The banking regulatory structure is an illusion and the regulators know it's a sham ― but they just don't care. Assoc Prof Evan Jones reports on a monstrous financial scandal.
The Senate Economics Committee Inquiry Hearings into ‘the post-GFC banking sector’ on 8-10 August starred three significant collective players. Significance is here defined by the wilful destruction of hundreds of developer/hotelier BankWest customers after the Commonwealth Bank took over BankWest in late 2008. (Denise Brailey’s representation for low-doc loan victims is a separate story.) There are representative victims, their stories recounted here. There are the CBA and BankWest spokespersons, their defenses recounted here. Then there are the spokespersons for key agencies and regulators, whose statements are recounted below.
The line? Nothing happened of consequence, merely an instance of the hurly burly of commercial life. If some casualties of the post-crisis shakeout see themselves as victims of foul play, it’s nothing to do with us.
First, to the Australian Prudential Regulation Authority, whose spokespersons appeared on Thursday 9 August. APRA’s formal responsibility is for the stability of the banking system, which translates into ensuring the health of Australian ‘Authorised Deposit-taking Institutions’.
In the context of an exchange over banking remuneration structures and the potential impact on undesirable risk-taking (lending quotas with bonuses attached, etc.), Senator Cameron chose to highlight the evidence of widespread bank malpractice:
The evidence we have had about some of the excess behaviour of banks has been at that lower level of remuneration, a mid-management type area. It seems to me the evidence we have had is that this is where pensioners are getting ripped off and small business people are getting ripped off. There is a huge information asymmetry in the relationship between the bank and borrowers. This is a fundamental issue. APRA is saying: 'We have this under control. We're looking at it. We're monitoring it.' I would like to have a clear understanding of how you are doing it, because something is not working. Either people are ignoring you or the APRA guidelines, or the guidelines are not working. That would be my view.
APRA’s Keith Chapman: I have flicked through some of the submissions and I can see some of the issues in the submissions that you are raising now, Senator. There is a potential difference here between what could have been fraudulent activity versus that which is enshrined in the remuneration structures of an institution. Certainly some of the issues that appear to have been raised by submissions in the process we would suggest – if they are valid, and I am not making a qualitative judgement about that statement – look like fraud issues and should be taken up with the police rather than a prudential regulator.
I come back to one of the things we have said numerous times in Senate estimates. … we are a framework regulator. We cannot go and look at everything that happens in every institution. We try to start from the point of view of whether our policies are right and then we spot-kick down the bottom. If you were to ask me if we have sent someone to Condobolin, Sutherland or somewhere to look at what happens in individual branches, the answer is no.
Cameron: I am not asking that. What I would be looking at is the same as every other organisation or modern business does. They have key performance indicators, they have cultural issues, they have management checks and balances, and they have oversight and supervision, which is your job. Your oversight and supervision, surely, must go back to the culture within the organisation. You cannot ignore that. You cannot ignore whether key performance indicators are in place in relation to the management systems.
Are there appropriate management systems in place? Is there training in place? Is there fraud detection in place? My view is, from the stuff we are getting, there is not enough. There may be some. You would have every bank that has appeared here answer questions about whether it is fraud – and you say to go to the police. My view is there is an intermediate step. You have a responsibility, as APRA, to ensure that your oversight develops the appropriate culture where you do not need to call the police in. Am I wrong on that?
Senator Cameron may have forgotten that APRA had demonstrated precisely that concern in 2003 about an ‘appropriate culture’ at the National Australia Bank after NAB currency traders lost millions in illegal trades.
But APRA appears to have lost interest in ensuring an appropriate culture, and its personnel did not remind Cameron of that important intervention into NAB affairs.
APRA’s Charles Littrell: There are a great many people employed in the Australian financial services industry and they are around a lot of money. Neither we nor anyone else is going to be able to say there will never be misbehaviour in the financial services industry by the providers or the customers. We can say to you that in terms of our role, which is ensuring the institutions are financially sound, we do have systems in place to give us good feedback about whether there is a substantial or systemic problem. For example … let us say there are three million home loans and over 99 per cent of them were being paid back without, apparently, much difficulty.
Cameron: A lot of mortgage holders would say that is not true. Lots of them have difficulty.
Littrell: … From the point of view of the prudential regulator, some of those loans were made in error but not enough to threaten the solvency of the institutions ― not even close. We could run similar sorts of things on credit cards or small business loans.
Cameron: Mr Littrell, that is not what I have asked you. … I basically asked you: is there a rule for APRA as the regulator to make sure there is a proper culture in place, that there are performance indicators in place, that the management systems are in place, that the fraud detection is in place? That is question I asked. You went off on a bit of a tangent. I simply ask: is there a role for you guys in that?
Littrell: The answer to that is that it is part of our supervision systems. We certainly look at culture, particularly in the context of risk management, and we certainly look at systems, particularly in the context of risk management. The level at which we look is: are there issues that are large enough to threaten the solvency of the firm? It is not at the level of: is this organisation never going to mistreat or somehow mess up a client relationship? That is a much finer sieve than we would apply in our supervision. …
Senator Bushby: In terms of the financial institutions, ASIC has a responsibility. In the context of what you are talking about – correct me if I am wrong, but this is how I understand it – your job is to ensure the ongoing solvency of individual ADIs, effectively, and identifying risks to that.
Littrell: … If you thought you did not get a good deal, then yes, it would be ASIC or maybe the ombudsman or some other people, but not us. We are much more focused on ensuring that the [financial] firms are sound, not on whether the individual [customer] gets a good or a bad deal. …
So if banks are engaging in malpractice, go to the police or go to ASIC, but don’t bother us. We don’t care about the casualties. And we actually have no idea of the role of the police with respect to bank malpractice. As long as a particular bank isn’t at risk of collapsing by its own malpractice, it’s not our concern.
And if the good Senators want clarification on matters relevant to their Parliamentary responsibilities? Forget it.
Senator Williams: … we have people coming to our offices with problems. Sadly, I get a fair few bank problems ― too many; … Do you have a government liaison officer whereby [any of us] could speak to someone from your operation to raise a problem or seek advice or whatever? Do you have such an officer?
Littrell: The person to start with is our corporate secretary, who is on the website. …
Williams: Yes. Often when you go to the website it is a long and exhaustive process to actually talk to someone.
Littrell: But it is the same process as for Senate estimates questions. We do not have a parliamentary liaison officer per se.
Williams: We have contacts with the banks all the time, and with Telstra, but obviously we cannot have that with you.
Well then, what about ASIC to which particular bank victims are supposed to turn because APRA has its sights on the big picture?
Commissioner Peter Kell fronted for the Australian Investments & Securities Commission on Wednesday 8 August.
Senator Alan Eggleston
Senator Eggleston: Have you undertaken an investigation into various allegations about BankWest customers with commercial loans having been treated unfairly since BankWest was acquired by the Commonwealth Bank?
Mr Kell: We have received a small number of complaints relating to Bankwest and the matters that have been raised publicly in recent times. … I am happy to say that in relation to the sorts of matters that have been raised recently about Bankwest … we have received four complaints. … [Note: ASIC has subsequently acknowledged the receipt of seven complaints.]
ASIC has not received any evidence to suggest some sort of systemic misconduct by Bankwest in relation to these matters. Commercial lending arrangements are not regulated under the consumer credit protection laws. …
Eggleston: Does ASIC consider that the allegations of various kinds could indicate a potential breach of the unconscionable conduct provisions of the ASIC act or other legislation that ASIC administers? You have limited it somewhat by what you said earlier.
Kell: The matters we have seen to date do not at this stage suggest to us that pursuing an unconscionable conduct case would be appropriate. …
Eggleston: There are a number of rather unusual occurrences which are troubling. One of the submitters stated that in the second half of 2008, 'There was enormous pressure placed on us by BankWest which involved multiple daily phone calls, demands for repayment, requests for figures and demands for meetings which culminated in the appointment of Ferrier Hodgson to undertake an internal assessment'. A number of submitters have raised similar issues. Are you able to offer protection against such conduct?
Kell: 'Offer protection'? I am not sure that that is the phrase I would use in that circumstance. It would depend on the circumstances. I might note … that negotiations that arise when businesses get into difficulties are rarely happy, pleasant negotiations. They can involve very difficult and emotionally difficult financial discussions and difficult calls by the parties on both sides. That context needs to be taken into account here when you are looking at some of these issues. …
Bushby: Mr Kell, you were talking about when businesses get into trouble they have conversations which are not particularly pleasant with their financiers. The allegations here are that the trouble the businesses have got themselves into are solely arising out of the bank acting on the terms of the agreement with businesses that were otherwise not in trouble.
The BankWest victims who appeared at the Hearings (as did other victims in their submissions to the Inquiry) noted that they had been turned away by ASIC. Presumably, these complaints provided raw material that might have triggered a concern and an investigation into whether any ‘sort of systemic misconduct by BankWest’ was occurring.
Kell notes that ‘Commercial lending arrangements are not regulated under the consumer credit protection laws’, with reference to the federal National Consumer Credit Protection Act for which ASIC assumed responsibility on 1 July 2010. Quite. Commercial lending involving SMEs was excluded from the Act, not least due to lobbying from lenders (for example, here).
But ASIC does have responsibility for unconscionable conduct in commercial lending arrangements, that responsibility having been added with an amendment to the ASIC Act in August 2001, operative March 2002. ASIC has had its head in the sand ever since on this responsibility. I wrote an unpublished piece on this conscientious neglect in October 2010. The BankWest victims in their hundreds ought to be a prime vehicle for ASIC discovering its responsibility from this state of desuetude.
Mr Kell’s career has been steeped in the consumer protection arena ― with long stints in Consumer Associations, ASIC and the Australian Competition & Consumer Commission. ASIC should have had a relevant senior manager fronting the Committee Hearings with responsibility for commercial lending. But an examination of ASIC’s Organisation Chart highlights that there is no such person. Unconscionability might be covered under Commissioner John Price’s watch (‘Corporations and Corporate Governance’), and certainly under Deputy Chairman Belinda Gibson’s watch (‘Insolvency Practitioners’), but ASIC’s structure provides further indication that business to business unconscionability is just not admissible in its mental road map. ASIC’s annual reports provide further confirmation of this significant lacuna.
But on to the Federal Treasury, the ultimate overseer of the entire financial sector and its regulatory apparatus. Heading the Treasury representation on Wednesday 8th was Jim Murphy, Executive Director of the ‘Markets Group’ Treasury Division. Murphy is the most senior public servant overseeing financial sector regulation.
In reply to questioning, Murphy dissembled on matters as various as the state of competition in Australian banking (Treasury has condoned anti-competitive mergers), the Big 4’s profit rates exceeding its global comparators (seen as entirely reasonable), and presumed regulatory inhibition to predatory lending (there isn’t any). Regarding the BankWest saga:
Williams: Did the Reserve Bank or Treasury lend any money to Bankwest in the period from August 2008 through to December 2008? Are you aware of that?
Murphy: No. You would have to ask other people about that.
Williams: Ask the RBA?
Murphy: I would think so.
More dissembling. The CBA takeover would have been organised with close governmental involvement. Why can’t Murphy tell our elected representatives what he knows? Jim Murphy
Here is Murphy in his opening remarks:
“… business lending practices are generally governed by state and territory law as well as the general law of contract and equity. The ASIC Act provides protection for consumers and small business in relation to the provision of credit by prohibiting conduct that is unconscionable and deceptive as well as prohibiting false and misleading representations. The next limb of that issue is that the Corporations Act regulates the conduct of receivers appointed to corporations that default on a debt. In addition, some industry bodies have also developed codes of practice governing lending activities – and ABA is a clear one. They are, I suppose, the ground rules for the issue of lending between BankWest and its customers.
Overall, the period since the GFC has seen a global recalibration of risk in lending … and there has been a reassessment of the capacity to repay loans as well as lenders looking at the value of collateral offered for new loans. You cannot have a recalibration of a reassessment of risk without it having the downstream effect of what contains risk for banking institutions – that is, their lending and the way they value the assets which are the collateral for those loans.”
The regulatory structure is thoroughly adequate and functioning. Moreover, the CBA takedown of BankWest customers was a natural and appropriate consequence of the GFC’s presumed impact on property values. Wrong, on both counts.
And the Banking Code of Practice? A joke. An integral part of any credit contract, the Code is universally honoured in the breach. Tasmanian MP Andrew Wilkie recently proposed a Bill to give the Code teeth ― but the ABA immediately swamped the media to head Wilkie off at the pass. Everything was in perfect working order with the Code, said the ABA. More, said the ABA:
“Banks' small business customers and individual customers have a number of avenues they can take a complaint if they believe that a bank has breached the Code of Banking Practice. They can go to the Financial Ombudsman Service (FOS), the Code Compliance Monitoring Committee (CCMC) and the Australian Securities and Investments Commission (ASIC).”
Ah, but the ABA knows that the FOS and ASIC merely pull up the drawbridge, and the CCMC is a figment of the ABA’s imagination.
Senator Mark Bishop
Senator Bishop: When the [CBA’s] new management took over they naturally went through the loan book to find out what the real state of play is. As a consequence, they did a range of things, it is alleged, such as revaluing loans, repricing loans, putting more pressure on consumers to pay up earlier. There has been a lot of pain in particular niche markets in New South Wales and Queensland in particular. When your people have looked at that response, as outlined in the public documentation, by the Commonwealth Bank and the other submissions, do you think that was proper business practice – to revalue and reprice the loans with the attendant pain? Or was it unacceptable business practice?
Mr Murphy: I do not think it is for a Treasury official to comment on those business practices. I would say that there is a framework there. This may not be solace to people who feel aggrieved or who feel that they were not given a fair shake. But there is a framework there for them to be able to take action if they feel that, in terms of the current laws of the land and in terms of what is fair and reasonable, that did not occur. We have to face the reality that this a commercial contract between borrowers and lenders. I suppose the thing that makes us consider this matter is that, to some extent, you had an intervention – the GFC – that took a lot of people by surprise. I could well imagine that borrowers, before the GFC, were planning their business on the basis of what they had seen previously, and lenders were planning their business on the basis of what had been up to then. It is not surprising that some issues have been raised from this event.
… the government faced the situation of whether to have Bankwest taken over by someone or to let it fail. The government went through a process. The financial regulators were involved – the Treasury, the Reserve Bank and APRA. Then the ACCC did a proper competition analysis, and in its view there would not be a lessening of competition if Bankwest were merged with CBA. At the macro level, I suppose, that is what has happened [meaning?].
… you then move into questions about whether the receivers acted appropriately, whether the valuation on the property was done correctly and whether there has been any unconscionable conduct by the lenders. What government does is set in rules and obligations on all the elements of the system, and one would hope that those rules are tight enough to ensure fair results for everyone, whether it is the borrower or the lender. So I can understand that people may have found that the actions of CBA were not to their liking, or that people were very critical of them, but I think there are arrangements in place whereby they can take action if they feel that way.
Well no, the ACCC did not do a ‘proper competition analysis’. The ACCC’s Public Competition Assessment of the CBA takeover was rubbish (as was the equivalent for Westpac’s proposed takeover of St. George)
The ACCC was pressured to come up with the right answer, so the process was corrupt. Murphy reiterates, ignoring the evidence, that the borrower defaults were a product of GFC-driven plummeting property markets:
Bishop: Does the response of CBA when it had been through the loan book and made its own commercial assessment of the state of BankWest, which it had purchased – and then its process on revaluing, repricing and bringing forward some repayments – strike you as being a rational and necessary response on the part of the new owner in the environment we are in?
Murphy: I would have thought so. It is prudent to do that. In terms of their capital requirements and in terms of liquidity, I would have thought that the regulator [which?] would be oversighting what was going on there. You would have thought that anyone in the same situation would do that.
More, it was imperative that the CBA pushed the defaults, because it was dictated by APRA requirements. Wrong again.
Bishop: In that context, then – in that process of revaluation, repricing and establishing new business models and repayment schedules for borrowers – have you been informed of any illegal or grossly improper behaviour or activity on the part of the new owner, such that you thought it appropriate to alert the relevant minister or ministers?
Murphy: I am aware of these issues, especially in relation to one of the commercial property developers in south-east Queensland.
Mr Ian Beckett (Murphy’s subordinate): I think you could say we have had some ministerials about the issues. In those cases our practice is to try to help people out by describing the framework and describing the relevant remedies that are available to them. I have seen a couple of articles in the newspapers about the outcome of a couple of court cases.
Bishop: No, I don't think you have quite got the question. The question was whether the new practices, instituted by the new owners of BankWest in both parts of New South Wales and southern Queensland – which have received the majority of press attention – were such that they could be categorised as illegal or grossly improper to the extent that you thought it within your purview to advise your minister or the relevant minister of such behaviour.
Beckett: We do not make judgments about whether things are illegal or not. That is a matter for the courts. People have claimed that some of the lending practices under BankWest were less than prudent in some cases. I am aware of those. In terms of the action that CBA has undertaken since, we have not formed a view that any of that conduct is illegal. But, again –
Murphy: It is not for us to find that. If that were to come across our desk now … We would refer it to ASIC. … If there is unconscionable conduct in relation to lending practices, it would be ASIC's role because there are protections in the ASIC Act for small business. They are narrow, because you are cutting across what are basically commercial contracts between people.
Jim Murphy and Ian Beckett
In short, we noticed this CBA/BankWest stuff appearing in the media, but we haven’t paid attention because it is not our responsibility, thus not our concern.
Eggleston: What role does Treasury have in policing, if you like, the ethics of banking in this country? Do you feel that you have some role in that area? Or are they matters you would refer to other agencies, such as ASIC and so on?
Murphy: In terms of ethical business practices, you would hope … that that was in a corporate's best interests. The checks and balances on a corporate, whether it is a bank or any other lending institution, would be the laws of the land. … So I think there are checks and balance in the systems, but it is hard to draw distinctions and ethics and commercial bargaining and commercial reality. Where it comes out from a government point of view, is on the question of whether there is unconscionable conduct between the parties, or there has been misleading information provided to the borrower. That is where the protections lie from the policy framework's point of view.
Eggleston: We have heard stories, in various submissions from various people, that in the Bankwest matter there were secrecy clauses, that people were not allowed to disclose the terms of loans, that there was stripping of assets, interest rates and things like that. This committee did an inquiry into the liquidators' industry … and there do seem to be some strong similarities between the behaviour of some of the less ethical – and even criminal – liquidators and the sorts of stories that have been spoken of by people who have been involved with BankWest. I am interested in the degree to which Treasury, as an important arm of government, plays a role in calling attention to what, in effect, it unconscionable conduct within the financial sector.
Murphy: I think the government has done a number of things in that area. One very much heeded the committee's view – I think it might have been to a parliamentary committee on insolvency – where there needed to be a tightening up of the regime, and there were some poor or nefarious practices. So the government released a proposals paper outlining some reforms of the regulatory system in terms of insolvency. That was late last year, to try to make sure that the people who are insolvency practitioners have the right skills, and to try to get the incentives right.
Also, on the credit reforms there has been a seeking to make sure that the receivers act in everyone's best interests, or in the public's interest, if they have to come in and reassess the price of the assets or sell assets. So the government has sought to provide greater safeguards for borrowers in receiverships, through the credit reforms. That said, there are actual provisions there, dealing with unfair contracts and unconscionable contracts. I must say that, up until now, they had been read quite narrowly by the courts. But the provisions are there for someone to seek to get redress, if they feel that they were unfairly treated in a commercial contract.
Well no. The government has taken no substantive action on providing ‘greater safeguards for borrowers in receiverships’. And yes, ‘unfair contracts and unconscionable contracts’ have been read ‘quite narrowly by the courts’. What has the Treasury done about it? Nothing. And no, the provisions are not there for someone to seek to get redress.
Eggleston: Do you feel our laws and regulations in this area are sufficiently strong to protect individuals? How do they compare internationally … ?
Murphy: I think the problem here is where you have commercial contracts entered into between a borrower and a lender, and a dramatic change in circumstances, and then trying to ensure that everyone's interests are taken full account of. So we see that the safeguards on the lender are that, as long as there was a proper process in terms of the loan in the first place. I think in these instances it was not excessive risk-taking by the borrowers or the lenders; it was more likely just a dramatic change in circumstances. Then you have to seek to ensure that the whole thing is addressed – by that, I mean either through extension of the loan, through some accommodation between the borrower and the lender, through receivership or through the winding up of a company. So I think it is very difficult where you have the personal dimension butting up against commercial contracts. …
Eggleston: … you sort of wonder whether or not the secrecy clauses that people were been asked to sign before they were given loans – the means of concealing unconscionable conduct, in many cases – should be a matter of interest to the government in terms of public policy to protect individuals.
Murphy: I think that would be a matter for the administration, for the regulators, to question. They have oversight of the receivers in the field.
Eggleston: They do. I agree that it is not your role, but nevertheless Treasury is a key part of our financial administration.
Murphy: Yes. If they felt that there was a systemic flaw, a problem with the relationship between the borrower, the lender or the receiver versus the borrower's assets, we would be informed and it would be put to the government as to whether you needed to bring in clearer rules, change the incentives in the arrangement or whatever. That is how we would do it.
We have an admirable framework in place ― yet it operates to facilitate lender corruption. There is no systemic flaw ― transparently absurd. Customers feeling aggrieved can go to ASIC and/or the FOS ― but it will be a complete waste of time and energy. Ultimately, there’s always the courts ― but victims have been typically rendered penniless by the foreclosure process and the courts rarely give bank victims the time of day.
The insouciance and cynicism of Murphy’s statements to the Senators is breathtaking. The CBA took over BankWest with official support and approval, and the CBA was given carte blanche in handling its new subsidiary. In effect, the Federal regulatory apparatus centred on Treasury (and the Labor Government itself) is criminally complicit in CBA’s corrupt default and foreclosure actions.
Thus, we have a Clayton’s regulatory structure which the powers-that-be can point to as evidence of a system that keeps players’ actions within norms of integrity. But the structure is an illusion, a sham. One can only infer that those responsible for that system know it and they are happy to leave it that way.
