Parliamentary Joint Committee On Corporations and Financial Services

COMMONWEALTH OF AUSTRALIA
Proof Committee Hansard

PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND
FINANCIAL SERVICES
Impairment of customer loans
(Public)
MONDAY, 4 APRIL 2016

SYDNEY
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This is an uncorrected proof of evidence taken before the committee.
It is made available under the condition that it is recognised as such.
BY AUTHORITY OF THE SENATE
[PROOF COPY]
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PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES

Monday, 4 April 2016
Members in attendance: Senators Fawcett, Ketter, O'Neill and Mr Ruddock, Mr Van Manen.
Terms of Reference for the Inquiry:
To inquire into and report on:
1.a. practices of banks and other financial institutions using a constructive default (security revaluation) process to impair
loans, where constructive default/security revaluation means the engineering or the creation of an event of default whereby a
financial institution deliberately reduces, through valuation, the value of securities held by that institution, thereby raising the
loan-to-value ratio resulting in the loan being impaired;
b. role of property valuers in any constructive default (security revaluation) process;
c. practices of banks and other financial institutions in Australia using non-monetary conditions of default to impair the loans
of their customers, and the use of punitive clauses such as suspension clauses and offset clauses by these institutions;
d. role of insolvency practitioners as part of this process;
e. implications of relevant recommendations of the Financial System Inquiry, particularly recommendations 34 and 36 relating
to non-monetary conditions of default and the external administration regime respectively;
f. extent to which borrowers are given an opportunity to rectify any genuine default event and the time period typically
provided for them to do so;
g. provision of reasonable written notice to a borrower when a loan is required to be repaid;
h. appropriateness of the loan to value ratio as a mechanism to default a loan during the period of the loan; and
i. conditions and requirements to be met prior to the appointment of an external administrator; and
2. in undertaking this inquiry, the Committee will take evidence on:
a. the incidence and history of:
i. loan impairments; and
ii. the forced sale of property;
b. the effect of the forced sale of property in depressed market conditions and drought;
c. comparisons between valuations and sale price;
d. the adequacy of the legal obligations on lenders and external administrators (including s420A of the Corporations Act 2001)
to obtain fair market value for the forced sale of property; and
e. any related matters.
On 4 June 2015 the committee resolved that:
in conducting the inquiry the committee will not investigate or seek to resolve disputes between customers and banks; and
where the experiences of customers may inform the committee about the practices of banks, the committee welcomes
submissions that explicitly address the terms of reference.
WITNESSES
ARMSTRONG, Mr Tim, Head, Micro and Small Business, South, National Australia Bank ....................... 59
BROWN, Mr Gerard, Group General Manager, Corporate Affairs, ANZ Banking Group Ltd................... 18
CAREY, Ms Annamaria, Assistant Commissioner, Banking and Finance Strategy, Australian Taxation
Office ..................................................................................................................................................................... 1
COHEN, Mr David, Group Executive for Corporate Affairs, and Group General Counsel,
Commonwealth Bank of Australia ................................................................................................................... 37
DE LUCA, Mr Rob, Managing Director, Bankwest ........................................................................................... 37
GREENE, Mr Geoff, Head, Strategic Business Services, Melbourne, National Australia Bank.................... 59
HARDIE, Mr Robert, Manager, Corporate Affairs, Oceania, Royal Institution of Chartered
Surveyors .............................................................................................................................................................. 8
HODGES, Mr Graham, Deputy Group Chief Execuive Officer, ANZ Banking Group Ltd .......................... 18
NOLAN, Mr Peter, Oceania Director, Royal Institution of Chartered Surveyors ............................................ 8
PARKER, Professor David, Fellow, Royal Institution of Chartered Surveyors ................................................ 8
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CAREY, Ms Annamaria, Assistant Commissioner, Banking and Finance Strategy, Australian Taxation
Office
Committee met at 09:31
CHAIR (Senator Fawcett): I declare open this public hearing of the Parliamentary Joint Committee on
Corporations and Financial Services. Today the committee is taking evidence as part of the inquiry into the
impairment of customer loans. This is a public hearing and a Hansard transcript is being made. The committee
prefers to hear evidence in public. We may agree to take evidence confidentially, if it is relevant. The committee
may publish confidential evidence later but we would seek to ask the witness before doing this. It is important that
witnesses give the committee notice if they wish to give evidence in private. In addition, if the committee has
reason to believe that certain evidence may reflect badly on a person the committee may direct that that evidence
be heard in private.
I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It
is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. If
they did, the action may be treated by the Senate as contempt, and it is also a contempt to give false or misleading
evidence to the committee. Witnesses should be aware that if they make adverse comment about another
individual or organisation, that individual or organisation will be made aware of the comment and given a
reasonable opportunity to respond.
If a witnesses objects to answering a question, the witness should state the grounds of the objection and the
committee will determine whether it will insist on an answer. I remind committee members that the Senate has
resolved that an officer of the department of the Commonwealth or of a state shall not be asked to give opinions
on matters of policy and shall be given reasonable opportunity to refer questions to a superior officer or to a
minister. This resolution prohibits only questions seeking opinions on matters of policy not questions asking for
explanations of policies or factual questions about when and how policies were adopted. Officers of departments
are also reminded that any claim that it would be contrary to the public interest to answer a question must be
made by a minister and should be accompanied by a statement setting out the basis for the claim.
The committee welcomes officers from the Australian Taxation Office. Thank you for attending today's
hearing. Do you have any comments to make on the capacity in which you appear?
Ms Carey: I am an assistant commissioner in the public groups and international area of the Taxation Office.
CHAIR: Would you like to make a short opening statement before the committee proceeds to questions?
Ms Carey: No. I am happy just to take questions on whatever issues you wish to ask me.
CHAIR: I take it you have read the terms of reference for the inquiry.
Ms Carey: Yes, I have.
CHAIR: Have you read any of the submissions that have been made to the inquiry?
Ms Carey: No, I have not.
CHAIR: Are you aware of the basis of claims that people are making about the conduct of banks and the
impairment of loans?
Ms Carey: I understand how the principle operates; however, my understanding is that I am here to answer
any tax related questions you may have.
CHAIR: Okay. I guess it is my expectation that if people come to provide evidence that they will have a good
understanding of the context, because that would make their answers more directly pertinent to the questioning
the committee may have.
One of the central claims by the banks is that they have no financial incentive to impair customers' loans, and
that they are far better off to help a customer work the loan out. We have had a number of submissions, as well as
some documents from the UK, put an alternative view, and that is that various incentives, including tax, provide
vehicles whereby the bank can minimise losses and maximise short-term revenue, which may go to the
remuneration targets for executives or managers within parts of the bank. Can you make any comment regarding
the broad framework upon which banks operate in the area of losses that they provision for and then realise
against bad loans?
Ms Carey: Certainly. Naturally, there can be a difference between losses that are written off for accounting
purposes versus losses that can be claimed for tax purposes. We have provisions within the Income Tax
Assessment Act that specifically allow deductions for losses in relation to what we call 'bad debts' in the
CORPORATIONS AND FINANCIAL SERVICES COMMITTEE
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Senate
Australian Income Tax Legislation. There is a specific provision, section 25.35, which applies to the writing-off
of all bad debts.
Certainly, the income to which the bad debt relates firstly must have been recognised as income by the
taxpayer. There are certain rules around writing-off the debt. It must be more than doubtful; it must actually be a
bad debt. The Australian Taxation Office has certainly released some guidelines, providing information and
guidance to taxpayers who wish to write off bad debtshow we would accept a deduction would be claimed
and that is contained in taxation ruling TR 92/18.
In addition, and specifically in relation to banks and financial institutions, there are particular provisions in the
Income Tax Assessment Actin parlance they are called the 'taxation of financial arrangements provisions'. They
are contained in division 230. Essentially, they specify for taxpayers who are involved in providing financial
arrangementsand, obviously, I am here because of my background in looking after the strategy in relation to
banks within the Taxation Officethe rules under which deductions can be claimed. They are fairly similar to
those in section 25.35 but, I suppose, provide specific guidance to those particular types of taxpayers.
Again, they relate to the calculation of the bad debt. The amounts being claimed as a deduction have to have
been included in the assessable income of the taxpayer and the amounts must arise in the course of a business of
lending money. Again, they are very specific rules. There are ways of calculating the actual amount but,
essentially, the rules around who is entitled to claim a bad debt are set out in that division. There is probably some
scope within division 230 for an amount being recognised as a 'doubtful' debt rather than as a bad debt, and that is
because of the way the taxation of financial arrangements provisions interact with the Australian accounting
standards.
Obviously, I am looking at it from the point of view of the taxpayer claiming the deduction. You indicated
certain incentives being available for banks and, I think I heard you say, their employees to allow for the writingoff of debts and the claiming of losses. I cannot comment on that. Obviously, I am here to cover off on the
interpretation of the law and in what circumstances either debts could be written off as bad or, in some cases, the
calculation may in fact cover off on some element of doubtful debts.
CHAIR: Sure, so the simplest case is where a debt is provisioned for and then becomes a bad debt and then
you have an actual dollar amount. There is also a transitional state, if you like, where a loan is impaired. The
banks tell us that they have a higher cost of providing finance in that environment. I would be interested to know
whether the rules you have mentioned cover how they can treat that higher cost of providing the finance from a
tax perspective. Also they then charge consumers default or penalty interest ratesthere are various words they
use for it. I would be interested to know whether the rules specifically cover how that additional finance, that
income flow coming to the bank, is treated from a tax perspective.
Ms Carey: Certainly penalty interest, default interest or fees that the banks may charge would form part of
their assessable income under normal income provisions. There is no issue around that. The issue I suppose is if
in fact those payments themselves remain unpaid. Again the same rules would apply to doubtful debts more
generally because the income should be returned by the bank or the financial institution if income is not received
or the income is recognised because the taxpayer is on an accruals basis but in fact the payment is never received.
Then again there would be a deduction that the bank or financial institution could claim under the previous
provisions that I referred to.
CHAIR: So from a tax office perspective penalty interest rates are essentially additional profit for the bank?
Ms Carey: Yes, that is correct.
CHAIR: If the rules were to change such that, if somebody were in default and penalties were applied, those
funds went to paying down the balance of the loan as opposed to going to the profit sheet of the bank, how would
that be treated from a taxation perspective?
Ms Carey: If it is not regarded as part of the assessable income of the bank?
CHAIR: Yes.
Ms Carey: I would need to take that on notice.
CHAIR: If you could do that
Ms Carey: Yes, I think I would need to.
CHAIR: At least one submission has raised the issue of property that has been sold by a liquidator and
subsequently the bank has come back some months after the transaction and demanded a paymentin one case
around $36,000for GST on that sale. The submission made it very clear that in the original paperwork the sale
was not subject to the goods and services tax, according to the paperwork and the boxes that were marked. From
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the tax office's perspective could you give us an opinion? Would it be your expectation that the sale of any
property, regardless of whether it was at the hands of a receiver or from normal processes, would be subject to
GST and who would be liable to pay that?
Ms Carey: You have me at a slight disadvantage because I am not a GST expert. I am happy to take that
particular issue on notice and check with our goods and services tax area. My understanding is that in most cases
GST would apply, but there could be particular circumstances and particular rules that would apply in a particular
case. Obviously in that case I am not aware of the background facts, but I am happy to take that on notice and
take that issue up with my GST colleagues.
CHAIR: Sure, and we can provide you with some more information as part of a question on notice.
Ms Carey: Okay.
Senator KETTER: Ms Carey, you mentioned that it is TR 92/18 that provides us with guidance as to what is
considered a bad debt. Is that the current position of the ATO?
Ms Carey: Yes. Even though it is quite an old ruling the principles still apply to the current legislation.
Senator KETTER: Just looking at that, and with regard to the terms of reference that we have, it says:
A debt may be considered to have become bad in any of the following circumstances
a number of which do not seem to be relevant to our current terms of reference. But in paragraph 31(d) it says
when:
the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt
And then (e) says:

where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, is
alleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered.
How does that line up with the technical defaults that we are looking at, where there has been no actual monetary
default. We are talking about situations where loan-to-value ratios or other breaches of covenants might have
occurred that do not really seem to fit there. Can you elaborate on that?
Ms Carey: Certainly. I mentioned division 230, which applies to the taxation of financial arrangements.
Under division 230, which, as I said, applies to banks and other financial institutions, taxpayers are actually
involved in providing financial arrangements for their customers and clients and there is the ability there toit is
actually described as the 'fair value method'. It is the methodology for the taxpayer to determine the actual amount
of the loss. That provision appears to relate to impairments, including doubtful debts. I would call them doubtful
debts; you described them as impairments. Essentially, it is comparing the fair value of the financial arrangements
decreasing from one income year to another. That would be one methodology where a taxpayer, even though the
debt was not bad, by essentially revaluing the loan a deduction will be triggered. But there are certain
requirements that would have to be complied with. The taxpayer has to elect to adopt that methodology, and it
also has to reflect what is included in the accounts of the taxpayer. Again, I am not an accounting expert, but
accounting standard AASB 139 basically sets out the conditions under which that revaluation can occur, and the
tax law then reflects that accounting treatment.
Senator KETTER: If I heard you correctly, you are saying it is really for the taxpayer to determine the
amount of the doubtful debt in that situation?
Ms Carey: It is based on the fair value, however that is determined.
Senator KETTER: Does each of the major banks adhere to that standardI think you said AASB 139.
Ms Carey: Yes.
Senator KETTER: Is that commonly applied by the major banks?
Ms Carey: Again, I would have to take that on notice, but I would certainly hope so. I would assume so.
CHAIR: How often does the ATO audit the major banks in terms of their compliance?
Ms Carey: How often?
CHAIR: Ever?
Ms Carey: Yes. Obviously I will not go into individual details, but we have ongoing engagement certainly
with the big four banksbig five if you include one other. I will not name it. I specifically will not name
taxpayers. We certainly have a process of ongoing review of the various transactions that the banks and other
financial institutions are involved in.
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Senator KETTER: I imagine, post GFC, this would be an area that the ATO would be looking at. I presume
there would have been a rise of the level of doubtful debts or bad debts at that timewould that be correct?
Ms Carey: Yes. They rise and fall in a cyclical pattern, but certainly, yes, that would be one issue that we
would be looking at as part of our ongoing reviews of the banks, as well as many other aspectsparticular
transactions they are involved in, particular types of financing. Certainly bad debts generally would fall into the
category of the sorts of issues that we would look at as part of a general review of the tax position of the banks.
Mr VAN MANEN: I want to dig down on this a little bit more, because it is a very important issue. I would
be interested, even if you take it on notice, for you to be far more forthright with the committee in relation to the
actual work the ATO has done in ensuring the banks are complying, during both the GFC period and post-GFC,
with these particular provisions in TR 92/18. Because you frequently see, year in year out, the banks regularly
review their bad and doubtful debt provisions on their financial statements, and it can have a material effect on
their profitability or otherwise. I would be very interested to know in some detail as to what work the ATO is
actually doing. I will accept it if you want to take that on notice, but if you have the capacity to comment now, I
would be very interested.
Ms Carey: Certainly I do not have the capacity to comment on the details now; I will take that question on
notice.
Mr VAN MANEN: Thank you.
Senator KETTER: Just following on from that, the ATO would do some industry level monitoring here to
look atI recognise the stability of the financial systems and another agencies responsibility, but you would have
your own areas of concern in this field when it comes to taxpayers paying a fair amount of tax.
Ms Carey: Certainly. Again, and perhaps I should have explained the particular area within public groups and
international that I manage, but I do manage the banking and finance strategy area within public groups and
international. We actually have a specific strategy team that manages and monitors what is happening in the
banking and finance sector. Without providing details in relation to these particular deductions, I can certainly
indicate that we are closely monitoring the banking and finance sector. We are certainly very focused on the sorts
of transactions that they are involved in. We have a working relationship with the banks as well, so we understand
what particular issues they are focusing on or are of particular interest to them at a particular period in time. The
period during the global financial crisis, even though I was not actually in this role at that time, certainly we were
conscious and aware of issues like the level of bad debts that the banks were experiencing at that time.
Senator KETTER: So having said that you monitor that and you analyse what is going on, does the ATO
have a view about some of the very high profile cases that have been in the media about the impairment of
loansperhaps the technical ways in which those loans were impaired? Have you formed a view about that from
a tax point of view?
Ms Carey: I would have to take that on notice.
Senator KETTER: I would be a bit surprised that you do not have a view that you could share with us today.
This is something that has exercised a lot of the print media, and it is certainly a matter of keen public interest. I
would be surprised if you were not able to tell us something about the ATO's view on this issue.
Ms Carey: Certainly we would be looking at that in the context of the audit and active compliance work we
are doing in relation to the banks. Whether we have reached a view on the extent to which the banks are
complying with the existing law or not, our role is to ensure that they are complying with the existing law.
Mr VAN MANEN: To reiterate the chair's opening comments, it is somewhat of a disappointment that the
ATO does not seem to be more across this issue, given the level of publicity and interest it has generated over a
significant period of time. I would be interested to know, more particularly, if the banks do write off a loan and
claim that as a loss and the bank is, subsequently, able to recover some level of fundswhether it be through
payments from guarantors or mortgage insurers or claims against other third partieshow are those proceeds
treated? Are they treated as a capital repayment or are they treated as income for tax purposes? If a bank writes
off a significant amount of a loan it reduces their tax payable. I would be interested in knowing how the ATO
treats any recoupment of those losses.
Ms Carey: The recoupment itself would be treated as assessable income of the bank.
Mr VAN MANEN: This goes back to my earlier question. How much work is done by the ATO to ensure that
this is properly accounted for?
Ms Carey: Again, that would be looked at as part of a review of a particular bank. It is one of many issues
that we would look at as part of any active compliance activity, in relation to a bank or financial institution,
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ensuring that the banks were complying with the income tax law provisions and how we have explained those
provisions should operate through our various public rulings.
Mr RUDDOCK: Is 'review' the same as 'audit'? You keep using the word 'review'. I am anxious to know
whether banks are, effectively, audited, in relation to the full range of matters that we are raising.
Ms Carey: We have a range of products, from audits to specific issue reviews to ongoing active compliance
activities. The banks are subject to a range of those.
Mr VAN MANEN: In light of that response and back to my earlier question, what level of workthat you
are aware of in your current roleis being done by the ATO with the banks to ensure that the tax obligations are
being met, in relation to these impaired loans?
Ms Carey: I would need to check with our active compliance teams to see to what extent they are focusing on
this as a particular issue. This is one of many issues we are focused on, in relation to the banks. It is a significant
one, from the point of view of the committee, but it is one of many issues that we would be looking at, in relation
to both the big four banks and the other banks.
Mr VAN MANEN: Wouldn't you be looking at the banking industry as a whole rather than just the big four
banks?
Ms Carey: Yes, we would be.
Senator O'NEILL: You indicated that the ATO manages and monitors what is going on in the banking and
finance sector and you said there is quite a degree of interest in their transactions. I want to go to the questions of
culture around banking. We saw the Commissioner of Taxation make some significant commentary in his
opening remarks at estimates, recently, about culture in banks. We have a number of them coming before us
today.
A question of interest in the media is around the ANZ bank and its interactions with the 1MDB and AmBank in
Malaysia. Are you aware of the ANZ bank's interaction with that matter?
Ms Carey: Not personally, no. If it is in the pressis it in relation to tax issues, specifically?
Senator O'NEILL: It is in relation to the cultural practices of banks and what people seem to get away with.
We hear, by implication, in some of the recent media around this bank that there is a significant movement of
money around the globe that is associated with the leadership in Malaysia. There is an ongoing inquiry with The
Wall Street Journal. I think it is a matter of $400 million involved. My understanding is that the ANZ bank has a
25 per cent share in that and senior members of the board have been involved in that. Is this the sort of matter that
is of interest, to the ATO, in that it creates a culture? Do you interact with APRA around 'fit and proper person'
tests and do you interact with the Australian Federal Police? One of the things that concerns me is that there is a
significant resistance to cultural change embedded in banking practice.
Ms Carey: We have, in factI probably cannot and I am not in a position to comment on cultural practices
within any large industry. Within the ATO, we have established some governance-best-practice documents that
we have shared with industry and the taxpayers who we have discussed those governance best practices with
and I am aware that some of the banks have been involved in those discussionshave, effectively, signed on to
that. All we can do is influence what we think should be good governance, particularly from the tax point of view,
within institutions like the banksnot just the banks but other corporates as well. When we talk to them, when
we audit them or undertake a review or an ACA type productand ongoing engagement with the taxpayerwe
get a better sense of how their governance processes, more generally, operate.
Senator O'NEILL: One of the concerns that is exercising the minds of Australians right now is the concern
about multinational tax avoidance. The banks have to be part of the process of moving that money around. If a
culture of success, in terms of a career, allows for behaviours that fly in the face of what normal banking
Australians would think was fair, I would have some concerns about the banking sector at large.
Would it concern you, when looking at incentives for particular behaviours that have been part of what we
have exposed in our inquiry so far, that it is not of sufficient interest to the banks? I will not refer to which one,
but this was a response to a question we asked about incentive structures applying, in banks, since 2008 and any
special arrangements that might have incentivised people to behave in inappropriate ways. The bank said: 'This
bank does not keep historical records of staff incentive structures and is not in a position to respond to questions
of this scope.' They wanted to have a specific question about a particular incident.
Does it concern you that given the weight of a Senate inquiry one of the major banks in this country cannot
even tell us what their incentive structures are? Doesn't that go to a failure to monitor, carefully, culture and
cultural practices and incentives that create that culture?
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Ms Carey: I cannot comment on particular instances like that. However, I do point out, again, that the issue
around good governanceand I think what you are describing is governance processes within a large corporate
Senator O'NEILL: Does it surprise you that a big corporate cannot provide the Senate with an answer to a
question about what its incentive programs have been since 2008?
Ms Carey: I would certainly hope, from a good governance process, that any large corporate, such as a bank,
had a process in place to enable those sorts of records to be made available. For example, if wethe tax office
were to ask for similar records, I would hope that those records would at least be available. That is part of the
good governance push that we are trying to encourage across corporate Australianot just the banks but
including the banks.
Senator O'NEILL: What are your interactions with the Australian Federal Police and APRA with regard to
fit and proper persons, cultural practices and questions of uncertainty about whether banks are behaving in ways
that would be exemplary in terms of corporate products?
CHAIR: We can include ASIC in that list of agencies as well.
Ms Carey: Certainly, my area does have interactions with APRA; not so much ASIC and the federal police
but the ATO as a whole does. I would need to take on notice the extent to which those interactions related
specifically to the banks.
Senator O'NEILL: I will have one more detailed question on notice.
CHAIR: As part of that question on noticenoting that the head of ASIC is making a significant pitch around
culture and likewise the ATO, APRA and even to a certain extent other agencies such as ACCC are talking about
culture, it strikes me that a whole-of-government approach would be appropriate as opposed to having multiple
strandsif you could come back with a detailed answer about your engagement with the other agencies.
Mr RUDDOCK: I have two questions. First, in relation to the way in which banking profitability has changed
over time: when those very substantial increases in profitability have occurred has the tax paid by banks reflected
that growth? What I am interested to know is whether the tax that is in fact payable is beingat a time of very
high profitabilitymanipulated in any way. There are obviously corporations that have been able to manage their
affairs so that they make large profits but do not pay a lot of tax. Have the banks' paymentswithout identifying
particular banks but asking the question generallyreflected that increase in profitability?
Ms Carey: Obviously, that is subject to various timing and permanent differences that create those differences
between accounting profits and tax payable. Certainly Australia's large corporates' effective tax rates are now
published on an annual basis. They were published last December for the first timeI would need to refresh my
memory on what the numbers were for the banks; I will have to take that on notice.
As for whether that has reflected a trend over the years, again, I suppose that would be disclosing particular
taxpayer information around individual taxpayers' effective tax rates. To be honest, I would feel slightly
uncomfortable in providing that information. However, I think you would get from those transparency figures,
which now have to be provided and published annually, a better picture of how the tax payable reflects the profits
of the individual banks from an accounting point of view.
Mr RUDDOCK: I would not want to let the opportunity pass without inviting you to consider the framework
of law in which these issues are being dealt with. Given that we are a body that can recommend change to the law,
does the Commissioner of Taxation have in mind particular changes and enhancements which we might be able to
pursue to ensure that it is able to deal adequately with the full range of issues that this inquiry has brought
forward? I am inviting you, if you think there are ways in which we should be legislating to improve the situation,
to make those recommendations to us.
Ms Carey: Certainly I can feed that back to the office. This is specifically in relation to impairment?
Mr RUDDOCK: This inquiry goes to a range of issues that impact upon not only the banks and their
profitability but also the situations of others and, I imagine, their tax affairs as well. We are concerned about
whether or not particular tax implications might lead to different behaviour by the institutions in relation to the
way in which they deal with their customers. That is why the questions were asked by my colleague earlier. I
would be concerned if the way in which the taxation issues and the deductibility issues are dealt with by the banks
could in fact encourage behaviour which might adversely affect these
Ms Carey: I will take that point on notice.
CHAIR: Following on partly from Mr Ruddock's line of questioning, you have indicated that you would be
reluctant to look at the tax affairs of any individual taxpayer. We have seen significant media coverage and work
by the ATO for the last 12 months looking at multinational corporations and where they make their profit and
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where they pay their tax or they do not as the case may be. Noting that banks are essentially global operations,
much of the finance that they lend actually comes from international markets, has the tax office applied a similar
degree of inquiry or audit to the affairs of the banking sector to check that there is no transfer of tax liability out
of Australia?
Ms Carey: We certainly have. As part of the international focus we haveany entity that has international
dealings, particularly with related parties overseas, but not restricted to related parties, of course. We are certainly
focusing on those transactions to determine whether they are operating within the law as it currently stands, and, I
suppose, picking up on Mr Ruddock's comment, whether we are seeing the need for changes to our current laws.
CHAIR: Thank you for appearing today, Ms Carey, and for your evidence. You have agreed to take a number
of questions on notice. If you could provide those answers to the committee by 12 April we would appreciate it.
Thank you for attending today.
Ms Carey: Thank you.
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HARDIE, Mr Robert, Manager, Corporate Affairs, Oceania, Royal Institution of Chartered Surveyors
NOLAN, Mr Peter, Oceania Director, Royal Institution of Chartered Surveyors
PARKER, Professor David, Fellow, Royal Institution of Chartered Surveyors
[10:12]
CHAIR: I welcome representatives of the Institution of Chartered Surveyors. I invite you to make a short
opening statement before the committee proceeds to questions.
Mr Hardie: If I may, last week we distributed a draft copy of your submission. I note for the committee's
benefit that it has not changed, but I would like to make a short statement if that is fine.
CHAIR: Sure.
Mr Hardie: The Royal Institution of Chartered Surveyors, RICS, is a professional body that accredited
professionals within the land, property and construction sectors worldwide. RICS regulates and promotes the
profession, maintains the highest educational and professional standards, protects clients and consumers via a
strict code of ethics and provides impartial advice and guidance. We accredit over 118,000 professionals
worldwide, and all individuals and firms registered with the RICS are subject to stringent RICS quality assurance
requirements. All RICS professionals are also required to keep up-to-date with current best practice through a
program of lifelong learning.
The key responsibility of the RICS is always to act in the public interest. To that end, the RICS will always put
the public and the profession ahead of our members. As a professional standards accreditation body, we are not a
general membership or advocacy organisation. Where we can speak out to improve the quality of the profession
and the ability of our members to serve the public interest we will do so.
Valuation is a key focus of the work of the RICS. Since 1976, RICS has prepared a professional guide to assist
values and conduct of their duties. Now in its seventh edition, the RICS Valuation Professional Standards,
known widely in the industry as the red book, contains mandatory rules, best practice guidance and belated
commentary from members undertaking asset valuations. All RICS members involved in valuation are required to
conduct themselves in accordance with the red book. Globally, we are moving to institute a program of valuer
registration which will require all valuers to be registered with the RICS and using the red book.
The RICS red book has been written to be consistent with international standards developed by the
International Valuation Standards Council. The red book itself is used in more than 140 countries, including here
in Australia. The purpose of the RICS red book is to provide an effective framework within the rules of conduct
so that the users of valuation services can have confidence that the valuation undertaken by an RICS member is
consistent with internationally recognised standards, generally known as the international valuation standards, or
IVS. The red book not only dictates the technical competency requirements of members but also the ethical,
objectivity and disclosure requirements of members undertaking written valuations. The key component of an
RICS red book valuation is that it must provide a transparent and auditable trail of how and why the figures in a
valuation have been arrived at by the valuer.
I turn to disciplinary action. The RICS will consider any complaint received from a member of the profession,
a concerned stakeholder or an individual. Complaints are handled at arm's length by an independent conduct and
appeals committee. To demonstrate the independence of the committee, it is chaired by a nonmember of the
RICS, and other members are drawn from within and without the organisation and profession. Disciplinary action
can involve the suspension or termination of RICS membership. It could also involve the levying of a fine or the
temporary suspension of a member or firm from conducting particular activities. This disciplinary action applies
to all members of the RICS, regardless of the nature of the qualification, be they a valuer, land surveyor or a
building manager.
I turn now to forced sale. The RICS notes the committee's earlier inquiries about the notion of forced sale end
of manipulated valuation instructions. We understand the committee has before it evidence to suggest that
authorised deposit-taking institution may act improperly in the drafting of instructions given to valuers so as to
deliberately alter the value of property to the benefit of one or another party. Consultation with the RICS
professional group of valuation, a member of six eminent valuers, has found no evidence of this occurring, to the
knowledge of the RICS. Were an RICS member to be a party to such an improper practice they would be referred
for disciplinary action as previously mentioned.
We refer members of the committee to RICS global valuation practice statement, VPS1 paragraph 8 of the red
book, copies of which are attached to our submission, which states:
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Whenever the valuer or client identifies that a valuation may need to reflect an actual or anticipated marketing constraint,
details of that constraint must be agreed and set out in the terms of engagement. The term forced sale value must not be used
VPS3 paragraph 2 states:

The report must clearly and accurately set out the conclusions of the valuation in a manner that is not ambiguous or
misleading, and does not create a false impression.
The red book goes on in detail to explain valuation reflecting an actual or anticipated market constraint and forced
values.
We look forward to representing the interests of our profession at this hearing today.
CHAIR: Thank you. Could I start off by asking you to confirm again for us from your perspective is the
percentage of people who are operating in the area of being a licensed or registered valuer who are members of
RICS. Do you represent 10 per cent of the industry or 90 per cent of the industry?
Mr Hardie: We have 600-odd members of our organisation who are valuers. What proportion that is of the
overall industry I do not believe we are in a position to say. I am happy to take the matter on notice if I can
provide a clearer response than that.
CHAIR: That is important, given your last comment that you are not aware of any manipulation or pressure to
change variation because that may only apply to a very small group of people who are working in that sector.
Mr Hardie: As I say, one of the important roles of the RICS is the way in which we regulate our members. To
that extent, were we to be aware that a member of our organisation was doing the wrong thing we have the
procedures in place to take disciplinary action.
CHAIR: Sure. But my point is that there may be many others in the industry who are not members of RICS.
Mr RUDDOCK: It would relevant for me on that same matter to know whether the banks, for instance, would
only use your members for valuation purposes.
Mr Hardie: We would dearly like the banks to only use RICS members for the purposes of valuation. We
would also like them to adopt the red book as the principle means by which they determine the way in which
property and assets are valued.
Mr RUDDOCK: You would like it, but they clearly do not.
Mr Hardie: We are working with the banks to encourage them to adopt the red book as the principle means
by which
Mr RUDDOCK: I hear that you are encouraging them, but they clearly do not.
Mr Hardie: The ANZ does.
Senator O'NEILL: Is that the only bank that does?
Mr Hardie: At this stage, yes.
Senator O'NEILL: And how much market share do you have?
Mr Hardie: The RICS?
Senator O'NEILL: Yes, of the banks' business.
Mr Hardie: I could not say.
Senator O'NEILL: Is it large or small, Mr Hardie?
Mr Hardie: The ANZ, in terms of adopting the RICS red book, gives instructions to its valuers to say that
they can undertake the valuation in accordance with either API guidelinesthe Australian Property Institute
guidelinesor the RICS guidelines. I do not believe we would be in a position to tell you what proportion of the
work is undertaken by the valuers working on behalf of the ANZ bank using either our red book or the API
guidelines.
CHAIR: How many of the members of your organisation would work for banks as a predominant proportion
of their work?
Prof. Parker: The majority would be either for secured lending for banking or financial reporting for balance
sheet purposes. Probably, the majority.
CHAIR: How many of them would be, for example, on panels of providers for banks where a significant
proportion of their work came through standard terms and conditions agreed for a period of three or five years
or whatever the panel terms arewith a bank?
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Prof. Parker: In terms of those that may be on panels, I would assume the majority would be on panels. In
terms of whether the bank secured lending work forms a majority of their practice, I would be unable to answer
that.
CHAIR: Could you take that on notice? I am aware you may not be able to answer that, even on notice. But
could you take it on notice to provide the committee with an indication of that?
Mr Hardie: Yes.
Mr VAN MANEN: In a previous answer you referred to the API guidelines, and you have your own
guidelines through the red book. I would be interested to understand what the commonalities and differences are
between your guidelines in the red book and what you expect your members to undertake as opposed to the API
guidelines.
Prof. Parker: The API, in common with the RICS and most of the other valuation bodies in Commonwealth
countriesCanada, India and the likeall subscribe to the international valuation standards definitions. We all
use those in common. RICS then has the global red book, which is applicable in any part of the worldChina,
India, Africa, South America, North America, Europe and Oceania. Then, at a national level, the API has further
national standards and national guidance notes. Oceania is in the process of developing RICS regional guidance
notes. Generally speaking, they have to be completely consistent with IVS standards, so the times at which you
need something in addition to IVS is potentially relatively rare and only comes up when there is a particular
national issue. The usual one in the context here is something like native title that requires particular guidance
note or technical information paper to address issues that are specific at a national level.
Mr VAN MANEN: In this context, obviously we have had a range of submissions from a variety of people
questioning the methodology. A more recent case that I am aware of in my area is: in the space of three months, a
property went from being valued at $2 million to $900,000 with a $700,000 bond held with Brisbane City
Council for infrastructure charges. I find that extraordinary, even though the valuations were done by two
different companies. If everybody is supposed to be using the same methodology, the same guidelines and the
International Valuation Standards et cetera, how do you finish up, in the space of three months, with a property
being valued at $1 million less than what it was valued at three months ago? We have had plenty of testimonies
and submissions to this committee in respect of this inquiry with similar stories.
What is going wrong in the valuation industry or what is being missed in the valuation industry that these large
discrepancies are occurring? If everyone is using the same rules, regulations and standards this should not be
occurring.
Prof. Parker: Whilst I cannot comment on that particular case, it is not uncommon to have large differences
in valuations. In my role as an acting commissioner on the New South Wales Land and Environment Court, we
can have differences between $40 million and zero. It is entirely dependent on the basis of value and the nature of
instructions. I would agree that if the basis of value and the nature of instructions are the same in both cases then,
unless there has been a very significant movement in the market, it would be surprising to see a significant change
in value.
This does vary by property type. For example, CBD office buildings are less volatile. They tend to move less in
value as markets go up and down. Development land is particularly volatile. Broadacre residential subdivisions
can go way up as a market improves and very quickly go way down, as we saw during the global financial crisis.
In the work that we do around the forensic valuation analysis, it is very usual to start with the nature of the
instructionsexactly what the valuer has been asked to doin order to understand the number the valuer came
up with. Unless it is an apples with apples comparison, we cannot necessarily equate two valuers' opinions unless
they are on the same basis.
Mr VAN MANEN: So that goes to the heart of many of the concerns that have been raised by submitters to
this inquiry as to the nature of the instructions from the banks. If the original set of instructions when the loan was
originally funded and the property was valuedsay in 2008 or earlier, and subsequently in 2011, or 2012 or
2013, whenever the date wassay, in 2011 or 2012, were materially different from those in an earlier period
when the loan was originally funded, you are potentially going to get a substantially different outcome in
valuation. The consequence of that is that the borrower could, potentiallyas in a number of cases that have been
testified to this inquirybecome in breach of their lending covenants as a result of the different set of instructions
with regard to a valuation from the bank involved.
Prof. Parker: It could be.
CHAIR: So what are the implications then, Professor Parker, if the rules of engagement between banks and
valuers and consumers were changed such that there were consistent guidelines at the point of issuing a loan and
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at the point of the bank assessing whether or not a loan has become a doubtful loan? It strikes the committee that
it appears that two standards are applied. We seem to get very optimistic valuations when people are trying to
write business and very pessimistic valuations when people are trying to secure their risk. Would there be
unintended consequences for your industry or for the consumer if there were to be a narrowing of that window of
instructions?
Prof. Parker: The instructions should be to a large degree relatively common. If they follow the red book and
what we call VPS 1, valuation practice standard 1, there are a dozen things that are to be included in the letter of
instruction. Those dozen things are to be considered in the valuation process and those dozen things are to be
reported in the valuation report. So, if they were exactly the same, that is one scenario. If the instructing party
includes further assumptions, then that can materially change things. And the most common assumption, as Mr
Hardie referred to, will be some form of limited marketing period. So, if the property market has collapsed, the
borrower is on the verge of collapse or default and the bank attaches further assumptions of, say, a three-month
marketing period, then that could significantly change the assessment of value.
CHAIR: And that is the heart of what I am getting at. If you look at the accrued interest payments, perhaps
retaining the property on the market for 12 months, it strikes me that that is significantly a smaller cost to pay than
the dramatic discount which is often realised in the fire sale or the distressed sale situation. So my question is: if
there was a constraint that the valuation upon which the business was written had to match the valuation method,
the instructions, upon which any risk measures were taken, would that unduly constrain your business or
disadvantage the consumer, in your opinion?
Prof. Parker: If we set methodology asidebecause that is a slightly different thingin terms of process, if
the instructions were the same the first time around and the second time around, then you would receive a
valuation that was consistent with the instructions. If, the first time around, the instructions were to assume a
reasonable marketing period, then the value if it was a buoyant market might assume a three- or six-month
marketing period. If it was a depressed market, the marketing period may be assumed to be considerably longer.
Senator KETTER: Chair, I want to follow up on that. Professor Parker, I am just looking at your red book, at
4.8. I know you do not like to use the term 'forced sale', but you talk about the circumstances there at 4.7 and 4.8,
and at the end of 4.8 you refer to the fact that, 'the term is a description of the situation under which the sale takes
place and so it must not be used as a basis of value'. So am I correct in assuming that should mean it does not have
an effect on the actual valuation that you provide?
Prof. Parker: No, the basis of value is either market value or investment value. There are only two bases of
value.
Senator KETTER: I see.
Prof. Parker: Within each basis you can have a variety of different forms of value, depending on the
assumptions that are adopted. The valuation practice standards are written to be globally applicable, so they
should work as effectively in China as in South America. But they should also allow scope for assumptions within
each country to deal with particular conditions or particular circumstances within those countries.
Senator KETTER: There was market value and what was the other
Prof. Parker: Investment value.
Senator KETTER: And depending on the marketing conditions, there could be quite a substantial difference
between the two?
Prof. Parker: There could. Market value is generally defined as the value to a hypothetical purchaser,
hypothetical vendor, reasonable marketing period, arm's length transaction, consistent with the Spencer decision
in 1906, I think. Investment value, otherwise known as worth, is the worth to a particular party. So certain
buildings may be worth more to particular parties than to hypothetical vendors and hypothetical purchasers
because they particularly suit that party. So most of the world works on market value, but there is the basis of
investment value, which may come up, for example, when an institution is buying a major office building because
its target rate of return may mean that it can pay a number higher than another institution that is working on a
different target rate of return.
Senator KETTER: I see.
CHAIR: Can I go to where you said 'there were a number of assumptions' as part of a valuation. We have had
some submissions that have talked about a valuation that was obtained and then, in the actual forced sale, rather
than the property being put in the hands of a commercial estate agent it was put into the hands of a residential
estate agent. The form of advertising, according to the submission, was grossly inadequate, to the extent that an
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auction was held on a day after a public holiday and only the owners turned up and a couple of casual passers-by.
In your 'assumptions', do you state that your valuation is based on the appropriate agent being appointed for the
sale of the property, or is the bank free to take your valuation but then give the sale process to whomever they
wish, to the receiver in this case.
Prof. Parker: There are two things going on there. There is the valuation process, which assumes 'prudent
parties acting reasonably'; and there is then whatever the bank chooses to do as part of its operations. So the
valuer can only provide the bank with his or her opinion of value. That is one input, usually into a bank's lending
decision or foreclosure decision. The banks generally have another range of inputs they put into that decision, and
then how they choose to effect that decision really is up to the bank.
CHAIR: Sure. What we are looking at here, though, is trying to protect the rights of the consumer, in this case
small business. If the valuation says that fair market value for this property in the current climate in terms of real
estate prices is X, on the basis of it being marketed for a suitable period by a suitable agent, then the best interest
of the consumer is if the bank then engages a suitable agent for a suitable period, whether directly or through the
receiver or however. My question goes to: what are the unintended consequences for your industry, in terms of
professional indemnity and all the other things that flow, if we were to constrain the banks to act in accordance
with the assumptions that underpin your valuation?
Prof. Parker: It is always open to the valuer and the bank to extend the assumptions to include things like
using a commercial real estate agent rather than a residential real estate agent, taking the property to auction or
taking it to private treaty or taking it to tender, depending on which one is more suitable. There is no limit to the
number of assumptions that can be built in. But the overarching assumption of prudence and reasonablenessas
we see in matters that come before me in court quite regularly; parties sometimes do not act prudently and
reasonablyif that works its way through to a professional negligence action against the valuer, then one would
think the valuer claiming an assumption the parties were acting prudently and reasonably would say, to use your
example, using a residential agent to sell a commercial property a day after a public holiday, was neither
reasonable nor prudent.
CHAIR: What you describe, though, is a situation where the consumer is not necessarily protected by your
industrybecause you just operate in accordance with an assumptionbut at the moment they are not protected
by anybody else, it would appear, in terms of holding the ADI or the receiver to account for being prudent and
reasonable. Do you have any suggestion as to how that gap could be closed?
Prof. Parker: Only in strengthening the law around foreclosure and the regulation around foreclosure.
Generally, following most property collapses we have had over the last 30 years we have strengthened the
regulation around unlisted trusts, listed trusts, property syndicates. As government strengthens the legislation and
strengthens the regulation, some operators will find further ways around it.
CHAIR: Last question before I go to Senator O'Neill: we have had some submissions that have highlighted
procedures within banks when they are assessing the equity of a consumer. Notes in the files have indicated this
particular applicant for a loan has this cash position or cash flow and this amount of securitisation, and they tend
to nominate it as either 'sensitive' or 'non-sensitive'. Without seeing a definition, I assume sensitive might be their
private residence; non-sensitive might be an investment property or something that is not particularly damaging. I
have not seen a definition for that. I have two questions. Firstly, is the valuation industry aware of a definition of
sensitive and non-sensitive?
Secondly, in placing a value on a property, do you ever make reference to or highlight the fact that what you are
valuing is purely a commercial or an investment grade security or is something that is patently and obviously a
sensitive asset to the individual involved?
Prof. Parker: In terms of familiarity with these terms, no, I have not come across them before. In terms of
how one goes about valuing things, for example, if it were a small warehouse with a single tenant, then the
instructions in the report would probably talk about the likely market, the likely marketing period. If it were the
residence of a party that, for example, was a particularly large or palatial residence on a very large area of land in
a part of Sydney where you might not normally expect such residences to be, that would probably get quite a bit
of attention in the report, because it would significantly affect the marketing period and the likely buyers for the
property.
Senator O'NEILL: Thank you very much, Professor Parker, for your evidence this morning. I am thinking of
so many small businesses and businesses of the scale that we have had present their situations to us. The common
understanding is a valuation is a valuation is a valuation. It is only in the course of this inquiry that we have
started to find out a lot more detail. Today is the first day that I have heard this difference between market value
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and investment value in terms of worth. If we are to create some practical outcome from this inquiry, it would
seem to me that the report that you produceyou have talked about the valuation reports, and it starts off with
general principlesstates that there must be clearly and accurately set out the conclusions of the valuation. But it
is becoming more apparent to me that it is not the conclusions of the valuation that people need to be informed of.
It is the assumptions, the directions that are given, the basis of value and the nature of instruction that seem to
have a very significant impact on the type of valuation that is achieved. While there are some directions that these
need to be read together, we heard evidence early in the inquiry that the valuation, although paid for by the client
of the bank, is owned by the bank. We have had a little bit of movement saying, 'No, if the client is paying for it,
perhaps they should have access to it as well. But my understanding is that that is not common. People have to
fight and ask to get the valuation. If they get the valuation, they will not necessarily get the nature of the
instruction or understand the complexity of the nature of the instruction. Am I describing the reality in a fair and
accurate way and, if so, what redress is required to make this a lot more transparent?
Prof. Parker: It may vary potentially quite a bit between individual circumstances, so I cannot comment on
those. But, if a valuer were to be working on the red book then the ninth of 12 things that he is required to state in
his instructions that he agrees with his client are in the assumptions and the special assumptions. The red book
then says, 'Well, if that is in the instructions, that should be mirrored in your valuation process in the methodology
you adopt and it should be very clearly stated in your valuation report. The 12 things that are flagged in the
instructions should be reflected in the valuation and stated in the valuation report. So there should be a flowthrough effect, where you should be able to read, from the opening of the report, the preamble and the
instructions, and see those instructions being put into practice, see the effect on value and the commentary in the
report at the end.
Senator O'NEILL: Could you provide a sample of a valuation and indicate for us clearly where it is easy for
somebody to see what the instructions are?
Prof. Parker: I do not personally have one.
Senator O'NEILL: On notice would be fine. I am sure you would be able to access one at some point in time.
Prof. Parker: Yes. Given that they are often proprietorial documents between clients
Mr Hardie: We will engage with our professionals group and find something that is suitably de-identified that
we can provide to the committee.
Senator O'NEILL: Thank you. That still does not give me great confidence that this is going to be an easy
document for people with small business loans who are engaging in commerce to be able to read without too
much translation by a professional. I also want to frame your answer in an understanding of how much of the
market you have and how much of the red book that you just referred to was actually applied, which was the
answer we did not get at the beginning to the chair's question of how much of the market you guys cover.
Mr Hardie: We are prepared to take that question on notice. I suppose one of the things that I gleaned from
Professor Parker's evidence this morning is that this is detailed work and it is something that requires some
experience and understanding of to understand properly. The end user, at the end of the day, needs to be in a
position to ask a question if they are unsure about what something does or does not mean. But these are technical
valuations undertaken for a particular purpose. If what the committee is seeking is greater transparency or perhaps
more easily defined terms in the way in which a document is framed, the committee can of course recommend
that. But I am not certain that that is somethingwe believe the red book, obviously, goes so far as to explain
what those assumptions need to be that are built in.
Senator O'NEILL: We are familiar with the concept of plain English and reconstructing some documents
over recent years to make them more accessible for people with a general reading capacity to read, so obviously
that is something we could talk about. But could I go to the issue of who owns the valuation and who is the client.
In point 4 of VPS3and this was a situation that came up quite frequentlyit says:
Where multiple reports are to be made to a single client over a period of time, with identical terms of engagement, it must be
made clear to the client and to any others who may rely on the valuation advice provided, that the terms of engagement and
form of report must always be read together.
What we have been discussing, though, is the fact that, in many instances, banks appear to have been a single
client who asked for a very different kind of valuation. Let me be more practical. One property is being sold and,
at one point in time, as the chair indicated, it has a particular value and a particular form, and the banklet us say
it is CommBank for the purposes of this argumentchanges the nature of the valuation that it wants. Is that
considered a new job? Is there any requirement for you as a valuer to indicate: 'This report was delivered six
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months ago. These were the assumptions in it. Now I am doing a completely new job. I have changed my set of
assumptions'? How do those sorts of documents talk to one another in the process that you manage?
Prof. Parker: I think the clause you went to in VPS3 deals with institutions revaluing their office shopping
centre portfolios on a three-, six-, nine- and 12-monthly basis. Somebody like Westfield will value a portion of
their shopping centre portfolio every three months on an ongoing basis over the year. The second scenario that
you looked at, where the assumptions changeyes, that is a new job; that is a different job. In terms of your
question as to who the valuation is for, the second of the 12 things that should be identified in the instructions,
according to the red book, is the identification of the client and any other intended users. Within the valuation
litigation law, there is a vast body of law on who can and cannot rely on valuations, and scenarios where banks
have commissioned them but borrowers have paid for them. It is a particularly vexed area. The red book is very
clear to say, 'Who is your client?' and 'Who are you, as the valuer and the client, assuming is going to rely on this
report?'
Mr RUDDOCK: That goes to the very question: is the bank required to give its instructions to its client so he
knows the way in which the bank is instructing the valuer? And does the valuer have to inform the client of the
bank as to the valuation that has been made? They challenge the valuation. Your instructions do not make it clear
that they are entitled to that.
Prof. Parker: No. On the first point, it is entirely up to the bank, when it drafts the letter of instruction, as to
whom it is prepared to make the valuation available to.
Mr RUDDOCK: It is entirely up to the bank?
Prof. Parker: Yes.
Mr RUDDOCK: That is probably the answer that
Prof. Parker: Sorry; if the bank is the instructing party.
Mr RUDDOCK: Even if somebody else is paying?
Prof. Parker: Yes.
Senator O'NEILL: It is very interesting to get some clarification around that.
Prof. Parker: It tends to be a feature of the banking industry and where the banking industry perceives the
risk may lie.
Senator O'NEILL: Professor Parker, you sound like you have been in this field for a long period of time.
Prof. Parker: A little while.
Senator O'NEILL: You have probably seen people come through your working lifein the way that we have
seen before this committeein a very distressed situation that may, in some part, be due to failure of management
of their business, or perhaps not. Can you provide any recommendations about the nature of ownership of the
valuation that needs to change? This is a transaction that affects parties at either endboth the bank and the
business owner. Are there any proposals from your industry to provide a less power-differentiated relationship
with the valuation of a property that is clearly of great importance to both the bank and the business owner?
Prof. Parker: One would assume that it would be within the powers of the bank to agree to provide a copy of
the valuation to the borrower, so at least the borrower sees the valuation.
Senator O'NEILL: That is an assumption that we definitely would have to say is not the case. At the
beginning of conversations that have been reported: 'Yes, it does seem fair that if you are paying for it, maybe you
should have a look at it.' It still does not go to where we need to go, which is to actually have a deep
understanding of the set of assumptions that are embedded in this valuation, and whether, indeed, it is a marketvalue valuation or an investment-value valuation, or what assumptions have been embedded in it.
Prof. Parker: As Mr Hardie saidat the risk of pushing our own barrowif the requirement on the banks
was to follow the red book, with a secondary requirement that came out of this committee that the copy of the
report should be provided to the borrower, then that would appear to address some of the issues you raise.
Mr Hardie: If it would assist the committee, we would be happy to take that on notice and raise that with our
professionals valuation group to determine whether theyas the eminent group of valuers in the profession that
they arebelieve that there are some things that could be done to encourage greater interoperability, I suppose, of
that valuation advice once it has been provided, based on who the client is, who has paid for it and that kind of
thing. You might like to put some more matters on notice that we can take away and discuss with them, or we will
just take this matter at face value and discuss it with them and come back to the committee with a response, if that
would assist.
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Senator O'NEILL: That would be helpful. Chair, this time I would like to ask about desktop valuations, but
we might run out of time.
Mr RUDDOCK: I want to understand the industry. You represent 600 in Australia. I imagine there are tens of
thousands of people who hold themselves out to be valuers.
Mr Hardie: We do not believe there are more than 10,000. We have 600 members
Mr RUDDOCK: Okay; 10,000. You have less than one in 10. I just want to get it into perspective. You want
to recruitI assume you do. You want to cover the fieldI assume you do. Who regulates the other 9,000?
Prof. Parker: I think the API submission nominated that 4,000 of their membership were actively undertaking
valuations. In those states that still have registration, the state government registration body would have a
regulating role. If they are a member of the API, the API would have a regulating role. If they are a member of
RICS, RICS would have a regulating role.
Just to address your earlier comment, that you assume we try to cover the whole market: I am not sure that we
do. The question on notice may provide greater illumination, but my general understanding is that RICS members
will be dealing with larger properties rather than smaller properties. The general valuation profession may do lots
and lots of houses for mortgage purposes all over the suburbs of Sydney, Melbourne and Adelaide. RICS
members might be more likely to be valuing business premises, office buildings and shopping centres, perhaps,
rather than houses.
Mr RUDDOCK: When I read the first dozen paragraphs about your organisation it says that you are a
professional body that accredits professionals and they are of the highest educational and professional standards
then it says nothing further about education. What are the educational standards?
Prof. Parker: We have a program of partnering with several hundred universities around the world in the
delivery of property education. RICS deliverers property education in land, building and construction, so we
accredit or partner with universities offering land surveying programs, quantity surveying programs and property
valuation programs. In countries where there is no infrastructure for education, such as India, we established our
own university in order to offer the courses. We were certainly offering courses by correspondence during the
Second World War to prisoners in Changi jail. We generally developed the curriculum for property courses that
formed the backbone of most courses offered around the world today. We have an annual review process where
the RICS and the university get together to see if anything has happened to the course. We have a five-yearly
formal partnership review meeting system, and our education accreditation system is based on competency. What
we are wanting to check is that the students going in are reasonably smart students, the quality of teaching is of an
appropriate level, the quality of research being undertaken by the institution is at an appropriate level and the
employability of graduates when they come out is at an appropriate level, because usually the best test of the
university's programs is whether or not their graduates can get jobs.
Mr RUDDOCK: In terms of your supervisory role, how many people did you expel this year?
Mr Hardie: We could take that on notice. We publish in our monthly magazine all of those members who
have been confronted for disciplinary action. You will note from our submission we removed or expelled a fellow
of the institution who was the former Surveyor General here in New South Wales, and that was published. That
gentleman lived on the Central Coast, and I believe the Central Coast Express Advocate at the time published an
article suggesting that he had been expelled from the organisation. I can take on notice to find the number that we
have expelled. But I believe, anecdotallywe were kicking this around in the office the other daythe number is
very small, which can be read one of two ways.
Mr RUDDOCK: It does happen; that is all I am interested in. In terms of the other 5,000 or 9,000
organisations, how do you see the other supervisory bodies? Or are there people out there practising as valuers
who have membership of no supervisory body?
Mr Hardie: I do not believe we would be in a position to professionally or otherwise critique the work that
other organisations do. All we can do is speak about the work we do to regulate our members, and we believe we
have the best regulatory system when it comes to ensuring the highest standards of professionalism within the
profession by our members.
Prof. Parker: Just to pick up on Mr Hardie's earlier point, expulsion is only one form of redress. We fine
members, we send them to do further education, we put them on periods of probation, and I think we are the only
professional body that publishes those that have been thrown out of the institution.
Mr RUDDOCK: Regarding the shortcomings that we are concerned about in relation to valuation practice,
we might assume that, given your red book and all your requirements and the prospect that people might be
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expelled, all your people are perfect. But there are another 5,000 or 9,000. We do not knowand you cannot even
tell mewhether or not any supervisory arrangements are likely to be adequate or not, because you are not
prepared to compare what they are offering with what you are offering. I have got no idea.
Mr Hardie: What I will say is that our organisationI have made this comparison beforeis not like the
RSL where you pay your dues and you get in and you go to a meeting every couple of months. We require our
members, if they wish to be members, to go through a rigorous process of accreditation, which means that, as
Professor Parker was saying, in order to get in the door in the first instance you have to have achieved the highest
levels of academic qualification and to have proven yourself to be worthy of membership of the organisation.
That, we would like to hope, would be sufficient, if you will pardon this expression, to weed out those who
perhaps are not capable of operating to the high standards which we would require. It may well be that there are
members of other organisations who could not be members of our organisation.
Senator O'NEILL: They might be more attractive if you are trying to get advice.
Senator KETTER: Given the time, I will try to compress my issues into one question. I note that in your
submission you say you are working hard to engage banks and other firms to see the adoption of the red book
throughout Australia. You have indicated that ANZ is one such institution. Are you surprised that the red book is
not used as much in Australia as it is in other, comparable countries; and does the fact that institutions do not
apply the red book restrict your members' ability to work for those financial institutions?
Mr Hardie: Yes and no is the answer to the second question, and I will answer both this way. Whilst the
RICS is almost 150 years old, we have only had a professional presence, in terms of a staffed office, in Australia
for the last 10 to 15 years. Over that time, we have been working with the banks and universities and in the
broader external stakeholder environment to improve recognition of RICS and our members in the work that they
do. This is a work in progress. We would of course like to see the red book adopted by all the banks, and we are
working with them towards that goal. This is just a matter of time. So, yes, we are working towards that.
In terms of the impact that it has on our members, where we become aware that a member is restricted from
operating by virtue of being an RICS memberbecause as a result of being an RICS member they are not
recognised for doing particular types of workwe seek to engage with that organisation. One example is that
some local government areas, when they are conducting a valuation, require that valuation to be undertaken by a
person with professional qualifications recognised by another organisation. We would seek to engage one-on-one,
where we can, with that organisation to say our members are equally well qualified as the members of the other
organisation. It would be great if we had a level playing field such that our members could participate in that
work as well.
CHAIR: Mr van Manen.
Mr VAN MANEN: I have first a brief statement and then a question. I am interested in the discussion about
education, and I would say there is a vast difference between education and applying that through experience. I
think experience is actually far more important than the basic education, and we have seen that in other areas.
I am interested in your view on the marketing practices for properties that are being soldspecifically, as you
see quite commonly as part of the marketing campaign by a bank or the agent appointed by a bank, where the sale
is a mortgagee-in-possession sale. What is the consequent effect of that style of marketing campaign on the
realisation value of the property; is there actually value in not allowing properties to be marketed on the basis that
the sale results from mortgagee in possession; and, in doing that, is there the potential for a higher realisation
value of the property on sale?
Prof. Parker: To deal with the first issue, I concur that experience is important, and so, when a student
graduates from an RICS accredited university, they are required to do at least two years professional experience
before they can apply for professional membershipbefore they are allowed to do anything, essentially, on their
own. The ability of graduates to get through their two-year assessment the first time seems to vary quite a bit each
year, so quite a few have not gained enough experience and they have to come back and do it again.
In terms of whether 'mortgagee in possession' is a prudent thing to place in advertising material, it may or may
not be. Generally, what we might call mortgagee-in-possession or forced sales would be disregarded from the
point of view of the Spencer test as not being evidence of an arms-length transaction or a transaction that had a
reasonable marketing period. One can see that, for the bank, selling the property promptly is better than having it
sit there for a very long period of time. If the borrower is paying some form of penalty interest, selling the
property promptly is probably beneficial, rather than having it sit there for a long time. Very often we notice that,
in localised markets, the most likely buyers know the vendor is in financial difficulty; they probably know the
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bank is going to sell or sell them up. So it is knowledge in the market that is effectively confirmed by the 'for sale'
sign. I am not aware of any research or control tests as to whether it does or does not make a difference.
CHAIR: Thank you for attending today's hearing and for your submission and evidence. You have agreed to
take a number of questions on notice. I would ask you to return those to the committee secretariat by 12 April.
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BROWN, Mr Gerard, Group General Manager, Corporate Affairs, ANZ Banking Group Ltd
HODGES, Mr Graham, Deputy Group Chief Execuive Officer, ANZ Banking Group Ltd
[11:11]
CHAIR: The committee will resume. We are today taking evidence from representatives from the ANZ bank.
Thank you for attending today's hearing. The committee has received your submission, No. 49, and
supplementary submission. Would you like to make an opening statement before the committee proceeds to
questions?
Mr Hodges: Yes, we will make just a short statement. We welcome the opportunity to appear again before the
committee. As you mentioned, we made a supplementary written submission to the inquiry addressing evidence
given to the committee hearing in Sydney on Tuesday 16 February. We have also provided the committee with a
confidential response to customer issues raised in that hearing and in public submissions made by ANZ customers
to the inquiry.
I would like to just take a few minutes, if I could, to address a couple of these claims. On the first one, the
purchase of Landmark Financial Services, ANZ did not purchase Landmark for 16 per cent of the value of the
Landmark Financial Services loan book. ANZ acquired the loan book for approximately $2.2 billion. That was
the total of the loans outstanding by the customers, which is a principal and small amount of accrued interest, less
provisions for those losses. The sale price of the Landmark deposit book was also the book value, which was
approximately $300 million dollars.
On the Landmark to ANZ transition, concerning the transition of customers from Landmark to ANZ, let me
repeat what I said at the committee back in November: there have been examples where ANZ could have done a
better job, in the transition to ANZ management, in the way in which some customers were treated. Having said
that, it is incorrect to suggest that customers transitioning from Landmark to ANZ had long-term loans truncated
to periods of two to six months. Customers in default are given time to sell down their assets and get back on
track. It would appear that a six-month deadline given to sell an asset may have been mistakenly construed as a
truncated loan period.
The third area is proceeds from sale. It was also suggested in the hearing on 16 February that the bank has
retained the surplus from the forced sale of properties after the loan interest and bank costs have been repaid.
ANZ rejects this. We know of no situation where this would happen and will happily review any case brought to
us where it is alleged that this occurred.
In the area of ANZ's approach to customers in difficulty, there have also been allegations that ANZ enforced
action has been taken at short notice. We are unaware of any case where this is correct. We reiterate that ANZ
aims to work with commercial customers in default to help them get back on track. Less than 0.1 per cent of all
commercial customers are subject to ANZ enforced insolvency action. As I said to the committee in November,
we estimate that, on average, the time between ANZ first issuing a default notice and actual enforcement is about
1 years for non-agricultural customers and over 2 years for agribusiness customers.
On the basis for enforcement action, legal or recovery action by ANZ is costly for all parties and is only
considered when all other avenues are exhausted. A directly negotiated agreement or an agreement resulting from
mediation is generally faster, less costly and less distressing for all parties. It has been claimed that ANZ has
relied on technical defaults as a basis of taking enforcement actionfor example, falling only $10 behind or
missing a payment by a couple of days. Again, we are not aware of any case where a minor default has been
relied on for enforcement. ANZ undertakes enforcement action as a result of a material monetary default or, in a
small number of cases, in response to significant external events, such as where there is a fraud or animal welfare
concerns. Even in these cases, enforcement does not occur before exhaustive attempts have been made to resolve
matters.
On the relationship between impairment and enforcement: there is some confusion between loan impairment
and contractual rights of recovery. Loan impairment is a financial accounting process that does not give rise to
any rights of recovery against a customer. An account can be in default but not impaired and vice versa.
Impairment without contractual default may occur where an assessment is made, for example, that a business is in
decline and, although the customer has not defaulted, ANZ has formed a view that a loss will ultimately result.
You will have seen that our supplementary submission also addresses some other issues raised in relation to
ANZ Landmark customers, including the ability of customers to refinance, evaluation methods used by ANZ, and
the process of sale of a property where enforcement action is required.
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On reforms, as we discussed in ANZ's appearance in November, we support amending the Code of Banking
Practice to require banks to provide customers with a copy of any valuation paid for by the customer. I again
indicate ANZ's support for a national approach to farm debt mediation to give all Australian farmers access to
high-quality independent process. ANZ already offers farm debt mediation in all cases, even if it is not
mandatory.
ANZ also supports amending the Code of Banking Practice to require minimum periods of notice for
customers to repay arrears before demanding full repayment of a loan. I note that the secretariat sent us a list of
around 40 questions on Friday, which we have reviewed. I do not propose to address any of those in my opening
statement but I would be happy to take questions on those.
CHAIR: Thank you, Mr Hodges. Before we go to specific questions, could I bring to your attention the broad
issue that has been reflected in the media recently about actions taken by ANZ to engage with a number of
customers where, I think in the bank's own words, there was maladministrationI think that was the wordand
there have been settlements reached with customers, or there is a process ongoing with that. I would like you to
answer, in the broad, what went wrong, when and how was that discovered, who made the decision to re-engage
with the clientswas that at the board level, executives or part of the process of the bank?
Mr Hodges: I might start with Gerard with a bit of the detail there, and then I will add my bits to that where I
can.
Mr Brown: If you just bear with me for a moment, Chair, I will go through our relevant notes relating to the
material received on Friday. I understand the question effectively goes to material that the bank provided in
response to questions on notice at the earlier hearing, and it goes to the number of claims that have been made
against the bank in relation to allegedly fraudulent loans. There are a small number of such loans disclosed in that
material. I am afraid I cannot find the relevant material at the moment, but it was a small number of loans which
were not part of a group, if you like, or were not related to the actions of an individual within the bank. They were
a dispersed range of maladministration, in our languagefor example, incomplete loan documentation, failure to
gain signatures, failure to gather relevant information in support of the loans.
Mr Hodges: You asked where that would that have been raised in the bank. This error was, I understand,
found ourselves and was reported to the authorities as a part of that.
CHAIR: When you say 'authorities', do you mean management within the bank or the breach reporting to
ASIC?
Mr Brown: Reported within the bank.
Mr Hodges: As a result of that, people would pick that process up. It would not have come to the board level
or even the senior executive level, I would not have thought. It certainly could have gone to the head of the
business, and I would have expected it to have gone to our head of the Australian business, the person who runs
the Australian business.
CHAIR: The feedback that the committee has been getting is that some of these engagements with consumers
were in the order of millions of dollarsquite significant amounts. It strikes me that a decision by the bank to
proactively reach out and try and re-establish a fair and equitable relationship with consumers of those kinds of
values would not be something that a line manager would be doing, that the board would have had some visibility
of that. I am just interested to know whether this indicates a conscious decision by the ANZ to review, through a
new lens of culture, your engagement and your internal processes. I am also interested to know whether indeed
any of the people who were disciplinedand I think you indicated, in one case, dismissedwere reported to
ASIC as a breach. My understanding is there were no breach notifications.
Mr Hodges: Just to your general point first: anyone running a reasonable sized business within the bank we
would expect to take immediate action to rectify any issues where we found something was wrong with the
customers. I would not have expected something of this magnitude to find its way to the board, except it may be
reported as an item ultimately in board notes, where there is an issue that we have resolved with clients.
CHAIR: In the current climate, where banks I think are quite rightly very sensitive to the reputational damage
that is occurring, are you giving the committee to understand that, where it appears there have been a number,
since the start of 2015, of loans where internal processes have broken down or been fraudulently conducted or
whatever the case was and you are refunding millions of dollars, that is not an issue that would be raised to the
board? Is that what you are telling the committee?
Mr Hodges: No, I am not saying that. What I am saying is that we would have expected management and
management would have immediately got on and processed that and fixed that. We would have been and we were
advised of that issue, and management were already working on that. At the senior level, we were certainly
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advised. At the board level, I am sure it is in the board report that would have gone. I would expect that
management, though, do not wait to report these things and to get advice back as to how to handle it; they get on
and fix these things when they find them.
CHAIR: Perhaps on notice, could you provide any evidence to show that you have had similar groupings in
such a close time frame of such amounts as we have seen since the start of 2015?
Mr Hodges: Sorrysimilar =8groupings on what?
CHAIR: Basically, you are saying that your line management have checks and balances such that as soon as a
discrepancy is noticed, they will take action to re-engage, reimburse the customer and restore the relationship. But
what
Mr Hodges: That is what we expect our executive management to do
CHAIR: Okay, I hear that. But what we are saying is that from what we see in the media and from your
response, it appears as though there has been a burst of such activity since the start of 2015. I would welcome any
indication that that is in fact indicative of your normal practice in 2012, 2013 and 2014. Or has it occurred
because of a renewed focus within the bank upon culture and fair and reasonable engagement with consumers
since the recent round of media attention and since this inquiry has started?
Mr Hodges: I think that we can certainly come back and give you a perspective on what has emerged, how it
emerged and how we dealt with ithow quickly we dealt with it. I am aware of an issue that we had with some of
our wealth clients back in April last year. We identified it at some period before but, obviously, worked with
ASIC to work out a reasonable repayment and fix. Sometimes those processes can take a little while, to ensure
that we have the correct fix which has been approved by ASIC. That process actually took longer than what we
would have liked it to, because of getting the approval.
Some of these actually dated back to 2010 and 2011, and we were still fixing them last year. With that one, for
example, we announced that change in 2015 but we were aware of that issue several years earlier and we
processed that. I think that what you will have seenand we did see a few issues emerge this yearis that they
are independent issues. But some of them might relate to issues that we have had earlier and which we have only
just identified and fixed.
Senator O'NEILL: Can I just go to matters of culture? I appreciate the fact that you have provided us with
evidence around your incentivisation schemes for staff setting up loans in the question on notice that we sent you
on 18 November. But can I express some concern that incentive structures are not something that the bank keeps
as an historical artefact? Given how many incentives are there as ways of managing key performance indices and
transparency around the sorts of behaviours that the bank wants, it is a concern to me that you could not provide
us with that sort of documentation.
Mr Hodges: I saw the answer to that question. I think that what we did give you were specific responses to a
number of very relevant areas for this inquiry. They include our credit management area and our branch staff,
where we have some detailed information around the remuneration structures.
I would just say that if there were any particular areas of the bank which you were looking for information on,
we would be very happy to provide that information. We have
Senator O'NEILL: Thank you, Mr Hodges
Mr Hodges: I would just say that we have about 40 different businesses in the bank, operating across 33
countries. Many of these countries have different regulatory regimes, and therefore some specific changes to
remuneration structures. That question was very general; we would have been giving you eight to 10 inches of
material to give you all of that material.
I think that we are very happy to give you whatever you are seeking in terms of the specific questions around
specific areas, but that was a very broad question that just covered everything. That is why you got a fairly broad
answer to it.
Senator O'NEILL: I think it would be pretty clear that we are interested in the incentivisation around the
matters that we are looking at, rather than across multiple countries.
Mr Hodges: Yes, that is what we did with the information on the branches, which I think we provided on 29
December, and also on the credit management area. So you can see how those areas are incentivised.
Senator O'NEILL: I will have more specific questions around that. Mind you, with the work that we do, I am
coming into a bank which has all this information in spadesone would assumeand you are asking me to ask
you for the needle in the haystack. You are the ones who have the information. I am just asking the questions that
generally I think people in the public want to know.
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Mr Hodges: I really appreciate the difficulty of trying to look into that structure. It is very difficult, which is
why we specifically gave you the information around the credit management department, which is clearly relevant
to this sort of inquiry, and the lending services department which is our area that manages the customers in
distress plus our frontline branch teams, because they are the ones who generally ride that sort of business.
Perhaps we can liaise with you to ensure that we have every area that you would like covered through these
responses and we are happy to pick that up and give you some further material.
Senator O'NEILL: Thanks, Mr Hodges. You also provided us with information around the number of
occasions on which there have been breaches and the answer was: 'We're not aware of any instance when a breach
has occurred with regard to advisers and conflict of interest.' That was a little surprising to me.
Mr Hodges: Advisers meaning financial advisers: is that what you
Senator O'NEILL: Yes, this is question 13 in your response: 'Receivers are seconded into banks to work with
distressed, defaulted or impaired loans.' This conversation between the evaluation sector, the accounting forensics
who are put in, is what you were answering in question 13. You say ANZ staff members are required to complete
mandatory training and they have a responsibility to declare. It is a description of things that you would like
people to do, but what has the action been? You have not found anybody out. What penalties are involved in
people doing the wrong thing?
Mr Brown: I am advised that we have not experienced a conflict of interest with the appointment of a
receiver, nor have allegations been made that we are aware of in relation to that.
Senator O'NEILL: In terms of valuations then, which are critical to what is being advised here, we have not
been able to get any clarity about the scale of the sector, who is employed where and the processes that banks go
through in employing valuers. You mentioned in your opening remarks that you have made some changes
recently. Could you provide us with any discerning information about valuations and your processes around that?
Mr Hodges: Yes, we have a panel of accredited valuers which would be reviewed quite regularly and
Senator O'NEILL: Where does that panel come from?
Mr Hodges: From market based valuers who operate as professional valuers. We would asses their credentials
and accredit them as an accredited valuer to ANZ.
Senator O'NEILL: How many do you have? Do you know?
Mr Hodges: I do not know the number of valuers we would have, but it would be a large number.
Senator O'NEILL: Would you be able to provide us with a breakdown?
Mr Hodges: Yes, we could give you that.
Senator O'NEILL: Who the valuers are?
Mr Hodges: Which firms they are from?
Senator O'NEILL: Which firms they are from, where their accreditation is derived from and the processes
that you have to manage. Were you here for the last witnesses?
Mr Hodges: I heard some of them, yes.
Senator O'NEILL: The questions that seem to be pretty poignant are about the directions that are given about
the nature of the valuation and our concerns around that cultural performance of: 'I'm incentivised to get the
business. I'll get a particular kind of valuation at point one.' At point two of the relationship, when things turn a bit
sour, it is as if that first valuation does not exist. It is a brand-new start and a different set of directions. It is
almost like it is a different person. What are your processes there?
Mr Hodges: I know my colleague has some stuff that he can talk to you on that. I think the way we approach
it is: we think the valuations need to be separate from the front line in terms of their accreditation. We generally
have that with our credit department, and they can sometimes be the specialist accredited departments who
approve and then monitor the valuers that we use. Typically, the issuance of instructions to the valuer will be
driven through that side of the bank rather than the front line. It is sort of separate to the people who are, if you
like, on the relationship side with the customer relationship. That is important, because you want to have someone
who is going to look at that with a one-step-removed view around what we are looking at for value. We generally
want to get a current market value, which is essentially what you are always trying to do. I would reflect on the
comment that you made that you take a value today and the value might be different later. That is true; the current
market can change.
Senator O'NEILL: It is not the market change that I am concerned about; it is the assumptions that go into
the valuation process that I am concerned about.
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Mr Hodges: Yes, and if we were instructing for a valuation we would use the usual practice of instructing for
a current market value. If the customer is asked to pay for that valuation, we would typically share that valuation
with the customerwe would give it to them to review. In fact, part of the process would be that the customer
would have a comment on that and the valuer may have to comment on the valuation if the customer either agrees
or disagrees with that value.
Mr RUDDOCK: Why do you use the word 'typically'? Does that mean that it does not always happen?
Mr Hodges: Maybe it is the lawyer in me. I am sure there may be instances where that might not be the case. I
could understand where you might have a dispute with a customer and where you may not choose to share that
valuation with the customer because of legal reasons et cetera. I would say in the vast majority of cases that the
customer would receive the valuation and get to comment on the valuation.
Mr RUDDOCK: I have a supplementary question that arises out of what you have been asked. The RICS said
to us that the ANZ Bank is now requiring the valuers appointed to be one of their members.
Mr Hodges: I am not familiar with that detail I must say.
Mr RUDDOCK: So they asserted but you cannot confirm it?
Mr Hodges: That is right. I cannot confirm that, I am sorry. We can confirm that at a later stage if you wish.
Mr RUDDOCK: It was assertedand I am sure it was the ANZ that was mentioned
Senator O'NEILL: That is right.
Mr RUDDOCK: I did not think I was just vaguely remembering itand you are not confirming it.
Senator O'NEILL: I want to go to the overall culture of banking. I am aware that it is in a period of
transition. Perhaps increased security is bringing about that change. I asked the ATO this morning about their
relationship with the AFP and APRA. I am thinking of 26- and 27-year-olds who are very keen to be successful in
banking businesses coming in and their mentors and models are people at senior levels in the bank. At the
moment I am sure you would be well aware of 1MDB bank and issues around the movement of money
internationally and questions of probity that are being explored by The Wall Street Journal. Is it a fact that ANZ
has a 25 per cent share in that bank1MDB?
Mr Hodges: No. I think you are confusing several things there. 1MDB, as I understand it, is a company that
has government ownership in Malaysia. It was largely I think associated with property development. The bank
you are talking about
Senator O'NEILL: AmBank.
Mr Hodges: Yes, is AmBank, which we have just under 25 per cent equity in. We are a shareholder in that
bank.
Senator O'NEILL: Do you have members on the board of that bank?
Mr Hodges: ANZ executives sit on the board of that bank, yes.
Senator O'NEILL: How many?
Mr Hodges: At the moment there is only one because there is a transition going on with board members.
Senator O'NEILL: How many would there normally be?
Mr Hodges: Typically we would have three members on that board.
Senator O'NEILL: Who are the ones retiring from those positions?
Mr Hodges: Mr Mark Whelan, who has just retired, and Mr Shayne Elliott, who retired in September-October
last year.
Senator O'NEILL: Mr Elliott's current position?
Mr Hodges: He is the CEO of ANZ. Just for the record, I am about to go on that board.
Senator O'NEILL: Thank you, Mr Hodges. From a public perception point of view around cultureconcerns
about this particular bank, ANZ's relationship with it, general cultural questions around probity and practiceand
I note also, in terms of the sharing of information with people who have valuations, there has only been a recent
change in the bank's behaviour about sharing that information
Mr Hodges: I do not believe so, Senator. When we ran the corporate and business bank back in the late 1990s,
we had a process where we just generally gave customers a copy of the valuation. So I do not believe that is a
recent process at all. In fact, if you really want to work well with your client, you should understand and they
should understand the position you are both in. I think it should be broadly a standard practice. It is only in the
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very exceptional cases where that would not be the case, I would have thought. Partly that goes to the whole issue
of the trust between the customer and the bank, and you are both working with the same broad information. That
can be quite critical for that important relationship about the financial position of the business. I think this has
been a longstanding practice for us.
Senator O'NEILL: That is quite different from what I understood for ANZ Bank. Nonetheless, if I go to the
whole notion of culture probity on a national and international scale, my question is: what processes have you put
in place as a result of ongoing inquiries from both the fourth estate and from this committee that have changed
your cultural practices towards people who are clearly very aggrieved?
Mr Hodges: I think we all have a heightened sense of focus around where customers find themselves in
difficult situations where it relates to the bank. I do not think that is recent, but there has certainly been a large
number of recent examples which have been played out through the media and, actually, the banks have
something to account for. I think banks are acutely aware of this. I cannot say any of us enjoy having these
circumstances, to be honest. Whether it is for us, where we have had issues of managing the Timbercorp issue
as you are very awareor where there are recent issues around insurance or the impaired loans here, but you can
go back further as well to financial planning, there are a clear range of issues that have emerged.
Some of those have emerged because we have found issueswe have discovered that we have incorrectly
done something with customers' accounts and we have disclosed those and they have become public and we have
rectifiedand in others have emerged because of collapses where the banks have been involved and it has been
very unfortunate that people have been very adversely affected in some cases. I think we are acutely aware of it.
As a banking sector we are not at all happy about it. It is something that would occupy the minds of the boards
and the CEOs and even at the ABA there is a regular discussion around this.
Senator O'NEILL: I would like to ask more questions about the ABA but time is going to get the better of
me. You are clearly significant leaders in your own bank. You just talked about Mr Elliott. With regard to APRA
and the sense of a fit and proper person, the bank must be very concerned about the image that has been created
by its engagement with AmBank right now. I am concerned about the processes by which junior staff might be
looking at these issues and have uncertainty about ethical behaviours when this pall is cast across the work of the
entire banking sectorand, in this case, particularly the ANZ Bank.
Mr Hodges: At a simplistic level, I would say that that would be one way of observing that. But it is a more
nuanced issue, to be honest. Clearly the directors on that board are not at liberty to talk about what goes on,
because they are in a publicly listed company in a different jurisdiction and there are laws that they have to
observe there. We do not control that bank. We are a director on that bank. It is a separately listed public company
with its management. As an ANZ executiveand one that is shareholder in thatare we happy with that?
Certainly not. But that is different to implying that the culture or the integrity of one of the people who sat on the
board is less than it should be because they have sat on that board. I do not believe that to be the case at all. In
fact, I think Mr Elliott is a very strong and good banker.
Senator O'NEILL: I do not want to cast aspersions, because I really do not know the detail. But I am
interested in that whole notion of how culture builds around that and what people might perceive.
Mr Hodges: Sure.
Senator O'NEILL: So could you take on notice: what sorts of processes and procedures have you put in
place? What communications have you had with APRA about clearly communicating to your bank that you have
the sorts of concerns that you have just articulated to me and the probity that needs to be adopted at every level of
the bank in terms of interactions with their customers where ethical behaviour is of the highest order?
CHAIR: Could you take that on notice, please, Mr Hodges?
Mr Hodges: Yes.
Mr VAN MANEN: Thank you, Mr Hodges and Mr Brown, for your testimony this morning. I want to cover a
couple of disparate areas, but I would like to start with the banking code of practice, if I could. According to the
Code Compliance Monitoring Committee, in 2013-14 there were nearly 6,000 referrals for breaches of the
banking code of practice compared to 2007-08 where there were less 1,000. I would be interested to know at this
stage, given your earlier testimony, to what level the bank or its subsidiaries have reported any breaches of the
banking code of practice in relation to not only the cases that have been submitted to this inquiry but also other
cases that may not have been submitted. The second part of that is: did the bank or its subsidiaries self-report any
breaches of the banking code of practice in relation to irresponsible lending that occurred prior to the GFC?
Obviously there was an enormous run-up in lending prior to the GFC which came unstuck.
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Mr Brown: I cannot assist you here with matters pre GFC, but we will seek to do that separately. I can assist
with more recent reporting. We reported for 2014-15 three breaches of the internal dispute resolution
requirements under the Code of Banking Practice to the CCMC and six in 2013-14. In relation to how they were
identified, two breaches for 2014-15 were self-identified and one was raised with us by the Code Compliance
Monitoring Committee. We will provide further information about this in writing to the committee.
Mr VAN MANEN: What about in relation to matters that have been brought to the attention of this
committee and this inquiry?
Mr Brown: I do not believe any of the matters that I have just referred to relate to matters that have been
brought to this inquiry. An obvious follow-up question is: where does this quite large increase come from in the
aggregate? We have asked the same question and I am afraid that we cannot help you with an answer to that, but I
am sure the Code Compliance Monitoring Committee could.
Mr VAN MANEN: I think it is an interesting question for the banking industry as a wholemaybe not the
ANZ specifically. That is a definite cause of concern for me, given that you have a banking code of practice and
between 2007-08 and 2013-14 the number of referrals have gone up from less than 1,000 a year to somewhere
between 6,000 and 7,000 a year. More generally, I think it is fair to say that the banking industry would need to
have a good hard look at its practices if that is the case. I would suggest that there is probably plenty more out
there that are not referred in any manner.
I would like to go to the issue of valuations. You have testified this morning that you are providing copies of
valuations to clients where the clients have paid for it. What was the situation with Landmark? Obviously a large
part of this inquiry has dealt with issues arising from the Landmark loan book that ANZ purchased. Was the same
process in operation with the Landmark loan book or not?
Mr Brown: We do not have information to hand on the practices of Landmark prior to our acquisition of it.
As to what our practice was post the acquisition, particularly with customers in distress: our practice has been to
provide a copy of the valuation. I am not asserting that that is the case in 100 per cent of circumstances, but it has
been our practice.
Mr VAN MANEN: I find it strange that you were not aware of the practices of Landmark prior to your
acquisition. I would have thought that that would have been a key part of the due diligence process.
Mr Brown: We may well have covered some of those related matters in our due diligence, but I cannot
answer that here. We can answer what matters our due diligence covered, in response to a question on notice.
Mr VAN MANEN: Thank you. Further to the discussion around valuationsand we had a discussion with
RICS this morning about the change in the nature of instructions over timeas part of the valuation process, does
the ANZ discuss or provide the ability for its clients to comment on the instructions that have been given in
relation to obtaining a valuation on a property or an asset in the event that the loan has gone into default or there
are issues around that particular loan business with the ANZ?
Mr Hodges: Sorrycould you repeat that again? It is a technical question.
Mr VAN MANEN: The discussion that we had this morning was: if a client obtains a loan in, say, 2010, the
valuations are done with a certain set of assumptions built into the valuation. Come 2016 the loan is now at risk of
going into default and a new valuation is done with a new set of assumptions. The assumptions are potentially
materially different from the original set of assumptions. What discussion and information is provided to the
borrower about the changes in those assumptions? They are going to potentially materially affect the future
decision making process of the ANZ in relation to that loan facility.
Mr Hodges: So perhaps to get a bit of colour, beef prices might have been different in 2010 to what they were
in 2016 and therefore affect the whole value of the future cash flow from a property. Is that what you are saying?
Mr VAN MANEN: Obviously in regard to an agricultural loan, absolutely. But equally that applies to any
sort of small business.
Mr Hodges: Yes, it could do.
Mr VAN MANEN: It is more general. The issue is: what discussions are had with the borrower to ensure they
fully understand the change in parameters so that they can understand the different view of ANZ in relation to the
risk of their loan facility or maybe the conditions that are applied to that loan facility as a result of changes in
those assumptions and parameters.
Mr Brown: To extend the example that Graham gave in relation to a rural property, our practice is to enable
our customer to view our instructions to the valuer and to accompany the valuer when he or she conducts the
valuation of the property on site.
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Mr Hodges: But would we have then shared the previous valuation with the new valuation? I have to at least
ask the question. I do not think that I can give you an answer to that right now. Clearly, the question is: if it is the
same customer getting a valuation five years apart, would they be able to understand the difference in
assumptions between the value today versus the value back then? I think the issue here is that in each
circumstance they are trying to get to what is the current market price. You are right: some of the underlying
conditions may well have changed, which would lead to a change in that price. Again, I could take that on notice
and try to think through the issue there. I do not know the practice of sharing, say, a five-year-old valuation. If our
practice is actually that we give the customer their valuations, they would still have had that previous valuation if
it is the same customer, which it would be in this case. So I would expect they would have that; the question is
whether they are able to process that themselves without having a dialogue with the valuer or with the bank. I
think Senator O'Neill said some of these may not be in easily digestible language, and I would like to maybe look
at that and ask our people about it.
Mr VAN MANEN: It may not be easily digestible for the client, but surely for the credit management
Mr Hodges: Yes, I accept Senator O'Neill's comments earlier and I think she is right: you need to have
something that is understandable by the customer. Even if you give it to them, there is no point if they cannot
clearly work out what has been done. So we will take that on notice, if that is okay. I think our practice is always
to get to market value at the time, but you are right: that can change over a period.
CHAIR: Can I ask you to add one thing to the question you are taking on notice. Mr Van Manen is talking
about the tertiary end of a relationship you have with a customer when things have turned sour. I am equally
interested as to whether you have any practice at the front end of a loan of saying, 'Here are the assumptions we
have used to value the property for the purpose of giving you the money.' In the same engagement with the
customer, do you apprise them of the instructions that you would give in the event that you became concerned
about the loan so that they are aware, right up-front, of the significant risk they are taking on by the borrowing of
the bank's ability to issue a separate set of instructions to a valuer to give us a market value in a distressed
situation, so that they can make an appropriate evaluation of their risk? Take it on notice, but do you do that and,
if not, what are the unintended consequences for you if that was a requirement of lending?
Mr Hodges: Okay, we will take that. It is quite a technical space, I suspect.
Mr VAN MANEN: I would like to move onto the issue of securitisation. There has been plenty of
commentary over the past eight or so years on securitisation, particularly with regard to the consequences of
securitisation and the GFC. As a starting point, I am interested to know how much, if any, of the Landmark loan
book acquired by ANZ was subject to securitisation. As a follow-up to that, does the fact that a loan book has
been securitised have an impact on the way that ANZ deals with customers whose loans have been securitised?
Mr Hodges: There is quite a lot ofI would not say misinformationmisunderstanding around securitisation
here. Securitisation is a funding mechanism.
Mr VAN MANEN: I am well aware of that.
Mr Hodges: It is a mechanism particularly where entities which do not have the capital strength and the
funding structureslike in deposits et ceterainitiate loans and then package the loans up and sell them off. I am
sure you are aware that we were part of a participant in a securitised structure around the Landmark loans prior to
ANZ's purchase. There were two banks that provided funding support into the securitisation structureANZ and
Rabobank. In purchasing that loan book, we no longer securitised it; we actually funded it on our balance sheet.
Each of those loans were individual loans within a securitisation structure and just became individual loans on our
balance sheet. So they are not treated any differently to an individual loan, as with any other normal customer in
the bank.
Mr VAN MANEN: So, in effect, the purchase unwound the securitisation.
Mr Hodges: The purchase unwound the securitisation structure and we purchased out Rabo's share of that
securitisation pool.
Mr VAN MANEN: Was that funded also off the balance sheet?
Mr Hodges: That is our balance sheet, so we have used that to fund it through our balance sheet. We then
fund that through our customer deposits and through the wholesale funding that we do. The other point which was
raised in some of the other material was around use of securitisation to mitigate risk. I must say that it seems to be
widely misplaced here. There is no capacity, really, to use securitisation to effectively get credit default swaps
across the securitisation pool and, therefore, mitigate riskin fact, quite the opposite. The regulators watch the
securitisation product quite strongly. If, for example, you chose not to continue a securitisation as a lender to a
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securitisation pool you could elect not to continue with that. Then, the person who is initiating the securitisation
structure has to find someone else to take on the debt that is required to support the structure.
The regulators look at that and say that the refinance risk on some of these securitisation pools can be quite
large and, therefore, they do not allow you to have any credit enhancement around those products. It is because
you are likely, as an issuer of those, to find you are going to find it back on balance sheet or, if you are a lender to
it, you might find you are unable to see that refinance so you are caught with the debt on your balance sheet as
well.
There are a lot of specific rules how regulators look at securitisation and the level of risk around them.
Typically, there would be 50 or so entities in the Australian market who could use CDSs to mitigate risk as was
suggested in some of the academic papers that were presented, here. It is a specific funding tool. It is an efficient
funding tool but it is, generally, used by those entities who do not have a balance sheet or a capacity to finance the
loans themselves, which is what we have seen, in many cases.
Mr VAN MANEN: As a follow-up question on that, with agriculture loanswhether it be the Landmark loan
book or more generallycan I get an idea of what the capital adequacy requirement for those loans are? For a
housing loan, for example, I believe it is around 10 or 15 per cent but for other higher-risk loans you have higher
capital adequacy requirements, as set by APRA.
Mr Hodges: Mortgage lending, at the moment, is 17 per cent but heading towards 25 per cent from 1 July this
year, as a risk weight. The risk weights for commercial loans tend to be much higher, and many of the them are at
the100 per cent level. They require more capital support for them.
Mr VAN MANEN: Once a loan is in default, what is the impact on the capital requirements?
Mr Hodges: Capital requirements go up as the loan is impaired.
Mr VAN MANEN: If it is at 100 per cent, already, how much higher is it
Mr Hodges: It could go, substantially, higher from there. That is the regulator indicating that the risk on that
loan has increased and, therefore, the amount of capital you need to hold against that loan. That is, generally, the
way the banks look at that, in a dynamic sense, within its loan portfoliothat any loan that gets regraded either
for risk or security you have to look at the amount of capital that gets held against that loan. That is how the
regulator ensures that the banks are sufficiently well capitalised for the economic environment that you are in at
the moment.
Mr VAN MANEN: If a loan is securitised does that allow you to reallocate that capital for other lending
purposes?
Mr Hodges: The securitisation structure will have a rating around it. If the rating of that moves, the amount of
capital you have to apply to it would move. But the rating on that entity would, partly, reflect the capital you have
to hold.
Mr VAN MANEN: I suspect you probably have not seen this paper. It was put together by the Bank of
England and their banking monetary analysis directorate, in 2014. The Commonwealth Bank made a comment in
their submission, and you have touched on it, in relation to lending of depositors' funds. The paper is called
'Money creation in the modern economy'. I would be interested in what ANZ does that is different. This is a UK
model. The report says:
The reality of how money is created today differs from the description found in some economics textbooks:
Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
In the scenario you have just outlined, you are saying that you are lending the depositors' funds, as have other
banks. Yet here you have the Bank of England making the observation that in reality it is actually the banks
making the loans that create the funds in the first place. They also say:
Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating
new money.
So how does the way the ANZ bank fund its loan book differ from this analysis paper that the bank of England is
presenting as a picture of the way banking is conducted today?
Mr Hodges: Certainly that is not the way we would see our bank working. When we look at it at the broadest
level in ANZ we have more loans than we do deposits in the bank. That is typically true of all of the major banks
in Australia.
Mr VAN MANEN: So a function of fractional-reserve banking.
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Mr Hodges: No, the reason for that is largely compulsory superannuation. So people are effectively saving in
superannuation rather than putting their money into banks. Then the super funds decide where they are going to
put their money, and they put some of that money offshore to diversify their investments. Some of that money
comes back into the banks in a wholesale form where they lodge it as a wholesale deposit.
We are short somewhere around $100 billion in our bank in customer deposits versus loans. We make that up
by having capital, obviously. That is part of that, but then we go to the wholesale markets and we borrow money
in the wholesale markets to fund the shortfall there. So in our case deposits are an important, stable funding
structure for the bank. Then we have term borrowing offshore which is also stable, but which is also a reasonable
size which supports the growth in our balance sheet. Then we have to make sure that those ratios are kept in the
right order such that we are not overly dependent on the offshore funding which people remind themselves of
back in the GFC because the cost of funding offshore went up.
I think typically in the Australian marketplace that example from the Bank of England is not true. When a
customer takes a loan they generally do something with that loan. I think what we can say is that within a banking
system it is a closed system so the money finds its way around that system. So we are not creating more money in
the economy, but the money is finding its way around the economy.
In Europe there have been particular issues where the banks were required to strengthen their balance sheet.
They were in trouble in terms of their capital ratios. They were borrowing from the central bank and lending it out
to customers, and the customers were bringing that back in and putting it in deposits. What they were finding was
that deposits were growing more quickly than loans because they were reluctant to lend because it was affecting
their capital ratios. So in the European experience in the last five years or so there has certainly been a very
different situation than what we would have called normal in the past. Maybe that is partly what the Bank of
England is talking about.
Mr VAN MANEN: In that regard, do we have a significantly different regulatory system from either the
Europeans or the Americans when you consider that from a GFC perspective our banks fared much better than
many others around the world?
Mr Hodges: We are all sort of subject to the broad Basel frameworks which we operate under. Our regulatory
system structure is somewhat different. We are more akin to the Canadian model, which has five large banks. We
have four in this market. We have a current account deficit, which the banks tend to fund a fair bit of because we
are doing the offshore borrowing in some of these other markets. The deposits exceed the loans in these balance
sheets, whereas we are the other way around. So there are structural differences. I think materially one of the big
differences is that banks here dodged the worst issues of the GFC and therefore continued to lend into the
economy and support the economy right through that period, obviously with the supportfor a short periodof
government guarantees. The banking sector overall is in a more robust position than a number of the markets
around the world, so I think that is an advantage that we do have.
Senator KETTER: I will just return to the issue of valuers and their engagement with the ANZ, and I note in
one of your submissions that you utilise valuers who have adopted standards and practices of the Australian
Property Institute or equivalent. Are you familiar with that.
Mr Hodges: I see we wrote that in the submission. I cannot tell you chapter and verse what that means, to be
honest.
Senator KETTER: All right. That was part of your submission. What I was getting to next was that it says 'or
equivalent'. Following from Mr Ruddock's earlier question of you, I think the 'or equivalent' there may well be the
RICS standards. Would that be the case?
Mr Brown: We will need to take this on notice. There have been several questions which, in effect, I think,
have been going to: how do you construct your panels and what are the qualifications for people who get on them,
and related matters? We will provide a detailed response into the construction of the panels, how people go on
and off them, the professional qualifications
Mr Hodges: And the consistency of professional qualifications.
Mr Brown: of the individuals on the panels.
Senator KETTER: I was just wanting to explore something that was in one of your submissions. You said
that the valuation process is independent of sales and lending decisions.
Mr Hodges: That is back to the point that I made earlier, which was that it is not the frontline people who
commission the valuations or commission the terms around the valuation.
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Senate
Senator KETTER: My question was going to the issue of the circumstances under which there would be a
truncated marketing of the property in a situation where we have a loan where there has been a monetary default.
Taking on face value your evidence that you do not use non-monetary devices to default loans, in what situation
do you find you are instructing valuers to provide a valuation on the basis of a truncated marketing of a particular
property, if at all?
Mr Hodges: I do not know the answer to that. I could envisage two things there. One, you would want to have
what I might call a full marketing of it to shore up the right client interest in a property so that you could get the
best realisable value, which would make sense. The other is that you might also have a shortlist of people who
you know are interested in it, so you get a current valuation, and that might be a truncated marketing because you
already have three or four bidders who come in and say, 'We've got a competitive bid here.' We know these are
the interested parties for whatever reasons. They might have a competitive business and want to take it over et
cetera. Therefore, you effect a quick sale, which might be seen in some ways as a truncated process, but one
which might be aimed at getting the best price as well. So, in all cases, especially in the case of an issue where
there is a likely impairment or loss, it is in the bank's and the client's interest to achieve the best realisable price
with certainty. When I say 'with certainty', it is because some people might say, 'Well, I will buy this subject to
my being able to raise finance,' and it is a difficult market and therefore there is a risk around that, and some
might say, 'I'll pay you $50,000 less, but I can give you the cash today,' and you have got to make a judgement
about what is the best way of doing it. All of that will go into the decision making around how you will deal with
a particular asset or business at a particular time. I think it is really difficult to specifically say you will do it all
one way or the other, because generally it comes back to the market circumstance, the asset, the likely interest and
how you think you can best achieve the best realisable price, if that makes sense.
Senator KETTER: What I am concerned about is where, perhaps, the bank's interest and the borrower's
interest diverge. There will be situations where a bankand perhaps in this case we have to talk about the ANZ
where the borrowers' interests are not necessarily served by a truncated marketing strategy.
Mr Hodges: I can accept that there may be cases like that. Certainly, in the perspective of the business owner,
if you like, that may well be the case. I think judgements are generally required around those moments. Typically,
it is more a bank judgement because they control that process or the receivers ultimately control the process, if it
is in receivership. The receivers are there under law to get the best value for all creditors. That is their
requirement. They would take into account more than just the bank's view. They would need to look at the way
they manage that receivership.
Senator KETTER: We heard from a gentleman from the Royal Institution of Chartered Surveyors this
morning. They talked about two bases of evaluation that are used: there is the market basis and there is the
investment basis. I understood them to say that when utilising the market basis, one of the assumptions is that
there would be a reasonable marketing period. That would seem to be a fair way of going.
Mr Hodges: I agree.
Senator KETTER: But there are obviously situations where that is not happening. Are you able to tell us
categorically, within ANZ, that that is not the approach that you use?
Mr Hodges: No. I can say that, in a declining market, it may be an advantage to go quickly to market rather
than to delay it. I think the trouble is that it does depend very much on the market position that you are in, the
asset you have got and the likely interest. From that, you will work out a strategy as to what is the best strategy to
achieve the best realisable value. That is typically what we would expect receivers to do if it is in that sort of
space. If it is not in that space, then that would be a combination of a discussion between the bank and the
customer and working out what they think. If it is not in liquidation but it is in a forced sale, if I can put it that
way, we would expect that customer to sell the asset and then you would have negotiation around that. You would
typically want to give the customer time to work through that process.
I heard the comment earlier about if it is a mortgagee sale versus a non-mortgagee sale, does that affect the
value of it? I would say there is every chance it will affect the value if it has got mortgagee auction written on it,
because people think that they are foresellers and you will get an opportunity to buy it at a cheaper price. It
depends, therefore, on the competition. I understand the line of questioning here, but I do think it very much
comes back to the asset and the circumstances as to whether a shorter period is really a truncated one or it makes a
lot of sense to do that. It is truncated in time, but it might be the best solution for that particular circumstance.
Senator KETTER: It is a question of whether it is in the best interests of the borrower or the financial
institution.
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Mr Hodges: Yes, I accept that. I think the answer to that generally would be that you want to give an
appropriately full marketing time for an asset, but there will be circumstances when a shorter marketing period
may be appropriate.
Senator KETTER: This is an opportunity for you to put out a sales pitch here: how do you assure your future
commercial customers that they will not be put in a situation where that may well happen?
Mr Hodges: Maybe I am not the right marketer here, but I can see both sides of this. My sense is that if you
step back and say, 'We're going to try to the right thing here,' that actually works for both the bank and the
customer. Giving the right marketing period for an asset makes a lot of sense. I think that is what the bank would
want to do, generally.
Senator KETTER: I think the general public would like to see that translated into contractual obligations.
Mr Hodges: I would just be a little careful. That is because if it is contractual on time, you might end up
achieving a worse outcome; that is all. It is contractual in what way? Then you will end up having, 'No, you didn't
take the right approach.'
Senator KETTER: I was putting the question to you.
Mr Hodges: Therefore, you are just opening it up to further legal action, as to whether that is right or not, and
then someone is going to have to make a judgement in the end. I am just saying that ultimately, as we all know if
we are buying or selling something, these things come back to a judgement call as to what the right strategy is
around dealing with an asset, a business or whatever it is. We have all made these calls individually. Some we
have got right and some we have got wrong. I would say that by putting too many rules around it you will reduce
flexibility around what might be the right thing to do.
Senator O'NEILL: Having no rules around it gives all the power to banks and none to the borrowers.
Senator KETTER: I will just finish up
Mr Hodges: If I may, Senator: if it is in the hands of the receiver, they have an obligation
Senator O'NEILL: A receiver who gets paid by the bank.
Senator KETTER: Because of time constraints, I will just finish up. We were talking with the ATO this
morning about the circumstances around doubtful debts and your ability write them off. They were unclear as to
whether the relevant accounting standards were being applied across the financial institutions. I wanted to give
you the opportunity to tell us that you apply AASB 139, which I think relates to the fair value of loans et cetera.
Do you know whether you apply that?
Mr Hodges: I can assure the committee that we apply all of the correct financial standards to the way we
manage that, and that includes through our finance committees, through all of the attestations we require out of
our business and ultimately up to our audit committee and the independent auditors reviewing all of those things.
We absolutely take incredible care around that process.
Senator KETTER: Can I ask you to take that on notice and confirm for me that you do comply with AASB
139?
Mr Hodges: Sure.
Mr RUDDOCK: Mr Hodges, I want to ask you about the internal dispute resolution arrangements, and
particularly the cases that you have settled and the basis upon which that has occurred, and to tease out some of
the arguments that I think you addressed in your earlier evidence. If I can put it in context, I do not know whether
other banks are here listening to the evidence that you are giving, but I want to work out whether I should
promote you as a role model to others, whether you have in fact implemented the very best way of resolving
contentious issues, particularly in relation to loans that have been impaired, troubled or defaulted. I am looking at
the procedures.
When I said you were a role model, I do not know whether it is because the numbers of impaired loans were
relatively small, which makes it easy to deal with. But you did say to usand this troubled me a littlethat what
you were looking at were loans where the documentation on the bank's part may have been inadequate. Is that a
qualification, or have there been situations where what has been brought into question is whether people have
been given reasonable time? Have you revalued property so that you then say to people, 'There is not sufficient
security and we are going to impair it'?
What I am trying to gather in my own mind relates to what I hear has been the settlement of a number of
matters where these sorts of allegations have been raised, and I thought you were questioning whether they had
been raised. But, where they have been raised, how have you dealt with these matters with appropriate,
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Senate
independent consideration of the issues that may in fact be contested? Or have you just been extraordinarily
generous in order to get them out of the system because there are a relatively small number of matters?
Mr Brown: Firstly, I wanted to acknowledge that I think both in an earlier answer today and in an earlier
answer to a question on notice we should have done a better job of explaining the use of some of our language
particularly in relation to the term 'lender mortgage fraud' that was used in material provided by the committee,
and our use of the term 'maladministration' and then the use of the term 'impaired loans'.
We will provide further information to the committee in relation to the original question that was asked using
the term 'lender mortgage fraud'. The numbers in the context of the bank are relatively small. We identified nine
files subject to a range of internal fraud or misrepresentation over the period 2011 to December 2015. Separately,
we identified complaints of maladministration, which goes to failure of documentation and so on. We have settled
a number of those cases, and that is because either we were in error or it was simply commercially sensible to
make a resolution.
Mr RUDDOCK: It impacts upon your reputation?
Mr Brown: Yes, that is correct.
Mr RUDDOCK: You might have taken a different view if it were several thousand, might you?
Mr Brown: It would depend on the individual circumstances of the case. Then, separately again to those
matters that I was just talking about, are the impaired loans issues and the issues relating to Landmark. I am
actually trying to be helpful here and to provide more clarity, not less. We will provide a further written answer to
that original question, because it is not as clear as it should be.
Mr Hodges: Going to your point on dispute resolution: it is an important part of what we do, because we will
have disputeswe know that we are going to have complaints and disputes. In the first instance, if a complaint
comes in to the frontline staff then they are required to forward that on to our customer complaints area if they
cannot deal with it effectively straight away.
The customer complaints team would then work through a particular issue with a client. If they resolve it, then
fine; if they cannot resolve it then it goes to what we call inside the bank our 'customer advocate'. Essentially,
they are employed by the bank but take a completely independent view to say, 'Is the bank acting reasonably
here?' Or, 'What is the position of the customer, and how do I actually get some sort of broad resolution to that
issue?' That advocate is sort of independent in the bank hierarchy and able to make a decision, and we are bound
by the decision of our advocate.
If the customer still has the view that it is not the outcome that they want, then the next level would be to take
that to FOSthe Financial Ombudsman Service. If it is within their jurisdiction they would hear that and manage
that process. We are bound to
Mr RUDDOCK: But it is a fairly limited jurisdiction?
Mr Hodges: I would not say that it is fairly limited. I think
CHAIR: Small business?
Mr Hodges: Well, small- to medium-size business and consumers. I asked that question of our people, and of
the businesses in Australia it would cover somewhere over 90 per cent of businesses in Australia. So it is a large
number of businesses that it would cover, according to the broad rulesand also consumers. So it is quite a wide
ambit, but it has a dollar threshold which might cut some of those people out.
But, generally, it will go to FOS and then, again, we are bound by the FOS determination
CHAIR: Twelve months later.
Mr Hodges: So we have that process. If that is not the case, and there is still a dispute, then the issue is that
rather than have that proceed through the courts we would go through some sort of mediation process. Typically,
we like to work through that process. I would say
Mr RUDDOCK: I am trying to get to the mediation process, to understand it. I am looking at issuesmatters
that have been put to uswhich are clearly unresolved and highly contested, with no resolution.
Mr Hodges: Sure.
Mr RUDDOCK: I am asking, 'Should there be a royal commission in relation to those issues?' That is what I
am asking. Or is there, effectively, independent mediation where a large organisation can agree that it will be
mediated independently?
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Mr Hodges: We are very happy with that independent mediation. At some point, though, it requires two
parties to come to the table. There are parties there who fundamentally disagree and, typically, it is those ones
that, ultimately, will proceed towards a court outcome.
Mr RUDDOCK: Do you have any of those left?
Mr Hodges: I am sure we do, yes. We will always have some of those disputes which are intractablenot
many, but we will have some. I do not think mediation will work in all cases, to be honest. The court process is a
long one. There was some talk aboutI think in one of the questions about arbitrationwould that be a better
way of going? Our view is: no, not really. Ultimately, the arbitration process is going to require exactly the same
as the court process. It is going to be just as costly. Mediation is clearly a better outcome if the parties can get to a
point where they can agree. I am aware of several cases where there is no way there is going to be an agreement
and, for the most part, they will go through a court process. It is unfortunate, but that is just where it is. We get to
a point where you cannot agree to something that you absolutely do not agree with. It is not about the dollars here
or there; it is about fundamental disagreement. That is where you have those problems.
Senator O'NEILL: Isn't this the process that is commonly called 'deep pocketing', though, where the bank's
resources are so profoundly different from individuals from a small- to medium-sized enterprise background that
where arbitration fails, the courts really have no capacity to provide redress because it is such an unfair contest?
Mr Hodges: I agree that that is an issue. I know that we have got to a point with some of our customers where
we have paid them to get legal advice to help them through an issue because they have a completely different
view. We have paid for them to get independent legal advice to help them better understand their situation
because we believe that they are wrong. They are better to get the advice there and come back and mediate, rather
than to go through a whole court process. But there are some customersand we are talking about at the very
marginswho will never agree with you. They will fight to the last. I would say one or two of the customers who
are in dispute in this inquiry fit into that camp.
CHAIR: You said you sometimes pay for legal advice. Have you ever paid for class actions?
Mr Hodges: Paid for class actions
CHAIR: Paid for a law firm to undertake legal advice on behalf of a group of ANZ customers?
Mr Hodges: The class actions are generally against us. Are you saying that we are paying for them to go
away? Is that what you mean?
CHAIR: No. Paying
Mr RUDDOCK: No. Paying for them to bring their case on.
CHAIR: for them to bring their case on, if there are a number of people who have a similar complaint.
Mr Hodges: No, not that I am aware of. I think that is quite a problematic area, I must say.
Mr RUDDOCK: On the same matter, though: the extraordinary bargaining power of a bank and the
resources, as against people who have only one set of transactions and, where they have been impaired, often to
the point where they are bankrupted: it is suggested, at times, that bankruptcy is pursued to ensure that they
cannot litigate.
Mr Hodges: I can understand that perspective, but it certainly is not what we would do. We would not think
that would be right. In the end, our view is that as a large institution in Australia we should do the right thing.
That is why we make such an effort around mediation. We go to some extraordinary lengths to try to get rid of
these issues rather than go to court, particularly around the sorts of people that you are talking about. If they are
large corporates then let us fight it out blow to blow but, for people with lesser means, we think it is in everyone's
interest to settle those things.
Mr RUDDOCK: So if there are cases that fit this modelendeavouring to identify a way that might deal with
another financial institution or institutions who have not been suggesting that they would cooperate in the way in
which you haveyou would not object to us finding a mechanism to require effective mediation?
Mr Hodges: A mediation process first? No. The only issue around a mediation process I can seeoff the
cuffis that, if it is used as a way of deferring an outcome with no real intent and that outcome might be deferred
through a process, then, ultimately, that could be to someone's detriment. I can see how any process, if it is
required, could be used mischievously but, in the broad sense, I would say yes. We tend to practice that anyway,
so we would not have an issue.
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Senator O'NEILL: Following up on that, if that was through the Australian Bankers' Association and funded
by the banks themselves, would you be in approval of that? We have got to fund these things; we have got to
come up with the money.
Mr Hodges: No. I think in the end that the funding model for the Australian Bankers' Association is a separate
model. I think it should be the bank involved, basically.
Senator O'NEILL: My question goes to an article by Sally Rose and James Eyers in today's The Sydney
Morning Herald around APRAthe warning that the economy is brittle. I refer to it in the light of this inquiry,
with regard to the holding of capital in line, particularly, with the Basel requirements. The article indicates that
there is some concern with regard to work still to be done to reduce reliance on short-term funding, which is
considered less stable as a characteristic of the Australian banking model, and also the indication that there is still
some decision making before the end of the year around a financial capital strategy.
If I understand it correctly, if this was to adjust the amount of money that the bank had to hold against loans, I
am assuming there would then be some action by the bank to reassess loans, particularly of a commercial nature.
My fear would be that it would set in train the sort of process that we have seen that came out of 2008 with banks'
liquidity being a factor in a review of people's loans. Is that a possibility; and what actions can the bank take to
assure its commercial customers that they are not going to be subject to drastic action as a shift in capital
requirements comes through towards the end of this year?
Mr Hodges: If I may, just to cite background on that: what is being considered at the moment is what we
euphemistically call 'Basel 4', which is an adjustment to the current Basel arrangements, where they are going to
adjust the standardised approach to capital in banks, and then they are going to reissue a new approach for
advanced banksthe four majors in Australia are advanced banks. That work has been underway for some time.
The outcomes of that probably will not be known before the end of the calendar year. That will then be
considered with APRA and they will consult with the banks around that through 2017.
Two lots of draft papers have come outboth in December last year and December the previous yearon
what that might look like, and there is still quite a bit of uncertainty as to how that will finally shape up.
Obviously, there is a general sense that there may well be more capital required rather than lessand I would say
that that is the way most people are anticipating. Certainly, for some asset classes, there will be more capital
required. That does not necessarily mean you reassess a loan. It does mean that, if capital is required to go up in
banks, then the cost of doing banking goes up and the question that then needs to be decided is: who pays for that
extra safety, if you like, that is being generated by the greater capital? To date there has been, effectively, a
sharing of that cost between the customers of the bank and the shareholders of the bank. I think that is probably
what would happen in the future in some ways as well.
I think the real question of policy is that banks have been materially strengthened since the GFCglobally but
in Australia. They had never been stronger in liquidity, capital et cetera. The question gets to the point of: how
much more capital is required to ensure that the banks are unquestionably strong and what is the risk of just
adding more capital and therefore more cost to the economy, which actually is not adding a lot of value? I think
that is the sort of debate we still have not had. At what point do you say, 'We are strong enough,' and any more
capital being required is just an extra cost on the economy that has to be borne by either shareholders or
customers? I think that debate will probably come through in the next year or two as well. I do not think that leads
us to managing the loans specifically differently except in a pricing sense. It will affect likely pricing of particular
asset classes if they are required to hold more capital because the costs for us will go up as a result of that.
Senator O'NEILL: In terms of asset classes, where does commercial lending fit in? What you are describing
as asset classes before you go onto the
Mr Hodges: With 'asset classes' I was still thinking about global banks, so lending between banks, or global
multinational corporates, so the largest corporates down through mid-range corporates, small business, mortgages
and then things like credit cards, personal loans et cetera. Those are what I mean by 'asset classes'. Typically what
we are seeing is that there is going to be more of a mandated amount of capital on the most sophisticated asset
classes and more a model level of capital on the more diversified asset classes. That seems to be the direction in
which the Basel accord is going.
Senator O'NEILL: So it would be unlikely for a wholesale review of loans and revaluation of commercial
loans?
Mr Hodges: No, it does not lead to a review of the loan per se but it will look at the relative return off the loan
for the bank and therefore may affect pricing because capital is not free.
Senator O'NEILL: Thank you.
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CHAIR: Mr Hodges, I take it that you are aware of the proposed changes on 12 November this year to unfair
contract provisions being extended to small business.
Mr Hodges: Yes, I am awarenot the detail but I am aware that
CHAIR: Have you read the ASIC guide that has been published recently pertaining to those?
Mr Hodges: No, I have not read that yet.
Mr Brown: Yes.
Mr Hodges: Gerard has.
CHAIR: You would be aware then that they state in there that it is not their job to define what is fair or unfair
but they give three worked examplesthe third of which goes to the issue of standard terms and conditions that
essentially give the bank unilateral power to vary conditions. They say that in their mind to make it fair there
would also have to be a clause that gave a small business an option to exit the contract if the bank wished to vary
those terms and conditions without penalty. Can you give the committee a sense of what discussion is occurring
within the bank as to whether you accept the guidance provided by ASIC and would seek to change your
contracts accordingly to provide small business those sorts of exit options or whether you will take that to court to
protect the kind of one-way power structure that the terms and conditions of your standard contracts currently
contain?
Mr Brown: Senator, we are currently considering how best to implement the new legislation. We have not
arrived at a conclusion in relation to that, but we can update the committee in writing as to what our current
direction is.
CHAIR: That would be greatly appreciated. If you could extend that not just in terms of the standard terms
and conditions but as you look at each segment of what this inquiry is looking at in terms of the loan-writing
process, the ongoing management, the pooling of somebody into your credit managementthere are a whole
bunch of steps where procedural fairness links back to decisions that the bank can unilaterally take at the moment.
I would be interested to understand how you intend to implement in your standard contracts the worked examples
and concepts that this change on 12 November will bring out.
Can I go to the issue of responsible lending. We have had a number of submissions that have given us
documentary evidence of where a bank has looked at the assets held by a potential borrower and in the same
evaluation noted that, whilst they are comfortable with the level of asset, the business would be quite stretched in
order of meeting the repayments and yet has gone ahead and made the loan anyway. Within the ANZ would that
be acceptable practice?
Mr Hodges: We would want to assess a loan on its serviceability in the first instance. Is that customer able to
comfortably service that loan? The sort of example that you just talked to would put in question whether that loan
would go ahead, because serviceability is really the first and most important way of ensuring the loan fits the
customer's need. There will be some examples where the cash flows are not there but there is a prospective cash
flow or there is an asset being created which will then be sold to repay the loan, so you could see some
circumstances where serviceability is not immediately apparent but a means of paying back the loan is quite
evident in front of you. There are obviously going to be exceptions around that, but we would always want to
ensure that there is a sufficient cash flow and a sufficient buffer for issues that a customer would deal with.
Senator FAWCETT: Your chief executive has made the comment that he is looking at remuneration
structures and how they drive culture. We have seen examples where clearly there has been fabrication in some
cases. I am not specifically saying ANZ here, but clearly there has been fabrication or omission of information
pertaining to a customer that has led to the loan being issued, which, in hindsight, in some cases, the FOS has
indicated has been malpractice on behalf of the ADI. What processes does ANZ have in place to ensure that
people are in fact complying with responsible lending requirements? I note in your comments around
remuneration structures that there is a gate before they are even eligiblethat people have complied with those
thingsand yet what we clearly see is that those internal processes of banks, along with many large
organisations, are not foolproof and in some cases, I would argue, not even robust. What assurance can you give
the committeeI am happy to take this on noticeabout the extent of your internal compliance checking with
those kinds of requirements?
Mr Hodges: We will give you a detailed response on notice, but in terms of the way we look at the
remuneration of people, across the whole bank, really, the first knockout point that I mentioned is whether the
person has behaved according to our valuesand that would be a tick or a cross, if you like. If they get a cross
there, then there is clearly an issue with that individual and the way they have behaved. We would not only look
at their remuneration but we would look at their employment, and typically that sort of staggers updepending
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on the nature of the issue that is raisedwhether it is a first and final warning, a clawback of past remuneration
or, ultimately, sacking the individual. There are different levels of action around that.
When we look at the actual performance of the individuals and assess them, obviously it goes through that gate
firsthave they performed in a way that we would expect an ANZ person to do? We then look at four broad
criteria we are assessing people's performance against. The first one is customer performance: how have they
treated the customer and how have they managed that? The second one is the financial or the budget: are they
managing their budget? The third one is risk, compliance and process: have they followed processes? The fourth
one is people: how have they managed people et cetera? So there are those four categories and each of them are
weighted in building up an assessment of someone's performance for the year.
In that third one I talked about, the risk and process, people would be assessed by compliance teams as to
whether they have complied with the bank's policies or the broader rules. If they have not complied, then
obviously that would be, depending on the nature of their issue, a significant factor affecting their remuneration
and/or ultimately their potential employment.
CHAIR: So as part of the review that your CO talked aboutof remuneration structureswhat is the likely
weighting of that performance against the budget side? My understanding is: for a lender, that is all about the
extent of both the loan business that he or she writes and also the cross-selling of other banks' products and
referrals to other parts of the bank. Clearly, from the things we are seeing from ASIC and various organisations
that are looking at culture in the banking sector, those drive aberrant behaviour. In your view, what should be the
weighting placed upon that aspect of an employee's performance?
Mr Hodges: That will vary, particularly by job, in the organisation. Remember, of course, the financial side is
not just a revenue or a customer acquisition, but it could also be cost management and other things, as well. So it
is just depending on the nature of the role. I think typically it would be somewhere around between 25 and
probably 40 per cent of their role, depending on the nature of the role of the individual. The more senior you get,
the more the wider factors are particularly important in terms of what influences a person's performance. One of
the comments that our new CO did make was that he was more inclined to weight the remuneration and
performance assessment more on collaboration and working well in teams rather than on individual performance.
So I think part of that is to say it is about the team working well together and not just individuals working for
themselves, if you like, which is going to become part of the way people will be assessed in the ANZ. I think that
is sort of saying that, actually, it is a wider thing than just your individual performance; it is how you contribute to
the wider organisation. Of course, that is where particularly those other factors come to bear rather than your
individual budget or your individual financial targets.
CHAIR: As we look at financial services in the broad, we have had a number of inquiries. A number of issues
have arisen in the last few years that have gone to the issue of: are we dealing with bad apples who are individuals
or are we dealing with a culture in an organisation and a lack of governance and compliance enforcement, or a
combination of both? In the financial advice and life insurance areas, what we have come up with very clearly is
that we need individual accountability, which goes to professional standards, educational standards, ethics and, in
things like FoFA requirements, the requirement for an individual adviser to be giving a statement of advice which
is essentially a guarantee that the product being offered, or the advice being offered, is in the best interest of the
individual. As we look at the sector that this inquiry is consideringyour small business, predominantly; so I am
not talking about when you lend to a large corporate but when you lend to a small business where a mum and dad
operator of a business have their family home on the linethe implications for them and their families are just as
dire as the advice that a financial planner may give somebody for their retirement investments. If we compare
those two, what can you tell the committee about the professional and educational standards that you require of
the people who are actually making that decision as to whether to lend the money, and who, at the end, signs off
on the equivalent of a statement of advice that says 'this loan is in the best interests of the person and does not
expose them to undue risk which they have not been made aware of'? And if those first things are not in place,
what would be the consequences of us requiring a similar level of personal responsibility and disclosure? I am
happy for you to take that on notice, if you prefer.
Mr Hodges: I think we should because it is a very substantial sort of issue that you raise. I would say that the
potential for that would be significant, particularly when you get to more standardised products and services
which are, effectively, scorecarded. So the issue is for some assets you are really running these through
scorecardscredit cards, some of the mortgages, some asset finance, some consumer loans are done through that.
So there is not an individual who sits there and looks at that and signs off on that in particular. There is a very
strong process behind it, but that is quite different lending than individually managed relationship managed
lending, which is the core of some of the client stuff that we have talked about here today. So how you would
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consider that in the context of the nature of the lending, the nature of the decisions and how they get made could
have a material impact in terms of both the timing and the cost of customer access to finance.
CHAIR: If you could come back to the committee though?
Mr Hodges: We will get your specific question, go through that and give you a more detailed answer.
Senator O'NEILL: How many of your commercial loan holders would have a customer relations manager?
Members of the audience interjecting
Senator O'NEILL: None?
Mr Hodges: That was not me.
Senator O'NEILL: Sorry. That was a voice from the populace.
Mr Hodges: It depends on how you define that; if it is access to a manager or full-time manager, it would
probably be somewhere around 60 to 70 per cent of our commercial customers. The smaller small business ones
would not have a dedicated manager, but
Senator O'NEILL: But they might have a few
Mr Hodges: they could have access to someone if they need it. Those bankers are sitting in the branches, and
people can go in and meet with them and do their banking with them, but they are not dedicated to those
individuals.
Senator O'NEILL: But it is not a long way from 60 to 70 per cent coverage to the sorts of things that we
were just hearing from the chair about the potential of having, rather than general advice, more tailored specific
advice for particular businesses?
Mr Hodges: No, it is quite a way, because some of these managers who are there might have up to 500
customers. They are sort of their contact point in the bank, if you like. That is a very different sort of model than
if you are at the other end of town, where you have three clients.
CHAIR: But I still raise the point that the decisions that are being taken sometimes have not only a material
impact on an individual but, potentially, on extended families and communities, when you look at some
businesses. Yet what you are describing is a system where nobody individually takes responsibility for the
decision; it is a process or a scorecard that
Mr Hodges: I do not think that is correct, because we obviously look at the outcomes of that work and it is
very carefully scrutinised. The efficiency around some of these things can be understood with today's modern
technology, and people get quick decisions around this. I think we spend a lot of time and care on those issues.
The committee are looking at a small tail of issues versus a very big range of activities going on. The question
then is: would that sort of outcome be appropriate for the sorts of issues that you have been facing? I know you
have been facing some particularly difficult issues, but generally they typically are not in that very small part of
the market.
CHAIR: Mr Hodges, that is why we continually ask for you to identify what the unintended consequences
are. We understand that small business needs access to capital. We understand the banks have an obligation to
protect depositors and everyone else. But we also have an obligation to make sure that no one person and no one
business falls through the gap unnecessarily because of a lack of due process or a lack of fair and conscionable
conduct and culture within banks.
Mr VAN MANEN: I would like to take you back to the discussion around mediation and dispute resolution. I
particularly note with concern your comment, Mr Hodges, that we would all like to get rid of these problems.
These are ordinary people you are dealing with, whose lives are on the line; their houses are on the line. Their
families pay the consequences for these things not being done properly. So I do not think it is an issue of 'getting
rid of the problem', with the greatest respect.
Mr Hodges: I agree with you. It was loose language.
Mr VAN MANEN: I suspect that, in some respectsand maybe not you personallypart of the problem is
that, whilst it might have been loose language, it is sometimes a reflection of the attitude of the big banks more
generally to their customers. In the context of mediation, I find it strange that you go through a process in the
bank, then you go to FOS and then you go to mediation. Why isn't there a process of mediation upfront, rather
than going through all of those other processes first and then finishing up in mediation?
Mr Hodges: May I suggest that each of these other processes is a form of mediation anyway; they are just not
formal mediation where you get an independent formal mediator and you all line up around that. FOS is
independent, but that is a final go at this after you have already been through a range of mediationfirstly, with
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Senate
bank people to try to work it out with the bank; secondly, with an independent person in the bank, the advocate,
who we go to before the FOS; and then with FOS. FOS is a mediation process as well. I think that is just a
language issue, to be honest. They are all trying to mediate an issue where there is a difference of view.
Mr VAN MANEN: So, rather than having three or four different attempts at mediation, why not have an
independent mediation process right at the outset and
Mr Hodges: It is a funnel. There is a mediation process. As soon as you have an issue between two people,
you have to try and mediate the issue. You have to talk about the problem, talk about each other's view on that
and try to get to an outcome. That is what we expect people to do. It is a big funnel. That final mediation process
which I was talking about is a formal mediator, who is trained, who can sit there with the parties and try to nut out
what would be a reasonable, sensible compromised outcome that you can get to and take a view and make a
decision. I do not think I am disagreeing with you. I am just saying that we are actually mediating all the way
through that process to some extent.
Mr VAN MANEN: If you are saying that the final person is somebody who is trained et cetera, I am
assuming that the other people in the process, including your advocate in the bank, are also trained mediators and
have the relevant qualifications.
Mr Hodges: Yes. Their job is to look at disputes and attempt to mediate them. We just use that as a mediation
point at the end point to say: 'Prior to court action, can we have one go at trying to settle this thing?'
Mr VAN MANEN: One final go.
Mr Hodges: Yes.
Mr VAN MANEN: Okay.
CHAIR: Gentlemen, thank you for appearing today to give your evidence. You have agreed to take a number
of questions on notice, and I ask that you to provide those back by 12 April.
Proceedings suspended from 13:03 to 13:43
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COHEN, Mr David, Group Executive for Corporate Affairs, and Group General Counsel, Commonwealth
Bank of Australia
DE LUCA, Mr Rob, Managing Director, Bankwest
CHAIR: Welcome and thank you for attending today's hearings. The committee has received your
submission, No. 48, and subsequent answers to questions on notice. Would you like to make a short opening
statement before the committee proceeds to questions?
Mr Cohen: We welcome the opportunity to appear before the committee today. Since this inquiry was
referred to the committee 10 months ago we have provided a written submission and we have also responded to
other submissions that the committee has received; we appeared before the committee in December for over two
hours; we have answered over 50 questions on notice; we have reviewed in detail 36 customer submissions
relating to Bankwest; we have provided comprehensive responses, including timelines, to eight specific customer
cases of particular interest to the committee; and we have made available hundreds of pages of content to
committee members. I would just like to take this opportunity to summarise what we have provided.
There are broadly three questions to consider in relation to Commonwealth Bank and Bankwest. First, is there
any evidence of a conspiracy around the purchase of Bankwest and did Commonwealth Bank have an incentive to
impair loans to reduce the purchase price or gain some other benefit?
The unequivocal answer to that is: no. Commonwealth Bank could not reduce the purchase price payable to
HBOS by impairing customer loans, nor did it attempt to do so. Commonwealth Bank repaid all of the wholesale
funding, and there was no claw-back possible. There were no warranty claims in relation to impaired loans. There
was no loan guarantee from the British government, as has been claimed, and there was no capital benefit from
impairing loans, as has been claimed. Commonwealth Bank incurred more than $2 billion of losses on Bankwest
commercial loans and had no recourse to other parties for those losses. They were borne by Commonwealth Bank
shareholders. A conspiracy theory is simply not true.
Secondly, putting aside the conspiracy theory and the lack of any motivation to do so, did Bankwest take action
against customers who were meeting the obligations on their loans? Clearly, the answer again is: no. We have
examined 36 of the submissions provided to the committee. Of those 36, the customer was in monetary default in
33 cases. Of the remaining three, in one case there was no monetary default at all and, therefore, no enforcement
action was taken. In the second case, the customer appointed a voluntary administrator itself, not Commonwealth
Bank or Bankwest. In the third case, the customer invited Bankwest to appoint a receiver because of its financial
difficulties.
Thirdly, excepting that there was no conspiracy and the customers were failing to meet obligations to
Bankwest, did Bankwest act too quickly or did it fail to adequately work with customers? Again, the answer is:
no. We have examined 28 submissions related to Bankwest where a receiver was appointed. The average number
of days between the first default evident and the appointment of receivers was 539. That is 539 daysnearly 18
months. The median number of those days was 397.
If I can just summarise it for you, around 40 Bankwest customers have provided submissions out of around
26,000 commercial customers. Around 12 CBA customers out of 126,000 commercial customers have provided
submissions. Some individuals continue to claim Bankwest appointed receivers to more than 1,000 cases and
constructively impaired $8 billion of loans. These claims are simply fictitious.
There is no doubt that a business in financial hardship is stressful for a customer. If the inquiry produces
evidence of any customer being mistreated or any new information about their cases, we are always willing to
review our actions, as we have previously made clear. However, some customers who have appeared before the
committee have simply not given an accurate picture of events, and we cannot allow these statements to stand
without correction. We have provided clear, factual evidence to refute these inaccurate claims. Some customers
who appeared before the committee claimed that their loan was put into default despite never missing a
repayment. That is just not true. Of the eight customers the committee identified as being of most interest, seven
ended in receivership. Every one of those seven missed repayments or failed to repay their loan when it expired.
There has been no evidence produced to explain why Commonwealth Bank or Bankwest would take action
against a customer who we believed had the capacity to repay their loan. The interests of the bank and our
customers are aligned. That is, the best outcome is that their businesses flourish and they repay their loans.
Instead, in these seven cases where a receiver was appointed, Commonwealth Bank wrote off close to $190
million. While we worked with each of these customers for a significant period of time in an attempt to improve
their circumstances, in all but one of those cases, unfortunately, this was not possible and the actions taken were
an unfortunate last resort.
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Thank you, Chairman, for the opportunity to give the opening statement. We look forward to answering your
questions.
CHAIR: Thank you, Mr Cohen, for your opening statement and for the effort you have gone to to answer a
range of questions on notice. It may not surprise you that, just as you maintain that some of the facts that have
been put forward in the submissions are not accurate, we also hear extensively from consumers that some of the
responses you have provided are not accurate, and we may well engage with you further in terms of
understanding just how transparent you are happy to be with some of the answers you have provided to us to
allow consumers to put forward any evidence they had to refute some of the positions you have taken.
Mr Cohen: I am very happy to do that.
CHAIR: We thank you for the work you have put in. I take it you are aware of the changes that are proposed
to take effect on 12 November this year in terms of extending unfair contract provisions to small business?
Mr Cohen: Yes, I am.
CHAIR: You are familiar with ASIC's guidance material?
Mr Cohen: Yes, I am.
CHAIR: Could you talk to the committee about what processes the Commonwealth Bank has in play at the
moment to review your standard contracts to meet the intent of ASIC's worked examples?
Mr Cohen: Yes.
CHAIR: I think the most pertinent one is probably their third worked example which says that under the
current construct, where the bank essentially has a unilateral right to vary a range of terms and conditions, to
make it a fair contract then a small business would be needed to give an exit clause to exit without penalty in an
appropriate time frame from that loan. Could you just talk about processes and where you think that will end up in
terms of extending that to small business?
Mr Cohen: Certainly. I think the first point to make is that since the legislation was first mooted and then
passed we have had a project underway across the group to review documentation to ensure that we do comply
with the legislation from 12 November. That process is underway. It involves a cross-team projectso it involves
business people, legal people and risk and compliance people. We are going through every contract
systematically, as we did when the unfair contracts regime was introduced at a consumer level a couple of years
ago. We are following pretty much the same process as we did then, and that project is well underway.
One point that I would make is, as you would be aware, the new regime, as it applies to small business
contracts, does have a $300,000 or $1 million threshold which, in cases such as the one that we have been
considering with the committee, unfortunately does not necessarily help much because it does not catch those
cases. There is, I suppose, an issue in that those thresholds will catch certain but not manysorry, not allof the
relevant, or business loan, contracts that we have been talking about.
CHAIR: Would you be supportive of raising that limit?
Mr Cohen: I think our suggestion would be: let us see what this first manifestation is and how it works, and
see what the experience is for a short period before people consider extending it again. It is a new regime, and I
think it is sensible for us to see how that new regime is going to operate for a period before making judgements as
to whether it ought to be extended.
CHAIR: So if it is within the bank's gift to exercise your contractual arrangements with customers as you
determine given that ASIC have basically indicated that they will not seek to determine what is a fair contract or
notthey leave that to the courtsand given what you have just said about your desire to work with customers,
would the Commonwealth Bank look to unilaterally and voluntarily increase the monetary limit upon which you
apply the same process of providing fair contract terms and provisions to small business?
Mr Cohen: I think our position is as statednamely, we want to work within the regime as it exists at the
moment to actually seed it first to see how it works out from both our point of view and from a customer's point
of view. Then I think we can make more sensible decisions as to whether it ought to be extended voluntarily or
mandatorily.
CHAIR: Can I take you to the issue of responsible lending practice. We have at least one submission in some
detail that talks about a loan the Commonwealth Bank provided to a small business. There is email traffic to
indicate that the bank's assessment of the security held by this person and their business, including their personal
assets, was comfortableI think the wording was they 'gave a degree of comfort'but recognised that their
ability to repay the loan was questionable. Yet the bank made the loan. Why do you do that?
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Mr Cohen: That is not the general practice. We apply loan serviceability tests when assessing an application
for a loan. Our business people and our risk teams who assess applications are trained in serviceability
calculations. It makes no sense from our point of view, nor the customer's point of view, to enter into a loan where
the customer is known not to be able to service a loan. That makes no commercial sense at all.
CHAIR: Then why would a line manager within your business, and the various people who sign off on the
supervisory levels of approval, have approved that loan?
Mr Cohen: Which loan are you specifically referring to?
CHAIR: It was one in Tasmaniato a small business.
Mr Cohen: If you can give me a customer name I can give you details, potentially.
CHAIR: We can do that, but I am looking here more at a governance-compliance regime within the
Commonwealth. If that is not in the business's interest and it is not in the consumer's interest, how would that
have slipped through your system?
Mr Cohen: It should not have. I cannot give you the specifics because I do not know the customer name. If
you tell me the customer name I might be able to give you the specifics at a general level, which is where I think
you are pitching the question. Our systems and our processes are designed for that situation not to arise. So if it
did arise then we would need to look into that.
CHAIR: In this case, it was looked into. It was lodged with FOS, and FOS found that there was
maladministration within the bank over that loan. What action was taken against individuals within the bank who
were part of the process?
Mr Cohen: Chairman, I have asked you three times now for the name of the customer and you will not tell
me, so it is very hard for me to answer the specifics.
CHAIR: I am happy to tell you but not in public session.
Mr Cohen: Okay. I am happy to answer you but not in public session as well, once I know the name.
CHAIR: Let's take it back to a general level then. In a situation where FOS found that there had been
maladministration, regardless of who the consumer was, what would your expectation be about action the bank
would take?
Mr Cohen: If there was maladministrationand it sounds like it was proven in this case, at least as found by
FOSnormally in those circumstances we would look at the individual concerned and their conduct and look at
their performance on the individual loan. If we found that they had failed to meet their obligations both in terms
of their key performance indicators and their risk requirements then a range of sanctions could be applied. It
would depend on the individual case. The range of sanctions could be, for example, a training counsellingin
other words, go and do more training; it could go to something more significant such as a reduction of pay or of a
bonus; or, if it were a very serious case, it could go to termination of employment.
CHAIR: That would be a breach which would be reported to ASIC?
Mr Cohen: Not necessarily, because the breach reportingagain, depending on which area we are talking
aboutis often done on the basis of significant breaches. So, an individual case might not amount to a significant
breach. As you are probably aware, in the Corporations Act there are various tests for determining when a breach
is 'significant'. It is unlikely that a single individual case, unless it was something that was systemic or there was
evidence of a systemic issue, would amount to a reportable breach.
CHAIR: In the correspondence that FOS sends out to people who make a complaint through that system there
is an indication that, if the bank or lending institution is found to be at fault, FOS will seek to restore the
consumer to the position they would have been at prior to that loan or if that loan had not been made. Do you
support that as a general principle?
Mr Cohen: Yes, generally, we do. That is the situation which we find ourselves in those cases where FOS
does make a determination in favour of the customer. For example, if it were maladministration or 'mislending',
the intention would be to reduce the loan amount by the amount of excessive lending, if I can call it that, and then
repay interest that was paid on that excessive amount and the fees that there were paid on that excessive amount
so that the customer is in a position whereby they were effectively lent what they should have been lent.
CHAIR: If following the process with FOSand, again, a generic questionFOS realised that, because of
new evidence that was presented, their determination about the size of that excessive lending had been
inappropriate, despite the fact that it made a determination would the bank seek to actively work with the
consumer to redress that situation, or would you rest on the finding of FOS and allow it to sit at that point?
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Mr Cohen: From our point of view, it would be unusual for us to simply rely on the strict finding of FOS one
step before FOS received updated information. From our perspective, we try to ensure that we give excellent
service to customers, and that does not just mean in the lead-up to entering into a transaction; it also means
afterwards. So, at a general level, on its merit, if there were subsequent indications that lending had been
excessive, over and above the extent previously determined by FOS, that is something we would look at seriously.
CHAIR: Would you require FOS to make a new determination, or would you be happy to engage with
clients?
Mr Cohen: Generally speaking, no, we would not insist on going through another FOS process. In those
circumstances, one has to be both practical and understanding of the customer's situation. If we have had
information brought to us that suggests that the lending was more than or more excessive than the FOS
determination, and that is not a fanciful or lightly made allegation but is backed up with some evidence, then that
is something that we would take seriously and we would not require that it go back to FOS for yet another round.
CHAIR: It has been put to the committee that we should consider a commercial arbitration option to be built
into contracts. What would the bank's view be if that became a standard part of contracts, for lending above a
certain threshold? We are generally talking here about a larger companynot a corporation but an SME. Should
commercial arbitration be something that is a standard way of resolving these issues? So, essentially, a FOS but
built into the contract.
Mr Cohen: But built into the contract rather than being through a body or an agency as such?
CHAIR: Yes.
Mr Cohen: Well, it is interesting; over the years, commercial arbitration has evolved from being quite an
expedient alternative dispute resolution mechanism, and it has developed to the point where actually it is not
much more expedient these days than court proceedings, unfortunately. It is still more expedient. It does not
suffer from quite the same resource constraints that the court system often suffers under. However, it has evolved
somewhatand I think somewhat disadvantageously for the sorts of purposes that you are talking aboutfrom
being quite an expedient alternative way of resolving disputes into quite a technical and, in some respects,
legalistic way of resolving disputes. So my only caution would be to say that, whilst in the past it had quite an
attractive element to it, these days commercial arbitration itself is quite a lengthy, time consuming and legalistic
process. Perhaps to just take your question away from commercial arbitration per se and to look at some
alternative dispute mechanisms, my response to that would be: in the case of small business, that might be an
appropriate position to take. However, I imagine that, in the case of medium to large businesses, we tend to
operate on the basis that those businesses are able to pursue their legal rights if the parties are unable to come to
an agreement.
Mr RUDDOCK: As long as they are not wound up or bankrupted.
Mr Cohen: Correct. Yes.
CHAIR: Which appears to be the case for many of the people who have been affected by the sort of thing that
we are looking into. Can I take you to the issue of remuneration. The new CEO of one of your competitors has
recently made some comments about reviewing the remuneration structures of staff because of the potential for it
to adversely impact on culture and practice. We have seen the head of ASIC make comment on this and a range of
people identifying that the culture within a bank or within any institution is as important as the conduct of any
individual person who may be labelled a bad apple. When it comes to lending practice, we have had concerns
raised with the committee about remuneration structuresand I notice in your answers to questions on notice that
you gave quite a detailed breakdown about, essentially, the gate that people have to pass in terms of their ethical
conduct before they are even eligible for bonuses. Can you describe to us what your compliance-checking process
is to evaluate their conduct so that there is some level of assurance that it is not just a box-ticking exercise but that
their conduct is indeed being scrutinised to stop the kind of behaviour that would ultimately disadvantage a
customer who was given a loan, as we saw in this case in Tasmania, that they could not service, or was on the
basis of a valuation that was very optimistic.
Mr Cohen: Yes.
Mr De Luca: I am happy to respond to that question. Just to give you a little on how it works on a day-to-day
basis: from the point of origination when the commercial lenders put through a submission to provide financing to
a business, depending on delegations and authoritieswho can actually sign off on and approve thatthat has
gone through its process. Typically they are risk officers. Once the loan has been approved, then there is ongoing
monitoring of the performance of the loan. Typically, there are things like arrears management; so if the loan goes
in excess of its limitsgoes overdrawnthat appears on a report.
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On a monthly basis the business bankers have a scorecard assessed against their performance. It looks at a
number of typical metrics. That is reviewed by line 2 in our case, which we call risk management and which is
independent from the commercial lenders. When it comes to the performance remuneration process at 30 June,
when we assess the individual commercial lenders, there is input from detailed reviews from risk officers on the
performance, the loans and the portfolio to give managers and senior management comfort that they have
operated within the terms and conditions from a compliance perspective.
CHAIR: I am not filled with comfort as I read The Weekend Australian, where I see that your compliance
checks within the organisation around things like acquisition of IT involve lines of management who disregarded
concerns that were raised because of, in this case, the potential for them to seek illegal benefit. The systems of
compliance and checks obviously broke down, and those bribes occurred, but we have also heard that
remuneration packages relate not just to individuals but also to groups that they work within, so clearly there is an
incentive at those levels of sign-off within the group for the group as a whole to do well. Pressure can be applied
as it was in the case of the IT acquisition.
My question then extends to whether in the area of financial advice we are seeking to raise the ethical,
educational and professional standards of advisers and in things like FOFA make them individually accountable
for statements of advice. How would the bank respond to a requirement to lift the individual accountability of the
people who sign off on a small business loan where it is potentially going to impact on not only the livelihood but
the families and the family home equally as significantly as the financial advice somebody might give around
retirement savings? If the requirement were to come in so individual accountability became a feature of the
lending system of Australia, what would be the unintended consequences? What would be the benefits of moving
down that path?
Mr Cohen: It is difficult to say what all those unintended consequences would be. I think one issue that the
industry, not just us as an institution, would have to consider is whether that makes the industry sufficiently
unattractive for people to join. Does that mean that you do not get the best quality people? Does that mean that
you end up with second-level quality people? Personally, I think there are ways around that, but that would be one
issue that would be considered.
I think the overall notion of having individuals accountable, whilst it has some attraction, does not necessarily
deal with what some of the regulators and others in the industry have been talking about, and that is the absolute
importance of having the right culture in an organisation as a whole. It needs to be a culture that is organic. I think
having that culture imposed purely by regulation only works to a degree. That is not a reason to say it should not
be coming at all, but it should only be one of a number of initiatives.
CHAIR: Have you organically reached out to make some remedy to, for example, the gentleman who was the
whistleblower who objected to things like this IT contract? That speaks to the consumer, the broader public and
all the employees in the Commonwealth that the culture in the bank still does not support individuals who wish to
do the right thing even if it is seen to go against the interests or the wishes of somebody in the line of
management.
Mr Cohen: I have actually met with that individual. I met with him in June and August of last year when it
became apparent to us that he had raised issues with his direct manager in December 2013, just before the IT
contract in question was signed. It became known to me in June last year that he had raised issues. The reason it
became known to me is that, once the police laid charges against the two former executives and the issue was out
in the public domain, that former employee came forward to say, 'I raised issues back in December 2013 with my
direct manager and, by the way, I was then made redundant several months later.' I was sufficiently concerned by
that when I received that notice that I met with him on 30 June to hear from him, firstly, exactly the circumstances
of him raising the issues and, secondly, his concerns about being made redundant. He was concerned that he had
been made redundant because he had raised issues.
I then investigated with a couple members of my legal team. I personally went into quite a lot of detail around
the restructure of his team. What happened in January 2014, about a month after he raised issues, was that his
entire team in his division was restructured and seven executive manager positions were reduced to, I think, five.
Everyone had to apply for their position again. Everyone was scored on an individual basis. I went into that in a
lot of detail to look at his individual scoring on all of the criteria for the role against the criteria scores for every
other candidate. I then met with him in August of last year to take him through that and to explain to him my
view, which was that I had looked at it as impartially as I could together with one of my legal team members, who
is an expert in employment law. We had gone through the selection criteria in detail, we had gone through the
scoring in detail and in fact he had not measured up as well as some of the other candidates against the criteria.
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CHAIR: You have used the word 'impartial' there. It is my understanding that the person who perhaps did that
scoring was in fact one of the managers to whom this person had objected to the IT deal going through and who
was subsequently jailed. Is that correct?
Mr Cohen: No, that is not right at all.
CHAIR: It was reported in the paper this weekend. That is incorrect, is it?
Mr Cohen: You should not believe everything you read in the papers. I will tell you the facts. He raised his
issues in late Decembermid-December, actually2013 with his direct manager. His direct manager reported to
one of the executives who we subsequently terminated in December 2014. The assessment of criteria and skills
used to determine who would take roles was carried out by the person to whom he reported his concerns, so his
direct manager carried out that assessment. The ex-employee did have an interview with one of the executives
who was terminated and who has been charged, but it was not that executive who made the choice. It was his
direct manager who made the choice.
CHAIR: Okay. The reason I am labouring this point a little is that I am concerned about understanding what
has changed within the bank and its culture in that, if those kinds of concerns could be raised and dismissed by
management over something as transparent as poor acquisition practice that puts the bank's money, let alone the
consumers', at risk, then somebody who is concerned about pressures within a business unit of the bank in terms
of remuneration structures and lending practice who wishes to raise a concernwhat confidence can the
committee or the public have that concerns they would raise would be dealt with in any more of a transparent or
effective manner given that, because of the group remuneration incentives, the people in the management stream
may see that such a complaint could impact their personal remuneration bottom line? What has changed in the last
two years after that experience to make sure that people who wish to raise a concern are able to do that? I have
met with people who have left the banking system because their concerns over the corrupting influences of
remuneration structures were not listened to.
Mr Cohen: I understand. I will deal with that on two levels. Firstly, at the specific level, the issues raised by
the former employee did not give any indication of the sort of criminality that has been alleged to exist. He raised
issues specifically on two fronts. One was that normal procedures around contracting had not been followed. At
the point he raised issues with the executive who was dismissed, he was concerned about a lack of legal review
and a lack of due diligence review.
CHAIR: Excuse my interrupting. The very concern we are raising around things like responsible lending and
the corrupting influence of remuneration structures is that you have said they rely on adherence to and compliance
with a process, and that is exactly what this person reported and was ignored for.
Mr Cohen: Yes. He raised a number of process issues that concerned him. What has not been reported
subsequently is that, having raised the issueshe raised the issues around no legal review and due diligence quite
early in the contracting processwhat he did not know and what he has not subsequently revealed publicly is that
there were lawyers working on that transaction. In fact, there were external lawyers working on that transaction.
He has never mentioned that, but that is a fact. There were actual processes going on around due diligence bearing
in mind that this was a relationship that we held with the IT providers since 2012. This was not a new
relationship; it was a relationship under which a contract existed for some time. He was not particularly close to
that previous contract, so, whilst there were processes in place, he was not necessarily aware of them.
CHAIR: And they were not necessarily particularly effective from a due diligence perspective either, I might
suggest.
Mr Cohen: The service provider had been doing so since 2012 quite successfully.
CHAIR: Do you frequently have $2.9 million worth of bribes paid as part of your normal process?
Mr Cohen: No, we do not. In fact, because it was criminal as alleged and because it was not happening above
board, the due diligence around it would never have picked it up. The due diligence goes into the nature of the
company we are contracting with. The bribes were not paid by the company we were contracting with.
CHAIR: I do not particularly wish to go down the rabbit hole of that contract. My point which I think I have
made is that I have concerns about the ability of people within your system to report concerns and be listened to. I
would be happy to take an answer on notice about what specifically has changed in terms of the reporting and
ability of somebody essentially to whistleblow around concerns in that structure.
Mr Cohen: To say one thing in closing on that point: we have considerably revamped our whistleblowing
system over the last couple of years and particularly in the last 12 months. We have a hotline or reporting line
called Speak Up. It is staffed by an external contractor, not our internal people. It receives information either
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confidentially or with name attached as the staff member wishes. That external consultant then makes a
determination as to what type of issue it is and therefore what sort of resource should be applied to investigate
itwhether it is a legal issue, an HR issue, a commercial issue or a fraud issue, for exampleand then
investigations are carried out. The enhanced system involves keeping the whistleblower informedobviously
only if they are not an anonymous whistlebloweralong the way. I think that in the past a weakness of the
process has been knowing how to deal with the whistleblower, so that has been enhanced considerably. There is
now also an oversight committee comprised of four group executives of the bankI am one of themthat
oversees the complaints every quarter and looks at the progress of each complaint to make sure none are just left
wallowing or stuck but are actions. It also looks at the treatment of the whistleblower to make sure they get the
protections they deserve. It also looks at the consequences and how the consequences have been dealt with.
CHAIR: Thank you.
Senator O'NEILL: Have you appointed that gentleman who was the identifier of these practices quite early
on to one of those probity boards that you were just talking about then? Is he still looking for a job? He might be
your man.
Mr Cohen: No, he is not any longer looking for a job. When I met him in June and August of last year, he
was working, from memory, for another financial institution. He actually expressed that he liked Commonwealth
Bank and would still like to work for Commonwealth Bank if there were an opportunity for him to do so. Whilst
he was happy with his job at that stage, he would come and join us if there were an opportunity to do so. We have
not made an offer to him. The probity that I have just described to you is an internal committee of group
executives, so senior executives.
Senator O'NEILL: There are many more questions that I would like to go to on culture before I go to my
questions around value of investigative accountants and receivers. I also want to talk to you a little bit about Basel
I and II. My questions this morning to the ANZ bank were really about cultural dimensions of behaviour that
cannot actually be measured with the sorts of processes we have just been hearing about from you. Leadership is
required to deal with that behaviour that goes beyond the pale and will not be accepted. I have to say that I
appreciate how well prepared you are, Mr Cohen, but that the tone of the conversation that we consistently hear
is, not unsurprisingly, defensiveit is your role to be here and defend the bank. I do not sense a shift in language
use about conciliatory behaviour and more of an ethical discourse around customer relations. I do not quite hear
that we are there yet, if I can make that observation.
I will go to the valuers investigating accountants and receivers. Where a bank does not appoint a receiver but
proceeds to possess and sell off a property, what governs the Commonwealth Bank's conduct in terms of using
proper processes, ensuring that that property is sold at market value in a manner that is agreed to and understood
by the commercial loan holder as well as the bank officer?
Mr Cohen: This is in circumstances where a receiver has not been appointed but where the bank itself sells a
property?
Senator O'NEILL: Yes.
Mr Cohen: That is known as mortgagee in possession, as you would probably know. There is a whole body of
case law over several hundred years dealing with the obligations of a mortgagee in possession. There are also
obligations under our conveyancing legislation dealing with that. The legal obligations are very well known. I
should say that it is probably in the vast minority of cases where the bank acts as mortgagee in possession. It is
definitely more common for a receiver or other controller to exercise a power of sale and sell property. However,
where a financial institution generally acts as a mortgagee in possession and actually sells the property then it is
subject to the common law and the statutory law duties around doing that.
Senator O'NEILL: We have heard a range of evidence this morning from different organisations that are
responsible for the management of valuers in the country. What are the processes that the bank engages with in
terms of getting a valuation that allow the loan holder to be part of the process of determining the terms on which
that valuation is undertaken and receiving the valuation? What is the relationship in terms of who pays for this?
Mr Cohen: You may recall, Senator, when we appeared before the committee in early December, as part of
our opening statement we made a suggestion around valuations because
Senator O'NEILL: You did.
Mr Cohen: I think as we discussed then, the practice to date has not been to necessarily provide the customer
with a copy of the valuation that the bank requires to be obtained.
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Senator O'NEILL: Which is very different from what we heard from the ANZ. They were at quite a degree
of pain today to make sure we understood this was a longstanding process, for their part.
Mr Cohen: I am just talking at a general level here, not individual cases. I did not hear ANZ this morning.
That is why we made the suggestion in December that, across the industry, the practice could change to one
whereby, if a valuation is obtained by a financial institution, then a copy of the valuation is provided to the
customerall the more so, as we discussed then, because the customer is paying for that valuation.
Mr RUDDOCK: Has your practice changed?
Mr Cohen: Has our practice changed to date? No, not yet.
Mr RUDDOCK: You have not implemented it voluntarily?
Mr Cohen: No, not yet.
Senator O'NEILL: We find ourselves at a point where the customer is still paying for the valuation. They do
not get to see it. I would assume then that they are not a part of the decision making around the terms that are
given, or the directions that are given, to the valuer?
Mr Cohen: You mean the instructions to the valuer, for example?
Senator O'NEILL: Yes.
Mr Cohen: Generally speaking, if it is a valuation that is obtained at the commencement of a loan
relationship, the bank will instruct the valuer. Likewise, at the enforcement stage, if there is
Senator O'NEILL: Is there a standard form that you use for that?
Mr Cohen: Of the instructions?
Senator O'NEILL: Yes, at the beginning.
Mr Cohen: I do not know the answer to that. I do not know whether it is a standard form. We can find out for
you and take it on notice.
Senator O'NEILL: That would be good, if you can provide us with a copy. One of the interesting things that
seem to be emerging is the difference in the type of valuation that is acquired as the business is constructed and
then there is a significant change at a point further down the line when the business looks like it might be in
distress. There is a different set of instructions issued, which are extremely opaque to us at this point in time. Who
makes the decisions around that? From what you have said, certainly there is no consultation with the loan holder
about those directions and change in directions to the valuer.
Mr Cohen: No, that is generally the case. The only other thing I would add is that, in December, we suggested
therefore that where appropriateand we acknowledged that not all circumstances were appropriatethe basis of
valuation going in should be the same as the basis of valuation going out, where that can be done, which I think
gets to your point around standardisation of instructions.
Senator O'NEILL: And also a degree of transparency and understanding. One of the things that strikes me is
how we have had to go through so many inquiries to get to the point where we now know, as of today, that there
are different types of valuations. There is a market valuation and there is an asset valuation. Could you give me a
little bit more information around whether or not it is an asset valuation that you are actually getting when you
seek to sell off a distressed property? Is that what you are asking for?
Mr Cohen: It depends on the circumstances. It depends very much on the condition of the asset, the condition
of the industry and the condition of the market. Generally speakingand this is again at the generic levela
valuation will be sought which seeks to value the asset as it stands on that day.
Senator O'NEILL: So its worthits investment value rather than its market value. Is that correct?
Mr Cohen: The valuers apply their professional expertise and their professional standards in coming up with
the value, but what we generally ask is for a valuer to tell us what the value of the asset is in the market. In order
to determine that, amongst other things, the valuers will look at comparable sales of similar properties in similar
locations.
Senator KETTER: The RICS organisation indicated that the standard assumption as part of those instructions
is that there would be reasonable time given for marketing of the property, so that has to be one of the
presumptions. Are you aware that there may be some situationssay, a mortgagee in possessionwhere there is
a truncated marketing period as part of your instructions?
Mr Cohen: Generally, truncated marketing periods are rare, and they usually arise only in fairly unique
circumstances. For example, the only unique circumstance that I can give you straight off, and Rob might be able
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to give you more, is where there is clear evidence that a market is rapidly declining for that type of asset in that
location. In those circumstances, it is not to the borrower's or the bank's advantage to delay, if it is felt that that
market is going to continue falling rapidly.
Senator KETTER: But in that case, and in many of the situations we have heardyou might disagree with
thisthe borrower feels that it is not to their advantage to have a 'forced sale', to use that term.
Mr Cohen: Yes, and we completely understand that. Actually, it is not to the bank's advantage either for a
property to be known to be sold as a forced sale or a fire sale by any stretch because it tends to scare off bidders
and it tends to produce a lower price, which is not to anyone's advantage.
Senator O'NEILL: We cannot seem to get any clear line of sight over the valuers. You have a pretty big
institution that uses valuers fairly frequently. Could you give us an indication of how many valuers you believe
are out there?
Mr Cohen: I could not tell you how many valuers are out there.
Senator O'NEILL: You have no idea?
Mr Cohen: We have a panel, as I think we have explained to you previously, but, as to how many valuers
there are in total, I do not know. We do know that some valuers are members of the Royal Institution of Chartered
Surveyorsthe organisation you heard from todayand some valuers are not.
Senator O'NEILL: How much does their membership of a particular organisation influence your
determination of whether they should be on your panel or not?
Mr Cohen: We select our valuers based on a range of factors: expertise, experience, knowledge of the
particular asset classwhether it is a shopping centre, a commercial property or a hotel, for exampleas well as
the size of the organisation and the extent of resources.
Senator O'NEILL: How do you know the size of organisations? We cannot find that out.
Mr Cohen: We know very well the size of the organisations that we deal with regularly. It is like, for
example, dealing with a large law firm or an accounting firm. You know the firm and you know their capabilities.
Senator O'NEILL: Mr De Luca, do you want to answer that?
Mr De Luca: I would also say location as well. We want diversification across the country because,
obviously, we have a spread of customers all across the country.
Senator O'NEILL: It would be helpful for the committee if you could give us a bit of a mud map of the lie of
the land as you see it and any understanding you have of the different levels of probity and oversight that are
embedded in the different organisations that give the valuation certification. There seems to be quite a bit of
variation within different organisations, and certainly the quality of the evidence we have received has been very
variable.
Mr RUDDOCK: How many are on the panel?
Mr Cohen: How many valuers are on our panel? I do not know off the top of my head how many individual
firms, but we would have at least a dozen valuers. In fact, when you take into account all the geography there
would be many more than that.
Mr RUDDOCK: So not hundreds.
Senator O'NEILL: Not hundreds, no, which is interesting. If a valuation is in dispute between the bank and
the client, what processes do you have in place currently to deal with that? And what processes do you propose
going forward, given the fact that generally you are not yet sharing these with people?
Mr Cohen: At the moment there is no formal process in place. If we obtain a valuation and the customer
believes that valuation is flawed for some reason, there is no formal process in place. Having said that, if the case
or the client account is being handled by our area that deals with distressed or impaired loans, there is regular
communication between the two. So there would at least be an opportunity for a discussion.
But, firstly, on the point that we made earlier, because the client does not automatically receive the valuation,
there is no automatic way for the client to say, 'I object to that valuation.' Secondly, going forward, in line with
the comments we made in December about the appropriateness of providing valuations, that would at least bring
the issue out into the open fully. I suppose that could lead to an opportunity for discussion. I have not given any
thought to whether there ought to be a formal mechanism allowing the client to dispute the valuation, but clearly
if the customer is given a copy of the valuation then there would be a much more open and knowledgeable
discussion on both sides around that valuation.
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Senator O'NEILL: How would it impact on the efficiency and business of the bank if at the commencement
of business the terms and conditions that were set out for the valuation and the valuation itself were provided to
the client? At a later point, then, they would have that to refer to. Would it be a major imposition on the bank to
provide that at the commencement of the banking relationship?
Mr Cohen: No, I do not believe so. Rob can comment on this in a bit more detail in a second, but generally
the practice is that when a valuation is obtained up-front, at the time the loan is applied for, there is a discussion
with the customer about the valuation, because that valuation sets the security level, if you likein other words,
to what extent the bank is secured by that particular property.
Senator O'NEILL: So, seeing as it is already undertaken, it would not be a major problem for you to hand
that information on to the person to hold?
Mr Cohen: No, I do not believe it would.
Mr De Luca: At the point of the origination the client would have input into the instructions. To answer your
earlier question, there are times at the point of origination that the customer may disagree with the valuation. If
there is another valuer on the panel that they are happy to pay for, we give them the option to get another
valuation.
Senator O'NEILL: So they have to pay twice to be unhappy?
Mr De Luca: Yes.
Senator O'NEILL: Moving further down the line, you have indicated a willingness to consider sharing these
valuations, I am assuming at each of the points that we are discussing, whether it is at the happy beginning or the
distressing close. You are proposing to share that. When do you think that that will be the case?
Mr Cohen: That is a good question. I have not actually raised it within the business as something we are
doing yet. It is something that we are comfortable withwe would not have suggested it in December otherwise.
One of the issues that has been on our mind is what recommendations might come out of this inquiry, so we will
be very interested to see what they are. But, as I have said, we think it is a good idea. We would be happy to do it.
Senator O'NEILL: I have to say, given the public relations drama that surrounds banking at the moment, and
your bank, I am surprised that you have not taken the opportunity to do something of that kind already. Maybe we
can wait for it next week or the week afterwe will see.
Could I go to Basel I and II. In today's Sydney Morning Herald there is an article by Ms Rose and Mr Eyers, I
think it was, about concern about the 'brittle' nature of the economy, with APRA suggesting there is 'still work to
do to reduce reliance on short-term funding' and that there will be a 'higher capital requirement', which I think was
characterised by ANZ as 'Basel IV'. One of the concerns that has been raised with this committee was that the
Basel I and Basel II change meant that there was a different requirement on the bank and that there was some
incentive there to change your loans structure to comply with Basel. It has been put to the committee that under
the Basel II rules APRA required Bankwest to significantly increase regulatory capital held for non-investmentgrade corporate loans on the Bankwest book. Do you have a view to put on that, Mr Cohen?
Mr Cohen: Yes, I can find the particular letter that we have sent you. We have already commented on that,
and we have said actually there was no incentive through the Basel capital impositions to change the treatment of
loans.
Senator O'NEILL: I keep hearing 'bahl' and 'Basel', but I know that both of them are in active use. In terms
of the capital that is required to be held and increasing capital demands on the bank going forward, should people
with commercial loans be concerned that the bank might be beginning to reassess them if the capital requirements
demand that the bank changes the capital that it holds and reassesses its risk with regard to commercial loans and
lending?
Mr Cohen: What I will say is that probably the group of stakeholders who are most concerned at the moment
about increased capital holdings are investors, because the more capital that is held and that cannot be utilised in
the business the lower the return on equity for the institution as a whole and, therefore, the lower the return that a
shareholder receives. It is a fact that all of the Australian major banks have significant foreign investors, and those
foreign investors make their decisions on where to invest based on the return that they can get in the various
investments they make. So we do hear that there is a degree of interest, perhaps even heightened interest, amongst
foreign investors around how the capital implications for Australian banks will pan out in terms of the return that
they receive on their investment in the bank. In terms of customers, which I think is specifically what you are
asking about, we do not anticipate that holding more capital, whether it be for prudence or whether it be for
operational risk reasons, is going to impact adversely on the organisation's willingness to make commercial loans.
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Senator O'NEILL: One of the arguments was that around 1 January 2009 there was a critical period of
transition from Basel I to Basel II that impacted at the same time, because of the purchase of Bankwest, on the
capital holding of the Commonwealth Bank. Those two things are not connected in any way, in your view?
Mr Cohen: No, senator.
Mr RUDDOCK: I noticed on 15 February a Mr Narevyou may know himwas interviewed by Ticky
Fullerton. They were speaking about a project Magellan, which was revaluing the loans of thousands of
commercial clients by some 75 per cent. Mr Narev went on to say that it was important to understand the history
of the purchase of the bank: it was really struggling for a number of reasons, it did not have a strong funding base,
and it had done a lot of lending which was not prudent and lending that the Commonwealth Bank certainly would
not have done and did not do in those circumstances. He went on to say:
I wouldn't characterise it as aggressive lending. I mean, most of the difficulties we'd been working through over a period of
time have been as a result of loans that were on the book when we bought the bank. We have, over time, made sure that the
lending standards and pricing become prudent, and as a result of that we've had to work through some difficult situations with
some customers.
Perhaps it is not surprising that people may be looking for motivation when, as he did not rebut, it was suggested
that there were thousands of impaired loans. As you said there were no inappropriate motives, I was interested
today that you characterised it as being less significantperhaps only 46 contested loans. If it is such a small
problem, I wonder why you are not in the same club as the ANZ: endeavouring to work these issues through in a
way which may resolve some of the contested questions. Let me just say that I would love to be able to
forensically go through each of the letters that you have adduced for us, and for which I thank you, but the parties
have not seen them. I do not know whether or not they agree with the assertions you have made, or contest them. I
suspect that numbers of them do contest what you have put. So I ask myself, and I put this question again to you,
because I have done it before: whether the bank, rather than waiting for some recommendations from us, is
prepared to be proactive in putting in place a genuinely independent commercial arbitration or mediation where
people are properly resourced, particularly those that have been wound up or bankrupted, to be able to test these
issues and to have them resolved in a way that brings this matter to an end.
CHAIR: Order! Could I have silence, please, in the public gallery.
Mr RUDDOCK: The opportunity is there if the bank is minded to take it up.
Mr Cohen: Thank you, Mr Ruddock, for the question. Firstly, all the responses that we have given to the
committee are available on the website, so all customers have access to them. I am not too sure if all customers
have read them, but all those facts are there. We have been very deliberate in being as open as possible and in
being as fulsome as possible as well, for that very reasonthat we expected these responses to be publicly
availableso that not only committee members but also customers and the public can form a view. That is No. 1.
Secondly, we have provided to the inquiry very detailed responses to the allegations made, and the committee
asked us to look into eight cases in particular, which we have done. We were very happy to do so, and very happy
to provide the fulsome answers that we have. In each of those eight cases we have answered the various
allegations that have been made by customers when giving testimony to this committee, and we have sought to
show exactly where those allegations are not correct.
I do genuinely understand the emotional distress and the financial distress that occurs when a business does not
succeed as hoped, and I do recognise that there is significant emotion involved. However, what I will say is that
we have sought to deal with allegations that quite often are general, and quite often are not specific. In some cases
they are specific, but in each case we have sought to deliver a very specific, fact-based answer so that at least
everybody can be as fully aware as possible of the actual facts. And I would say that, so far, on all of the facts and
the information that we have given the committeenotwithstanding the fact that the wind-up of a business or the
sale of an asset or a business not succeeding as hoped is emotionally distressing and financially distressingthe
fact of the matter is that that does not per se make the actions of Bankwest or Commonwealth Bank wrongful. We
have sought to show you, through the information that we have provided, that there has been no wrongdoing on
the part of Commonwealth Bank or Bankwest.
Mr RUDDOCK: I take it the answer is no, but let me just say that our terms of reference do not permit us to
bring counsel in. The chairman will bring me into order fairly soon when my questioning gets going, and will say:
'There is no more time for you. We have to share it with some of your colleagues.' This is not the forum in which
that can be done, but I do have on my email system today two people who must have known you were putting this
information on the website and who have sought to rebut comprehensively many of the points you have made.
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I do not know how I am going to be able to resolve those issues. I put it again: rather than us having to
recommend that there be a royal commission to deal with these issues comprehensivelybecause there are
matters unresolvedare you prepared to look at some form of independent, and genuinely independent,
mediation?
Mr Cohen: I do not believe there is a single thing that a committee member would want to know that you
cannot obtain from us simply by asking the question. And you have asked many questions.
CHAIR: Order! Ladies and gentlemen, this is a public hearing. I would ask you to listen in silence. If you
cannot show the witnesses that respect, I will ask you to leave.
Mr Cohen: This committee has asked us over 50 questions on notice. We have provided factual answers, we
have provided information, we have been completely open and have shown a complete willingness to answer
every single question that the committee has asked and to provide everything that the committee has sought.
There is not one thing, I think, that a committee member could want from us that you could not obtain simply by
asking. It is going to be up to the government to decide whether a royal commission is necessary but, based on
what we have provided to you and our willingness to answer every single question you have asked, the royal
commission does not seem warranted.
Mr RUDDOCK: Well, I just make the point. I know how you would do it in a proper tribunal, where you
have got unlimited time to forensically test evidence before you, and these committee processes do not lend
themselves to that modus operandi. It is just very clearyou are here for two hours; the chair will share the time
around amongst the membersthere is not an opportunity for that sort of forensic analysis. Our terms of
reference do not permit us to examine individual cases on that basis. We have to find a way forward to deal with
the matters that I believeon the evidence that has been put to us by you and those who have responded to the
evidence that you have put to usneed to be resolved.
Senator KETTER: I would like to return to the issue of the scale of the problem and the quantum of loans
that have been defaulted on here in comparison to the population size that we are dealing with. I would like to try
to come to grips with the population size. You indicated in your opening comments that there were 26,000
customers of Bankwest. I am interested in digging into that number, 26,000. It is possible that that number is your
broader commercial customer base, which includes business deposit accounts, business cheque accounts and
business credit cards, and therefore we might be comparing apples with oranges to some extent. Is there a
distinction between commercial customers and SME commercial loan customers?
Mr De Luca: The numbers that we have provided there are commercial lending customers. We have about
87,000 commercial and business customers overall at the moment. These relate to customers who have actually
had borrowings at the timeeither at the acquisition or today.
Senator KETTER: So 87,000
Mr De Luca: Small and medium-sized commercial businesses. The remaining customers would be a number
of customers who may have just a business credit card, a deposit with us or just a merchant facility.
Senator KETTER: So they were Bankwest SME
Mr De Luca: 87,000 total customers today.
Senator KETTER: Sorry; I want to go back to 19 December 2008.
Mr De Luca: I do not have the number at hand, but it would be more than the 26,000 that you have got in
front of you, who were customers who did not have borrowings but would be SME customers.
Senator KETTER: Okay. In terms of the value of the loan book, I think Mr Cohen has given evidence that it
was $23 billion as at the date of acquisition19 December 2008. Is that your evidence?
Mr Cohen: Yes. Broadly speaking, the commercial loan book was $22.8 billion.
Senator KETTER: I noted that Bankwest reported in their capital adequacy and risk disclosures quarterly
update on 31 March 2009 that commercial loans were to the value of $14 billion, which is a significantly lower
amount. Would that figure be correct?
Mr Cohen: Did you say that was at 30 June 2009?
Senator KETTER: It was at 31 March 2009.
Mr De Luca: Do you know whether that is an exposure number or a facilities number?
Senator KETTER: I note that it is in this 'Capital adequacy and risk disclosures' quarterly update. I am not
sure what the actual
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Mr Cohen: Those are not necessarily the full exposures that we faced to customers as a result of loans. That
could be the exposures at a capital level that we were holding.
Senator KETTER: So it is not comparing apples with apples?
Mr Cohen: No, I do not think it is. I would have to look at it in detail for you, and I am happy to. But, off the
top of my head, it does not sound like it is a direct comparison.
Senator KETTER: What is the explanation for the disparity between the $23 billion and the $14 billion?
Mr Cohen: It sounds to me as if that number that you are referring to, the $14 billion, is more likely a number
based on the capital that we hold against the loansI suspect it iswhich is not necessarily the same amount as
the full exposure under the loans.
Senator KETTER: I go to the commercial loan warranties. I note that Freehills, on behalf of CBA, sent a
letter to HBOS reserving CBA's rights in relation to a number of warranties. That is correct, is it not?
Mr Cohen: Yes, three warranties in particular.
Senator KETTER: These were separate to the 67 commercial loans that were subject to the draft completion
balance sheet dispute notice?
Mr Cohen: That is correct.
Senator KETTER: You have given evidence that CBA has made no formal warranty claims in respect of
customer loans.
Mr Cohen: Yes.
Senator KETTER: Did you ever proceed with the warranty claims that were flagged in that Freehills letter?
Mr Cohen: Yes. We wrote to HBOS and said we believed that HBOS was in breach of three warranties. One
warranty was in relation to basis swaps, the other was in relation to invoices paid by Bankwest for IT platforms
and the third was a claim relating to the discovery that certain letters of credit and bank guarantees provided by
Bankwesttwo were on behalf of HBOS Groupwere off balance sheet. Those were the three issues that we
raised with HBOS. We claimed that those were breaches of warranty. In the end, rather than proceeding all the
way through with a dispute with HBOS, we agreed to settle the claims for $5.3 million.
Senator KETTER: So they were formal warranty claims but were settled?
Mr Cohen: No, they were not formal warranty claims, because we did not go through the warranty process set
out in the sale agreement. Instead we wrote to them saying, 'We think you are likely to be in breach of these
warranties,' and we in fact commenced some legal proceedings at a very early stage around those, because they
said, 'No, we don't think we are.' We settled those legal proceeding on the basis of a payment of $5.3 million to
CBA.
Senator KETTER: So there were no warranty claims in respect of commercial loans?
Mr Cohen: That is correct.
Senator KETTER: Perhaps not formal warranty claims, but were there any alternative settlements reached in
respect of commercial loans that may not have gone through the warranty process?
Mr Cohen: No, none whatsoever. As you will recall, the only process around commercial loans was around
impaired loans, and that was through the price adjustment process that we undertook in 2009.
Senator KETTER: Can you tell us what the settlement that Dr John Schubert referred to at the 2009 AGM as
a confidential post-acquisition settlement related to?
Mr Cohen: Off the top of my head, I do not recall what he was referring to. The only post-acquisition
settlements that occurred would have been around the three warranties that I have just described to you, which did
not relate to commercial loans. That is about all I can recall. I am not too sure if you have anything there that is a
bit more specific.
Senator KETTER: No, that is all I have.
Mr Cohen: We can look into it for you, but I think that would be what he would be referring to. That
settlement occurred in December 2009. Did you say he was speaking at the 2009 AGM?
Senator KETTER: Yes.
Mr Cohen: December 2009 would have been after the AGM, I think, so we will have to look into that for you.
Senator KETTER: Is it possible that that post-acquisition settlement did not relate to warranties, that it could
have been some other settlement?
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Mr Cohen: I am trying to recall whether there was any other form of settlement. We had a number of IT
contracts in place with HBOS where BankWest was continuing to use HBOS IT platforms. We finished those a
little bit early because we managed to transfer BankWest over a little earlier than planned, so it may have been in
relation to that, but there was no significant post-acquisition settlement. The major thing that happened was the
July 2009 finalisation of the purchase price, which involved CBA paying back the remaining wholesale funding
that BankWest had borrowed from HBOS, number 1, and, secondly, the price adjustment process through the
independent expert.
Senator KETTER: Right, but you will come back to us with that.
Mr Cohen: Yes. I will certainly look into what Dr Schubert was referring to at the AGM.
Senator KETTER: Will you be able to give us a quantum of that settlement?
Mr Cohen: Yes, I am sure.
Senator KETTER: I want to return to the vexed issue of Basel I and II, to try to understand that a bit more.
This has obviously been touched on on many occasions, but it has been put to us that APRA required BankWest
to increase significantly regulatory capital held for non-investment grade corporate loans on the BankWest book.
That would have been under the Basel II requirements. Would you know anything about that?
Mr De Luca: When was that?
Senator KETTER: I do not have a specific date for that.
Mr De Luca: There was a process for BankWest, which it went through Basel accreditation. It had its
accreditation revoked I think in 2013 for not following certain processes that it needed to rectify. We are currently
going through a process of reapplying for accreditation. If it relates to that, it means that the portfolio needs to be
assessed on a capital basis on a standardised basis versus using our own models. I think that would be the
difference.
Senator KETTER: My information is that BankWest changed from Basel I to Basel II on 1 January 2009.
Mr Cohen: Yes, that was early. That is correct.
Senator KETTER: That is 11 days after the acquisition.
Mr Cohen: Correct.
Senator KETTER: Did those Basel II regulations require BankWest to hold significantly more capital for
non-investment grade loans?
Mr Cohen: Not to any material respect as far as I can recall. There was no significanceas you probably
know, Basel I and Basel II represent a difference in evolution of the capital standards and also looked at allowing
banks which had more advanced risk management systems to internally rate and internally model their risk
profiles. That was one of the significant differences between Basel I and Basel II. CBA and the other large banks,
as you are probably aware, were able to effectively use their internal modelling systems in order to risk-rate.
Under Basel I that was not possible. Under Basel II that did become possible. That did not happen immediately
for BankWest and therefore it did not make any significant difference to BankWest.
Senator KETTER: I note that the timing of the change from Basel I to Basel II was very close to the date of
acquisition. Was there a particular reason for that or was it a coincidence?
Mr Cohen: That is purely a coincidence. The introduction of Basel II was well flagged in advance. It was
known by the industry for many, many months before the commencement date. In fact, the banks had been doing
a lot of work in the lead up to the introduction of Basel II in order to show that their internal risk-modelling
systems were sufficient to get what is called the advanced accreditation status from APRA.
Senator KETTER: You are telling me that there was not much significant additional capital that needed to be
raised by BankWest to meet those requirements?
Mr Cohen: No, there wasn't any significant difference. To the extent that there was any difference it was
effectively provided through Commonwealth Bank now being the parent of BankWest.
Senator KETTER: So there was some sort of realignment or a new methodology of calculation. Is that what
you are saying?
Mr Cohen: No. What I am saying is that one of the advantages for BankWest of having Commonwealth Bank
as its parent was that Commonwealth Bank was very well capitalised at the time, whereas HBOS had found itself
in a very challenged capital position at the time. So one of the advantages for BankWest was that it was able to
rely on the CBA as a well-resourced parent and, secondly and very specifically, BankWest was able to rely on
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Commonwealth Bank being able to raise wholesale funding in wholesale funding markets at rates that were more
advantageous to BankWest than if it had been trying to do so on its own, which at that point was very difficult.
Senator KETTER: I wanted to move to your review of BankWest's loan book. I want you to confirm that
your assessment of the loan impairment provisions and of the proposed adjustments carried out were in
accordance with BankWest's accounting and credit policies as at 31 December 2007.
Mr Cohen: The review was carried out in 2010. This is Project Magellan I think you are referring to, is that
correct?
Senator KETTER: It has been referred to in that way. I am talking about the assessment of the loan
impairment provisions.
Mr Cohen: Yes. That was an exercise that was called Project Magellan. It was carried out in May and June
2010 and involved a review of about 1,200 files, which was approximately just short of 50 per cent of the
commercial loan book. Your question I think was: was that in accordance with accounting standards that applied
back in 2007?
Senator KETTER: Yes.
Mr Cohen: They would have applied the then current accounting standards.
Senator KETTER: From 2010.
Mr Cohen: Yes, what was prevailing in May and June 2010. Those accounting standards would determine the
rules around impairment and obviously would have to impair according to the then existing accounting standards.
Senator KETTER: Is it correct that the commercial loans were reviewed for accounting purposes and
reported to relevant regulatory and audit bodies on a downside or conservative or worst case basis?
Mr Cohen: I am not familiar with reporting to accounting bodies. The way impairment is carried out is that a
view is taken on whether or not the loan is going to be fully or partially recoverable and whether any losses might
be incurred on that loan. The requirement is that once an impairment becomes evident then the organisation is
required to make an impairment provision. That was part of Project Magellan and having made an impairment
provision then an equivalent impairment expense is taken to the income statement of the bank.
Senator KETTER: I am aware of an email between Mr Michael Hayes, National Manager, Portfolio Groups,
BankWest, to Catherine PorteousI am not sure of her position within that
Mr Cohen: CBA
Senator KETTER: on 27 March 2009, where Mr Hayes says, 'Catherine, as per our telephone conference call
on Wednesday, I have been asked to remind all that the papers have been prepared, as instructed, on the basis of
downside risk, in most cases representative of insolvency/enforcement of our security, and these strategies are not
representative of anticipated likely case outcomes currently being pursued.'
Mr Cohen: Yes. I think that is an email, if I recall, talking about the basis on which impairment calculations
were carried outso as staff went through each file, thinking about the impairment that the bank might have to
raise against that loan. That is quite different from a default and quite different from a loss or a write off. It is just
a view on how much might be lost on that loan in the future. Impairment is a dynamic process. It occurs regularly.
Impairments can go up if the situation is looking worse, but if the situation with a particular borrower, and
collectively across a portfolio, improves then impairments can go down as well. I think that is an email, from
memory, that refers to the basis on which the impairments would be calculated for the purposes of raising an
impairment provision.
Senator KETTER: Did CBA instruct Bankwest credit officers to conduct such a review and report the results
back to CBA, even though they were not representative of anticipated likely case outcomes being pursued?
Mr Cohen: The Project Magellan exercise was carried out and the results of that exercise were reported back
to CBA. CBA asked for that project to be carried out because we had seen, on a number of occasions, in the
period between acquiring Bankwest in December 2008 and May 2010, Bankwest raise impairment provisions in
lumps, and it was felt that we had to look through the book to get a proper view of what the impairment situation
was rather than getting surprised every now and then by a sudden lump of impairment.
Senator KETTER: The question for me is: were those impairments assessed on a downside, conservative or
worst-case basis?
Mr Cohen: Not on a worst-case basis, no. They were certainly assessed on the basis that, in the past, a number
of impairments had not come to light sufficiently quicklythat had been our experience. I think it is fair to say
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that impairments had not been recognised as promptly or as regularly in the early stages of CBA's ownership of
Bankwest as CBA was used to, and certainly not as regularly or promptly as CBA itself practised.
Senator KETTER: Were the results of that review used to characterise non-impaired performing loans as at
19 December 2008 as having impairments prior to that date?
Mr Cohen: Sorry, I do not think I understand the question.
Senator KETTER: Were the results of this CBA instructed review used to characterise non-impaired
performing loans as at 19 December 2008 as having impairments prior to that date?
Mr Cohen: I see. No, the impairments were calculated as at the date the impairment review was carried out
namely, May and June 2010. It was a view of the impairment situation of a loan as at May or June 2010, not
retrospective.
Senator KETTER: Were HBOS informed during any dispute process that this basis of Bankwest's
performing commercial loans was undertaken by the CBA?
Mr Cohen: In 2010, at the time that review of impairments was carried out, we were not then dealing with
HBOS. The sale had completed and HBOS had been taken over by Lloyds, which in turn had been bailed out by
the British government. There was no dispute process ongoing. Effectively, from July 2009, about a year before
this impairment process was carried out, we ceased our dealings with HBOS because there was nothing further to
deal with them on. So there was no dispute.
Mr VAN MANEN: Thank you for your testimony today. I should disclose up-front that I used to work for the
Commonwealth Bank many years ago. In this whole process, particularly around the Bankwest book, I am
interested in what work has been done by the Commonwealth Bank since its acquisition of Bankwest to identify
and, ultimately, self-report any breaches of the banking code of practice?
Mr Cohen: We have a process in place across the group, so it is not just specific to Bankwest, and that
process across the group is to comply with our reporting obligations to the Code Compliance Monitoring
Committee. Bankwest is very much part of that, just as the other areas of CBA are.
Mr VAN MANEN: Have you identified cases where there have been breaches that had not previously been
reported and subsequently reported those breaches?
Mr Cohen: No, we have not identified any such cases.
Mr VAN MANEN: I find it interesting that, from 2007-08, around the time of the GFC, reporting of
noncompliance with the banking code of practice was running at about 1,000 per year and, as of 2013-14, it is
now running at between 5,000 and 6,000 a year and reporting of non-compliant breaches of the banking code of
practice has got up as high as over 7,000 a year. I find it strange, given the broad-ranging discussion we have had,
in relation to both Bankwest and others, that there is no self-reporting of breaches, and I find it hard to believe
that there have not any breaches that have occurred in that process.
Mr Cohen: I am sorry; you say no breaches have occurred. We have been reporting breaches in the normal
course of events, so I would answer your question
Mr VAN MANEN: That is what I asked. Have there been breaches reported?
Mr Cohen: Sorry, I understood your earlier question to be: have there been breaches in relation to specific
Bankwest cases that we have subsequently identified and reported? And the answer to that was no. However,
generally speaking
Mr VAN MANEN: There have been breaches?
Mr Cohen: We do report breaches of that code to the Code Compliance Monitoring Committee. Yes, we do
and that is across the group.
Mr VAN MANEN: I want to go to an area that we probably have not really touched on. Without referring to
any specific clients, I would like to pick out one particular case that you have outlined to us in response to a
question on notice of a customer that was in difficulties and had a very substantial loan facility. I am concerned
about some of the fees that are levied on people who are already in difficult situations, and then you levy
substantial additional fees on top, which, in my view, just makes the situation worse. In this particular customer's
situation, the increase in the interest rate on their facility resulted in an increase of nearly $2.4 million just in their
annual interest liability, in addition to which you charged a $75,000 fee for the privilege of increasing their
interest rate. You subsequently charged an additional extension fee of $100,000. Subsequently, six months or so
later, you changed the facility around but you charged a $600,000 fee and, subsequently, another $25,000 fee. So
in the space of 18 months you charged approximately $900,000 in fees, plus additional an interest bill of $2.4
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million. How, in a situation where a business and a client are already in difficulties, can you possibly justify, in
the space of 18 months, charging additional costs of some $3.3 million?
Mr Cohen: I am happy to explain that. The customer you are talking about is an ASX listed companyCEC
Group Ltd, as you are aware. Each of those fees that you are talking about is actually not a fee for being in
trouble; it is not a fee are doing anything wrong; it is a fee for extending the facility. In each of the cases you have
mentioned, and as we pointed out in our letter to you of 31 March, the fees were charged for extending facilities
that had expired. That is absolutely standard practice. When a borrower takes out a facility, they get charged what
is called a facility fee. In this case, when the facility had expired and the bank decided to support the customer by
extending the facilitynotwithstanding the fact that it had not been repaida facility fee was charged because it
was, in effect, a new facility.
CHAIR: Can I ask a question of clarification there?
Mr Cohen: Yes.
CHAIR: The facility provides the framework within which you lend capital and the consumer pays capital
and interest back, or capitalises interestwhichever the structure is.
Mr Cohen: Yes.
CHAIR: What is the value offered by the Commonwealth for the three-point-something million dollar fee? If,
as you have stated, your intention is to work with the company to help them work out of their problems, what is
the value added by that fee, as opposed to the long-term business proposition of them having a loan?
Mr Cohen: The value is the continuation of the funding. Let's say the facility expires. The customer, in this
particular case CEC, came to the bank on each occasion to say, 'We're not in a position to repay. We'd like to
continue the funding.' At that stage the bank had the option of continuing the funding and working with the
customer to achieve some pay-down milestones which CEC sought to achieve. In return for that, the bank agreed
to continue the funding and charged a facility fee for continuing the funding. The alternative was to say to the
company, 'We're not going to extend the facility,' so the company would have to find another way of repaying the
bank, which would be through either refinancing or sale of assets. In this particular case, CEC did undergo a
program of selling assets as well to reduce its debt.
CHAIR: In effect what you are saying when you argue that you are prepared to work with the customer is you
will work with the customer on the basis that you make a very handsome profit along the wayin this case, over
$3 million from a fee that actually adds nothing to the customer's survivability except for the fact that the
facility continues.
Mr Cohen: That is a major factor in the survivability.
CHAIR: But, Mr Cohen, your argument to us to date has been that the bank bends over backwards to help the
business survive because it is in the bank's long-term interests and the customer's long-term interest for them to be
able to continue under the loan agreementthat they will pay out that loan. What we have seen in many cases is
that companies may have had a 25-year facility when they reached a certain point, whether it is a cash flow crisis
or perhaps a change in valuation, and a process was put in place by the bank. Fees like this, to a lay observer such
as me, do not appear to be adding much value to the company in terms of meeting that long-term proposition of
working through the loan for the 25-year period that in the case of one of the submissions was the original
agreement the bank had with the customer.
Mr Cohen: In this particular case, the facilities had expired, so the customer was in a position where it owed
$169 million. The facility had expired and the customer was faced with the question of how to move forward. It
had a discussion with the bank. The bank agreed to continue the funding, so to continue to lend $169 million. The
bank's situation here was it had a certain amount of capital set aside for that particular customer. It had worked on
the basis previously that that capital would be returned at the expiry of the loan and that the bank would then
hopefully go and use that capital to lend to another customer. In lending to that future customer it would have
charged a facility fee. In this particular case, the customer asked that the facility be extended, so the bank forwent
the opportunity of taking that capital and lending it to somebody else and instead stayed with this customer and
kept the funding going. I agree with you that certainly had a benefit of the customer being able to continue in
business and therefore that is a benefit to the bank as well, absolutely. But it is in effect a fee charged because the
bank is no longer able to use that capital as it was going to do when the facility was due to expire.
Senator O'NEILL: How much does it cost to get $169 million? Is $900,000 the average cost, or is that
excessive or small? Was that a special deal for a favoured customer?
Mr Cohen: Do you mean the interest charged or the fee charged?
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Senator O'NEILL: Was there a $900,000 facility fee? Am I understanding what is being said correctly?
Mr VAN MANEN: That is a combination.
Mr Cohen: No, the fee charged was $75,000 for $169 million.
Senator O'NEILL: In terms of that business, it was seen that they were over a bit of a barrel and then you
came in and gave them a bit of a whack on the way through. What sort of capacity does a business really have at
that pointwhen it is in a crisisto go to another major bank and say, 'We would like to establish another
facility'?
Mr VAN MANEN: None!
Mr Cohen: What I would say is that in those circumstances, if the borrower did go to another bank to
refinancefor example, if they had gone to another bank to refinance that $169 millionnaturally, that bank
would have charged a facility fee just like any bank would, so the customer would have paid that fee.
Senator O'NEILL: How much is that likely to be, Mr Cohen? What is the facility fee for that sort of amount?
Is there a sliding scale or is there a common amount?
Mr Cohen: No, it is a commercial matter between the parties. In this case, it was 0.045 per cent of the facility
amount. That is not an unusual amount at all. It does depend on the institution and it is a commercial negotiation
between the parties. But that amount of fee as a facility fee is not an unusual amount. I think you would find it
would be in that range or thereabouts for most banks.
Senator O'NEILL: Does it go us as the company looks like it is getting into more trouble or does it go down?
Mr Cohen: It does not at all.
Senator O'NEILL: Which one?
Mr Cohen: It does not go up just because a company is facing difficulty, for the very reason I think Senator
Fawcett was alluding tonamely, if a company is in difficulty, charging it more is not going to help it unless it
has a sustainable plan to get through.
Senator O'NEILL: But in that commercial decision-making moment you could actually reduce the amount to
keep the facility going.
Mr Cohen: Yes, that is absolutely possible. The assessment is made at the time on the basis of the customer's
financial circumstances.
Mr VAN MANEN: I would like to move back to valuations, which seems to be a favourite topic today. Say
you have a new client in 2010 and their facility and assets are valued, and then in 2016 they get themselves into
some difficulties so you revalue their assets and their business to see where you are at. Is there a capacity in the
valuation methodology to actually report those two valuations side by side so that customers can clearly see the
assumptions that were used in the initial valuation report and the assumptions that were used in the new valuation
report, so that you are able to clearly explain it to the customer, so that they can see what has changed and so that
there to be a discussion around that? That seems to be a significant part of the issue, from what I have seen and
heard. There is little understanding or correlation in that valuation methodology from when you do the initial
valuation to subsequent valuation when a business or client is facing difficulties.
Mr Cohen: I would say that the greater the transparency, the better the opportunity of avoiding
misunderstanding. I agree with you entirely. I think a little towards our conversation earlier today, that is a matter
that we think is a benefit going forward. Of course, the longer the time period between the initial valuation and a
subsequent valuation, the more there will be difference in terms of value, potentially. But that is just a market
force issue. As for the actual assumptions going in, which I think you are referring to, I think there is a benefit in
greater transparency around those.
Mr VAN MANEN: But would it be fair to say in any of these cases we are looking at here, which you have
provided a response to in terms of question on noticewhether it is CC or any of the othersthat they are very
significant loan facilities in the majority where they would have had business relationship managers that would
have been responsible for those clients and their relationship? In the ordinary course of eventsand certainly in
my time in the bankwhen you met with customers you discussed what was going on in their business, economic
conditions, issues they are facing, et cetera. I would have thought that in these situations, given the size of these
loan facilities, that would have been a very regular discussion between the responsible relationship manager and
the client to try to forestall some of these issues long before they became a problem.
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Mr De Luca: Certainly in my experience, during these times the frequency of the conversation increases.
Obviously, post-GFC the market was moving quite significantly, so some of the views of what was actually going
to happen were unknown.
Mr VAN MANEN: If you had a set of valuation metrics that you used to write the business in the first place,
is there ever, in those review discussions as the relationship proceeds, a reference back to those valuation metrics
to say to the client: 'We are 18 months down the track. We have had a global financial crisis and there are a
number of issues as a result of that. This is the basis on which we first lent you the money. What has now changed
in relation to those metrics? What issues do we see?' What, if any, of those discussions were had and, if they were
had, what was the outcome? How did that affect what happened down the track?
Mr De Luca: I think in some of the responses we have provided we have outlined the ongoing conversations
with a number of customers during that period. Obviously, they would have to be on a case-by-case basis. The
facilities, as we have outlined, have changed as well during those periods based on the impacts of valuations and
also the impacts of the financial performance of the business. They would be the discussions and, as David
alluded to earlier, generally across a number of these they were long-term discussions from the start of the crisis
till subsequent events.
Mr VAN MANEN: In relation to the book of business with Bankwestand one of the major topics of
discussion out of the GFC was the issue of securitisationwas any portion of the book securitised?
Mr De Luca: No, there were no commercial facilities in securitisation at the time of the acquisition.
Mr VAN MANEN: I asked this question of ANZ earlier. For commercial loan facilities, what are the capital
adequacy requirementsis it 100 per cent, 50 per centof the loan facility?
Mr De Luca: It depends, as I think David alluded to earlier, on the approach taken. When we moved to Basel
II it was a standardised approach, which was consistent across all of the facilities. Under the current regime it is
Mr Cohen: Off the top of my head, Senator, I cannot recall.
Mr De Luca: I cannot remember off the top of my head. It has been awhile. We could come back to you on
that one. I do not recall.
Mr VAN MANEN: Now that you are under the Commonwealth Bank banner you are under the advanced
Mr Cohen: Yes, the advanced accreditation.
Mr VAN MANEN: accreditation process. Under that process what are the capital adequacy requirements on a
commercial loan of $100 million?
Mr De Luca: It is done on an individual basis. Basically, the advanced approach is to use your own models.
Depending on the risk rating of the loan, the term of the loan and the industry type, it is done on an individual
basis. Each one is different.
Mr Cohen: The theory behind that is that those organisations that have invested heavily in their risk
assessment processes and risk modelling are better placed to determine how much capital should be held against
each individual loan according to the circumstances of that borrower: the industry that it sits in, the prospects for
that industry and the prospects for that business.
Mr VAN MANEN: So you would then have your own internal metrics? If you increased the risk profile of a
particular customer's loan facility, you would have an internal metric as to whether or not you are required to hold
more capital for that loan. Can that be a value judgment, or is that a very black and white requirement within your
risk management and capital management processes?
Mr De Luca: If the circumstances change for the customer: if the risk rating changes, if the size of the facility
changes, if the term of it changes or if the purpose of why they are borrowing changesso if it started off as just
commercial property and then expanded into a businessthen those factors are taken into consideration and
thrown into the model, which then provides you a view of what the provision should be.
Mr VAN MANEN: Is that the basis on which you then apply whatever margin is applicable over and above
your base interest rate margin?
Mr De Luca: That is an input into the pricing.
Mr Cohen: It is one of the factors; that is correct.
Mr RUDDOCK: I mentioned to you earlier that we have received a number of letters putting other views on
some of the matters that we have under discussion. I noted today that we received a letter from a Mr Sean Butler,
who apparently wrote to you on 25 February flagging a number of questions. Have you brought with you an
answer to that letter?
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Mr Cohen: No, I have not.

Mr RUDDOCK: He does raise issues in relation to requests for meetings. He said that Mr De Luca, for
instance, had sent him a letter on 11 March stating, 'We met with you in the presence of an independent person in
an attempt to resolve your concerns.' Mr Butler says that that is untrue. A series of other questions have been
addressed to us which go to questions of substantial differences of view in relation to allegations made. He said
that he sent the letter to you by registered mail. I am just surprised that you have not come prepared to answer the
questions.
Mr De Luca: I have got a copy of the letter in my response on 11 March. I have responded to Mr Butler, and
we are happy to provide the committee with all the documents that support it in terms of the meeting that was
held.
Mr RUDDOCK: You believe that you have further responded to the matters he has raised?
Mr De Luca: Yes.
Member of the audience interjecting
CHAIR: Order!
Mr De Luca: We can give the committee our letter of 11 March. It might help.
Senator O'NEILL: Just to clarify: what form of response has been sent to Mr Butler?
Mr De Luca: A letter to his email address.
Senator O'NEILL: Okay. Is it possible for you to provide a copy of that for us now?
Mr Cohen: Yes, definitely. You can have it now.
Senator O'NEILL: Thank you. If I could return once again to matters of culture. I understand that banks have
become increasingly aware of the need to do things in this area. Could you explain to the committee the sort of
work that you are undertaking. I am providing you with an opportunity to put on the record that you are
proactively doing some things, but I want to also expressjust in the exploration of that one issue with regard to
access to valuationsthat there still seems, to me, to be some considerable gap between the language and the talk
around cultural practice change and the practical realisation of that in a way that would give me more confidence
about what the bank is doing, particularly in light of other matters that are in the media at the moment. Could you
speak to the cultural practices that you are attempting to undertake and give any indication of the practical
application of those in terms of redressing some of the concerns that I think that you are now very aware are
exercising the minds of this committee. That is the first part of my question. The second part is: you appear to be
awaiting our report. Our report is hopefully informed by evidence that we receive from all participants, both civic
participants and, in your case, commercial participants. I am also keen to hear from you recommendations that
you may now be aware of, in light of the journey we have been on, that you believe would enhance the life
outcomes of people who have engaged in commercial loans with the bank going forward.
Mr Cohen: Certainly. I will address the first part of your question first: namely, what is the Commonwealth
Bank group doing around culture? Firstly, in 2014 our CEO kicked off a process, which we call our vision and
values dialogue. We have a vision across the group, which is focused on enhancing and securing the financial
wellbeing of customers, businesses and communities. Secondly, we have five core values. What we did in 2014
was engage Dr Simon Longstaff of the St James Ethics Centre here in Sydney, as well as KPMG and a law firm
to carry out across the group a series of focus group discussions and surveys in order to understand were there any
processes or procedures or policies across the group that inhibited an employee on a day-to-day basis from
helping the bank achieve its vision and applying each of our values: integrity, collaboration, accountability,
excellence and service. We carried out in those reviews, those focus groups and those surveys. With the results of
those, we then prepared a report, which went to be considered by the board and by senior management.
We then embarked on the second part of the exercisethat is, to identify policies and procedures and
processes that our own employees had told us get in the way of us achieving the vision and applying the values
consistently. That has thrown up a range of items that we are addressing at the moment. The work was carried out
in 2015, following the initial work in 2014. We have been addressing those policies and procedures to try to
change them so that our employees are not in a position where they feel that their effort to, for example, ensure
that a customer achieves financial wellbeing is stymied or hindered or delayed by one of our policies and
processes.
Mr Cohen: That is the first thing. It is an ongoing piece of work. We are an organisation of 52,000 people. It
is not possible to change everything overnight, but we are steadily working our way through it.
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The second thing

Senator O'NEILL: Before you move on to that, how is that integrated with your incentivisation structures
and your financial reward for both individuals and teams? How can the community be assured on matters of
professional integrity, which I think are at the forefront of people's thinking with regard, sadly, to the
Commonwealth Bank. What are you doing to make it happen? Rather than observations and talking about
reporting et cetera, what are the incentives for people to behave in ways that meet community expectations?
Mr Cohen: It is a process that is embedded within our vision and values work. The issue that you raised is
reflective of something that regulators have been saying toothat is, are people rewarded not just for speaking up
and for raising issues that are of concern but also for demonstrating the right culture, the right values, the right
ethics? That is something we are currently going through at the moment. From July this year, when we commence
our new financial year, we are introducing a new performance management system and a new rating scale so that
people are actually measured not just on their business outcomes, which is part of our current process, but also on
their application of the values. We recognise that it is not just what you do, it is how you do it. The how you do it
is more important than the what you do. So the new performance management system that is being rolled out
across the group from 1 July is going to measure how each employee actually applies the values of the
organisation. The way they apply those values will reflect in their remuneration that they receive so that is a very
practical step that we are taking.
Allied with that is something that we alluded to earlierthat is, we have a process whereby your risk
behavioursso the behaviours that each individual employee demonstrates when acting internally, dealing with
customers, approving loans, taking actionsactually then get applied to alter the remuneration. So if somebody
has not fully met their risk requirements, then that reduces their remuneration. If someone has fully met their
requirements, then they are free to proceed to the level whereby they are assessed on their outcomes and the way
they have applied values. We are hopeful that that is going to be a very meaningful thing for people, that (a) we
are applying the values in everything we do, and you get measured according to it, and (b) your risk behaviours
are taken into account and reflect in your remuneration up or down, as does the way you have demonstrated
values. So we agree with you that remuneration is a very important factor in terms of behaviour and what
behaviour it encourages, and that is why we have introduced a new system to take effect from July.
To the second part of your question: how can we enhance the life outcomes for customers? That is a very good
question. As I said before, we seek to achieve a vision whereby we enhance and secure the financial wellbeing of
customers. We do not pretend that we are perfect at it, and you have alluded to situations where the media has
highlighted and other areas have highlighted where we have not achieved that mark, and that is true. One of the
measures of an organisation and whether it is seeking to do the right thing is how it responds to those situations,
and in a couple of those situations we have taken a very earnest approach to try to rectify issues.
Going forward in terms of how we deal with our customers to ensure that they do succeed in their endeavours,
we will try to provide the excellence in customer service that we focus on so much, but applying our values, as I
mentioned before, as well. The fact of the matter is, and this is an unfortunate fact of life, we know that some
businesses will not succeed. In those circumstances, it is incumbent on us to work with customers. We seek to do
that and we think we have demonstrated to you today, and in our submissions, that we do work with customers. It
is not lip-service; we do spend a long time working with customers. Unfortunately, there will be circumstances
where success is not an outcome for the business and we then have to work with the customer to try to achieve a
resolution.
Senator O'NEILL: I suppose it goes again to Mr Ruddock's point: if you know that there are going to be
businesses, in commercial loans in particular but in other a range of other interactions with your customers, where
there are going to be points of failure, then surely it would be prudent at this point, given what has preceded, to
establish an independent resolution structure that would attend to some of the issues that have really taken up so
much time in this committee hearing?
Mr Cohen: I can repeat what I said before: this is a very different situation in terms of scale and issues from
issues such as Storm Financial or financial planning, and we honestly do believe that we have tried to address
every single issue that has been raised, not only by this committee but also by customers directly. It is
unfortunate, but we acknowledge some customers do not want to accept our version of events or the facts as we
have presented them.
Member of the committee interjecting
Mr Cohen: I understand that
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Senator O'NEILL: And they do not have the money to take it to a court, to find that resolution, and there is
no other alternative. I think that is the point we are at today, which is frustrating for so many people.
Mr Cohen: The facts are there for everybody. We have always said, and we continue to say, that if a customer
comes forward with either new information or evidence of mistreatment, then we are willing to sit downwe
have always have been willing to sit downwith customers and talk with them.
Mr Cohen: We are willing to do that. We have said we are willing to do that, and that remains the case.
CHAIR: Order! If people wish to interrupt, I will ask you to leave or I will suspend the hearing. Mr Cohen?
Mr Cohen: I have nothing further to say.
Mr RUDDOCK: Thank you very much for the copy of the letter. I do not intend to take it all up, but
obviously Mr Butler has not necessarily agreed with all of the points you have made. I was interested in the point
that was made, that the head of your legal affairs department is alleged to have said 'sink boots into the customer'.
Mr RUDDOCK: When I read the response, you do not deny it. You say:
More recently you have raised a specific allegation (based on handwritten notes
I assume that is what was written by a third party

that, in September 2012, Bankwest's Head of Legal was of the view that Bankwest should take an aggressive approach
I suppose that is what 'sinking the boots in' is

to dealing with your situation. We have reviewed this allegation and do not agree that Bankwest's Head of Legal sought to
take an aggressive approach to dealing with your financial situation.
In other words, 'By winding you up and appointing a receiver, we weren't taking an aggressive approach'.
Mr De Luca: In terms of having reviewed the notes of others who were involved in that meeting, that is fairly
inconsistent with all of the notes that I have reviewed from others. As I stated in the letter, at that point in time the
head of legal was pursuing to actually have a meeting with Mr Butler and mediate through the process and the
matters.
Mr RUDDOCK: I simply make the point: I have read what he wrote, I have read your response, and it seems
to me that the issues are contested. My view, and I will repeat it again, is that this committee is not going to be
able to deal with those issuesyou know that and we know thatbut we are going to have to find a way forward.
I am still inviting you to think through how that might best be done.
CHAIR: The time being after the time allotted for the Commonwealth Bank, I thank you for attending the
hearing and for your evidence today. You have agreed to take a number of questions on notice. Could you please
return that information to the committee by 12 April.
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ARMSTRONG, Mr Tim, Head, Micro and Small Business, South, National Australia Bank
GREENE, Mr Geoff, Head, Strategic Business Services, Melbourne, National Australia Bank
[15:53]
Evidence was taken via teleconference
CHAIR: The committee welcomes representatives from the National Australia Bank via teleconference. The
committee has received your submission, which we have called No. 50. Would you like to make a short opening
statement before the committee moves to questions?
Mr Greene: Yes, thank you. Chairman, we thank the PJC for the invitation to again appear before the
committee and we thank you for agreeing to our appearance on this occasion via teleconference. I am the Head of
Strategic Business Services, or SBS, in Melbourne for NAB. SBS is the turnaround and work-out area of the bank
that is responsible for managing and engaging business customers facing difficulties and challenges. I appeared
before the committee on 18 November.
Joining me today is Tim Armstrong, Head of Micro and Small Business, South for NAB. Tim is responsible for
leading and managing our small business bankers across Victoria, South Australia and Western Australia. Tim is
appearing to address any questions concerning our internal processes, remuneration and incentives, and
compliance with writing small business loans.
NAB made a full opening statement in support of our submission at our last appearance before the committee
on 18 November last year. We have also responded to a large number of questions on notice from both that
hearing and subsequently. We are therefore happy to proceed direct questions.
CHAIR: We note that the National Australia Bank does not feature heavily in submissions we have received,
and I think that is credit to you. In your submission, you talk about the fact that impaired loans are dealt with
through an extensive and inclusive process. As we have been dealing with other witnesses, we have had a fair bit
of discussion around internal dispute resolution mechanisms, transparency and working with customers. Could
you expand upon the inclusive aspect of that statement to give the committee a bit more of an understanding of
your processes of working with customers and what information you share with them at the point of writing the
business, as well as at the point of adjusting or responding to an awareness of increased risk.
Mr Armstrong: We have a separate independent area which is called NAB Resolve, which actually works
with our customers that are in dispute. We also have an area called NAB Assist which works with customers who
have impaired files. So customers that are facing hardship can absolutely availed themselves of the services
within NAB Assist. Should they have an issue with the way in which a file is being managed, they can also work
with NAB Resolve to have that worked through in a different scenario if they are not happy with the way in
which that file has been resolved.
In terms of how we communicate to our customers, we always try to be open and transparent and be clear with
them. Our bankers try to spend a lot of time talking with and understanding our customers, understanding their
situations, understanding their aspirations for their business so that we align with them and create financial
solutions for them that meet their needs.
CHAIR: Could you describe in a little more detail in the NAB Resolve process what independence there is in
that process to the extent that it either forms either a mediation or an arbitration style process.
Mr Armstrong: NAB Resolve is a separate function so it is a separate team from my frontline team where the
bankers work. It is a separate independent function and has the ability and capacity to make decisions on any
agreement that might be reached with those customers that are in dispute.
CHAIR: Is there any recourse for the customer to seek an external party to that process?
Mr Armstrong: The customer, through that process, would be able to go to the financial ombudsman if they
were not happy with the way that the complaint was handled through Resolve.
CHAIR: With the NAB Assist function, you have indicated that businesses who are in trouble can draw on
their support. I would be interested to understand to what extent that provides advice for businesses in terms of
turning around at the very early stages or improving profitability. To what extent does that involve the
appointment of a forensic accountant, for example, at the cost of the small business to then provide instructions as
to what they need to do to satisfy the bank's concerns? I do not know if I made myself clear. The first is
essentially an advisory role, which is free of charge to the customer. The second is at-cost and provides
instructions from the bank as to what the customer must do.
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Mr Greene: In terms of that internal function, they would not provide advice to the customer. They are more
of a customer advocate into the process and they would not provide financial advice to our customer. In terms of
situations where we were appointing an investigative accountant to conduct a review, that would be something
that would happen probably at a later stage of the process.
CHAIR: What I am trying to understand here is: if you are having an inclusive process and helping a
customer work out problems, at what point does that become an imposed process by the bank? For example, at
the time of the writing the loan, if it was borderline between the business's ability to repay, do you sit down with
the business and with your credit risk people and say, 'We are happy to go ahead as long as you understand that
you are on the margins and you would need to be very focused in these areas and here are the risks that will arise
for you as a business if you do not succeed.' Do you just block the loan or do you write it to see what happens?
Mr Greene: I think that is probably a question for Tim. If we had a loan where serviceability was looking
marginal, what we do?
Mr Armstrong: We would certainly work very closely with our customers, particularly where serviceability
was quite marginal. But we would aim to have a very close dialogue and stay in regular contact with that
customer. We do not provide them with advice as such around how they should run their business or potentially
business advice that might support or improve their business. We would always encourage them to get
independent financial advice in those instances.
CHAIR: Since you last appeared before the committee, we have had ASIC issue their guidance for the new
unfair contract provisions that will come into force in November this year. I am see assuming you are familiar
with those with those and with the guidance?
Mr Armstrong: Yes, we are aware of the guidance.
CHAIR: I would be interested in your feedback as to how NAB is approaching the worked examples that
ASIC have put into that guidance around the kind of additional clausesfor example, essentially a break contract
clause that the small business should be given if the bank has insisted on retaining all of the existing powers to
unilaterally very terms and conditions of contract. How is NAB internally addressing this change and do you
anticipate supporting the benchmark that ASIC has put in those work examples or do you anticipate ending up
challenging those in the courts?
Mr Armstrong: Within my capacity as head of micro and small business, I guess it is probably outside the
realm of my role and my responsibility. What I could say is that we have a team working through the planning
and preparation to implement the changes around the unfair contract terms so we certainly expect to be fully
compliant and have implementation in place for the due date in November.
CHAIR: You could take this question on notice: when you say 'fully compliant', I am interested to know what
NAB thinks that means, because ASIC has been quite clear in their guidance document that ultimately it will be to
the courts to determine what fairness is or unfairness in terms of contract terms. So I would be interested to
understand what NAB thinks compliant is. I am happy for you to take that on notice.
Mr Armstrong: Okay, thank you.
CHAIR: We have had quite a deal of discussion with other witnesses around valuations and the role of banks'
instructions in valuations. Could you describe for the committee the process you apply at the time of writing a
loan, instructions to a valuer who you use, what requirements you have on the valuer, what visibility the customer
gets of the instructions that have been given. And, likewise, if your SBS group seeks evaluation, could you
describe the process at that point.
Mr Armstrong: Yes, certainly. Our frontline bankers, in the course of putting forth an application for a loan,
would send a request for a valuation through to a separate, independent valuations team. That valuations team
uses both external panel valuations and some internal valuations. But, essentially, that function is removed from
our frontline bankers, so they do not have any input or, if they are not happy with the valuation or the amount that
is returned, they do not have any right of reply to change that valuation or get another valuation. That is very
much a separate function and the valuation is what it is. It is whatever it comes back at, and the bank then has to
work with that.
CHAIR: I understand the fact that your frontline people do not have an input, but somebody from the bank
must give instructions to the valuers in terms of the assumptions that they are to apply. I am just interested to
understand what assumptions are generally given at the point of writing a loan, in terms of how to determine
market value et cetera.
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Mr Greene: Our frontline bankers, effectively, work through an automated system called Valex. We would
always seek a market valuation, and I would assume that that is quite a consistent basis that the various property
professional associations would work to.
CHAIR: Okay. But we have heard of quite a discrepancy between the point of writing the business, where the
valuers are able to give the valuation on the basis that a reasonable sale might take 12 months or something to get
the best value, if they think that is the case, and the point where your credit or restructuring group might be
seeking a valuation, where the instructions might be to sell within 30 days, and these instructions would
significantly change the valuation, even if all other factors essentially remain consistent. What I am interested to
understand is: regardless of whether it is an automated process or a completely separate group within the bank,
what instructions does the bank give valuers at the point of writing the loan versus at the point of seeking to
understand the risk management side?
Mr Greene: I do not believe we specify a time period for sale, either at origination or once it moves into the
work-out area. We ask for a market value valuation. Once it goes into the work-out area, we will sometimes ask
for a forced sale valuation in addition to a market valuation, but we would not use the forced sale valuation to
calculate for LVR purposes. To say that another way: I believe the valuation would be done on the same basis
whether at origination or at a management area.
CHAIR: You believe that, or is that the required process applied by the bank?
Mr Greene: Because I do not actually see those instructions that go, perhaps we can take that on notice. But
that is my belief.
CHAIR: If you could take that on notice that would be useful, thank you.
Senator KETTER: What is the purpose of the forced sale valuation?
Mr Greene: We tend to use the forced sale valuation to help us assess provisioning outcomes.
Senator O'NEILL: What is that?
Senator KETTER: What is the practical effect of that?
Mr Greene: We use the provisioning analysis that is required by the accounting standards and APRA
requirements to make sure that we estimate possible loss.
Mr RUDDOCK: I want to test you as to whether or not you want to continue to be the good cop on the block
with admirable performance about which we have not yet received complaint and whether, in that context of
being the good cop on the block, you may move beyond the position that some of your industry have taken that
we might not move to an independent or commercial arbitration set of arrangements or an independent set of
mediation arrangements where there is dispute over outstanding loans which have been foreclosed on. My
particular concern is that those who are wanting to press those matters and who would normally do so through the
courts cannot do so if they have been wound up or bankrupted. I want to see a situation in which people can get
redress through a genuinely independent process. You would be prepared to support that, wouldn't you?
Mr Greene: There are three subquestions in that question. Firstly, thank you very much for the nice things
that you have said about our bank. Secondly, I do not think I would completely agree that there is no redress for
borrowers, because the liquidator of a company has access to the Assetless Administration Fund and to litigation
funding, so there is certainly the possibility for liquidators to pursue action against banks if they think they
should, and there are those liquidators who have done so. Thirdly, in relation to a mediation scheme, we deal with
a very wide range of borrowers and a very wide range of complexity. I cannot say more than that it is beyond my
role to commit to a process along those lines, but if there were more detail I am sure we would be happy to look at
it.
Mr RUDDOCK: I would like to see some self-starting in relation to these matters to evidence bona fides. I
have encouraged other banks to look at the matter on the basis that maybe they should address these questions
before we report. Perhaps you might like to pursue what I have suggested with your more senior
Mr Greene: Thank you. I am happy to do that. I should make the point that we do go to mediation and
alternative dispute resolution on a case-by-case basis, so it is not something that we are closed to as an
organisation.
Mr RUDDOCK: I would not like to think that there was an industry position resisting change of that sort.
Mr Greene: I am certainly not aware of one.
Mr RUDDOCK: We will watch with interest. Thank you very much.
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Senator O'NEILL: I think Senator Fawcett has covered a lot of the questions that I had around valuation
processes, and I thank you for your submission. Just to be clear, before I move off that topic completely: you
indicate that your current arrangements prevent the bank from providing a copy of a valuation to the borrower?
Mr Greene: That is right.
Senator O'NEILL: Are you aware of the conversations that the committee has had with a range of presenters
over the course of this inquiry with regard to this matter?
Mr Greene: No, I am not.
Senator O'NEILL: Okay. The context into which you are walking, Mr Greene and Mr Armstrong, is that
there have been many disputed valuations. The committee has come to some understanding about the range of the
different types of valuations that are being commissioned by banks, the degree of uncertainty about the standards
across the valuation sector and the competing territorial behaviour for business within the sector. Given all of that
and how critical valuations are and the way in which the instructions are prepared, would the NAB have any
major objection to it becoming standard practice that, on the establishment of a loan, the borrower receive not
only the instructions but also a detailed valuation, just as a matter of course?
Mr Greene: I do not believe that we would have an objection. As I said, we would need to change our
engagement arrangements, but that is certainly possible.
Senator O'NEILL: You indicated the valuer would need to agree to the disclosure. If it became standard
practice then the valuer would certainly have to agree to the process, wouldn't they?
Mr Greene: That is correct.
Senator O'NEILL: How many people do you use for your valuations across the country? Are they
companies? Is it a panel? Are there individuals? Does it vary from state to state? Which regulating body do you
think provides the highest quality valuations? Maybe that is a question on notice.
Mr Greene: We have a range of valuers that we use and we will use different valuers in different industries.
We will also use different valuers for different geographic regions. To give you that detail I think we would need
to take that on notice.
Senator O'NEILL: Could I go to another area of interest to me, which is the creation of a culture that
supports ethical behaviour, the interplay of discourse practices around that as an aspiration and the reality that
behaviours are driven by incentives. You answered a question for us, 'What incentive structures have applied
since 30 June?' with a very interesting response. You said that you have had the same ones in place since 2008
that you have not changed your incentive structures. Is that true?
Mr Greene: We have the same framework: a balanced scorecard. I think the factors within that balanced
scorecard framework would change from year to year, but the balanced scorecard has been in place for quite some
time.
Senator O'NEILL: In your answers to questions about that, when we asked about branch employees, you said
thatcould you explain the balanced scorecard? Is that about their threshold performance against values and as
part of a team?
Mr Armstrong: There are four quadrants in the balanced scorecard. The key components are around financial
performance and risk, strategic projects and process improvement, contribution to the team and to the culture, and
customer and community contributionso there is a balanced scorecard there that is underpinned by strong risk
management principles.
Senator O'NEILL: That is quite different from some of the individually oriented incentive programs that we
have heard about in other contexts. You also identify a number of values against which your employees are
measured. Could you articulate what they are?
Mr Armstrong: With the value framework, which is applied subsequent to the balanced scorecard, we have
five values: passion for customers, do the right thing, respect for people, be bold, and will to win.
Senator O'NEILL: Interestingly there are some parallels there with some of the values that we have had
articulated this afternoon by the Commonwealth Bank. They also have five values that they were talking about,
but clearly they have been on a different kind of journey than you, in terms of public perception with regard to
impaired loans and commercial loans. What is it about the culture of NAB that seems to have protected you, at
this stage, from significant reputational damage with regard to commercial lending?
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Mr Armstrong: From my perspective, it is because it is led right across the organisation, from the executive
leadership team right through. I think we genuinely believe in our values. We talk to our values every day with
our bankers and with our people, right across the enterprise. From my perspective, it is well led.
Mr Greene: We probably have less insight as to what the other banks do, apart from one point. In terms of
our own organisational issues, if you have worked at NAB, you know that being the No. 1 business bank is part of
our core belief system. When a customer gets into problems, we want the problems to go but we want to keep the
customer. With just about everything we do we work really hard to keep the customer. The other point that I will
make isin terms of understanding where we have it different to the other lenderswe do know that at NAB we
keep the relationship banker involved as we work through problems. That person stays there as an advocate for
the customer; they keep that continuity going and gives us the advantage of the history. That is one thing that we
can point to that we do differently, I think, to the other banks.
Senator O'NEILL: Okay. That is a pretty significant detail. How many customers do you have per
relationship management person in the commercial lending area?
Mr Greene: It will depend on the size. If we talk about our very largest customers, then it might be a team of
two or three people looking after 10 customers. As we go down to small business, I think Tim is probably better
placed to talk about that.
Mr Armstrong: Yes, in small business it is approximately 250 customers per banker.
Senator O'NEILL: Which is in direct contrast with what we heard today. We hear it was one to 500 inI
think that was the Commonwealth Bank, or it might have been the ANZ. I do not remember which part of the day
we received that evidence in. But one to 500 is quite different from one to 250. The other thing that you have
indicated there is that there is an inside advocate within the bank for the customer to negotiate processes. Could
you explain a little bit more about that?
Mr Greene: Let me go back a step. If a customer becomes involved with the work-out area, the customer's
previous banker absolutely stays involved with the customer all the way through. They are working very hard to
make sure that we keep our customers. The very worst thing for us is to help our customer get through their
financial difficulties and then have them refinance through another bank because they do not like the way they
have been treated. So, in terms of the realities, our bankers are advocates for our customers and they [inaudible].
Senator O'NEILL: Can I just go to the sad situation where a business fails and
CHAIR: Could I just ask one more question before we move on. I just want to follow up on the growth in the
size of your staff around business banking and their interaction with customers. I notice your campaign to
increase your business lending. There are reports in the media that say you have exceeded your targets and are
now lending almost $2 billion a month to businesses, and that Angela Mentis as the head of that area has hired
some 200 business bankers since she was appointed. So I am interested to know, for people who obviously have
been recently employed into an environment where you are assertively trying to increase your market share, how
do you make sure that they are responsible lenders who are not swayed by remuneration structures and other
targets to achieve that growth and that market share to the long-term detriment of the businesses who may then be
exposed in the same way the Bankwest customers were several years after their fairly assertive expansion?
Mr Armstrong: I am certainly happy to talk to that. Firstly, we are very careful about who we hire to become
business bankers. We certainly look for people who have previous lending experience. Also, when they do join
and become a new business banker, we send them off on quite a detailed on-boarding pathway. There is a
minimum eight-week pathway for a new banker to go through before we even put them in front of customers.
They have to go through a whole range of different training. They get support from credit partners. We continue
to invest inthey do not immediately have accreditation to write loans either. They do not immediately have
accreditation to write their own fees up. Certainly, that is something that they will build up over time once we
gain confidence and they work with their credit partners and the region managers. Once they have that, we require
them to have ongoing, continuous education. There are a number of ways and pathways that we ask our banks to
continue to adhere to to ensure that they are accredited and that they meet our standards around being responsible
lenders.
In addition, once we are comfortable with the banker's capability, we do a lot of work through our management
insurance and our independent audit functions. Those are functions separate from frontline banking. They actually
review the quality of the file and the quality of the output. We have an independent audit function that goes
through that well. That is something that gets included within the banker's scorecard that I spoke about. So, if
there are breaches or any issues of concerns around risk or lending practices, we cover that off in the scorecard.
That will mean that they are not eligible if they fail their risk and compliance measures.
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Senator O'NEILL: You gave some detail about that four-quadrant order, the financial planning and risk
management strategic process team and customer, and I have got a better understanding based on what you have
just said. But, regardless of that, there will be situations where businesses fail. You do have a department that
deals with distressed, default or impairment. How do you manage that when things go badly? I am sure it does not
always naturally pass through without contestation. How do you manage that process?
Mr Armstrong: We work very closely with our customers. We obviously have very in-depth conversations
with them about the situation that they are going through. We take a real approach that the right thing to do by the
customer is to help them get back on their feet and help them as much as possible. So we certainly try to have
really in-depth conversations with our customers and really support them through that process. What we have
found in taking that approach is that our customers come out of hardship and out of those types of areas where
they are actually strong advocates of our brand and the support that we have given them through that process.
Senator O'NEILL: Even if their business goes under?
Mr Armstrong: The customer has still been very happy with the way that they have been dealt with and felt
that it has been respectful.
Senator O'NEILL: We have heard evidence today about a banking customer who has a loan or creditor
whatever structure it wasof $169 million with the Commonwealth Bank, and it reached a point where they were
unable to pay their loan and their facility had expired. Mr Van Manen might fill in the detail on the fee for them to
continue the facility.
Mr VAN MANEN: In total, fees over the period of 18 months were some $900,000 plus another $2.4 million
in additional interest costs.
Senator O'NEILL: Could you give me a professional opinion on that sort of money? As a layperson, that
seems to be an extraordinary exploitation of a person in a financially vulnerable situation.
Mr Greene: I am sorry, but I do not quite understand the reference to 'additional interest'.
Mr VAN MANEN: The interest rate on the facility was increased as a result of an increased risk profile and
the resulting increase in the interest bill was $2.4 million per annum.
Senator O'NEILL: Plus there was an extension fee of $75,000, which was 0.5 per cent of the $169 million
facility. Is that standard practice? Is that the way you operate too?
Mr Greene: We certainly have a higher cost of capital for loans that deteriorate in terms of credit risk.
Whether there were fees charged or increased interest would probably depend on a case-by-case basis. I would be
very hesitant to comment on another bank's situation without understanding the full picture.
Senator O'NEILL: If I had a loan with you and I needed to renegotiate it and there was an extension fee that
was requested, what is the sort of standard cost of an extension fee? Is it a percentage of the total amount of the
loan or is it a fixed amount? Is there a sliding scale that you apply?
Mr Greene: Sometimes we charge a fee and sometimes we do not. It will depend on how much work is
involved and also sometimes on the term of the loan. There is not a scale or a calculator that I would look up and
say that this is how it is worked out.
Senator O'NEILL: So this is generally negotiated on a case-by-case arrangement?
Mr Greene: In my world, yes.
Senator O'NEILL: Which is quite markedly different from the information we have received on other banks.
You do not need to comment on that; that is just an observation. There is a sliding scale with the ANZ and we
have had evidence here today about the application of that percentage as a common practice for the
Commonwealth Bank.
Mr VAN MANEN: Thank you, Mr Greene and Mr Armstrong, for your testimony today. I would like to go
back to the issue of valuations. I raised this issue this morning in an earlier session. I am aware of a situation
locally where a property was valued at approximately $2.5 million and three months later it was valued at a bit
over $900,000so a $1.5 million difference in the space of three months. We had plenty of discussion this
morning about the impact of valuations on business. In this case, it was obtaining finance for a project.
Interestingly, it was, I believe, an ANZ customer. Could you please give the committee a broader picture of what
your valuation processes are and instructions and how it could possibly beand I will not ask you to speak to that
situation specificallythat that could occur and where it does occur?
Mr Greene: I am very happy to look a the specific details if you want to give them to us later and take that on
notice. The valuation should have been done on the same basis. You can see a shift in valuations. For example, if
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you are looking at a commercial property and there is a loss of tenant, that can affect the level of income in the
property and that would roll through to the capital value of a commercial property. You can see situations where
somebody discovers contamination or zoning issues the second time they do it. Perhaps the first one was not done
correctly. It is fairly hard to generalise.
Mr VAN MANEN: In that circumstance would you then sit down with the client and go through both
valuations with them to understand where the differences were?
Mr Greene: I would have thought you would be talking very carefully to the valuers, first of all, to make sure
you understood that. Then I do think that you would be discussing that with your customer to explain that to them.
Mr VAN MANEN: From what I know of the situation, neither of those things occurred.
Mr Greene: I am very happy to look at that situation.
Mr VAN MANEN: I will discuss that with you privately. The committee has had a wide-ranging discussion
today about valuations. Obviously, we have had a lot of testimony and submissions from various submitters about
concerns about how valuations were done and, I should say, the difference in methodology of valuations from
when the person originally became a client of the financial institutions to when things started to go awry. Where a
period of time has elapsed between when a loan has been taken out and when a business gets into difficulty and
you are having it revalued for the purposes of ensuring you still have adequate security or other assessment
processes, do you see value in sitting down with the client or borrower and in some detail going through both
valuations and comparing both documents to ensure that the borrower understands where the difference in the
situation has arisen and why the bank is taking the course of action that it decides to take as a result of that
changed valuation?
Mr Greene: Yes, I see the value in having that kind of a conversation.
Mr VAN MANEN: Is that something the NAB does currently?
Mr Greene: I would like to think that, as a matter of practice, where we have valuations that are significantly
different we would go through them with our customers and explain them.
Mr VAN MANEN: But at this stage it is not actually a policy as such.
Mr Greene: I do not believe it is.
Senator KETTER: I have just a couple of questions. The first goes back to the incentive program you talked
about in your submission and some of the concerns that have been documented by a fellow by the name of Ross
Barry, who is the head of research at First State Super. I am quoting from an article by Jonathan Shapiro in The
Australian Financial Review recently. Shapiro says:
He believes incentive structures for management, that encourage them to chase high returns even as net interest margins
are narrowing and global regulators force stricter capital rules upon them are a crucial aspect of stability.
"The elephant in the room for me is the mismatch between senior executives' return-on-equity targets of 15 per cent or
more, while regulators would probably prefer them to adapt to a more sustainable model, with longer-term funding and lower
returns of 10 to 11 per cent over time", he says.
The consequence, he says, may be behaviours that are counter to the interests of customers.
Would you like to comment on that concern in the context of your growth? I note that you have for some time
been the largest lender to business in Australia and are now looking at significant rates of growth. Could you
comment on your incentive structures in light of those concerns?
Mr Armstrong: Can I clarify: are you asking specifically about the return-on-equity targets?
Senator KETTER: Yes, that is right.
Mr Armstrong: In the micro and small business area that I head, there are no such targets for bankers around
return on equity. It is certainly something that we have within targets that are at a divisional level. What we do is
spend a lot of time working with our bankers, building capability for bankers' understanding the value and
ensuring that we price transactions appropriately in accordance with the risk.
Senator KETTER: What do you call 'divisional level'?
Mr Armstrong: At the sort of level, micro and small business as a division.
Senator KETTER: At that level you still have those types of return-on-equity targets?
Mr Armstrong: Yes, that is true.
Senator KETTER: Do you see some of the concerns there that have been expressed in that article by Mr
Barry?
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Senate
Mr Armstrong: No, I have not seen the article, unfortunately.

Senator KETTER: Do you think that those concerns are warranted?
Mr Armstrong: I think, in reality, it is ensuring that we, as a bank, practise good risk management principles
and that we price our loans accordingly for that risk. That is, I guess, as far as I would comment.
Senator KETTER: Do you have a process of reviewing those return-on-equity targets periodically?
Mr Armstrong: Not within our business unit. I certainly cannot recall pricing loans around returns.
Senator KETTER: Okay. Chair, I am happy with that.
CHAIR: Mr Greene and Mr Armstrong, thank you for your participation in the hearing today and for your
evidence. Any answers that you have agreed to take on notice should be provided to the committee by 12 April. I
thank broadcasting and the committee staff.
Committee adjourned at 16:42

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