Additional Comments
by Senator Williams
1.1
The following is compiled in support of the committee’s report and
recommendations, and contains further recommendations.
1.2
The original catalyst for the Senate Economics References Committee's
inquiry into the post-GFC banking sector was the concern surrounding the
handling by Bankwest of its loan book. Evidence was beginning to emerge of
Bankwest calling in its loans and the resultant selling up of many assets, some
below market value. These issues were highlighted in a Four Corners
television report, and this resulted in further allegations against the bank's
practices. The Senate inquiry did not specifically target Bankwest but much of
the evidence centred on its actions. It was disturbing to read and hear of
people discovering their low doc loan application forms had been allegedly
doctored to include inflated incomes and assets. It was also disturbing to
hear and read of the "lend at all costs" attitudes to people who were
at risk of being unable to repay. This practice has destroyed Australians
lives. These and other issues are outlined below.
Receivers and section 420A
1.3
The conflict between receiver and borrower is partly addressed in
committee recommendations 9.18 and 9.19.
1.4
Of great concern is the continued selling of assets by receivers for
below market value. Section 420A of the Corporations Act 2001 states:
(1) In exercising a power of sale in respect of property of a corporation, a
controller must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a market value--not less
than that market value; or
(b) otherwise--the best price that is reasonably
obtainable, having regard to the circumstances existing when the property is
sold.
(2) Nothing in subsection (1) limits the generality of anything in section 180,
181, 182, 183 or 184.
1.5
However, evidence given to the inquiry suggests this provision is either
being breached, ignored or not considered when receivers are selling assets.
Evidence given by Mr Jim Neale to the Sydney hearing emphasised the
non-compliance:
Senator Williams: So
you were in discussions to sell a property for $4 million after it was sold.
After it was sold, it was valued at $3.58 million, to the best of your
knowledge. What was it sold for?
Mr Neale: My account
was credited with $195,000, which was sale proceeds of $635,000 from the bloke
I was talking to in order to sell it to in the first place, less $440,000 for
the receivers.
Senator Williams: So
this bloke you were talking to in order to sell it for $4 million – did he
actually buy the block?
Mr Neale: Yes.
Senator Williams:
That is a pretty good discount.[1]
1.6
Similar evidence was given by Mr Sean Butler of Perth. Mr Butler and his
wife owned the Lighthouse Beach Resort in Bunbury and in 2007 it was valued at
$20 million. In 2009, the property was re-valued at $14.7 million, but five
months later at the direction of Bankwest and a cost of $9,500 to the Butlers,
the property was again re‑valued at 22 per cent less than the $14.7
million. Mr Butler indicated the property was still profitable and he was able
to meet interest payments on all loans.
Mr Butler: In
January, 2011, we had further discussions with Bankwest ... In February
2011 we got a purchase offer for the Lighthouse Beach Resort at
$14 million, that being 22 per cent higher than what the [r]evaluation
was. In other words, we got an offer for it that was close to the original
valuation. It has almost proved them wrong. At that point our business partner,
himself a banker, advised that he would match the $14 million offer and buy
that property. [2]
1.7
Eventually Bankwest appointed Taylor Woodings as receiver-managers:
Mr
Butler: ... Meanwhile, amidst all this secrecy and deception, our
business partner, a prominent banker himself, negotiated with Taylor Woodings
without our knowledge to buy it for $9.5 million—$4½ million less than what he
had offered just a few months before. We have been advised that this conduct is
illegal. That is one property.
Senator WILLIAMS:
Were you a company?
Mr Butler: Yes.
Senator WILLIAMS:
Under section 420A they must make the best effort to get the maximum price.
Mr Butler: Yes.
Senator WILLIAMS: And
it did not go to auction?
Mr Butler: No.
Senator WILLIAMS:
They had offers of $14 million and it was sold for $9.5 million?
Mr Butler: Yes.[3]
Recommendation 1
1.8
That the Australian Securities and Investments Commission (ASIC)
initiate a wholesale review into matters raised during the inquiry relating to
breaches of the Corporations Act 2001, specifically section 420A and
more broadly across the banking and insolvency industry.
Bankwest
1.9
In evidence to the inquiry, Bankwest maintained it worked with its
clients and the problems only arose because of the economic circumstances, not
through any inappropriate action of the bank: 'In cases where clients were
impacted, we worked closely with them to try and improve their position'.[4] The major
complaint about Bankwest from submissions and oral evidence was in relation to
assets being revalued down when the business was clearly viable and meeting its
commitments. Bankwest in its evidence defended its right to undertake
valuations:
CHAIR: So except for
the contracted points of time or events or a customer clearly already being in
difficulty, you would not undertake a valuation.
Mr Corfield: We would
not unilaterally be deciding in a given week, let's do a valuation on this.
CHAIR: So you
wouldn't sit down and say, 'Look, the GFC has happened. The value of hotels is
suffering. We have some clients that have hotels. Let's go and send a valuer in
to have a look at that just to see what is happening with their valuer.'
Mr De Luca: As you
know Mr Corfield stated, the terms and conditions provide us the ability to do
a valuation update, let us say, on an annual or biannual basis, so at that
point in time we may decide to do it earlier before the financial year finishes
or after the financial year but within the terms and conditions. [5]
1.10
I believe that following the takeover of Bankwest by the Commonwealth
Bank of Australia, Bankwest panicked and began having assets revalued. Bankwest
had "begged" for business and targeted property developers on the
eastern seaboard and hoteliers, but didn’t hesitate to "pull the
plug" on those businesses after a rise in the LVRs. I question some of the
valuations stated in the inquiry. The reasons for this action need to be
scrutinised.
Recommendation 2
1.11
That the Australian Securities and Investments Commission (ASIC)
review the purchase of Bankwest by the Commonwealth Bank of Australia and
provide a report on compliance with all Acts and regulations.
Pressure to lend
1.12
In its submission to the inquiry, the Finance Sector Union of Australia
(FSU) pointed to the pressure bank officers are under to meet lending targets.
The Union points out that '[c]ommissions and bonuses, as well as access to
annual pay increases are built into performance pay systems that are designed
to drive aggressive lending behaviour'.[6]
The FSU stated that its members are concerned enough to have run three
campaigns within their own banks about their lending targets, addressing
unreasonable targets and the fact that 'employees were expected to make up
their targets for any periods of absence from work including annual leave and
sick leave'.[7]
I believe this lies at the heart of what I regard as reckless lending.
1.13
Evidence was given by Mr Geoffrey Reiher of the time he was seeking
finance for the purchase of the Grand Hotel at Cobar:
We were pursued by
Bankwest, taken to lunch and, in a whirlwind deal, we had finance for the
hotel. We had tried other financial institutions and failed. They were talking
a long-term commitment of 20 years and they were committed to helping out and
making sure we got through the tough times.[8]
1.14
However, when the GFC struck, the bank was not so cordial:
The hotel was doing
up to $25,000 a week in the good times and through the GFC we went down to
probably $11,000 a week. In that time the hotel bar takings actually went up 10
per cent; our downfall was gaming. From that we managed to get it back up to
about $18,000 a week, until our termination. We had a valuation of the hotel
done probably six or eight months prior to the termination of our agreement
with Bankwest. That is when the hotel was down at its worst and we were asking
for a revaluation. That never came to fruition.
In the closing stages
of our commitment with Bankwest, probably in the last three months, through
telephone conversations with some of their senior officers they made it quite
clear that they did not want our business and they basically told us to go somewhere
else if we could.[9]
1.15
Mr Reiher reiterated the bank had changed the rules to get his business:
Senator WILLIAMS: How
much was the hotel valued at when you went to buy it?
Mr Reiher: $2
million—$1.8 million.
Senator WILLIAMS: How
much did you request the loan for?
Mr Reiher: $1.35
million.
Senator WILLIAMS: You
said in your opening statement that the bank shifted the goalposts to get the
loan through. What do you mean by that?
Mr Reiher: The
valuation—I think they were loaning 80 per cent at the time.
Senator WILLIAMS: So,
in other words, if something was worth a million dollars they would lend
$800,000?
Mr Reiher: Yes. We
did not fit the criteria. We fell short. I do not know the number but we did
fall short by a small margin. It was said over lunch that we will just move the
rate to fit you in.[10]
1.16
Following a revaluation, Mr Reiher said Bankwest appeared to want to end
the agreement:
Senator WILLIAMS: Are
you saying that, for there to be an agreement, Bankwest said, 'Forget the 20
years as originally proposed; we'll set you up in a five-year loan where you'll
pay the whole lot back in five years'?
Mr Reiher: The way it
was put to us, he said they would make it basically a five-year loan so that we
could not make the payments. They wanted out; they did not want anything to do
with us.[11]
1.17
It is my view that banks should not abandon a client when the
loan-to-value ratio blows out. If a borrower is able to make interest payments,
the banks should be encouraged to show patience and tolerance.
Default interest rates
1.18
A number of submissions pointed to the trap of high default interest
rates. Mr Sean Butler pointed out his default interest rate with Bankwest
was 18.81 per cent if not repaid as agreed.[12]
Where people are in financial trouble and miss repayments, the default interest
rate can be too large a burden to overcome and the business or investment is
doomed. Whilst the bank is entitled to retrieve its principal and interest, the
excessive penalty interest rate is of concern. It was put to Bankwest in the
inquiry that the higher penalty rates may in fact lead to a huge tax saving for
the bank:
Senator
WILLIAMS: ... Is it tax deductible for the bank if you have got a loss
on a customer where they owe you a million, it compounds out to $1.2 million
with these higher rates and you sell the asset for a million and you are
$200,000 short. Is that $200,000 tax deductible?
Mr De Luca: The
interest income is income. It is not a tax deduction. It is income.
Senator WILLIAMS: But
isn't that $200,000 loss on your books? If you have got a customer who on your
book owes you $1.2 million and you have sold him or her up and cleaned them out
or whatever for one million and there is a loss of $200,000, is that loss tax
deductible?
Mr De Luca: The loss
is. The loss is, not the interest income.
Senator WILLIAMS: By
having huge default interest rates, surely that builds that amount to a
situation where in some cases or in many cases of these bad loans that leads
you to a greater tax deduction. Would that be the case?
Mr De Luca: Firstly it
is in our interests actually to make profits, not to actually have losses. As
Ian [Corfield] alluded to, also our interest there is aligned with the
customer's where the customer is actually able to take it and actually able to
pay to service their debt. As Ian alluded to, we negotiate and work with the
customers on a case-by-case basis on what the right default rate is.
Senator WILLIAMS: You
have not answered the question. If that money goes out, because the debt
explodes by a very high interest rate level, then the more that goes out the
more you have on your books that has not been repaid, so is that tax
deductible? Yes, it is.
Mr Corfield:
Technically, yes. If it causes a further loss then it would be tax deductible
but, as we have said, those interest rates simply reflect the additional costs
that are in the business. So the reality of what is happening through the PNL
of the business is that actually we are no better off; in fact, we are worse
off from customers that fall into this.
Senator WILLIAMS: I
am seeing a situation here where the Australian Taxation Office might look at
this and say, 'Okay, this loan has gone bad. You're sad about it and the client
is sad about it.' But then when you can put up interest default rates to 18 or
20 per cent when official cash rates are at 3½ per cent and you can put that on
your book, that is a big tax deduction, because that last 12 months of the
dying period of the loan allows you to actually escalate your losses very
quickly. You know you are going to lose dough. You know they have fallen over.
I am not blaming Bankwest. Obviously, with this you can go right around the
banking industry in Australia. Doesn't that allow you a greater tax deduction
come the end of the year of doing your books?
Mr De Luca: As Ian alluded
to, technically yes.
Senator WILLIAMS: You
can determine the interest rate which then determines the level of loss. That
is a pretty good business deal, isn't it?
Mr Corfield: Except
the biggest cost at that point is actually the additional capital that we are
holding against that business, so there is not some great benefit to us in
jacking the interest rates up at that point because we are carrying that
additional capital cost in any case.[13]
1.19
The above evidence confirms my belief the penalty (default) interest
rates should be capped as indicated in recommendation 3.
Recommendation 3
1.20
That the Australian Bankers' Association conduct an industry
education campaign urging its members to re-evaluate their systems of incentives
to curb aggressive lending. Further, that the Association consider an industry
standard whereby its members are required to act in the best interests of the
client generally, and by capping penalty (default) interest rates at no more
than 50 per cent higher than the interest rate of the loan.
Low‑doc and no‑doc loans
1.21
Low‑doc loans are good for self-employed people who are unable to
provide documentation such as pay slips. There is no doubt they fill a void in
the loans market.
1.22
But from evidence given to the inquiry it is clear there have been cases
where loan application forms (LAFs) have been altered after being signed by the
borrower. Whether this was by a broker acting to a bank's criteria or a by a
bank officer themselves is unproven.
1.23
The President of the Banking and Finance Consumers Support Association,
Ms Denise Brailey, claimed it was widespread:
Ms Brailey: The banks
provided commissions for mortgage manager, mortgage originators and mortgage
introducers that came down in a chain to employing brokers. The brokers copped
the full brunt of the blame that they were falsifying loan application
forms ... The four majors are in there. They are all responsible
through a series of emails from banks to brokers, instructing the brokers how
to get their deals across the line – 'make the deal fit' was their usual
interpretation. They targeted older people, carers, people on parenting
allowance and the aged pension.
* * *
We have the loan
application forms from over 400 people in the last six weeks, During that time,
not one of them is a clean document—each one has been fraudulently dealt with.
* * *
CHAIR: What you are
saying is that those applications were doctored after they had looked at them?
Ms Brailey: That is
right. I have complained to each of the Chairmen and CEOs of the banks involved
...
CHAIR: They knew they
were getting a loan though
Ms Brailey: But they
did get the loan; the banks will argue that they got the benefit of the
loan—however, there was a sustainability factor: there was never any
affordability criterion in the process.[14]
1.24
The same issue was identified by Mr Lucas Vogel in his submission:
The bank made a
$600,000 loan to us without a signed application form.
a. This
means we were never afforded the opportunity to check and verify the basis upon
which the loan was subsequently approved.
b. Dependent
children (2 of) were not recorded in the banks computer record (or the records
were altered) resulting in a reduction in calculable living expenses thus
skewing the banks serviceability calculations in favour of the loan approval.
c.
Income was attributed to my non-working wife using the ABN-for-a-day mechanism.
This subterfuge had two benefits (to the bank), firstly it improved the
apparent serviceability of the loans, and secondly it removed my wife as a
dependant thus skew the serviceability calculations further in favour of the
loan approval.
d. The
bank holds and relies solely on a Low-Doc declaration form which was supplied
blank to my wife for signing. Examination of that document clearly shows two or
three distinctly different hand writings, only the signature of which is
belonging to my wife. In other words the document was altered post signing. We
know this because the income and asset figures entered on that document bear no
resemblance to reality and match numbers detailed on a prior date within the
banks file notes.[15]
1.25
It is imperative this issue be addressed.
Recommendation 4
1.26
That the Australian Securities and Investments Commission (ASIC)
conduct an investigation into low‑doc and no‑doc loans to determine
if loan application forms as held by the Banking and Finance Consumers Support
Association have been fraudulently completed. Further, that if ASIC determines
that a criminal investigation is warranted, the matter be referred to the
Director of Public Prosecutions.
Recommendation 5
1.27
That the government review the relevant legislation relating to
low‑doc and no‑doc loans to ensure that the legislative framework
currently in place adequately regulates these types of loans.
Payment of GST to the Australian Taxation Office
1.28
There were allegations that GST from the sale of assets by a receiver
were not passed on to the Australian Taxation Office. This matter was raised
during the appearance of the Bankwest executives:
Senator WILLIAMS: Why
has Bankwest been so reluctant, because the receivers were selling these joints
up and giving you all the money after their fees, to hand over the GST
component to the Australian Taxation Office?
Mr De Luca: I am not
aware that we have been.
Senator Williams: Let
me make you aware of it. Lauderdale Projects Pty Ltd and the Bank of Western
Australia—the sale went through for $9 million. Bankwest agreed to the sale
contract. There was $900,000 of GST. So the sale price was $9.9 million. The
receiver gave Bankwest $9.9 million. If Lauderdale did not get the $900,000
they could not pay the Australian Taxation Office in their quarterly or monthly
BAS. You held on to the money. You would not hand over that $900,000. So what
happened? The parties—and Bankwest agreed to this—called in a bloke called Ron
Merkel, a former judge. You agreed to abide by Mr Merkel's decision as an
expert. It was not a mediation. Mr Merkel ruled these were the issues.
'Bankwest held a recent mortgage over the property. A dispute now exists
between Bankwest and Lauderdale as to whether the GST amount is payable to
Bankwest or to the Australian Taxation Office. Bankwest was required to
discharge its mortgage over the property. Bankwest and Lauderdale have agreed
to resolve this dispute.' He made a decision. He said, 'The amount payable to
Bankwest is to enable Lauderdale to pay GST. Accordingly, the GST amount is
required to be paid by the stakeholder to Lauderdale to enable it to meet its
liability to the Australian tax office in respect of GST.' He gives court cases
as examples. He said, 'The GST amount is properly to be regarded as an expense
occasioned by the sale rather than as part of the purchase price payable to the
bank by the sale.' He went on to say that, 'The special circumstances describe
a clear intention on the part of the purchase of Bankwest and Lauderdale that
the GST amount was to be paid to Lauderdale.' He went on to say that 'Bankwest
as secured creditor under its mortgage and charges is not entitled to the GST
amount in priority to the ATO as of date of completion of the sale or at any
time thereafter and the payment of the GST amount to Bankwest without making
provisions for the payment to the Australian Taxation Office of the GST due on
the sale of the property will in the circumstances of the present matter be
unlawful'. I put it to you that these receivers who have sold up so many of
your customers have collected the GST component, and I believe you still have a
lot of it to the tune of probably hundreds of millions of dollars. Why did that
have to go on for a couple of years? Why did you have to get Justice Ron Merkel
to hear this case? When you got that $9.9 million, you clearly knew that $900,000
was the GST component. Why would Bankwest not hand that over to the ATO?
Mr De Luca: I am not
aware of that matter. I am happy to look into that one for you.
Senator WILLIAMS You
had better look deep because I am sure that there are going to be other people
looking into it as well. This is the thing that this committee must do as a
regulator—make clear regulations seeing that in the case of receivers selling
up commercial properties that have the GST component that that component goes
to the proper authority, which is the Australian Taxation Office, and is then
handed on to the states. I am very concerned about this issue about why there
was a legal fight. It was not in a court room but both parties agreed to abide
by the decision made by Ron Merkel. He makes it quite clear in the matter that
Bankwest retaining this money is unlawful. As I said, I think this has been
going on in a widespread fashion.
Mr Corfield: We are
obviously committed to meeting all of our obligations. In any receivership there
are normally many creditors. Quite often it is complex to work through exactly
what the position is, but—
Senator WILLIAMS: The
GST component is very simple. It is not complex. You sold the property for $9
million; you received $9.9 million. You did not want to give up the $900,000 to
the tax office. It has gone on for years until, finally, an independent expert
has made a judgement. What I am saying to you is this: I believe the receivers
have done this right through your network of selling these commercial
properties up and I believe you are hanging onto a lot of GST components of
those sales. I want to go through those sales, contracts and collections of
money you have had to see if there is a GST component there because, if you
hang on to the money, the ATO will go after the business the receiver has sold
up and they will bankrupt it. They will lose out with the Australian Taxation
Office while you retain the money. To me, that is very wrong and very
un-Australian. I want you to go through that. No doubt there will be other
people going through and checking this very issue. As regulators we need to be
assured that this loophole is patched right over.
Mr De Luca: That is
something we will obviously look into. It is not widespread. We have not got
other—
Senator WILLIAMS: It
is not widespread?
Mr De Luca: Not that
we are aware of. [16]
1.29
Whilst this allegation could not be proved, those in the insolvency
industry should be reminded of their obligation under the A New Tax System
(Goods and Services Tax) Act 1999 (GST Act):
Under the GST Act,
liquidators, receivers, managers and administrators are all collectively
referred to as "representatives of incapacitated entities." Such
representatives are personally liable for any GST payable on taxable supplies
that are made by a company post appointment. The ATO ranks as an unsecured
creditor in respect of pre-appointment liabilities. This means that the ATO is
at risk that it will not recover pre-appointment GST liabilities in full.
However, if a representative is personally liable for the GST liability that
arises post appointment, the ATO is likely to recover its GST liability on post
appointment supplies in full.[17]
Summary
1.30
Australia has a strong banking system. There is no dispute the cost of
funds had been for some time increasing, but evidence to the inquiry suggests
it has now plateaued. Compared to the number of loans approved each year, the
number from which problems arise is very small. But what this Senate inquiry
has revealed is problem areas in risky lending which in some cases lead to the
loss of an asset and a severe effect on lives. The above recommendations
combined with those in the Committee report should address many of the
shortcomings.
1.31
If elected to government, the Coalition will undertake a full root and
branch inquiry of our financial system. That inquiry should also address the
imbalance between Authorised Deposit-taking Institutions (ADIs) and non-ADIs,
whereby ADIs receive a government guarantee on deposits, but no such surety is
given to non-ADIs.
Senator John
Williams
Senator for New
South Wales
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