But Flanagan had glaucoma and couldn’t see, her memory was foggy as a result of an operation for cancer, and she suffered from osteoporosis and other medical problems, including the effects of multiple strokes. So when it came to completing the appropriate application forms, she was unable to read the details, write answers or even sign her name. To get around this and enable the loan to go through, the Westpac officer pre-filled the guarantor document with false information. He also wrote ‘yes’ in answer to a question on an acknowledgement form asking Flanagan if she had ‘read the guarantee and indemnity . . . carefully’. (Westpac later claimed Flanagan had received independent legal advice before signing the loan documents, something Flanagan denied.)
Hodge went through the loan application for Flanagan’s daughter and showed it to be riddled with errors, inconsistencies and contradictions. This prompted Commissioner Hayne to suggest that getting a small-business loan was more about process than substance, box-ticking rather than checking facts.
‘Yes, I think that’s a correct assessment,’ Westpac general manager of commercial banking Alastair Welsh told the commission. ‘It was more form, and the substance was more anchored in the security position and not anchored in [the] understanding of Ms Flanagan’s income or potential to pay back the debt.’
Flanagan’s case identified serious defects in Westpac’s procedures for issuing small-business guarantor loans. For example, the bank hadn’t checked other discrepancies, such as the loan being for $160,000 when the pool-maintenance franchise her daughter was buying cost $85,000, which was a serious problem in itself.
When the pool-franchise business failed, Westpac called in the loan. With Flanagan unable to pay, the bank attempted to evict her from her home. If Flanagan hadn’t received help from Legal Aid NSW, which brokered a deal for her to stay in her home until she died, she would have been out on the street, homeless.
Flanagan’s case highlighted the dangers of elderly parents acting as guarantors for their children’s loans, and of banks allowing incapacitated and possibly ill-informed customers to sign highly complex legal documents – a particularly damaging practice since loans to small businesses aren’t covered by the strong consumer-protection laws that apply to individuals borrowing money.
Concerned by the message Flanagan’s story might send, Alastair Welsh repeated the banking industry’s mantra that the practice of parents acting as guarantors should be allowed to continue nevertheless, saying, ‘Many parents want to back their children. The reality is in Australian society, we’re often asset rich and cashflow poor . . . The support of a guarantee for many small businesses is critical.’ It was a message banks desperately wanted to convey to politicians: everything was fine and guarantor loans should be left alone.
*
Another part of the round-three testimony into small- and medium-business loans that grabbed attention was CBA’s shabby treatment of customers when a technology ‘glitch’ had resulted in the bank overcharging thousands of small-business owners millions of dollars on two overdraft products, one of which was a simple business overdraft. Slow remediation, an attempt to cover up the matter, and failure to make a breach report to ASIC were just some of the revelations.
The issue had emerged in 2013 when a customer alerted CBA to the overcharging of interest on their overdrafts. Instead of charging 16 per cent, it was charging a nose-bleeding 32 per cent or more. The bank implemented a manual fix in late 2013 until a system solution was implemented in May 2015. The ‘system fix’ worked in 95-plus per cent of cases but more than 2500 customers continued to be overcharged. Yet CBA didn’t believe it needed to notify ASIC of the breach.
When Clive van Horen, CBA’s executive general manager of retail products, was questioned at the royal commission on 24 May 2018, he responded with a cavalier attitude and tried to defend the scandal as a ‘technical’ problem. It may have started out as a glitch in their computer systems or a coding error, but it snowballed into another example of misconduct at CBA caused by a culture focussed on profit and image rather than doing the right thing.
Counsel assisting, Albert Dinelli, described the devastating impact of the ‘technical’ problem on one customer who had been overcharged: ‘I went to the bank and was quite directly and abruptly told that a bank is a business and that is the price you pay for borrowing money,’ the small-business owner, whose name was withheld, said. ‘On three separate occasions, I had broken down in the bank asking them to help me understand why it didn’t matter much that I was trying to pay back my overdraft and high interest charges and I could not get ahead.’
After the woman’s third visit CBA realised the mistake was not hers, but that it had been charging her the interest rate of 32 per cent. Instead of taking the issue further to see how many other customers were being overcharged, the bank tried to isolate it to one case. ‘Due to some system error, we have been charging a customer 32 per cent interest instead of 16 per cent,’ an email from a staff member of the bank said. ‘To resolve the matter, I recommend to early charge off and approve a payment arrangement of $50 a week. If not, the matter will escalate and might be raised as systemic, because it could be happening with more customers, too.’
The revelations were sickening, as was van Horen’s attitude. Dinelli asked him, ‘Do I understand that email to be a suggestion that it be settled so that the issue isn’t raised and thus becomes a systemic issue?’
‘Yes . . . I think the person was clearly trying to resolve the complaint for the customer,’ van Horen replied.
The bank offered the customer $2750 in compensation, but when she threatened to go to the media it upped its offer to $3494 ‘as a commercial decision to resolve the matter’.
Inside the courtroom, onlookers looked on aghast as van Horen continued to downplay the bank’s actions. When Dinelli said to him, ‘And there were two reasons for CBA wishing to have this dealt with speedily. One was the bad PR?’ van Horen replied simply, ‘Fair to say.’
Dinelli then said, ‘One was also the fear of it being identified as a systemic issue?’ to which van Horen replied, ‘I wouldn’t be comfortable saying that that was a CBA view.’
Unhappy with the offer, the customer lodged a claim with the Financial Ombudsman Service. It was this decision that forced CBA to broaden its investigation. As Dinelli pointed out, if the customer had left the matter alone and not gone to the FOS, the bank might never have looked into the problem and thousands of others would have continued to be overcharged.
Yet still CBA played the game. Dinelli read out another email van Horen had written requesting a ten-day delay in remediation payments – which CBA had already taken two and a half years to move towards – to avoid poor PR: ‘Can we make all this happen, letters and actual refunds, after House of Reps hearing on 7 March? Eliminates the chance of this being brought up in the hearings and a delay of ten days is immaterial.’ He was referring to a scheduled appearance by CBA’s then chief executive Ian Narev and Matt Comyn, who was running CBA’s retail bank, in Federal Parliament on 7 March 2017.
It was typical of the practice already highlighted at previous inquiries into banks cosying up with regulators. Hayne asked van Horen to explain his actions.
‘At the time, we did not believe there was any reportable breach,’ van Horen responded. ‘In terms of materiality . . . it was less than 1500 customers out of 10 million. It was, you know, I think, .002 per cent of our total earnings. So it was a very small issue in the scheme of things . . . A judgement call I made in the moment . . . And I accept it was the wrong decision, but that was the decision I made.’
It was an answer that encapsulated the bank’s culture of denial.
Dinelli pursued the issue of CBA’s delay in reporting the breach to ASIC, asking if it was true that it wasn’t until 15 May, with the royal commission approaching, that CBA made a disclosure to ASIC and conceded its conduct was misleading or deceptive.
Van Horen replied, ‘Yes. I believe so.’
That
meant that from the time CBA realised there was an issue of overcharging until the completion of remediation – 960 days – it sent out ten statements to its customers. Dinelli pointed out that ten statements to 2500 customers meant there were ‘25,000 instances of those false or misleading representations’. ‘Is that right?’ he asked van Horen.
‘Look, I think this feels to me like a very legal interpretation of the legislation. I absolutely couldn’t agree – you know, I don’t know enough about that to say yes.’
‘Well, your letter did say, “The issue may also give rise to other breaches of financial services law,”’ said Dinelli.
‘Yes,’ van Horen replied.
Dinelli then tried to get van Horen to admit there had been an actual breach of the law.
‘I don’t understand that,’ van Horen replied. ‘So you’re asking me quite a legal question. I’m not going to be able to give you an answer to that.
Here was another banker who’d been briefed by his lawyers to concede as little as possible, even when the evidence was in front of him.
*
Another disturbing case study in this round of hearings involved Marion Messih, whose experience as a Pie Face franchisee illustrated a frequent lack of due diligence on the part of banks and small-business owners when it came to loans for franchised businesses.
I’d developed a keen interest in Australia’s $170 billion franchise industry after a series of exposés into Domino’s Pizza, 7-Eleven, Caltex and the Retail Food Group, which has brands including Gloria Jean’s Coffees, Michel’s Pattiserie and Brumby’s Bakery. The owners of numerous franchises – small businesses – across the sector had suffered financial devastation and mental health issues after watching their dream of owning a small business turn into a personal and financial nightmare. The common theme was abuse of power by the big franchisors, with fee gouging, excessive rebates, an imbalance of power and unconscionable contracts, all of which made the business model unworkable for many franchisees.
Banks had played a role in the financial ruin of thousands of franchisees across the country. They did this by accrediting franchise operators, which the franchisors marketed as an endorsement of their business model, and by their willingness to lend money to franchisees wanting to purchase a franchise. In return for the accreditation, franchisors steered franchisees to borrow from the accrediting bank. This goes a long way to explaining the rapid growth of the franchise sector and the havoc it has wreaked on some franchisees’ lives.
Westpac had accredited Pie Face, a franchise network renowned for selling both pies and coffee. Pie Face steered Messih and her brother and sister-in-law to borrow $360,000 from Westpac to buy a Pie Face store. Soon after, she realised the previous owner had ‘exaggerated’ the financial figures. To try and make their franchise profitable, Messih worked fourteen-hour days, opening at 5 am and knocking off at 7 pm. ‘If we made $500 a week it was a miracle,’ Messih told the royal commission.
Eighteen months after investing in the store, Messih and her brother and sister-in-law called it quits. That same year the entire Pie Face network collapsed, leaving many franchisees stranded and paying off bank loans. It would later emerge Pie Face hadn’t made a profit in ten years, which makes you wonder what sort of checks banks do before accrediting franchise networks.
Messih said that after giving up the franchise, ‘I had the business loan, I had a credit card with Commonwealth Bank that I was paying off and also another Westpac credit card that I was paying off . . . It was just too much.’ Alhough Messih received rental income from an investment property she owned, it didn’t cover all the expenses she had.
Messih and a group of other Pie Face franchisees lodged a claim with the Financial Ombudsman Service, saying Westpac should never have given them a business loan and should refund the interest and bank charges. Meanwhile, the letters and phone calls from Westpac to Messih demanding payment ramped up. Messih recalled to the commission how she’d told Westpac, ‘Well, you’re going to let me starve to death, even though I have got no money.’
She decided to sell her investment property ‘just to breathe’. Of the $750,000 she received for it, Messih planned to clear her debts by paying off $165,000 she owed on the investment property and $330,000 she owed on her home loan. She also planned to repay her half of the business loan with Westpac (the other half was still with her brother and sister-in-law).
But the day before the settlement occurred, instead of accepting her half of the loan repayment and coming to an arrangement with her brother and sister-in-law, Westpac decided to take 100 per cent of the loan from Messih. Her sister-in-law was now paying her back $120 a week, the royal commission heard.
‘It was the worst time of my life,’ Messih said. ‘I don’t want to ever go through that again. I had my kids paying my bills for me – paying my loans for me . . . I worked hard to get where I was. It’s gone. All of it has gone. I still owe money, when I should be retired by now. But I still owe money.’
Despite this shocking evidence, the royal commission failed to investigate the ramifications of banks accrediting franchisors, the level of comfort bank accreditation of a franchisor gives to franchisees signing up for life-changing business loans, or the extent of due diligence undertaken by the banks. This was a lost opportunity.
As the curtains closed on the third round of hearing, there was a sense of relief among bankers and investors. Despite some uncomfortable moments, no scalps had been taken and there was no expectation of government intervention in tightening restrictions on lending to small businesses or banning guarantors. Numerous breaches of the banking code of conduct and the Corporations Act had been revealed, and there’d been yet more examples of a culture that put profit before people and of the banks’ questionable accreditation of franchise models. Clearly there was an obvious imbalance of power between banks and small businesses. But the commission made it clear it wasn’t prepared to touch that area.
The banks had dodged a bullet in another part of their business, but there were many more bullets to come.
Chapter 19
Round 4: Services in regional and remote communities
Preying on rural battlers
THE FOURTH ROUND OF hearings began on 25 June in Brisbane then moved to Darwin to ensure the 6.9 million Australians living in remote and regional communities didn’t feel they’d been forgotten. It opened like any other hearing, with Rowena Orr laying out a detailed summary of the issues, then grilling the first witness, but on day two it turned political when crossbencher Bob Katter, sitting in the gallery, became frustrated and shouted, ‘Are we going to address why these things happened and what we can do about it to improve it in the future? Is the commission going to address those issues?’
Katter was referring to the treatment of farmers experiencing financial stress and hardship. He was concerned that the royal commission had allocated too little time to deal with their specific problems.
To everyone’s surprise, Hayne responded to Katter’s impassioned plea: ‘Mr Katter, I’ve indicated the course I will follow . . . We’re looking at these things at the moment through the lens of particular case studies,’ he said. ‘I understand your concern, you’re not the only one who’s concerned, Mr Katter. There’s a lot of people out there concerned and I know that.’
Hayne didn’t have to look too far as a group of aggrieved farmers had assembled outside the commission to protest. He had also seen the sheer volume of submissions from farmers outlining harrowing stories. So he acquiesced and announced he would reschedule the hearings for the rest of the week to allocate more time to these issues. It wasn’t enough to appease the farmers – Katter, the National Farmers’ Federation and some National Party members including Wacka Williams – but it defused what could have become a much bigger political issue.
Getting back to business, Orr outlined a series of farm cases where ANZ had played hardball with customers after acquiring the loan book of the Landmark rural bank in 2010. In one case,
a third-generation farming family from Western Australia, was issued with a default notice in 2013, a month after the patriarch, Stephen Harley, had suffered a heart attack and his wife, Janine, had asked ANZ for more time to make repayments. The bank granted an extension on the condition the family vacate the property within twenty-four hours if they failed to make a payment by the deadline.
‘Was one day a reasonable period?’ Hayne asked ANZ executive Ben Steinberg.
‘In an environment where we’ve executed an agreement with a customer who’s been advised of the ramifications of the agreement, I believe it is reasonable,’ Steinberg replied.
After hearing a string of stories about forced farm sales, mental anguish inflicted on communities, and the role of the banks, it became apparent that this was another area where the banks had failed their communities.
*
By the time the commission reached Darwin, the topic had switched from the treatment of farmers to funeral insurers exploiting the cultural significance of Indigenous mourning ceremonies in order to persuade Aboriginal and Torres Strait Islander people to buy insurance they couldn’t afford and didn’t understand. The hearing became emotionally charged when Aboriginal woman Tracey Walsh broke down as she recounted how she had signed up with Aboriginal Community Benefits Fund (which is not connected with any Indigenous organisation) and paid $10,000 in premiums for a policy that would only ever pay a maximum of $8000 in the event of her death. She had believed that if she paid more than $8000, the extra money would go to her family.
The royal commission also heard recordings of phone calls made by a sales agent at Select AFSL, which trades under the name Let’s Insure, to a sixty-year-old Aboriginal woman, Kathy Marika, for whom English is her second language. The agent was aggressively pushing Marika to buy funeral insurance, despite being told she already had insurance through her superannuation. The policies were underwritten by St Andrews Insurance, owned by Bank of Queensland until the bank announced its sale in April 2018, just ahead of the hearing.
Banking Bad Page 22
