Banking Royal Commission musings

A comment under the headline “Comment: Sickening bank behaviour shows need for broader probe” in the Sydney Morning Herald of 21 April states “If one thing is becoming clear from the royal commission it is that our financial institutions see themselves as beyond the law.”

As we’ve seen this week, “lying to the regulator, failing to invest money into the proper compliance systems, delaying breach reports to the regulator, charging fees for ongoing services to dead people and covering up wrongdoing are just a few of the grubby antics on show. It is sickening to listen to.”

That comment comes with a very serious implication; a perception probably held by what many people think. “Our financial institutions see themselves as beyond the law.” It doesn’t say “our banking institutions” or “our bigger financial institutions”, it just says “our”, meaning “all”. That’s a serious problem when there are lenders, such as our clients, that actually do try very hard to comply with the NCCP Act and other legislation.

Let’s roll back two weeks to 5 April when the Australian Banking Association (“ABA”) CEO Anna Bligh, a former Queensland Premier, is quoted as urging the federal government to ensure that any regulatory changes made in the aftermath of the Hayne royal commission remain balanced or risk unintended consequences and this particular comment:

“Tightening access to small amounts of credit can push more vulnerable customers out of the regulated banking sector and into the far riskier world of payday lenders and the like,” Ms Bligh said.

This is a disturbing statement from the CEO of the ABA. Ms Bligh conveniently “forgets” that non-ADI lenders are also subject to the requirements of the National Credit Code (“NCC”). She already knew that “payday” lenders were subject to interest rate caps as she was personally involved in the decision-making from her time as Premier when Queensland followed the lead of NSW and the ACT and brought in a 48% interest rate cap. I also told her Government in a 2008 submission that more detriment was caused by the banks and bigger lenders than the payday lenders and that the then proposed legislation was unnecessary. Since then, under Federal legislation, SACC lenders are now subject to more legislative and regulatory requirements than any credit product including home loans.

Now move forward 2 weeks and look at this from the Royal Commission and some of her members:

Falsified Documentation and back-handers

Counsel Assisting, Ms Rowena Orr, QC: “I want to put to you is that NAB knows, & you know, that there were unsuitable loans, there was false documentation, there was dishonest application of customers’ signatures on consent forms & there was the misstatement of some loans in loan documentation.

The whistleblower is recorded as saying: ‘One customer recently said at a particular branch, they told him he could borrow $800,000, but the valuation was only $450,000. The whistleblower said the money exchanges hands in cash, in envelopes, white envelopes usually over the counter. Money is deposited at CBA, so NAB can’t detect the deposits’. Now, this is the information provided by the second whistleblower. Is that right?”

Mr Waldron, NAB – “That’s correct”

Counsel Assisting, Ms Rowena Orr, QC – “And the whistleblower tells NAB that these people are making up fake payslips, fake ID, fake Medicare cards … They charge $2,800 bribery for each customer for home loans”.

I remind you this is also breaching AML/CTF requirements but this doesn’t appear to have been raised.

Failure to verify assessable income properly

Counsel Assisting, Ms Rowena Orr, QC – “And it wasn’t just the fact for Mr Meehan, that had submitted more than 50% to a single lender; it was also the fact that the particular lender that he had submitted them to was Westpac because Aussie [Home Loans] had formed the view that the credit assessment processes at Westpac were more lax than at other lenders; is that right? Aussie had formed the view that the fact that they [Westpac] were just requiring a letter of employment, as opposed to payslips, would be something that brokers would become aware of to be easier to provide the documentation that was necessary. And do you mean, by that, a letter of employment is an easier document to falsify?”

Lynda Harris, Aussie Home Loans – “Yes”.

Widespread use of Home Expenditure Measure (HEM) benchmark

One of the biggest revelations for me has been the widespread usage of the Home Expenditure Measure (HEM) benchmark by the banks in its most basic form. The NCC requires all lenders (and that includes banks) to properly assess a borrower’s ability to pay under responsible lending requirements and to ensure loan suitability. Regulatory Guide RG209 is very clear on what’s required and this was updated in light of the Court’s comments in ASIC v The Cash Store (in liquidation) [2014] FCA 926. Since then, we have seen repeated action by the regulator against both non-ADI and ADI lenders for failure to do so. Examples of these include Nimble, Zaam Rentals, Make It Mine, CBA and Bank of Queensland to name but a few so Ms Bligh’s comments were designed to be disparaging to lenders such as our clients. I’ve lost count of how many times the regulator has said lenders must properly factor in borrower’s actual living expenses rather than taking benchmark figures. Benchmark figures should be used to compare what the borrower tells the lender, nothing else, and then make further enquiries if necessary. So with this in mind, let’s look at what the Royal Commission discovered with some of the large credit providers that Ms Bligh’s organisation seeks to defend.

Failure to assess borrower expenses
Counsel Assisting, Ms Rowena Orr, QC – “The first issue I think that’s worth mentioning this across home loans…it’s a lack of questions & verifications about expenditure. When we ask for copies of their assessment, is that it looks much more likely that a benchmark has been used than they looked at the consumer’s actually expenditure, which can vary considerably from a benchmark figure. There is also very little evidence that expenditure has actually been verified in any way.”

Mr Ranken, ANZ – “ANZ recognised there were instances where it lacked evidence to show that genuine inquiries had been made.”

Failure of internal controls

Counsel Assisting, Mr Dinelli – “The remediation paid demonstrates that processing errors occur across a variety of credit products. They occur predominantly by reason of the application of automated processes, but human errors left unchecked often underlie them.”

Mr Van Horen, CBA – “It was the error we made in our serviceability calculation and the mapping the data flows … without overstating it, doomed to fail … having robust change processes, I think, was our failing and it’s clearly an area of ongoing work.”

Assuming what the royal commission has found is just the tip of the iceberg, it merely validates what I argued back in 2008; nothing has changed.

Quoting an ABC article, “UBS economist George Tharenou said while banks were already undertaking greater due diligence at the Australian Prudential Regulation Authority’s (APRA) behest, the royal commission had established misconduct was more severe than many observers anticipated, and irresponsible lending was already a key finding of its investigations”.

Mr Tharenou said “APRA raised an alarm regarding the over reliance on the HEM benchmark”. One has to ask where was ASIC in this when it is ASIC that regulates the NCCP Act? If APRA has concerns, it should be telling ASIC about them. After all, they lead to one conclusion; the banks aren’t adhering to the requirements of RG209 and the NCCP Act.

Many of these issues come as a result of the banks requiring brokers to do their work for them but in the past few days, an article by David Jacobson of Brightlaw, has suggested “financial institutions giving evidence have trouble complying with “soft” laws.” Rather than being prescriptive, soft laws are principle-based and culturally driven. It shouldn’t be that hard to determine elements like fairness, transparency, having sound financial products and using common sense. Unfortunately, reasonableness is based on perception, open to interpretation and cultural biases.

The way those giving their evidence before the commission hasn’t helped, and whilst not condoning their actions, could the Commissioner determine at least some of those are a result of the unintended consequences of the need for businesses to operate within the complexity of the NCCP Act and its extremely poor drafting? The typical Government response will be a call for even more criminal and civil penalties in the NCCP and ASIC Acts – and some deservedly so, in addition to the ones already being prepared that give ASIC even more powers but we don’t need to see penalties introduced for every little mistake. What we do need to see is the regulator start using the powers it already has in an even-handed way.