Banking royal commission live: ‘ANZ failed in duty of care’

ANZ executive admits the bank did not demonstrate the care and skill of a prudent banker in the case of a franchise loan.

Day three of the banking royal commission’s third round of hearings has heard ANZ executive Kate Gibson admit that the bank failed in its duty of care when a franchise loan for a Gelato shop was approved. (AAP Image/Joel Carrett)

That’s it for day three of the banking royal commission’s third round of hearings. Join us tomorrow for day four.

4.35pm: BOQ head of business banking up tomorrow

Bank of Queensland counsel Noel Hutley SC asked to see the letters received by borrower Suzanne Riches before cross-examining her.

“The position of banks cannot become akin to that of a custodian of the interests of the small business holder because they need to, and should be looking, to their own advice, because on the whole they have the intelligence and sophistication to in effect protect their own interests,” Mr Hutley said.

After some discussion, Mr Hutley said he would not cross-examine Ms Riches.

Tomorrow morning the hearing will resume with BOQ’s head of business banking Douglas Snell.

4.15pm: ‘Stuck between a rock and a hard place’

Ms Riches became emotional in the court, saying she had felt she was between a rock and a hard place. The cooling-off period had elapsed, she said.

She had missed out on “two lucrative weeks” of school holidays that documents from the previous year showed would have brought in $40,000 in revenue, she said.

She tried to make repayments where she could but it was “very difficult”.

After receiving a notice of default on payments she spoke with her accountant.

She discussed selling her block of land as a way out.

She discussed letting the lease go for the larger outlet and focusing only on the kiosk, which she kept operating until mid-2015.

“I wasn’t at all happy with the way we were dealt with,” Ms Riches said.

She complained to FOS and refinanced the loans with ANZ Bank.

She received a letter from the Bank of Queensland and was “amused” because she had met all the requirements in the deed of forbearance, paying out the business loan and remortgaging the house, so she believed there was a nil balance.

Shortly thereafter she received a letter confirming there was no money owed.

She then received a “friendly reminder” text saying the account was in arrears so she rang the bank and spoke to someone who said there was no debt.

A further letter said the account was overdrawn or in arrears, then another said that letter was sent in error.

4.05pm: Monthly loan repayments doubled

Suzanne Riches received a conditional letter of offer from Bank of Queensland in August. The term was 84 months and repayments of $4420 a month.

She passed the figures on to her accountant and he said it fitted into his calculations, Ms Riches said.

Ms Riches then put an offer in on two Wendy’s franchises, but subsequently heard from her branch manager there was a difficulty with the loan.

As settlement date approached she called and emailed the bank.

The settlement did not take place on the settlement date of 8 October, Ms Riches said.

The bank manager mentioned the short-term nature of the leases, she said.

She received the final letter of offer on October 15 and had not met the settlement date.

“The vendor’s conveyancer sent, I believe it’s a notice of default, and I was being charged interest for every day that we were late in settlement,” Ms Riches said.

A new document showed the loan approved was for $280,000 but the repayments were now $8696.89 per month on a three-year loan, she said.

“I was alarmed that the amount had almost doubled from the $4400 and that the term of repayment was only three years,” she said. “He said that was due to the nature of the leases. That was the only way they could get the loan through.

3.45pm: Suzanne Riches takes the stand

Case study Suzanne Riches has taken the stand. She has been a primary school teacher for 42 years. She faces questions from counsel assisting Eloise Dias.

She started considering buying a franchise in early 2012 after her husband received an inheritance from his mum and wanted to secure his financial future.

They decided on the two Wendy’s outlets at Westfield Marion shopping centre in Adelaide.

She received a business profile and passed it to her accountant. She intended to keep working and not work in the business.

The lease on the downstairs outlet was due to expire in Sept 2013 and the kiosk upstairs in Jan 2015.

She met with CBA where a banker said the loan could not be serviced, given the short nature of the leases.

She heard through an acquaintance of her son that the Bank of Queensland were looking for customers and might view the application favourably. Ms Riches had a house and block of land in her name only so she would have to take out a loan as the sole director, she said.

She had discussed the business profile with her accountant who was going to perform due diligence and wanted to seek legal advice.

Ms Riches said despite being advised of the small profit margin they were confident of being able to improve profits given her husband’s experience as a chef and caterer and a training program at Wendy’s that they had been told could improve their profits by 10 per cent.

Ms Riches applied for a business loan at the Bank of Queensland for $280,000.

She made an appointment with the bank manager. “I specifically asked him, ‘Given the information you’ve been supplied with and your calculations, are we in a position to be viewed favroubaly for this loan? ... Will the Bank of Queensland be able to supply a loan for us?’ To which he answered ‘Yes.’”

3.10pm: ‘Bonuses allow staff to share in bank success’

Witness Carol Separovich has taken the stand. She is the head of reward and performance management for consumer bank, business bank and support functions at Westpac.

Senior counsel assisting Michael Hodge QC raised the issue of bonuses for bank staff.

Westpac made changes to its key performance indicators between 2012 and 2017, Ms Separovich said.

Mr Hodge highlighted the category of customers with eight-plus products from Westpac.

The bank has already removed all financial gateways for bankers, Ms Separovich said, in light of the recommendation from an independent review of bank pay. Bankers also have to pass the behaviour and compliance standards in order to get a bonus.

Commissioner Kenneth Hayne interjected to note that 50pc of the scorecard goals are financial.

Ms Separovich said bonuses were a way for staff “to share in our business success”.

Over time, the bonus calculation is less of a formula calculation and more discretionary and more holistic, Ms Separovich said.

Mr Hodge suggested the bank was encouraging staff to sell.

Ms Separovich: “Selling is, and supporting customer needs is, their role.”

Historically bonuses were anchored in “heavily financial” business performance but are now “more holistic”, she said.

2.40pm: 13 texts in 17 days over debt

Westpac’s Alastair Welsh has faced questions about the text messages the bank sent to yesterday’s case study Marion Messih who had borrowed to buy a Pie Face franchise with her sister-in-law.

After her business failed she was forced to sell an investment property to repay her debts — which also included a credit card and residential property loans.

She earlier spoke of her stress at receiving communications from the bank over her debts.

Mr Welsh said that “sadly” there were 13 text messages that should not have been sent to Ms Messih.

The bank had placed a “do not contact” code on Ms Messih’s business loan but not on her home loan, Mr Welsh said. “We made that error,” Mr Welsh said.

The sending of 13 messages in 17 days “seems a lot to me”, Mr Welsh said.

1.50pm: Pauline Hanson makes appearance

One Nation Senator Pauline Hanson has called for an investigation into receivers, liquidators and administrators and into lenders’ mortgage insurance.

Ms Hanson has arrived at the financial services royal commission in Melbourne, where she addressed reporters outside the court before taking a seat in the gallery.

She and colleague senator Peter Georgiou are hoping to see justice for members of the public affected by the actions of the banks, including for borrowers who lost their homes, after the party pushed for the royal commission.

An investigation into receivers and mortgage insurance would go further than the current inquiry, she said.

“I hope it is opened up a lot further for people to have their say,” Ms Hanson said.

Read more

Pauline Hanson watches on at the banking royal commission

1.10pm: ‘I take it you never ate at Pie Face’

“I take it you never ate at Pie Face, Mr Welsh. It turns out not enough people did,” Mr Hodge said.

Was there something inappropriate on the part of the banker in accepting the information?

Mr Welsh: “Broadly I’m happy with it. There’s a few things that I’ve read that I’m not, that I would have liked to have sen more information. There’s a few gaps there I would have liked to have seen filled and a bit more explanation around.”

Westpac had not conducted a review of the Pie Face franchise system in 2012, and in 2013 an internal document showed the bank decided it would suspend the accreditation of Pie Face.

. Mr Hodge read from an internal bank email chain: “If we as a bank are not prepared to lend to the franchisor it does not seem wise to lend to the franchisees on an intangible security basis.”

1.00pm: ‘Loan should have been made’

Senior counsel assisting Michael Hodge QC wondered if the loan to Marion Messih and her business partner — heard in yesterday’s evidence — should have been made.

“The loan should have been made,” Westpac’s Alastair Welsh said, disagreeing with the FOS determination but adding that the bank is bound by the ruling.

Why did he disagree?

FOS had used a 3pc buffer on top of the interest rate which Mr Welsh thought was “very high”.

The document showed the business had average weekly sales of $10,750.

Westpac’s available information about Pie Face franchises was that the low average weekly sales was $13k, average $17k and high $21k.

What should a responsible banker do with that information, Mr Hodge asked?

“What the banker did note here was that was not within the benchmark, however as mentioned before this is due to the store being a small store and all figures reflect on each factor,” Mr Welsh said.

“It was the smaller end of their stores because it was kiosk.”

Mr Hodge wondered if there were many Pie Faces that weren’t kiosk style and Mr Welsh did not know.

12.40pm: Attention turns to accredited franchise program

Senior counsel assisting Michael Hodge QC has turned to the accredited franchise program at Westpac.

The bank uses the sector to value ratio, a percentage which is used to calculate the maximum amount Westpac will lend to the franchise in an accredited franchise system with only cashflow, Mr Welsh agreed.

Mr Hodge displayed an internal Westpac document.

If the SVR for a particular franchise was 60pc Westpac could lend 60pc of the “debt sizing” or purchase price, Mr Welsh agreed.

The document showed that say a business was going to cost $300k and it had a SVR ratio of 60pc Westpac would lend up to $180k against cashflow.

Mr Hodge displayed the franchise system profile for Pie Face franchise at July 2011.

If a borrower wanted to borrow up to the relevant sector value ratio, these benchmarks provide a guide in terms of sales.

For existing stores it was a 1.75 multiplier to ebitda capped at 60pc.

The case study under this policy could have borrowed up to 50pc of the purchase price of the business, Mr Welsh agreed. They could only borrow 1.75 times the ebitda for an established business.

As the loan was against cashflow it would still require security over the entirety of the business with the directors to give guarantee, Mr Welsh agreed.

But they would not necessarily have to give a mortgage, Mr Welsh said.

This policy offers ready rules to allow lending to small businesses, Mr Welsh agreed.

“It gives the guidance to our banker and also gives guidance to the market of what we might be looking to do … It also shows the franchising set-up costs … so it helps with the risk-based decision.”

Mr Hodge asked if an advantage of the policy was that it directed potential small business owners to Westpac, setting up some potential of referrals.

Mr Welsh: “not necessarily”.

Yesterday, former Pie Face franchisee Marion Messih gave evidence that the franchisor said she had to move all her borrowings to Westpac.

That would not have been correct, Mr Welsh said. “There is no requirement.”

Mr Welsh was surprised the franchisor would say that to a potential franchisee.

12.20pm: Welsh back on the stand

Westpac general manager of commercial banking Alastair Welsh has returned to the stand, after yesterday admitting it was common practice for Westpac bankers to fill out loan documents with false information.

Mr Welsh had seen increased competition for lending to small businesses, including from the other three major banks.

“I think they’ve all got a clear strategy to try and support this market and improve in it and back businesses,” Mr Welsh said.

Junior banks and non-banks were also focused on small businesses, with non-majors “pretty hot competition” in Queensland and non-bank fintechs “looking more at supporting small businesses”.

Mr Hodge raised the subject of property development, which Mr Welsh said related more to commercial business than small business.

“We’re very sensible about how we approach that market,” Mr Welsh said.

“I think we’re cautious and careful for all of our loans on that.”

The bank looks at what proportion of its book is allocated to property development, hospitality, retail, etc to make sure it is not overweight in one particular area, he agreed. The bank would also look at how its book was performing in different geographic locations.

“You always back your longest standing customers. So you back the ones that have been with you for a long time,” Mr Welsh said.

Ben Butler 12.00pm: Bonus scheme ‘made little sense’

ANZ’s Kate Gibson has admitted under questioning from senior counsel assisting Michael Hodge QC that a bonus scheme encouraging bankers to “relentlessly” sell small business loans made little sense.
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11.50am: ‘ANZ did not demonstrate care of diligent banker’

Under questioning from ANZ counsel Matthew Collins QC, ANZ’s Kate Gibson said she did not regard the business plan as comical. It follows comments by counsel assisting Michael Hodge in which he referred to elements of the business plan submitted by the couple as ‘comical’.

The loan applicants had looked at the expectation for ice cream retailing, the shopping centre in question, the spend, and the nearby population.

The customer had also analysed the strengths, weaknesses opportunities and threats for the business, Ms Gibson said.

She admitted errors: “There are a number of errors. There are data entry errors. Some of those data entry errors then caused other people to make decision without regard to data that they should have had.

“The consideration of the business plan was that it was acceptable.

“Errors are going to be made. That’s just life. There are human beings involved. Errors would be made. But when I stepped back and looked at the cumulative number of errors here I was not comfortable. “

Counsel assisting Michael Hodge clarified: “Do you think that in this case ANZ has demonstrated the care and skill of a prudent and diligent banker?”

“No,” Ms Gibson said.

11.15am: Gibson rejects poor practices assertion

Senior counsel assisting Michael Hodge QC turned to notes from the banker assessing the loan.

The notes included that cashflow forecasts could not be tested because it was a start-up business.

“Notwithstanding the concerns that you and I have discussed, I think that the bulk of the detail one expects in a business plan is there,” Ms Gibson said.

Planning for a default scenario involved halving the income from the business for the wife, removing any net profit from the business and using the husband’s income only. This was known as a break-even scenario.

Ms Gibson acknowledged that liabilities had been left out of the calculation.

Mr Hodge raised the incentive measures for performance were in place at the time.

“It’s a sales target,” Ms Gibson explained. “That is with respect to six of the products that the small business bankers were able to either sell to customers or refer to other parts of ANZ,” Ms Gibson said.

Another target covered contribution to a high-performance culture, which did not include financial measures, while another was that the banker did not trigger any risk or behaviour flags.

This loan would have been in the second half of 2015. The commission heard that this banker in the first half of 2014 was described as having a “great half” and “meeting the majority of his targets” but did not meet “new-to-bank lending”.

The commission heard about the performance review for the second half of 2014 where the banker outperformed “across most measures, with the banker adding “Has been a great half given the challenge I put myself to achieve new-to-bank lending”.

Ms Gibson rejected Mr Hodge’s assertion that the focus on new-to-bank lending may have contributed to poor practices at ANZ.

“I think bankers were very clear that they needed to meet the compliance and requirements. It certainly would have meant they focused on building their circle of influence and finding opportunities to bring customers to ANZ, but I don’t accept that it follows that it led to poor practice,” she said.

10.50am: ‘Heated conversations with customers’

ANZ’s Kate Gibson said the bank would not seek to exclude the ability of parents to guarantee their children’s loan even if the parent wasn’t getting any benefit — although it made the parent a higher risk and meant the banker needed to ensure they recommended independent legal advice.

The bank made a calculation of the serviceability of the loan but did not make that number available to guarantors, she said.

ANZ Bank executive Kate Gibson answers questions at the banking royal commission.

“We could provide it but I suspect it would end up in some reasonably heated conversations with customers about why we were counting expenses higher than they were,” she said.

Senior counsel assisting Michael Hodge returned to the business plan for the New Zealand ice cream franchise.

Was the plan what the bank expected?

“The business plans are many and varied and there are very different levels of detail in them,” Ms Gibson said.

“It looks to me like a template document that the franchisor would use with franchisees and would populate with data specific to the franchisee but would reuse for future business plans.”

Mr Hodge showed several pages of the plan and suggested it was “substantially filled with what looks like clip art”.

Ms Gibson: “I think it could have been more succinct, yes.”

“I do think that the banker should be asking questions about whether or not the person who’s going into the business has thought about it and has understood what they’re getting into,” she said.

10.35am: ‘It would have a negative impact’

ANZ’s Kate Gibson agreed the bank had relied on the ice cream company director’s personal income to fund the loan if the company could not meet its obligations, an issue raised by FOS.

“My understanding of what FOS is saying is that if you don’t have an asset, you go to the income. If you don’t have an income that’s sufficient to cover all of the family’s expenses and the business loan, you shouldn’t lend. And that would mean that somebody who wanted to start a business who didn’t have a tangible security and didn’t have a partner with an income sufficient to cover the business debt and all of the family expenses would not be able to get a loan,” she said.

She agreed that FOS argued ANZ should not have been satisfied that the husband’s income would be enough to service the loan.

“If banks accepted that definition then we would have to look at these applications, and in the absence of there being an income available to service the debt in the event of default, under FOS’s definition then we shouldn’t lend.

“I believe that we do lend in those circumstances. I believe there are probably many small businesses who get funding in those circumstances who could be assumed not to be able to access that if that was the case. So I do believe it would have a negative impact.”

For a single person who didn’t have a spouse or assets, she was unsure how the bank could say they had met FOS’s expectations around servicing debt.

“If we as a bank say that we have got risk appetite to support small business owners in that situation and FOS is saying that that’s contrary to the code then I think that’s problematic,” she said.

10.15am: Gibson questioned on small business loans

ANZ’s Kate Gibson — currently the boss of home lending but who previously had responsibility for small business banking — has returned to the stand to answer questions from senior counsel assisting Michael Hodge QC about a gelato franchise that received a loan from the bank.

Questions have kicked off by looking at how the bank decides to lend to small business.

“My expectation is that they (the banker) would have looked for indications that the business plan had taken into account appropriate expenses, that they would have looked at the revenue, and had some understanding of how the revenue had been arrived at,” Ms Gibson said.

The banker would also have looked for “obvious signs” that hadn’t been thought through, for example, if there was no seasonality in the figures.

The credit officer had to form an opinion. “We provide guidance on the sorts of things we think they should take into account, but we’re not prescriptive about exactly what has to be sourced beyond saying that they do need to provide a business plan, they do need to provide cashflow forecasts, and the bank officer and credit officer need to have formed an opinion that they’re reasonable,” she said.

9.30am: Day three kicks off with ANZ’s Kate Gibson

The banking royal commission will hear further evidence today about lending to small businesses and franchises in particular, with ANZ’s Kate Gibson expected to return this morning.

Ms Gibson is set to finish giving evidence after yesterday facing initial questions about the bank’s loan to a gelato shop on the back of a generic-sounding business plan that promised a romantic atmosphere suitable for dates even though it was a kiosk in a Westfield shopping centre.

Westpac’s Alastair Welsh — who yesterday answered questions about the bank’s dealings with blind disability pensioner Carolyn Flanagan about her going guarantor on a loan to her daughter’s small business and bankers filling out loan documents with false information — will also return. This time he will respond to another case study, Marion Messih. Yesterday Ms Messih spoke of going through the “worst” time of her life when Westpac pursued her for debts following the closure of her Pie Face store.

Other witnesses listed include Westpac’s Carol Separovich, Bank of Queensland’s Douglas Snell, and Suzanne Riches, who is likely to be a case study. The commission may not get through all of them today.

The hearing kicks off at 9.45am.