On Friday 6 July 2018, the fourth round of public hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry concluded in Darwin. The Commission’s third round of public hearings concluded 1 June 2018.
Commission’s focus on hearings
The third round of public hearings focused on responsible lending to small businesses, the approach of banks to enforcement, management and monitoring of loans to businesses, product and account administration, the extension of unfair contract terms legislation to small business contracts, and the Code of Banking Practice.
The fourth round of public hearings focused on issues affecting Australians who live in remote and regional communities, in particular, farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander (ATSI) people and financial services entities. The fourth round was held in two blocks: the first week was held in Brisbane from 25 June until 29 June, and the second week was held in Darwin from 2 July until 6 July.
Overview of third round of public hearings
Responsible lending to small businesses
The Commission considered what obligations should apply to small businesses in relation to responsible lending and whether they should differ from obligations applicable to consumer lending. Under the Code of Banking Practice, banks are required to act with prudence and diligence in assessing small business loan applications, and the bank must act to satisfy itself to a reasonable standard that the borrower will be able to repay the credit facility. However, the bank does not warrant the success of the borrower’s business when providing credit, and as emphasised by counsel assisting the Commissioner, Mr Hodge QC, nor can it be expected to be.
The three cases studies considered by the Commission involved lending of credit to small businesses from ANZ, Westpac and Bank of Queensland. In each case, the borrower was relying upon a third party for advice – either an accountant, franchisor, broker or lawyer. In each instance, the small businesses failed simply because the performances of the businesses did not live up to the projections presented to the banks and the ‘hopes and the aspirations of the borrower’. Mr Hodge QC made it clear however, that despite poor lending practices, the banks were no more responsible for the failures of small business than they are for a renovation at a shopping centre or a global economic crisis, which might cause a small business to fail.
Mr Hodge QC submitted that based on this, the Commission should find that no additional statutory obligations should be imposed with respect to the making of loans to small businesses.
Extension of unfair contract terms legislation to small business contracts
The unfair contract terms (UCT) regime in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) relates to financial services and is regulated by ASIC. The UCT regime in the Australian Consumer Law which deals with all other parts of the Australian economy is regulated by the ACCC.
The Commission heard evidence from both regulators, which revealed a different approach to implementation and enforcement of these new provisions. It was suggested that the ACCC’s approach may be more effective than ASIC’s approach.
The Commission sought further submissions on the following questions:
- Is ASIC’s approach to the UCT provisions and the consumer protection provisions under the ASIC Act generally more appropriate and moulded to the risks of the contraventions and practical resources constraints on ASIC?
- Has ASIC’s approach been effective in ensuring compliance with the UCT provisions that came into effect in November 2016 and the consumer protection provisions of the ASIC Act generally?
The Code of Banking Practice
The Commission observed that the definition of ‘small business’ is inconsistent in various pieces of legislation. The Commission heard that the Australian Banking Association’s position is that the definition of 'small business' should extend to businesses with a total debt of $3 million or less, whereas ASIC's position is that a ‘small business’ is a business with a total debt of $5 million or less. Agreement is yet to be reached on the definition of ‘small business’ for the Code of Banking Practice.
Fourth round of public hearings
The five case studies on the topic of agricultural business lending concerned issues about access and support available, non-monetary default and changes to lending conditions. Businesses operating in this industry face particular challenges which affect their financial position, including exposure to significant and sometimes prolonged weather events, pests, and commodity price fluctuations.
The Commission heard evidence that ASIC should have a larger role in farm finance. ASIC’s role in farm finance is currently limited but there is argument for extending it on the basis that the minimum standards for responsible lending should also be applied to non-bank lending in the context of farming finance.
All parties with leave to appear are invited to provide written submissions addressing the following questions:
- What does it mean for a bank to act fairly and reasonably towards a customer in a consistent and ethical manner? Consequently, what does that obligation require of a bank in relation to agribusiness customers in an enforcement context?
- What weight should a bank give to the interests of the customer when making decisions about agribusiness customers experiencing financial difficulty? How should a bank balance the competing interests of the customer and the bank in that context?
Interactions between Aboriginal and Torres Strait Islander people and financial services entities
The Commission examined four case studies regarding interactions between ATSI people in regional or remote communities and financial services entities.
The case studies examined situations where language barriers resulted in ATSI people failing identification requirements and having their account locked. This requires the customer to travel to the nearest branch which is often a significant distance from ATSI communities. Access to banks is limited due to distance and also weather conditions which can block access to roads for months at a time during the wet season. Language and literacy issues are significant due to limited understanding of banking products and concepts such as interest rates and default on payment. ATSI people have faced difficulties when seeking access to their superannuation entitlements due to a lack of understanding of the existence or purpose of superannuation. In relation to insurance, the Commission heard evidence of funeral insurance providers using inappropriate sales practices to sell their products to ATSI people living regionally or remotely.
It is open to the Commission to find that this conduct falls below community standards and expectations. The Commission seeks submissions as to whether financial services entities have in place appropriate policies and procedures to assist ATSI people to overcome obstacles associated with geographical remoteness, to address the cultural barriers to engagement, to address the linguistic barriers and obstacles posed by financial literacy levels.
Natural Disaster Insurance
Examination of natural disaster insurance was initially scheduled for round four. To ensure adequate time is allocated to farm finance case studies, the topic of natural disaster insurance has been delayed until Round 6 in September.
Round 5 of hearings will commence 6 August 2018 in Melbourne. The Commission’s interim report is due September 2018 with a final report due in February 2019.