Banks never Clients
The Banking RC Report marginalises small business borrowers, effectively calling them sore losers and whingers and telling them to bugger off once and for all, writes Dr Evan Jones.
Commissioner Hayne has chosen to emphasise the sins of the finance sector in the “wealth management” arena (financial advice, insurance, super — the last, superficially). Media coverage has implicitly accepted Hayne’s priorities (nowhere defended); indeed, the media has itself set the scene over preceding years for these priorities.
Marginalised, in particular, are the domains of small business and family farmer lending. These two areas command a mere ten of 580 pages! Upon reading the pages on small business lending I experienced revulsion and disbelief. And I am an outsider. A small business victim reading these pages, life destroyed, would be reacting with fury.
In the 2001 Australian film The Bank, a bank CEO has hold of research suggesting with certainty that a massive stock market crash is about to occur. Rather than publicise the advice he suggests the bank take advantage and make a massive profit out of the crash. When a board member suggests they have a duty to the public to release the information, he replies he only cares about the shareholders – “They are our people. They are our ‘society’. The public can take care of themselves.”
The final report of the Hayne royal commission into misconduct in the banking, superannuation and financial services industry shows that this view was not the stuff of fiction.
The text displays no understanding regarding the relationship between bank lender and small business borrower. It reminds me of banking law textbooks where statutes are described (at great length) as if they were automatically and successfully applied, with no description of the real world.
And the chief protection for small business borrowers has for some time been – and remains – the Banking Code … Among other things, the Banking Code provides that, if a lender is considering providing a borrower “with a new loan, or an increase in a loan limit”, the lender will “exercise the care and skill of a diligent and prudent banker”.
The ‘Banking Code of Practice’ and the Banking Ombudsman were centrepieces of the era of “self-regulation” ushered in after the whitewash 1991 ‘Martin Inquiry Report‘. The Code has been a façade since its sanitised introduction under bank control in 1996. Only in 2003 did the banks succumb to pressure to include small business and the banks responded with the 2004 revised Code, which was corruptly structured to inhibit access to the complaints process.
The scam was eventually exposed and the Code revised again, albeit not until 2013. As late as 2015, the NAB sued to enforce a guarantee but was repelled by Judge Elliott because it was cynically obtained (NAB v Rice, VSC 147, 23 April 2015). The judge opined that the Code was an integral part of the loan contract, whereas the NAB insouciantly acted as if it was merely discretionary. The NAB lost again on appeal. Slow learner, the NAB.
Each revision of the Code is longer than its antecedent, but banks continue to treat its substance cavalierly.
Moreover, the RC Report sees no problems with the guarantee system, nor with the bank lender’s discretion to cancel or alter terms of a facility upon its scheduled renewal.
There is a glimmer of sympathy for the farmer’s plight. The Report questions the ethics of imposing penalty interest rates during a declared drought. It even recommends that the lender should ‘cease charging default interest when there is no realistic prospect of recovering the amount charged’.
The Report implicitly acknowledges problems with farmer land valuations and sale prices following foreclosure but doesn’t enlighten us on why these things might be a problem. It expresses heartfelt hope that farm debt mediation schemes can be made to work properly and supports (desirably) a uniform national scheme. But it doesn’t educate the reader that the banks have learned how to rort the system.
Finally, the Report notes:
‘When dealing with distressed agricultural loans, banks should ensure that those loans are managed by experienced agricultural bankers’.
And before the loans become distressed?
So the Report does sniff some symptoms in agriculture but declines (as with SMEs) to look under the bonnet.
The SME/farmer domains are where serious bank corruption occurs. The potential for corruption is rooted in the profound asymmetry in the lender-borrower relationship. The lender has the ready capacity to create structures in which it can default the borrower at will. Much unconscionable conduct and fraud are enacted through processes that are nominally legal.
Everybody is in on the act, not least spiv consulting firms, law firms, valuers and receiver/liquidators. It’s a widespread racket.
The industry-funded Financial Ombudsman Service is part of the problem. There are perennial cases of FOS personnel complicity with the bank in disputes, but FOS (now incorporated into AFCA without reform) has gone completely under the radar. Copious evidence of this predatory structure is available from victim submissions to the Commission, and to myriad Parliamentary inquiries. Nobody in authority seems to pay attention.
Then there are the courts. Apart from the asymmetry of resources, the courts are biased against borrowers litigating against banks. The judiciary seems to have had its collective mind frozen since studying the law of contract at University. Very few judges know, or care to inquire, about the nature of the bank lender — small and medium enterprises/farmer borrower relationship. Would the Royal Commission delve into the intellectual deficiencies of the law and the courts? Wishful thinking.
I laid out key elements of the background to the current malaise in my February 2018 submission to the Royal Commission. The Commission has ignored it, as with submissions from other independent observers and whistleblowers.
All these issues are encapsulated in the Bankwest saga – the takedown of 900 or so developer/hotelier Bankwest borrowers after the CBA acquired Bankwest in December 2008. The Interim Report’s chapter on this issue could have been written by the CBA itself. But admit that this affair stinks and the modus operandi of the entire banking edifice is up for exposure. I wrote a brief article, ‘The Royal Commission falls from grace’, on the controversy in June 2018.
The Final Report devotes some paragraphs to correspondence that subsequently arose from the foreclosed Bankwest borrowers. In masterly prose, the Report refers to them as “victims”, calls them sore losers and whingers and tells them to bugger off once and for all. It claims that two parliamentary inquiries (‘Inquiry into the post-GFC banking sector’ and ‘Banking, Impairment of Customer Loans‘) and several court cases are decisive. Wrong. It is ironic in that the Bankwest victims are probably most responsible for getting up the Royal Commission in the first place.
As I noted in my submission following the Interim Report, perhaps we need a royal commission into the Royal Commission.