Banking royal commission: Banks held to account on risks

The royal commission has asked banks and financial services companies to defend sky-high bonuses and incentive policies.

Banking royal commissioner Kenneth Hayne

The royal commission has asked banks and financial services companies to defend sky-high bonuses and incentive policies that reward sales volumes that may “create an unacceptable risk” and prioritise sales over responsible lending obligations and requirements to act fairly with customers.

Sales targets, asset growth KPIs, large financial rewards and other non-monetary bonuses such as cruises are all in the firing line after the royal commission heard that Commonwealth Bank subsidiary Bankwest, ANZ, Bendigo Bank’s Rural Bank, National Australia Bank and agribusiness lender Rabobank may have engaged in misconduct when selling finance to farming customers, based on evidence heard in the inquiry over the last two weeks.

It follows a series of findings in the royal commission’s hearings on responsible mortgage lending, financial advice and wealth management, which showed staff at some of Australia’s largest companies were shunting customers into bad products to meet sales targets and to win bonuses.

The list of findings of misconduct and behaviour falling below community standards, which were made open to the royal commission by counsel assisting Rowena Orr yesterday, came as commissioner Kenneth Hayne asked banks and regulators to better define what constituted “fair” dealings between customers and banks.

He also warned banks, which will be required to answer questions about poor behaviour when dealing with agribusiness customers, that the lenders cannot rely on claiming their past practices were acceptable because of different community standards that have changed over time.

“Someone may wish to say, ‘oh the times have moved on, the times have changed, standards have somehow changed’. Well if someone’s going to say that, I will be much assisted by knowing how or why,” Mr Hayne said.

“If we’re dealing with concepts like fairness it’s not instantly apparent to me that what is fair today is different from what was fair yesterday. If someone wants to make a timing point about this, it is not likely to be persuasive if they just say, ‘times have changed’.”

In their pleadings to the royal commission, numerous bank executives said they would have done things differently today, after they were plied with evidence of questionable dealings with farming finance customers.

Ms Orr has asked companies to submit responses as to whether remuneration and incentive policies that reward volume sales “create an unacceptable risk” and prioritise sales over responsible lending obligations and requirements to act fairly with customers.

Over the last fortnight, the royal commission heard that sales incentives played a key role in disastrous bank dealings with farmers taking out loans to fund their businesses. Hundreds had been kicked off farmland that had been held by families for generations, after banks rushed to acquire specialist agribusiness without conducting proper due diligence on the businesses and conducting fire sales of land owned by farmers in hardship.

Banks will now need to provide arguments about when it is “both best for the customer and best for the bank” to appoint receivers and whether it is appropriate for banks to conduct their own appraisals of property values. There had been mounting pressure to expand the royal commission to examine receivers appointed to conduct fire sales of land and livestock of distressed borrowers.

Ms Orr asked banks what it meant “for a bank to act fairly and reasonable” and what weight a bank should give to the interests of the customer when dealing with distressed agribusiness lenders. ANZ’s head of lending services, Benjamin Steinberg, told the inquiry of his need to balance the needs of farmers against the bank’s duties to protect its depositors’ savings.

The question of fairness prompted Mr Hayne to interject and say that “an available view may be that the minimising of loss to the bank will minimise loss to the customer and to that extent the interests of both parties are parallel, rather than competing”.

He said a good example of where this tension occurred was when Bankwest executive Sinead Taylor said she accepted the bank fell below community expectations when it got property values wrong, but denied that it represented misconduct. Mr Hayne said there was a “need to unpack what is seen as being community standards and what that requires and how, if at all, that differs from the obligation to be fair”.

In light of the evidence heard, Ms Orr said it was open to find that Bankwest had engaged in misconduct and breached the banking code of conduct, which requires ethical, fair, consistent and honest dealing with customers. She said Bankwest’s processes were lax and its “remuneration practices” and “inadequate internal systems” contributed to the problems.

It was heard a “champion” manager at Bankwest, whose target-beating lending won him a trip to Hayman Island, later left the bank after he was found to have kept inaccurate information in his files, engaged in mis-selling and had fudged numbers to garner bonuses.

Ms Orr said it was open to find on the evidence that ANZ had engaged in conduct falling below community standards when it dealt with a series of farmers, including Arthur and Rhonda Cheeseman and grazier Charlie Phillot, and WA farmers Stephen and Janine Harley.

Ms Orr said ANZ failed to “conduct proper due diligence” before its calamitous $2.4 billion takeover of rural lender Landmark. She said the poor treatment of farmers may be “attributed to ANZ’s lack of preparation for a situation that would require it to deal with significant numbers of agribusiness customers experiencing financial difficulties”.

Rabobank’s dealings with Queensland farmers Wendy and Adrian Brauer may have amounted to misconduct, Ms Orr told the royal commission.

The Brauers ended up $1 million worse off after they were forced to repay Rabobank more than they had borrowed.

Ms Orr said NAB had a “culture by which default interest was used as a strategic tool to place pressure on borrowers in default”, after it heard how the bank imposed default interest rates on Ken and Debbie Smith following drought and low cattle prices, which doubled their debt to nearly $7m.

Ms Orr said Bendigo Bank’s arm Rural Bank may have breached standards after it was found five managers had suppressed information pertinent to a borrower’s credit quality.