The Royal Commission falls from grace

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Michael Hodge QC delivers the opening address for the third round of Royal Commission public hearings (Image via YouTube screenshot)

The Royal Commission established to look into misconduct by the banks has failed, particularly with the small business sector, writes Dr Evan Jones.

(Versions of this article were sent to three mainstream media outlets. There was no response.)

PRIME MINISTER Malcolm Turnbull announced the establishment of a Banking Royal Commission on 29 November 2017. Turnbull reversed his Government’s opposition after pressure from backbenchers, the Opposition and the public.

The Commission was established on 14 December. The Terms of Reference were a motley collection of admirable and potentially limiting or diverting items. Its preamble was a shocker of government self-delusion — a system “most stable”, “systemically strong”, “internationally recognised”, “world’s best”, and so on.

That and the ridiculous brevity of the Commission’s mandate looked like a Clayton’s Commission in the making. Thus the title of my series on the backdrop to the Royal Commission hearings.

The Commission’s early hearings were a surprise. There has been assertive questioning of the banking sector’s cosseted and overpaid leaders. The A.M.P. has come crashing down. Banking involvement in the corrupt franchise sector has been a revelation.

But much of the supposed shock horror exposures have already received good coverage in myriad Parliamentary inquiries and ongoing Fairfax media stories.

Beginning 21 May, the Banking Royal Commission devoted a cursory two weeks to small business lending. Cursory, because this sector has been long under the radar.

The ASBFEO Ombudsman, Kate Carnell, has expressed dismay at the brief period allocated to small business and she’s right.

Having been the regular recipient of bank victim accounts since 2000, I am atypically familiar with the banks’ modus operandi regarding its small business (and family farmer) borrowers. It is perennially ugly. I can attest that it is a sector rife with malpractice, indeed criminality.

An event with more than a whiff of malignity was the takedown of close to a thousand Bankwest commercial property borrowers after the CBA purchased Bankwest from HBOS on 19 December 2008.

Curious, then, that Counsel Assisting, Michael Hodge, should open the small business session declaiming that the foreclosed customers got the story wrong regarding the CBA’s motivation for this takedown.

The key alleged claims were that the CBA’s ultimate purchase price could be reduced by default and foreclosure of select Bankwest borrowers (“clawback”) and/or that a desired enhancement of the bank’s tier one capital adequacy ratio could similarly be achieved by such foreclosures.

Mr Hodge noted that these ulterior motives

"... allow the convenience of avoiding grappling with the risk presented by a particular borrower or industry… They therefore avoid asking how a bank might or might not legitimately respond to its perception of increased risk in respect of a particular loan or lending in a particular industry."

This characterisation could have been written by the bank itself.

The Hodge presentation was readily picked up by the Australian Financial Review and painted as the unvarnished truth and the last word.

Mr Hodge’s summary of the supposed claims is inadequate, indeed inaccurate.

Bankwest victims were forced to make inferences from the fragmentary information publicly available. Two Parliamentary inquiries (Post-GFC Banking, Impairment of Customer Loans) were impeded for having no access to the documentation. A Royal Commission is supposed to get to the bottom of things.

It is indisputable that the CBA tried to clawback a sizeable $47 million of resort developer Rory O’Brien’s loan but was denied by HBOS and its advisers. Some clawback was obtained with the ultimate price paid being $2.126 billion, compared to the agreed $2.428 billion. Moreover, HBOS’s book value for Bankwest at time of purchase was $3.676 billion. Has the takedown already been pre-ordained in the large scale discount in the purchase price?

The injustice and the scale of the CBA foreclosures has generated a resolve amongst foreclosed Bankwest borrowers that has led to numerous inquiries and, ultimately, to the Royal Commission itself. For this group to be crudely impugned is to threaten the integrity and reputation of what should formally be an august procedure.

The stakes involved in the CBA takeover are enormous. Bankwest’s parent HBOS was ailing. The Government and the regulatory apparatus gave CBA carte blanche to acquire Bankwest (in a hurry) in the interests of system stability. The ACCC produced, to my mind, a questionable accommodating report, asserting that the takeover was not anti-competitive.

A superficial glance at a sample of Bankwest victims unearths familiar stratagems. The Global Financial Crisis did not universally wipe out values. Rather, there followed strategic devaluation of assets, promises not kept, arbitrary imposition of usurious fees and penalties, receivers rampaging through appropriated properties, customer assets sold ridiculously under value and fabricated residual debt.

Some Bankwest victims and families were disgracefully harassed. Where is the commercial imperative in this sadistic behaviour?

One’s initial fears of a Clayton’s Royal Commission are now rekindled with substance. It appears that there are forces greater than merely the CBA itself that want this large scale borrower foreclosure removed from forensic examination, exposure and redress.

The CBA has been exposed as a corporate blackguard regarding Storm Financial, Commonwealth Financial Planning, Comminsure, Dollarmite accounts, money laundering facilitation on a vast scale… Can we seriously believe that the CBA has been driven by “commercial imperatives” in this wholesale cleanout of Bankwest’s commercial portfolio?

The foreclosed Bankwest borrowers have been sacrificial lambs for a process instigated for a broader public purpose. The CBA appropriated that public purpose for a private end — with catastrophic results for many victims.

All documentation relevant to the purchase should be made public. The entire paper trail of the purchase and the CBA’s foreclosure program should be exposed.

Retail banks, regardless of their private ownership, are para-state organisations. Their public role is fundamental — hence the need for commensurate regulation.

The 1981 Campbell Report – the bible and rulebook of financial deregulation – got it wrong. The Report claimed that rudimentary prudential capital provisions and unrestrained competition would produce the goods. The Report’s authors declined to enlighten us on what “competition” in retail banking involved.

Campbell claimed there was no need for specialised or government-owned banks. Thus they were done away with. Of special relevance is the closure of the small business/farmer Commonwealth Development Bank in mid-1996, with the privatisation of its parent bank.

From day one of deregulation, the experience was anything but salutary — witness the foreign currency loans scandal and the orgy of crazy lending to dodgy corporates.

My interpretation of the 1991 Martin Banking Inquiry is that it was oriented not to dissecting and repairing the dysfunctionality of the de-regulated 1980s, but to diverting dissent — not least from the victims’ publicity conduit, Democrat Senator Paul McLean.

Post-Martin, the banks were granted self-regulation in the form of the banking ombudsman and the cynically-contrived privatised code of banking practice.

This is the backdrop to the current environment in which the banking sector treats selected borrowers savagely and with impunity. Thus has, in particular, the People’s Bank become the nemesis of the people.

The bank lender – small business/farmer borrower relationship is one of the most asymmetric of all commercial exchanges.

Nobody cares to examine the character of the relationship, least of all the complicit legal profession and the ill-educated courts. Banking law academics are silent. A contract is a contract, says the law.

Banks break the contract at will, but the courts see only borrowers’ indebtedness and obligation for repayment.

And what price the hallowed contract when a borrower’s contract with a lender is assumed by another when the lender is taken over, the new owner proceeding to change the terms of the contract? This issue is especially relevant when the borrower is a farmer with a loan with a specialist rural lender (Commonwealth Development Bank, Primary Industries Bank Australia, Landmark, Rural Finance Corporation of Victoria) that is taken over by a conventional bank.

Bank borrowers essentially have no rights, only obligations.

Banks perennially take customer security, especially the family residence and extended family guarantees, not to mitigate risk, but as a vehicle for ready predation. The strategic object ab initio is property theft. Armed with a banking license, it’s as easy as falling off a log.

The credit relationship is one of structured dependence, traditionally compensated by trust in professional expertise and integrity. But the banker has been replaced by the money lender. Trust is betrayed and the customer is disarmed from the beginning.

These issues have been laid out in my submission to the Royal Commission in late February. Commission staff have not seen fit to contact me, even given my evident broad exposure to the nature of the beast that is the subject of the Commission’s investigation.

The banks remain unrepentant. There is every probability that when the Commission runs its course the banks will carry on with their entrenched unlovely practices — indeed, with a new ferocity.

ASIC will continue to tell small business complainants to go away, in spite of its legislated responsibilities for unconscionable conduct in financial services. The Financial Ombudsman Service, soon to move unreformed into the Australian Financial Complaints Authority, will continue to destroy borrower hopes by deferring to the interests of the banks that provide its funding.

“Entrepreneurship” is touted as the root stock of a free enterprise economy. In this environment, anybody who takes that calling at face value is living in a fool’s paradise.

Dr Evan Jones is a retired political economist.

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