Poor lending practices and mortgage broker incentives that have led to customers being badly treated by banks are among the revelations that have already been aired in a Royal Commission into the Australian financial services sector, reports Tom Ravlic

It is the commission the Australian conservative government never wanted to institute in the first place. Royal Commissioner Kenneth Hayne, a former judge of the High Court of Australia, has already presided over commission hearings at which reputations are being shredded.

Senior executives of banks and mortgage brokers have revealed the lengths to which some bank lenders and mortgage brokers went to secure lucrative trailing commissions or payments at the expense of the customer seeking the loan.

The hearings have also seen bank customers questioned about the behaviour of banks, and the ease with which credit had been granted without full regard for customers’ personal financial circumstances. Commissioner Hayne has a year within which to provide the Federal Government with a report on his findings after the Royal Commission has gone through its investigations.

The concept of a Royal Commission into the banking sector had been around prior to the July 2016 federal election with such an inquiry having been the policy of the opposition Australian Labor Party, the populist Pauline Hanson’s One Nation and select members of the Federal Government’s coalition parties.

Prime Minister Malcolm Turnbull, a former banker, was reluctant to initiate a Royal Commission despite the emerging evidence that the major Australian banks and other similar institutions needed a scalpel-like inquiry to identify and expose the deficiencies of the banking system that was regarded outside Australia as being among the best in the world.

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A parliamentary committee examining the chief executive officers of the banks on a regular basis was offered up as a regular act of accountability. That was not enough to quieten those baying for the banks to be brought before a full-blown judicial inquiry as a result of widespread allegations of lenders or brokers selling the wrong products to customers so that they were able to secure lucrative commissions.

An inquiry by a second parliamentary committee into lending practices in the agricultural sector, a regulatory investigation into Commonwealth Bank of Australia and public controversy over collusion between the banks to fix certain bond prices were among other factors that ramped up pressure on the government.

The Australian conservative leader’s resolve collapsed like a house of cards in the face of two great pressures. The Liberal Party’s coalition partner, the Nationals, was leaderless for a period, as the chief at the time, Barnaby Joyce, was standing for election again following controversy over the constitutional validity of his election in 2016.

Nationals’ representatives in the parliament threatened to break ranks and vote for a Royal Commission if a motion to commence such an inquiry was moved in parliament.
The second, and most significant, factor was the banks themselves insisting that the reputation of the sector had been tarnished and a Royal Commission was required to assist the process of building confidence in the banks as institutions.

“Those institutions are the bedrock of the economy. There’d be very few Australians who are not a customer or shareholder of the banks; many of us are both, with almost every worker holding bank shares through their superannuation fund. The banks employ more than 200,000 people alone,” the besieged Turnbull told the assembled Canberra press corps on 30 November 2017.

“Now, the speculation about an inquiry cannot go on. It’s moving into dangerous territory where some of the proposals being put forward have the potential seriously to damage some of our most important institutions.”

The banks’ letter sent to the government, Turnbull acknowledged, highlighted their concerns about the scope of various inquiries that were being canvassed publicly and that they had written to Turnbull “asking the government to step in, end the uncertainty and ensure an orderly process that addresses the concerns”.

Turnbull announced the appointment of Royal Commissioner Kenneth Hayne the day after the media release and press conference announcing the inquiry with Hayne and his commission team required to report back to the government by February 2019.

The terms of reference require the Royal Commission to produce a report that looks at the full extent of behaviour of banks and other institutions, and provide recommendations. These can include recommendations for legislative change as well as any instances of further investigation that might be required. The terms of reference, however, acknowledge that Australia’s financial system is robust and the inquiry was to investigate a broad range of misconduct.

Failure to co-operate

While the banks had called for the inquiry to end reputational damage, they were in Commissioner Hayne’s crosshairs for not cooperating with certain aspects of the inquiry’s information gathering early in the process.

The commissioner had requested specific information from the banks as a part of the process of seeking facts about the conduct of banks and similar Institutions in letters sent in December last year.

“Examination of those responses showed that in important respects, some large industry participants had sought to respond by giving examples of misconduct or conduct they identified as falling short of community standards and expectations rather than, as my original request had asked, by specifying the nature, extent and effect of the conduct they had identified,” the commissioner explained.

“I, therefore, wrote to some of those large respondents on Friday 2 February asking each to give more specific information about misconduct identified by that entity over the last five years, and in addition, I asked some of them to amplify some of the information provided in their original responses.”

The commissioner told those present at the initial hearing that an initial request for 10 years’ worth of information was made on December 15 last year with initial responses arriving from the banks by January 29.

“That a request for details of events of misconduct as defined in the terms of reference identified during the last five years cannot be met within the time sought, even though the initial request for that information was made approximately two months ago, is itself a matter to which further attention may have to be given,” the commissioner observed. “Whether it is will be a matter for debate at a later time.”

The counsel assisting the Royal Commission, barrister Rowena Orr QC, told the initial hearing of the commission that information received from companies, regulators, consumer groups and individual customers is being used to frame a range of case studies that will provide the commission with the ability to explore certain practices that may either breach the law or not meet community standards.

Among the concerns raised by bank customers were the commission-based remuneration arrangements that were agreed between institutions and brokers. Evidence was tendered during the first two weeks of detailed hearings that revealed instances in which brokers submitted false or misleading information in order to gain loan approval.

It was noted by counsel assisting Rowena Orr that brokers involved in Aussie Home Loans were found to have engaged in inappropriate conduct.

“In four instances, the brokers involved were convicted of criminal offences, the same four brokers who were the subject of the evidence in the Aussie Home Loans case study in these hearings,” Orr noted in her address to the commission as she wrapped up the first two weeks of hearings.

“There are references to 19 events involving breaches of the National Credit Act, including incidents where brokers did not make reasonable inquiries or verify the financial situation of customers, and there are references to 134 events involving either a breach of a broker or franchise agreement or a breach of policy.”

Other banks have also presented evidence of documentation for loan applications that had been falsified. During the same closing address for the first fortnight of hearings, Orr outlined other examples that included additional material provided by Westpac that revealed further problems.

Westpac, CBA under fire

“The additional material received to date demonstrates, for example, at least 55 instances of Westpac staff either falsifying or accepting falsified supporting documentation in connection with home and personal loan applications,” Orr noted, “[and] a number of instances of Westpac staff receiving payments from 30 referrers for the referral of customers to Westpac for loans, and at least 25 instances where the Financial Ombudsman Service found, or Westpac conceded, that a customer who obtained a Westpac car loan should not have been approved for the loan as it was unsuitable for the customer.”

The commission also heard from a credit card customer, David Harris from the Commonwealth Bank, who had told the bank he had gambling problems but they kept offering him new lines of credit given that information on his gambling problem was not provided to credit decision makers.

“In early 2017, Mr Harris applied for, and was offered, a credit limit increase of $8,000 to $35,100,” said Orr. A representative from the Commonwealth Bank acknowledged that Harris should never have received an increase in his credit limit at any time.

The Royal Commission will continue to hear evidence from a broad range of stakeholders involved in the financial services sector during the year and the report from Hayne will be compelling reading if the evidence presented before it so far is any indication.