David Bushby (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I present a report of the Economics References Committee on the post-GFC banking sector together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be adopted.

This report builds on the Senate Economics References Committee's work over recent years on the effects that the global financial crisis has had on Australia's financial sector. In particular it follows on from the major inquiry into banking competition that the committee completed in May last year. Most of the recommendations made in that report have yet to be implemented, despite their impact in terms of increasing competition in the banking sector being just as strong now as when the report was delivered.

This year's inquiry focused on a number of additional important consequences of the GFC. One issue examined was how Australian banks' costs of funds had changed, an argument regularly put forward by the sector as to why loan rates diverge from movements in the Reserve Bank's official cash rate. It is evident that funding costs have remained elevated since the crisis as risk has been more appropriately priced and banks seek to secure more stable sources of funds. Expected falls in costs as funds sourced at high cost during the crisis are refunded do not appear to be happening due to ongoing economic uncertainties globally and the funding mix shift towards deposits and longer-term wholesale funding which retain a need to pay a premium. Despite this conclusion, this is a subject that warrants close ongoing scrutiny, given the implications for millions of Australians.

Another important topic covered was Basel III, the internationally agreed package of reforms that aim to improve banking regulation and supervision in a post-global financial crisis environment.

Basel III is unlikely to be well known or even widely understood outside of banking and financial circles. But the changes that it introduces are important and warrant a public discussion. My concern with these changes has always been that they will introduce answers with consequent costs for Australians to problems that we in Australia have never experienced.

While the committee accepts that Australia cannot deviate too much from what the rest of the world is doing and that the Australian Prudential Regulation Authority has done an effective job at minimising unnecessary impacts on Australia, we are moving more quickly than many other jurisdictions to implement Basel III. The need for this haste is at first glance questionable. Nonetheless, the committee also accepts that the objectives of Basel III are appropriate, given international events in the financial sectors, and that, despite increasing costs to banks and hence consumers, Australian banks are well placed to meet the new requirements.

The implementation of Basel III will help ensure that Australia's banks remain safe and that risk is being prudently managed. Whether the best balance has been achieved between solvency/stability of the system and the desirability of a competitive and lean banking sector delivering credit to Australians at the best prices, I guess time will tell. There do, however, appear to be some commercial implications flowing from the accelerated implementation in Australia, and recommendations have been included in the committee's report regarding added transparency to address this issues, at least in part.

The issues raised during the course of this inquiry also lead to the conclusion that there is a need to further consider the current state of Australia's financial system as a whole as well as the direction it is headed in the longer term. Accordingly, the main recommendation of the committee is that an independent root and branch inquiry into Australia's financial system is needed. The last such inquiry was the 1997 Wallis inquiry. The nature and regulation of the financial system has changed significantly since that time. Australia's banking sector is in transition following the GFC and as a result of impacts of the development of new technologies and products.

While this transition is underway, a clear opportunity to conduct an independent inquiry is available and is needed. Although Australia avoided the worst of the GFC, this should not be allowed to result in complacency about the structure and performance of our financial system. The roles that financial institutions perform are far too important to the health of the broader economy for the sector not to be reviewed at regular intervals. To ensure that the system that we have, even if it has served us well under stress, is the most appropriate and best system as we move forward.

There are a number of critical questions that need to be considered and addressed. The sustainability and implications of the funding mix used by Australian banks is a key issue. Related to this are evident questions about the interaction of the banking and superannuation sectors. Australia's pool of superannuation savings totals $1.4 trillion and is expected to reach $3 trillion by 2020. Yet Australian banks have to borrow significant sums from offshore. An inquiry could consider whether this is optimal and, if it is not, explore ways to reach a better outcome.

The explicit and implicit government support for financial institutions should also be considered, as should means to encourage greater competition, greater choice and better outcomes for consumers. Essentially, a comprehensive debate needs to be had about what the financial system over the next 15 years should look like and what changes are needed to help it achieve that outcome.

I turn now to another distinct issue that featured prominently throughout this inquiry; certainly, it was the most controversial issue. At the height of the GFC, the Commonwealth Bank acquired Bankwest. The committee received sad and distressing submissions from many former small business and property developer customers of Bankwest who ultimately had their loans terminated after the takeover. Besides losing their business, many also lost their home and were made bankrupt, and now rely on family, friends and government assistance.

In examining these cases, it is evident that there are a number of similarities in what occurred in the lead-up to the funds being terminated. The borrower's businesses were revalued and assessed to be worth significantly less than what they had been when the loan was entered or upon revaluation prior to the GFC. High rates of penalty interest were imposed in many cases, overwhelming the borrower.

In the opinion of many borrowers, Bankwest was unwilling to work through the issues and receivers were instead appointed. Separate issues about the conduct of receivers were also received. Of course, there are two sides to every story. The sectors and regions involved were generally experiencing tougher times, and the aftermath of the GFC cannot be dismissed. Banks also are not charities. They have responsibilities to their depositors and shareholders, and should direct credit to where it will be the most effective. Nonetheless, the committee sympathises with the experiences of many borrowers who faced and continue to face difficult and sometimes impossible battles to have their cases reviewed or to seek a fair assessment of their argument against decisions of the bank or of the receiver. There is no doubt that, collectively, the individual cases raised before the committee pose serious questions about the power imbalance between borrowers and lenders in circumstances where factors sometimes outside the control of the borrower trigger technical or more serious defaults under loan agreements.

A Senate committee is not a court, and this point was emphasised by the committee throughout the hearings and in the report. Individual disputes will need to be considered through appropriate processes. What the committee has done, however, is develop a number of proposals to help ensure that future dealings between small businesses and banks are more equitable and that maybe the process for individual dispute resolution might better enable aggrieved borrowers to have their arguments fairly and more cost-effectively heard.

The committee has for sometime believed that an industry code of conduct that specifically deals with small business lending needs to be developed. The Bankwest cases further reinforce the need for action to be taken on this front. The committee has also identified ways to improve the ability of small businesses to have their disputes with banks and receivers externally reviewed.

The experiences of these Bankwest customers should lead to some straightforward but fundamental changes to how banks deal with small businesses. The sector has both the obligation and the opportunity to demonstrate that it takes concerns about small business financial issues seriously and that it is willing to develop a solution. Personally, I am not a fan of government regulation of legitimate private sector activity except where it is absolutely necessary. So I stress to the banks and to the financial sector that failure by the sector to embrace the committee's recommendations to voluntarily move to a small business code of conduct addressing these types of issues will only strengthen the public case for intervention through greater government regulation in this area.

I would like to thank all of the individuals and organisations who assisted the committee during this inquiry. I also thank my colleagues on the committee for their work over the past year and for their contributions to the report. Finally, I would like to pass on my sincere thanks to the secretariat: Tim Bryant, particularly Colby Hannan, and also Kate Campbell for all their hard work and understanding. I commend this report to the Senate.

John Williams (NSW, National Party) Share this | Link to this | Hansard source

I would like to add some comments to what my colleague Senator Bushby has just contributed.

I have made some additional comments and recommendations to this inquiry. Senator Bushby emphasised that we are not a court, and how true that is. Some of the evidence that came forward was very concerning. People were distressed. They are under enormous financial pressure and, hopefully, this inquiry and the recommendations will bring this to the attention of both sides in this whole financial game, whether it be the banks or the lenders.

I have concerns about section 420A of the Corporations Act. There was a property owned by a Mr Jim Neale in Sydney. It was valued at $4 million. It was sold for, I believe, $645,000 and after the sale was valued at $3.58 million. Section 420A says that those receivers in place of controlling those assets must sell at the best possible market price. I asked ASIC at Senate estimates if they have ever charged anyone under section 420A, and they are coming back to me on that. They took it on notice. I think section 420A is a toothless tiger and it needs addressing so that when assets are cashed up the best possible price is achieved for those people who are being sold up.

I have huge concerns about Bankwest and when the Commonwealth Bank took over Bankwest. There were lots of arguments saying that Bankwest had a clawback system. It was in their interests to impair loans so that HBOS, Halifax Bank of Scotland that fell over in the UK, would have to reimburse the Commonwealth Bank for the price they paid for Bankwest, whereas Commonwealth Bank and Bankwest said this was not the case. I suggest that ASIC look at the whole transaction and see that the Corporations Law has been abided by all the way.

There is a lot of pressure to lend. No doubt a lot of bank managers and loan officers are under a lot of pressure to meet targets. This is concerning, and evidence from the Finance Sector Union is saying that when a loans officer has a target set to lend so much money a month, even if they go on holidays or are sick, they still must meet those targets. That can be very difficult at this time with the lack of business confidence that, sadly, we are seeing in many places in Australia now. We know that there is a lot of debt. There must be a limit to it, and so a lot of those workers are under enormous pressure.

One concern I have is the penalty interest rates when someone defaults on their loan. One customer at Bankwest was paying around eight per cent. When they defaulted, their interest rate went to 18 per cent. That is a huge increase. It appears to me that when you are down, they put the boot in. The point I am making is: if someone owes the bank a million dollars and their assets are $1.2 million, they put them on penalty rates of 18, 20 or 25 per cent. Nothing is regulated in that respect, then they sell the asset for a million dollars. If it takes 12 months to clear the decks, then their debt may have gone up another $200,000 or $300,000, and that is tax deductible to the bank. In that situation, banks can dictate their tax deductions. What other business can do that in Australia? This is something I think needs addressing: if you are paying eight per cent and you default, there should be a maximum of no more than an increase of 50 per cent on eight per cent—in other words, 12 per cent. We see interest rates go so high when people least of all in their business life do not need to have the boot stuck into them.

Low doc loans are very concerning. I tabled a statutory declaration to the committee this week where the loan application form had been falsified by the bank manager. Figures put in were not true. Assets and investments were simply not true, and it is clear that through the work of Ms Denise Brailey that they have been fudging the books, the applications—this is to get the loans over the line, to meet those targets the loans officers have to meet. I raised this with ASIC in Senate estimates. They said that is fraud. I asked ASIC to work with Denise Brailey, whose organisation is the Banking and Financial Consumers Support Association, to look at those and, if necessary, make a recommendation to the Director of Public Prosecutions.

We had one case of GST where the receiver had sold the asset for $9 million, and the receiver was paid $9.9 million. It attracted GST. That money went to the bank, but the bank did not want to hand that $900,000 back to go to the Australian Taxation Office. That is a very serious issue, and information I have received from phone calls and others are saying that this is not uncommon. The Australian Taxation Office should look at this very issue.

I will just raise this point in closing:

Under the GST Act, liquidators, receivers, managers and administrators are all collectively referred to as "representatives of incapacitated entities." Such representatives are personally liable for any GST payable on taxable supplies that are made by a company post appointment. The ATO ranks as an unsecured creditor in respect of pre-appointment liabilities. This means that the ATO is at risk that it will not recover pre-appointment GST liabilities in full. However, if a representative is personally liable for the GST liability that arises post appointment, the ATO is likely to recover its GST liability on post appointment supplies in full.

This situation needs to be clearly spelt out to the insolvency practitioners industry.

I fully support a full and thorough inquiry into the finance industry in Australia. It has been a long time since the Wallis inquiry. There are many issues I could talk about, be it support from the government to non-ADIs, which would obviously reduce competition. We know the costs of the banks have risen. There is no question about that; hence, their movements are not in parallel all the time with the Reserve Bank cash rate movements.

In closing, I would like to thank Senator Bushby for his chairing of the committee and his interest and input; to the staff, as he has mentioned; and to the other senators who were involved. To those who gave us evidence and submissions: many of you have had an extremely tough time. I hope you get over those tough times and your future is brighter financially and you can cope with the mess you have been in. There have been some terrible situations: Paul French at Cobar with his hotel—sold up for about the price of the poker machines. When I phoned the bloke, he was off to the Royal Prince Alfred Hospital to have his three-monthly check that his leukaemia is still in remission. Tough times for many—and I thank those people involved. The senators and the staff are doing a wonderful job.

Alan Eggleston (WA, Liberal Party) Share this | Link to this | Hansard source

I want to make a few additional remarks to those of senators of Bushby and Williams in regard to this report. The inquiry was essentially in two parts. The first examined the impact of the global financial crisis on the Australian banking sector, and in that we were reminded of just how resilient the Australian economy was. Senator Bushby has very largely dealt with that section of the inquiry. The second aspect of the inquiry, which interested me, as it did Senator Williams, was that the committee heard often startling and alarming evidence about the conduct of some players in Australia's financial sector around the time of the crisis and following it in dealing with mortgage holders. In submission after submission and testimony after testimony the committee received firsthand accounts of what can at best be described as unprofessional conduct and at worst criminal behaviour worthy of serious investigation by Commonwealth authorities. This was particularly with reference to the takeover of Bankwest and the use of so-called low doc loans.

The committee heard countless claims of how loan documents were altered and falsified; of foreclosure on multimillion dollar properties, as Senator Williams has referred to, literally overnight; of contradictory information and at times blatant lies, at other times a lack of action by the very authorities that were charged with protecting consumers and preventing misconduct. Low documentation or low doc loan facilities have clearly been misused and it would seem at times perhaps criminal activity in the form of fraud has occurred with the use of these facilities. I have to say that while there is no doubt that low doc loans fill an important role in accessing a proportion of consumers who would otherwise struggle to secure a loan, it was equally clear during the inquiry that the opportunity for abuse of this facility has been seized upon by some very unscrupulous operators. It is abundantly clear to me that everyday Australians have been wronged by organisations and people whose modus operandi raises questions about their ethics, and the question, as I said, of criminal behaviour arose on more than one occasion when documents were changed after they had been signed by the individuals.

Of the final 20 recommendations which were made, the most important was the recommendation for a widespread and independent root and branch inquiry into Australia's financial system. That has been referred to by Senator Bushby and I agree that it is very important and timely that such an inquiry is proceeded with.

In closing, I would like to thank those individuals who made submissions and appeared before the committee giving firsthand accounts of their experiences. I make particular mention of Ms Denise Brailey and Mr Geoff Shannon, who have proven to be competent advocates for those who have been wronged. Their selfless commitment is most commendable in the face of what too often was a David and Goliath battle.

Question agreed to.