees with the independent reviewer Phil Khoury, who called for a cap of $5 million of credit. This would allow the code to act more broadly.

"Our objective is to make it as good as it can be," Mr Saadat said.

Ms Bligh said yesterday the long-awaited revised code of banking practice had been held up by a difference of opinion with the regulator over the definition for small business.

Bligh saying a broad definition could restrict credit.

ASIC has deferred finalising its thinking while these royal commissions hearings are going on.

Mr Saadat said the prudential regulator APRA have "told us they don't have strong views about whether the definition should be $3 million or $5 million".

This is the first time a broad industry code has been submitted for approval from ASIC.

"We haven't made a decision yet," he said.

Saadat on

09:37 AM

Michael Saadat, a senior executive leader at ASIC, has been sworn into the box and proceedings are underway on Friday. Thanks for joining us again.

Michael Hodge, QC, is asking about ASIC approval of the Banking Code of Conduct, which was submitted by the Australian Banking Association.

We heard the bank's position on the code from ABA CEO Anna Bligh on Thursday.

She flagged a showdown with ASIC chairman James Shipton next week. The Financial Review's report on Ms Bligh's appearance yesterday can be found here.

ANZ criminal action

09:35 AM

As the royal commission gets under way, the banking sector is abuzz with news of another legal proceeding.

ANZ Banking Group will be hit by a criminal lawsuit alleging cartel conduct relating to a 2015 equity placement. The bank told the ASX this morning the commonwealth director of public prosecution also intends to bring legal proceedings against its group Treasurer Rick Moscati.

The Financial Review's news story on the unprecedented case can be read here.

ANZ said on Friday it will fight criminal charges.
ANZ said on Friday it will fight criminal charges.
What's coming up

09:33 AM

There are only two witnesses listed today for the final day of hearings into SME lending.

ASIC's Michael Saadat and Tim Mullaly will be examined.

And then we will hear the closing submissions from senior counsel assisting Michael Hodge.

Thanks for joining us again.
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