Banking royal commission live: ‘Worst time of my life’

Marion Messih has told the banking inquiry how she is still in debt after taking out a loan through Westpac to open a Pie Face franchise.

Former Pie Face franchisee Marion Messih. Picture: Stuart McEvoy

And that’s a wrap of proceedings for day two of the banking royal commission’s third round of hearings, Tune in tomorrow for more live coverage.

4.52pm: ‘Worst time of my life’

“It was overwhelming and just stressful. It’s the worst time of my life. I didn’t want to go through it again. And I don’t want to ever go through that again.

It’s not a nice feeling when I’ve always paid all my debts upfront, bills were always paid, and to continually get phone calls from institutions about where’s your payment, when are you going to make the payment, is just something that I’m not used to, and was really hard.

I had my kids paying my bills for me, paying my loans for me. That’s not what a mother does. That’s not what I do. That’s not what I’ve done all my life. I worked hard to get where I was. It’s gone. All of it’s gone. I still owe money,” Ms Messih said.

4.50pm: Messih details second FOS complaint

She sold the investment property for $750,000. She owed $165,000 on the investment property and $330,000 on her home loan. She intended to pay off the investment property, her home loan and her business loan and put any surplus into her everyday savings account.

The day before settlement she received an email from Westpac saying the bank would take 100pc owing on the business loan from the sale of the property, which they did then take, she said.

Her sister-in-law is paying her back $120 a week, she said.

She made a second complaint to FOS about the bank taking 100pc of the loan and about Westpac sending text messages asking for money.

FOS was “very helpful”, she said.

Ms Messih agreed FOS found against her the second time, saying Westpac was entitled to take the money to pay down the loan.

But FOS found in her favour based on Westpac texting her, and she received $6750 for stress and inconvenience.

4.45pm: FOS found in favour of franchisee

In early 2014 she sought a payment plan from Westpac because sales had fallen so she couldn’t keep with payments. “They were fine to start with,” she said. She paid weekly rather than monthly. “But the impact the construction had on the business, and not just our business it was all the businesses within the plaza was just — it was very hard to come back from that.”

She fell behind with the payment plan to Westpac and was issued with default notices.

The store was then shut down. Pie Face went into voluntary receivership, she said, so she could get out of the lease with the plaza if she acted within a week and a half.

She made a hardship application to Westpac, which was approved, with the bank suspending repayments for a period of time, she said.

“So it was just too much,” she said. “I had the income from my rental property but that didn’t cover all the expenses that I had.”

She complained to FOS — after meeting with other franchisees — saying Westpac should never have made the loan. FOS found in her favour and recommended no interest would be paid for the life of the loan. The principal $362,000 was still due, borrowed half by Ms Messih and half by her sister-in-law.

She repaid the loan by selling her investment property.

She had to quit her job because her mum was very ill with encephalitis of the brain and in hospital for three months.

4.40pm: ‘$500 in a week was a miracle’

Ms Messih appeared emotional while answering questions about trading.

“If we earned $500 in a week, it was a miracle,” Ms Messih said. “It was pretty woeful, to be quite honest. We were working 14 hours a day running a business and sales are not even $500. It was just ludicrous.”

She realised the previous owner’s sales figures were “slightly exaggerated”.

They set goals to increase sales and after the first year lifted sales to between $1000 and $1200 a week “which we were pretty proud of”.

But Werribee Plaza start to have major renovations, closed all the carparks bar one, a month before the busy Christmas period.

“People avoided Werribee Plaza,” she said. “So sales decreased again. We had to still pay the same amount of rent to the owners of the plaza. There was no discount given. And it was in their agreement that they can do renovations whenever they want to. And you have just got to put up with it.”

She met with the company doing the construction and negotiated to start work at 5am to be ready for the contractors to come in and get breakfast at 6am before starting work.

“That helped a great deal. If we didn’t do that we would have lost the business a lot earlier than that because it actually, it stabilised our income,” she said.

The owners never achieved their goal of having $50,000 each out of the business.

4.30pm: Franchisee required to bank with Westpac

As a requirement to get the loan, Pie Face said she had to bank with westpac, Ms Messih said.

She and her sister-in-law had hoped to get about $50,000 each from the business as a start.

4.20pm: Marion Messih takes the stand

Marion Messih, who took a business loan with Westpac in 2012 to open a Pie Face franchise, has taken the stand.

As of 2012 Ms Messih owned her home and had an investment property, with mortgages on both to CBA.

In 2012 she looked into buying a business to run with her sister-in-law, and her brother would be involved too.

She had hoped for a change of direction: “Hopefully run a business, earn some money, retire early.”

Ms Messih and her sister-in-law decided to buy a Pie Face franchise, after doing some research.

Pie Face representatives let her know there was an existing Pie Face for sale in Werribee Plaza.

The purchase price was $330,000. Pie Face said franchisees needed to get loans with Westpac because the franchise was accredited with them, Ms Messih said.

She applied for a loan of a little over $360,000 — with room for a business overdraft.

The commission saw a document with the loan application in Ms Messih’s sister-in-law’s handwriting.

She can’t recall preparing a business plan, although she admitted this does not mean she didn’t prepare such a plan.

3.55pm: Gibson admits ‘error by banker’

Senior counsel assisting Michael Hodge QC has suggested the statement of position for the small business that was funded by ANZ was lacking in detail and there were no contemporaneous written records reflecting the information entered by the banker into the small business system.

This was an “error by the banker” Ms Gibson said. “If there was some reason why those numbers had changed, they should have made notes to that effect.”

The language in the business plan does seem generic to the franchise system, Ms Gibson said, so she would have expected the banker would have checked the customer had been involved in the business plan development. The customer had looked at the market for ice cream stores, the area’s demographics and had detailed cashflow forecasts, she said.

Bankers are expected to get a business plan, cashflow forecast and form an opinion as to the reasonableness of that, Ms Gibson said.

One example of the generic business plan language was that “the franchise will be a great place to eat, combining an intriguing atmosphere with excellent interesting food”, Mr Hodge suggested.

The business plan had some references to the customers that suggest they at least had a conversation with the franchisor but nothing to suggest they prepared the plan from scratch, according to Ms Gibson.

The business plan also said the ice cream kiosk would be suitable both for families and for couples on dates.

Mr Hodge: “Do you expect your ANZ bankers to read the business plan?”

Ms Gibson: “Yes I do.”

Commissioner Kenneth Hayne wondered how many ice creams the business would have to sell to meet its sales targets.

Based on a 63 hour week and $7 an ice cream and 85pc of their revenue over the counter, the business would have to sell about 23 ice creams per hour on average over the whole year — less in July, Ms Gibson said.

3.05pm: ANZ’s Kate Gibson takes the stand

ANZ’s Kate Gibson has taken the stand — she is currently the general manager of home lending but previously had responsibility for small business banking.

The number of applications for small business loans at ANZ had dropped between 2014 and 2017, the commission has heard, with Ms Gibson highlighting competition from fintechs.

ANZ would lend to small businesses without tangible security up to 50pc of the purchase price — but for accredited franchises the figure was slightly higher, around 60pc, Ms Gibson said.

ANZ general manager of home lending, Kate Gibson

The commission is about to hear a case study over a gelato shop and its three loan facilities with ANZ. The shop was a franchise but not one of ANZ’s accredited franchises so it was assessed as a start-up.

The case ended up at the Financial Ombudsman Service with the borrower saying they could not afford to repay the loan.

Ms Gibson said ANZ did not agree with a FOS finding that ANZ failed to exercise the care of a diligent banker in this case.

If ANZ believed that the serviceability of the loan could not be demonstrated then the bank would not have met its obligations under the code of banking practice, Ms Gibson agreed.

2.20pm: Bank processes ‘more form than substance’

Commissioner Kenneth Hayne AC QC has asked if Westpac knew Carolyn Flanagan was on a disability support pension when it took her guarantee for her daughter’s small business loan but Westpac’s Mr Welsh did not know.

Mr Hayne: “I want to put to you squarely that the processes which the bank went through to determine whether the guarantor stood to obtain any financial benefit were processes that were more form than substance.”

Mr Welsh: “I think that’s a correct assumption. It was more form. And the substance was more anchored in the security position and not anchored in the understanding of Ms Flanagan’s income or potential to pay back the debt other than realising on the asset in the worst case scenario.”

Commissioner Kenneth Hayne AC QC questioned Westpac executive Alastair Welsh.

Mr Hayne: “What I want to understand is what response you would make to an assessment of those inquiries as form rather than substance, or if you like box ticking rather than looking at the reality.’

Mr Welsh: “I think that’s right. The process is to make sure that you check that there’s going to be a commercial benefit. There’s not any substance behind that to make sure it’s going to happen … so I think it’s tenuous at best.”

Mr Welsh added that there was something troubling him.

“Many parents want to back their children … In Australian society we’re often asset rich and cashflow poor. And there’s a reality that many businesses particularly for the young today it’s damn hard to access finance and actually to build up a bit of a nest egg … so the support of parents is critical … The way the current laws and regulations work is you do have to be able to show commercial benefit … I think it’s a pretty critical issue for the Australian business and for the Australian economy.”

Andrew White 1.55pm: NAB links bonuses to customer service

National Australia Bank has foreshadowed a revision of executive pay practices that will include incentives linked to treatment of customers as part of a sweeping overhaul of its culture spurred by the royal commission.

NAB chairman Ken Henry said the new policy would be simpler to understand, reward long-term performance — including by deferring bonuses — and “incentivise the right behaviours, especially with respect to the treatment of customers”.

The new approach, which will apply from next year, comes as the bank aims to implement all of the recommendations of the Sedgwick Review of bank pay by 2020.

NAB has already replaced product-based incentives for 700 retail branch managers, assistant branch managers, and sales team leaders in consumer call centres with a group incentive based

on a “balanced scorecard and NAB performance”.
Read more

1.05pm: We forgot it was about Ms Flanagan

The signing of the loan document has come into focus.

The banker had signed as the witness without having seen Ms Flanagan sign the document, Mr Welsh agreed.

Mr Hodge: “And is it normal practice within Westpac for bankers to helpfully pre-witness signature that they haven’t seen done?”

Mr Welsh: “Not at all … In my view she did this in error and crossed it out.”

Mr Welsh agreed Westpac maintains there were no problems with its process over taking the guarantee and making the loan.

“We forgot this was about Ms Flanagan,’ Mr Welsh said.

“My read of the documents is we got into legal process and what FOS said and who was on what basis.

“She was looking to stay in her home, and when we finally cut to the chase of that, that’s what we did. We gave her life tenancy for her home.”

But Mr Welsh conceded that if she wanted to sell her home to move into another environment for health reasons she would first have to pay out Westpac.

12.55pm: Welsh defends Westpac processes

Attention has turned to a document where Westpac’s banker ticked off the process that was followed during the loan.

Westpac’s banker had filled in the “yes” boxes for Ms Flanagan including affirming that Ms Flanagan had read the loan documents — but Mr Welsh conceded the banker should have instead affirmed that Ms Flanagan had the documents read to her.

The banker had affirmed Ms Flanagan got legal advice — but she did not receive legal advice until later, Mr Welsh agreed.

“It’s not uncommon for these to be filled out in anticipation of something happening. So in anticipation that she was going to go and see a lawyer. So my read of these is that she filled out ‘yes’ here that they had the discussion about going and seeing a lawyer. So that’s not uncommon because this document was not intended to be signed here. So they would, it was going to be signed on at a later date with the lawyer,” Mr Welsh said.

Mr Hodge asked if it was surprising to write ‘yes’ in advance.

Mr Welsh: “That is often the practice … You know it could be the practice at this point in time. It’s not fair to say it’s often because I don’t know that.”

Mr Hodge continued to push.

“You just have no idea because your processes have not been complied with in this case,” Mr Hodge said.

Mr Welsh: “No, I don’t see that, I don’t buy that proposition.”

12.40pm: Value of loan ‘reasonable’: Welsh

The value of the loan seemed reasonable through his perspective as a banker, Mr Welsh said.

The loan account documents show payments including for rent and to Sydney Water.

Mr Welsh: “I’m not sure why rent would be paid.”

Mr Hodge: “What about why this business would be paying Sydney Water?”

Mr Welsh: “Not sure.”

Small businesses did not necessarily want their bankers reviewing every payment, Mr Welsh said.

Mr Hodge raised the question of whether it was the role of the bank to work out what the loan funds were being used for.

“Is the problem with Westpac applying its standards and policies in this case, or is the problem a problem with Westpac’s standards and policies, or is there no problem at all?” Mr Hodge asked.

12.25pm: ‘If you can’t get them, you can’t get them’

Mr Hodge produced documents showing the daughter’s partner had been working for the business, Poolwerx, for the past three months, estimating that in two months trading the income was $32,000. The partner was now planning to operate a mobile service and there would be no store.

Mr Hodge examined the profit and loss documents for the business.

If the last two years of full financial documents for a business are available it was the bank’s “preference” to see them, Mr Welsh said.

“In my experience you can’t say, ‘Sorry we can’t lend you money because the previous business isn’t going to give their accounts to you.’ You know we probably would not lend too much if that was, you know … I would like to think there was the right inquiry there, but if you can’t get them, you can’t get them.”

Mr Welsh would not have expected the banker to work out what the rest of the loan value was being used for — as the loan was for $160,000 and the initial franchise fee was about $85,000.

Mr Welsh said a banker would need to satisfy themselves as to the exact purchase price of lending against cashflow but denied he expected a lower standard when a house was on the line as security.

12.20pm: Flanagan listed as $1 shareholder

Senior counsel assisting the commission Michael Hodge QC continued to question Westpac’s general manager of commercial banking, Alastair Welsh, over another bank document.

If a banker had been informed that information provided by the borrowers was incorrect, that would put the banker on alert and “trigger a conversation” about working out the facts, Mr Welsh said.

Yesterday’s witness Ms Flanagan was ultimately registered as a $1 shareholder of the company but never appointed as a director, Mr Welsh agreed.

Westpac’s policy is that if you are a shareholder you have rights to dividends and that counts as a commercial benefit for the purpose of the loan, Mr Welsh said — even though he admitted under questions from Commissioner Kenneth Hayne that “in the normal course there probably would not be dividends” and it would be rare for a private company of this kind to pay them.

Richard Gluyas 11.45am: Bank advisory body to be suspended

The Turnbull government is set to suspend the operation of the Financial Sector Advisory Council while the financial services royal commission is underway.

It is understood that the decision could be announced as early as today.

FSAC, which is chaired by Suncorp boss Michael Cameron and has members including Westpac chief executive Brian Hartzer, advises the government on the performance of the financial system regulators — the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Payments System Board of the Reserve Bank.

It also acts as an industry consultation body, advising Federal Treasurer Scott Morrison on conditions and emerging trends in the financial sector, as well as potential regulatory reforms to improve the efficiency and competitiveness of the financial sector.
Read more on this exclusive.

11.10am: ‘We agree that just wasn’t true’

Mr Hodge produced an internal Westpac document showing relevant recent events, with customers approaching the bank to fund the purchase of franchising in western Sydney with a purchase price of $165,000 using the mother’s property as security.

Mr Welsh agreed that Ms Flanagan at that time was not a shareholder — although the document said she “will be” a shareholder.

Ms Welsh said the ratio of the loan to the value of Ms Flanagan’s security was relevant.

Ms Welsh said the business was purchasing a new company for them — but purchasing an existing franchise area that had been up and running.

Mr Hodge noted a line in the documents saying Ms Flanagan was employed with a start date July 30 2010.

“We agree, don’t we, that just wasn’t true,” Mr Hodge asked.

Mr Welsh replied: “Yes we do agree.”

Mr Welsh agreed that the document included a certificate of quality confirming the form was complete and correct signed electronically by the banker.

Mr Welsh said he had not seen any document in the file that could explain how someone could certify the document was correct and also state that Ms Flanagan was employed.

11.05am: $160,000 for franchise ‘not unreasonable’

Mr Hodge showed that in faxed documents the first 88 pages of the franchise agreement were missing, and Mr Welsh said no one had provided the missing pages to him.

Mr Hodge pointed to the initial franchise fee which had six elements totally $89,405.99, and Mr Welsh said “I will run with your numbers”.

Mr Welsh agreed the document provided for a special item — a deposit for $10,000 immediately and the balance of $75,409.09.

Mr Welsh agreed that what was to be paid for the franchise was effectively $85,500 but said he did not note that the payment was due by August 31, 2010.

Mr Hodge noted that the loan application was being made later on September 23, 2010.

Mr Welsh said the timing would not raise a red flag.

“That would have been going through a set process,” Mr Welsh said. “I didn’t explore this at great depth”.

Mr Welsh agreed that hypothetically the applicant must have obtained the funds from somewhere to make the August payment — but that he had no idea.

“Typically in my experience as a banker, you don’t just focus on one document, you look at the whole of the documents,” Mr Welsh said.

Mr Welsh said he could not comment on what the banker did in the case because he had not spoken to them.

Mr Hodge asked if Westpac needed to consider the amount of the money it was lending compared with the value of the business that it was buying, and Mr Welsh agreed.

Mr Welsh said the value of the business was “technically, the value is what it is was paid for. So the 165 [thousand dollars].”

Mr Welsh said “I didn’t do a forensic review of how much this business cost”.

But $160,000 for a mobile franchise with equipment and a truck seemed “not unreasonable”, he said.

11.00am: No reference to Flanagan being employed

Senior counsel assisting the commission Michael Hodge QC produced the business plan for the franchise bought by the daughter of yesterday’s witness Carolyn Flanagan.

The plan said the daughter’s partner is responsible for general management, the daughter manages administration, and the business is looking to hire an on-road pool technician and a shop manager, although there was no reference to Ms Flanagan being employed, Westpac general manager of commercial banking Alastair Welsh agreed.

Mr Welsh agreed the loan applications said there were no employees but the business plan records two employees and two vacancies, none of which are relevant to Ms Flanagan.

Mr Welsh said the inconsistency did not raise concerns about the process by which Westpac built the deal.

10.40am: ‘We followed our process’

Mr Hodge has resumed questions about employment, with Mr Welsh agreeing Ms Flanagan was not employed by the business or a shareholder of the business yet her property was used as security for the loan.

Mr Welsh agreed that this was the kind of situation that Westpac’s internal policy said the bank ought to exercise extreme caution in.

Mr Welsh said the bank had exercised extreme caution.

“We followed our process,” Mr Welsh said. “We completed the checklist of what we read out to her, and we completed the subsequent checklist, and we asked her to get external legal advice, which our evidence showed she did.”

Ms Flanagan had received documents, and got independent legal advice, Mr Welsh agreed.

Mr Hodge produced a document showing the valuation performed on Ms Flanagan’s home.

At the date of valuation in 2010, Ms Flanagan was not a shareholder or employee of the business, Mr Welsh agreed.

Mr Welsh said it did not cause him concern that Ms Flanagan did not have an interest in the business when the property was valued, as Ms Flanagan was going to become a shareholder — and did become a shareholder — at a later date.

Mr Welsh agreed it was the Westpac banker who had said Ms Flanagan would become a shareholder, after Mr Hodge noted that Ms Flanagan did not make this statement herself.

10.35am: Zero employees listed for franchise

Mr Hodge has produced a document counting the number of employees, which Mr Welsh agreed was zero for full time and part time employees.

Mr Welsh said he remembered having noticed that the loan application said there were no employees.

“I noted it but didn’t labour on it,” Mr Welsh said.

‘The deal evolves. So it’s not always something that’s in the original documents carries all the way through.”

Mr Welsh agreed that the loan application included other documents showing the daughter was working for the business but he had not referred to it in his statement.

Mr Welsh added that yesterday’s case study witness Carolyn Flanagan was also said to be working for the business in the deal build report — and would be employed on a part-time basis as well as being a shareholder of the business and receive a wage and dividends — but he had not noted that inconsistency in his statement.

Mr Welsh agreed Westpac would not have accepted a guarantee from Ms Flanagan unless she had a commercial benefit from the business.

Mr Welsh agreed he knew the deal build report was inconsistent with the loan application.

Westpac’s counsel interjected to defend Mr Welsh saying he had not been asked to address any deficiency in the loan process.

Mr Welsh added that sometimes there are “imperfections” as a deal goes through, but that did not mean failures to comply with Westpac’s policy or failure to exercise due care and skill as a banker.

10.30am: Welsh expresses ‘discomfort’ in Flanagan case

Mr Welsh said he felt “obviously some discomfort of seeing an elderly person in that situation”.

“Yet I suppose I went to the technical side looking across the whole of this because we, my view of the situation is we allowed a mother to back her child,” he said.

The case did not point to a problem in the bank’s practice at the time of taking the guarantee, he said, adding that the bank had made “a few minor changes” since then.

Internal Westpac loan documents produced by Mr Hodge show that the total finance required was $160,000, which included the purchase price of the franchises and $8000 in working capital, Mr Welsh said.

Mr Welsh admitted he did not discuss how much the franchises actually cost when he discussed the loan with his colleague in his credit team.

Mr Hodge noted that the loan documents said the finance would include the purchase of two vehicles and stock and equipment which Mr Welsh said he had read but wasn’t focused on.

Mr Hodge asked if it was important to understand “with some precision” what a loan was for and Mr Welsh agreed it was “very important”.

Mr Welsh said $160,000 to buy a pool franchise seemed “about right”. “It wasn’t my normal practice to sort of labour on that because you do a reasonableness test to look at that,” he said.

Mr Hodge asked how he informed himself as to the ordinary price of a pool franchise and Mr Welsh said he had asked some of the team and looked at the revenue forecasts.

Mr Welsh agreed he could not find any document that showed how the $160,000 broke down.

10.25am: Welsh questioned again over pensioner guarantor

Westpac’s general manager of commercial banking, Alastair Welsh, took the stand as the first witness at the banking royal commission this morning, returning after his evidence yesterday afternoon.

He faced questions from senior counsel assisting Michael Hodge QC over disability pensioner Carolyn Flanagan, who acted as guarantor for a loan to her daughter’s small business.

He was presented with Ms Flanagan’s statutory declaration from 2014, when she sought legal advice after the business had gone bad and the loan been called in, where she remembers being assured by the banker that the daughter could repay the loan.

Mr Welsh said the process of granting the loan looked “pretty reasonable” given the daughter’s partner had signed up for a business plan, made a finance request, before a valuer came to the house and Ms Flanagan took independent legal advice.

Mr Welsh agreed that the requisite level of skill and care was exercised in relation to the making of the loan, given the loan application, business plan and profit and loss statement.

Mr Welsh had a colleague in his credit team review the case.

10.20am: Banks slide as inquiry heats up

Shares in the big four banks are lower as day two of the banking royal commission’s third round of hearings gets under way

Westpac’s general manager of commercial banking, Alastair Walsh, was first up this morning, following up on his evidence related to Carolyn Flanagan, a disability pensioner who acted as guarantor for her daughter’s small business loan.

In morning trade, Westpac was down 0.65 per cent at $28.475, NAB was 0.77 per cent lower at $27.05, CBA was 0.26 per cent lower at $69.91 and ANZ was down 0.64 per cent at $28.13.

For more on the banks’ share prices and other markets news, go to our live trading day blog.

10.00am: Rod Culleton returns to hearings

Former One Nation senator Rod Culleton has returned to the hearings and is seated towards the front, after yesterday saying he would tender evidence gathered by a senate committee he sat on that examined ulterior motive theories over CBA’s Bankwest acquisition.

Senior Council Assisting Mr Michael Hodge QC, The financial services royal commission public hearing into financial advice continues in Melbourne, with Rod Culleton in the background.

9.30am: ANZ’s Kate Gibson to front hearing

Alastair Walsh, Westpac’s general manager of commercial banking, was back on the witness stand this morning. It follows his evidence yesterday in which he said it was “confronting” to hear how the bank allowed an ill disability pensioner to act as guarantor for her daughter’s small business loan.

The next witness expected today is ANZ’s general manager of small business banking, Kate Gibson.

Westpac is again set to face the hearing, with Carol Separovich, head of performance and reward for Australian financial services, to return after a previous appearance in March.

Another witness scheduled is Marion Messih, likely to be a case study.

The commission yesterday rejected conspiracy theories about CBA’s treatment of loan customers after the Bankwest takeover.

The hearings yesterday also covered the ongoing review of the banking code of practice and its definition of a “small” business, where banks remain locked in dispute with the corporate regulator.