Tough roads ahead

The fourth round of hearings held in Brisbane from 25–29 June, and in Darwin from 2–6 July, focused on the 6.9 million Australians living in regional and remote communities as at 30 June 2017. In her opening statement, Counsel Assisting Rowena Orr QC said that 28 per cent of the population may interact differently with financial entities than those living in metropolitan areas given the greater distances involved in accessing products and services.

The Royal Commission examined two topics: agribusiness lending and interactions between Indigenous people living in regional or remote areas. A background paper produced by the Commission described three ways people in regional and remote areas may suffer from financial exclusion: bank branch closures, relatively high ATM fees and relatively less access to the internet and other digital services. Another drew on Centre for Social Impact research that showed Indigenous people are much more likely to be severely financially excluded (43.1 per cent) compared to the national average (17.2 per cent).

Key themes emerged, including changes to lending conditions, access to appropriate banking services, restricted support due to distance from local branches, non-monetary default-related issues and the broader treatment of farmers in relation to financial matters. Case studies included the Commonwealth Bank (CBA), Bankwest, Rabobank, NAB, and Bendigo and Adelaide Bank (Rural Bank). The hearings also shed light on the issues facing Indigenous communities relating to alleged misconduct around the sale of funeral insurance plans.

Rural lending

In her opening statement, Orr addressed the broader financial challenges facing cattle farmers — severe weather, the decline in property prices and cattle prices, and the live cattle export ban — and also spoke to the financial issues in the case studies presented to the Commission. These included responsible lending practices, the use of property valuations, the provision of hardship assistance by banks, the adequacy of the farm debt mediation process, and bank practices in connection with the charging of default interest.

Royal Commission update

Submissions 7054 (as at 29 Jun)

Main nature of dealings

  • Agriculture finance
  • Insolvency professionals
  • Indigenous experiences

Top 3 submissions by industry

  • Banking 64%
  • Financial advice 10%
  • Superannuation 10%

Round 5 hearings commence 6 Aug, focusing on superannuation.

National disaster insurance case studies postponed from Round 4 hearings.

Commission can submit its interim report 30 Sep. More information here

As a result of the issues raised, the Commission heard how farmers were forced to sell property and other assets to get out of severe financial hardship and avoid insolvency due to the conduct of some financial institutions. Orr said the CBA told the Commission that it had taken enforcement action against 82 agriculture customers in the past decade, while ANZ said it took enforcement action on 30 farm businesses in the previous four years.

In the Brauer case study, the Commission heard that a Rabobank manager contacted its customers Wendy and Adrian Brauer while they were overseas to alert them to a property for sale — to help grow their Queensland cattle farming business. The Brauers were offered a $3 million loan facility to purchase the property and promised a further $300,000 to buy new cattle for the land. Based on the manager’s assurances regarding serviceability, the Brauers proceeded with the loan, however, the Commission heard the Rabobank manager was later found to have made miscalculations throughout the loan assessment process, putting the Brauers’ serviceability at question.

Orr questioned Rabobank on the circumstances in which the Brauers were offered the loan, as well as the bank’s assessment of loan serviceability, and its approach to hardship and recovery of the debt. The Brauers gave evidence that in order to pay down their debt by the end of the term requested, they were forced to sell the new property, estimating a $1m loss from the process. When Orr queried the bank’s reluctance to admit its misconduct or falling short of both community expectations and in its remuneration practices, Rabobank responded that its rural managers are incentivised to grow business via the sale of loans but “disincentivised” to write loans that cannot be sustained.

Orr alleged that because the bank’s remuneration practices were predominantly driven by sales, the bank was “not consistent with the recommendations of the 2017 review by former Australian Public Service Commissioner Stephen Sedgwick AO”. (The review examined how banks pay staff or third parties for selling retail banking products such as mortgages, credit cards and deposit accounts.)

Another case study before the Commission was between ANZ and Landmark, which concerned the bank’s conduct during the acquisition of the Landmark loan book in 2010. Orr said that among the 6892 submissions received by the Commission ahead of the hearings, 268 related to agricultural finance and, of these, 32 related to the Landmark acquisition. The Commission questioned the ANZ’s communication of changes to existing Landmark customers during the acquisition, the handling of complaints from former customers, as well as the bank’s approach to debt recovery. Submitted evidence revealed that during the transfer of customer details to the ANZ platform, some Landmark customers experienced difficulty opening their accounts, had current interest rates incorrectly charged or limits incorrectly loaded.

The Commission alleged that in some cases the bank had breached the Code of Banking Practice and its actions fell short of community expectations. Orr stated ANZ “should have been more responsive and empathetic” given its customers’ difficult financial circumstances.

Insolvency professionals

The behaviour and lack of transparency of insolvency professionals during farm foreclosures was a hot topic among farmers attending the hearings. However, Orr announced the Commission would not assess the role of receivers in farm foreclosures because it was not in the terms of reference. This disappointed the likes of NSW National Party senator John Williams, who had campaigned for the Royal Commission. He told media he hoped the Commission’s failure to probe receivers would lead to a renewed push for a national farm debt mediation scheme where banks would be forced to offer mediation to farmers before foreclosing on them. Currently only NSW, Victoria and Queensland have legislated farm debt mediation schemes in place, while South Australia has a voluntary one.

Indigenous financial interactions

The Royal Commission heard evidence from Indigenous customers who claimed they were targeted by financial institutions to sign up to funeral insurance and subjected to unsolicited door-to-door sales.

Customers of Aboriginal Community Benefit Fund (ACBF) Funeral Plans told of taking out policies with ACBF under the belief it was owned and run by Aboriginal people. Furthermore, some ACBF customers were led to believe that all the money they had paid in premiums would be paid out on their death, which was not the case.

The Commission also heard the funeral insurer was deducting money from the Centrepay benefits of around 6000 of its Indigenous customers — and cancelling policies when it was unable to automatically deduct premiums if customers’ welfare payments were cut off. The insurer also admitted not knowing its customers’ locations and therefore being unable to make contact when policies were cancelled.

Counsel Assisting questioned whether the insurer was specifically marketing policies to parents for their children and grandchildren — which the insurer denied — after it was revealed that about 33 per cent of ACBF plan policies are for policyholders under 18 years old, and 66 per cent for those under 30.

To read insights from HSBC Bank Australia's non-executive chair Graham Bradley AM FAICD click here, or click here to read ASX Corporate Governance Council chair Elizabeth Johnstone FAICD's proposed changes to Corporate Governance Principles and Recommendations.