Three banks, including two majors, have responded to allegations of responsible lending breaches put forward by the financial services royal commission.
Submissions released on Tuesday, 12 June, included responses from ANZ, Westpac and Bank of Queensland to claims put forward by senior counsel assisting Michael Hodge in his closing statement following the third round of hearings during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
In his closing address, Commissioner Hodge submitted that it was open to Commissioner Ken Hayne to find that, in relation to cases involving ANZ, Westpac and Bank of Queensland heard by the commission, the lenders had breached their responsible lending obligations under the Code of Banking Practice (COBP) and as members of the Financial Ombudsman Service (FOS).
Mr Hodge alleged that, with regards to a loan application it approved for a small business customer seeking finance to open a gelato franchise, ANZ may have failed to exercise the care and skill of a diligent and prudent banker as required by clause 27 of the COBP.
In its response to the allegation, ANZ submitted that FOS’ determination regarding the case in 2014 and evidence provided by the counsel assisting during the course of hearings do not support Mr Hodge’s finding.
FOS has determined that the cash flow forecasts relied upon by the ANZ bank assessor were “overly optimistic”; however, the major lender has claimed that the banker’s determination was not in violation of clause 27.
“Even if the cash flow forecast was overly optimistic, it does not follow that in deciding to extend credit to the gelato business on the terms it did, ANZ failed to meet the standard of a diligent and prudent banker exercising care and skill,” ANZ said.
“Clause 27 of the Code is concerned with a lender’s process in forming an opinion about whether a borrower has the ability to repay the loan applied for. It is not directed to the content of that opinion or to the ultimate decision to approve a credit application, which may take into account other matters.
“ANZ has at all times maintained, and continues to maintain, that the approval of facilities to the gelato business was within the judgmental discretion of the assessor, properly exercised.”
However, ANZ again admitted that “in the process of receiving and recording information with respect to the gelato business loan application, an unacceptable number of data and related errors occurred”.
Mr Hodge also submitted that it was open to Commissioner Hayne to find that Westpac breached clause 3.2 of the COBP, in failing to act fairly and reasonably towards small business customer Marion Messih in a consistent and ethical manner, by continuing to undertake collection activities against the customer after she had made a complaint to the FOS.
Further, Mr Hodge alleged that, in continuing to undertake collection activities against the customer after she had made her complaint, Westpac breached its obligation as a member of the FOS under 13.1 in the FOS terms of reference.
Westpac acknowledged that it did breach its obligations under the COBP, and as a member of the FOS, in pursuing collection activities, but it attributed the breaches to inadvertent “human processing errors” and a “short-term technical issue”.
“Westpac accepts that its inadvertent text messages to Ms Messih were inappropriate and adhered to the compensation recommendation made by [the] FOS,” the bank said.
Mr Hodge also noted that it was open to Commissioner Hayne to explore whether Westpac has adequate systems in place to ensure compliance with obligations under the COBP and terms of reference (TOR) with regard to collection activities.
In its response, Westpac claimed that it believes it has “adequate systems in place to ensure its compliance with its obligations under the COBP and the FOS TOR.
Bank of Queensland’s response
Moreover, in his closing statement, Mr Hodge alleged that Bank of Queensland had breached clause 27 of the COBP in failing to exercise the care and skill of a diligent and prudent banker in its approval and assessment of a loan to small business customer Suzanne Riches, who sought finance to open two Wendy’s franchises.
Mr Hodge also alleged that BOQ breached clause 3.13 of the COBP 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.
Further, Mr Hodge alleged that BOQ may have breached clause 3.2 of the COBP in failing to act fairly and reasonably towards the customer in contesting the FOS complaint.
BOQ accepted that with regards to all three allegations put forward by Mr Hodge, its actions “fell short of the standards set under the 2003 COBP”.
However, BOQ noted that the commission should also find that the breaches are “not serious or systemic non-compliance” with the COBP, and that BOQ has “taken steps to prevent a breach [from] reoccurring”.
The third round of hearings, which commenced on 21 May and concluded on 1 June, 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.
The commission recently announced the topics to be considered during the fourth round of hearings, which is set to focus on issues affecting Australians living in remote and regional communities such as, among others, farming finance, natural disaster insurance and Aboriginal and Torres Strait Islander Australians’ interactions with financial services entities.
The hearings will be held in Brisbane from Monday, 25 June, to Friday, 29 June, and in Darwin from 2 July to 6 July.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.