Banking royal commission: Banks fall short in small business dealings

The Australian, June 2, 2018

Commonwealth Bank did not engage in misconduct while dealing with four former Bankwest small business borrowers, the financial services royal commission has heard.

But counsel assisting the commission Michael Hodge, QC, said it was open for commissioner Kenneth Hayne to find that CBA’s lack of transparency towards the four customers was below community standards and expectations.

While sparing CBA the worst over the Bankwest saga, Mr Hodge attacked it and other banks after two weeks of hearings into how they dealt with small business borrowers.

CBA could be on the hook for a penalty of up to $2.1 million after Mr Hodge told Mr Hayne he could find CBA had made false or misleading representations about a ­financial product after sending out 25,000 statements to business overdraft customers telling them they were being charged 16 per cent interest when the real rate was twice as much.

It was open to find that NAB and Westpac subsidiary Bank of Melbourne engaged in misleading and deceptive conduct, while Westpac engaged in unconscionable conduct, Mr Hodge said.

His recommendations came after the hearings examined CBA’s attempts to clean up the Bankwest business loan book when it bought the WA-based company at the height of the global financial crisis.

The commission had earlier dismissed conspiracy theories that suggested CBA had moved customers off its books to try to reduce the price it paid for the takeover target or shore up its regulatory capital.

Despite CBA giving inconsistent information about interest rates, changing its valuation method for a property development project, refusing to give a customer a copy of a valuation, and charging a customer $9900 for an investigative accountant’s report it would not show to the borrower, Mr Hodge said he did not suggest there were open findings of misconduct in the four cases examined.

But the bank’s conduct raised broader questions about what lenders should do when they decide they no longer wished to fund a particular industry, Mr Hodge said, in light of the revelation that Bankwest’s business loan book was more than 50 per cent commercial property after the GFC, with the bank trying to reduce this to 45 per cent.

The small business hearings have raised the question of how much responsibility a bank should take when a borrower fails.

Banks could not be expected to act as advisers to small businesses, Mr Hodge concluded, saying this was a role for accountants, lawyers and franchisors.

This “very legal way of looking at things” might be undermined by slogans such as Bank of Queensland’s former tagline “It’s possible to love a bank”, he said.

“But slogans are not legal obligations, though they no doubt contribute to the expectations of the community,” Mr Hodge said.

CBA’s potential breach, and penalty, relate to an episode in which it charged thousands of small business overdraft customers more than double the interest rate it should have.

In evidence to the hearing CBA executive Clive van Horen confessed he put his “bruised” feelings ahead of the interests of 1500 customers stung by the double charge by delaying sending them a letter setting out what had happened for 10 days so it would not come up at a parliamentary inquiry.

Mr Hodge said it was open to Mr Hayne to find NAB engaged in misleading and deceptive conduct by telling borrower Ross Dillon it had rights to the proceeds of property when it didn’t.

NAB’s treatment of Mr Dillon also breached the Australian Banking Association code of conduct and fell below community expectations, he said.

The bank’s chief customer officer, Anthony Healy, said NAB would oppose the finding of misleading and deceptive conduct in its submissions to Mr Hayne.

Mr Hodge said Mr Hayne could find Westpac engaged in unconscionable conduct by taking a personal guarantee from a blind, seriously ill woman unable to read and write — an act that also fell below community expectations.