Banking royal commission: Westpac ticked “complete and correct” loan application despite falsehoods

Westpac allowed a vulnerable woman to pledge her house despite her daughter’s loan application containing falsehoods.

Westpac allowed a vulnerable woman to pledge her house so that her daughter could borrow money from the bank despite the loan application containing falsehoods, the financial services royal commission has heard.

In evidence this morning, the commission heard that a Westpac banker certified the application form for the loan was “complete and correct” even though it falsely claimed the woman, Carolyn Flanagan, had been working for the daughter’s business for months.

The bank approved the $160,000 loan in late 2010 even though it was told the purchase price for the business — a pool maintenance franchise — had already been paid.

Westpac general manager of commercial banking Alastair Welsh this morning also admitted that the type of tightly held private company the daughter used to buy the franchise was highly unlikely to ever pay a dividend to Ms Flanagan as a shareholder.

Ms Flanagan, a disability pensioner who suffers from a string of ailments and is partly blind, lost her house after the business failed and Westpac called in the loan.

After getting help from NSW Legal Aid, she was able to strike a deal allowing her to live in her home, rent-free, until she dies.

A screenshot of Carolyn Flanagan giving evidence to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry via video link from Sydney. Picture: AAP

Giving evidence this morning, Mr Welsh admitted there were “imperfections” in the process of making the loan but defended the bank’s decision to go ahead.

“We followed our process,” he 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.”

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

The plan said the daughter’s partner was responsible for general management, the daughter managed administration, and the business was looking to hire an on-road pool technician and a shop manager.

There was no reference to Ms Flanagan being employed.

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Mr Welsh agreed the loan application said there were no employees but the business plan recorded two employees and two vacancies — neither of which were relevant to Ms Flanagan.

He returned to evidence he gave yesterday that he found Ms Flanagan’s testimony to the commission about her situation “confronting”.

“I felt some discomfort in seeing an elderly person in that situation,” he said.

He said the bank “allowed a mother to back her child,” which was a big part of small business banking.

“In this situation it’s turned out in a very sad way,” he said.

Under Westpac’s lending rules a guarantor needs to have an interest in the business being bought using the loan.

Mr Welsh agreed with Mr Hodge that under the bank’s policies, being made a $1 shareholder late in the loan application process was enough to give Ms Flanagan an interest in the business.

Commissioner Kenneth Hayne asked Mr Welsh if he could point to an example where a tightly held private company would pay dividends to shareholders, rather than wages, which are deductible expenses.

“In the normal course there would probably not be dividends,” Mr Welsh said.

Mr Hayne asked: “Is an available point of view that it would be rare for a private company of this kind, a proprietary company of this kind, to pay a dividend?”

“Yes, that’s correct,” Mr Welsh responded.

The initial franchise fee was about $85,000 but the loan was for $160,000, the commission heard.

Mr Welsh said the loan amount seemed “not unreasonable” for a mobile pool franchise business with equipment and a truck.

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