Banking royal commission: Ken Hayne puts focus on ‘fair’ dealing as fourth round of hearings nears end

Banks will be required to justify whether bonuses aimed at rewarding sales volume create an “unacceptable risk”.

Farmers attending the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have a moment of reflection at the Brisbane Magistrates court last week. Picture: AAP

Banks and financial services companies will be required to justify to the royal commission whether their remuneration and incentive policies that reward sales volumes “create an unacceptable risk” and prioritise sales over responsible lending obligations and requirements to act fairly with customers.

It came as 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 or engaged in conduct falling below community standards when dealing with a number of farmers, based on the evidence presented during hearings of evidence over the last two weeks.

The list of findings open to the royal commission came as commissioner Kenneth Hayne flagged his interest for banks and regulators to better define what constituted “fair” dealings between customers and banks. He also warned banks they cannot rely on claiming their past practices were acceptable because of changing community standards.

“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. So if someone wants to make a timing point about this, it is not likely to be persuasive if they just say, ‘times have changed’.”

Counsel assisting Rowena Orr has asked companies if remuneration and incentive policies that reward sales volume “create an unacceptable risk” and prioritise sales over responsible lending obligations and requirements to act fairly with customers.

Banks will also need to provide arguments to the royal commission over when it is “both best for the customer and best for the bank” to appoint receivers and where it is appropriate for banks to conduct their own appraisals of property values.

There has been mounting pressure to expand the banking royal commission to examine receivers appointed to conduct fire sales of the farmland and livestock of distressed agricultural borrowers.

Rowena Orr asked banks to respond to questions about what it meant “for a bank to act fairly and reasonably” and what weight a bank should give to the interests of the customer when dealing with distressed agribusiness lenders.

It prompted Mr Hayne to inject and says 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 Commonwealth Bank subsidiary Bankwest executive Sinead Taylor said that she accepted the bank fell below community expectations when it got property values wrong, but denied that it represented misconduct.

Bankwest executive general manager of personal and business banking Sinead Taylor leaves the Brisbane Magistrate Court in Brisbane last week. Picture: AAP

Mr Hayne said it was “a good example of the 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”.

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.

Ms Orr said Bankwest’s processes were lax and its “remuneration practices” and inadequate internal systems” contributed to the problems.

The royal commission heard a “champion” bank manager at Bankwest, whose target-beating lending won him a trip to Hayman Island, later left the company after he was found to have allegedly overvalued loans. It heard the bank manager, whose name was suppressed, inflated farm valuations but he had also 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 misconduct, by breaching the Banking Code of Conduct, and engaged in conduct falling below community standards when it dealt with farmers Arthur and Rhonda Cheeseman and grazier Charlie Phillot. Its conduct with Western Australian farmers Stephen and Janine Harley also may have fallen below community standards or breached the code, Ms Orr said.

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 and conduct falling below community standards, 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. It came after the pair were encouraged to buy a massive property with a $3.7m loan by a banker who was set annual lending targets.

Ms Orr said Rabobank’s behaviour was “a result, at least in part, of the remuneration policies and practices of Rabobank” and that “Rabobank’s current remuneration structure is still predominantly driven by sales”.

It was also open to the commissioner to find NAB engaged in misconduct and behaviour falling below community standards. Ms Orr said NAB had a “culture by which default interest was used as a strategic tool to place pressure on borrowers in default”.

The royal commission heard how after Ken and Debbie Smith stopped making adequate payments on their $3.2 million loan because of drought and low cattle prices, NAB imposed default interest rates of up to 18 per cent on the couple, mushrooming their debt to nearly $7m.

Ms Orr said Bendigo Bank arm Rural Bank may have breached community standards and engaged in misconduct on the evidence.

Rural Bank in 2011 had to review its lending practices after the prudential regulator APRA noted it was seriously concerned about the findings from an independent KPMG report which found that all five of the bank managers it closely audited had suppressed information “pertinent” to a borrower’s credit quality and “misrepresented” data in the bank’s system. Ms Orr said the conduct of the bank contributed to 62 loans given to farmers becoming “non-performing” loans.