RC: Increasing responsible lending obligations ‘unnecessary’

In his closing remarks to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on Friday (1 June), counsel assisting the commission Michael Hodge noted that “no additional statutory obligations should be imposed with respect to the making of loans to small businesses”.

Mr Hodge made reference to three cases investigated by the commission involving small business customers who defaulted on business loans obtained issued by ANZ, Westpac and Bank of Queensland.

During the course of the hearings, the banks were alleged to have engaged in maladministration by failing to exercise the “care and skill of a diligent and prudent banker”.

However, in his statement, Mr Hodge contended that an extension of statutory obligations was not necessary, claiming that such instances were primarily caused by the inadequate serviceability assessments made by third parties.

“In all three cases, the businesses failed not because of some issue reflective of a very technical flaw in the loan assessment such as the interest rate rising outside of a particular buffer that had been used in the calculation of serviceability, but rather the business failed because fundamentally the performance of the business did not live up to the projections that were presented to the bank and the hopes and the aspirations of the borrower,” Mr Hodge said.

Mr Hodge continued: “Our submission is that it is not open to you to conclude that it is necessary or desirable to increase the obligations of banks making small business loans so as to make those obligations akin to, or similar to, or more like the responsible lending obligations imposed by the National Credit Act.”

Mr Hodge acknowledged that his view was not accepted by all parties, and he invited stakeholders with leave to appear to address the following questions:

• How much responsibility does the borrower and lender bear in assessing the cash flow forecast and other factors when deciding whether to enter into the loan contract?
• What are the outer limits of a bank’s duty to act as a prudent and diligent banker in assessing a business loan application? Should that outer limit or should the outer limit of this duty be codified?
• Should any of the provisions of the National Credit Act which apply to consumer credit contracts also apply to credit contracts with small and medium-sized business commerce? If so, why and to which small and medium business customers; if not, why not?

However, in relation to the cases involving ANZ, Westpac and Bank of Queensland, Mr Hodge invited Commissioner Hayne to explore the following findings from counsel assisting:

• ANZ may have failed to exercise the care and skill of a diligent and prudent banker as required by clause 27 of the Code of Banking Practice.
• Westpac breached clause 3.2 of the Code of Banking Practice, in failing to act fairly and reasonably towards the customer in a consistent and ethical manner by continuing to undertake collection activities against the customer after she had made a complaint to the Financial Ombudsman Service.
• Second, in continuing to undertake collection activities against the customer after she had made her complaint, Westpac breached its obligation as a member of FOS under 13.1 in the FOS terms of reference.
• Whether Westpac has adequate systems in place to ensure compliance with obligations under the Code of Banking Practice and terms of reference with regard to collection activities.
• BOQ breached clause 27 of the Code of Banking Practice in failing to exercise the care and skill of a diligent and prudent banker in its approval and assessment of the sue rich business loan.
• BOQ breached clause 3.13 of the Code of Banking Practice in failing to promote an informed decision of the customer by failing to provide effective and timely disclosure of the repayment amount and the term of the loan.
• BOQ may have breached clause 3.2 of the Code of Banking Practice in failing to act fairly and reasonably towards the customer in contesting the FOS complaint.

The third round of hearings began on Monday (21 May) and focused on loans to small and medium-sized enterprises, with responsible lending and unfair contract terms coming under the spotlight.

The hearings considered the conduct of several of the leading banks in respect of their dealings with small and medium enterprises, in particular in providing credit to businesses.

[Related: NAB ‘unlawfully’ seized proceeds from customer’s home]