Category: Banking Culture

CBA To Demerge Wealth And Mortgage Broking Businesses

In what could be seen a a recognition of the intrinsic conflicts of interest between advice and product manufacturing, CBA has announced that it will demerge its wealth management and mortgage broking businesses. It will also undertake a strategic review of its general insurance business, including a potential sale. No financial details were provided, ahead of the AGM on 8th August.

CBA’s Retail Banking Services (RBS) division will now include Bankwest. In addition, RBS will also include Commonwealth Financial Planning, designed to deliver better customer outcomes through a new safer, simpler, and more scalable model for financial advice. RBS will also have responsibility for General Insurance while the strategic review of that business is underway.

CBA says these initiatives will result in the creation of a leading independent wealth management business and enable CBA to enhance its focus on its core banking businesses in Australia and New Zealand and create a simpler, better bank.

The demerged business, CFS Group, will include CBA’s Colonial First State, Colonial First State Global Asset Management (CFSGAM), Count Financial, Financial Wisdom and Aussie Home Loans businesses.

CFS Group will benefit from a separate listing and ability to pursue its own growth strategies.

CBA says the move will unlock greater value for shareholders through the separation of CBA’s wealth management and banking businesses.

Embedded ASIC agents risk ‘capture’: Shipton

ASIC chairman James Shipton is asking the government for additional funds to embed his staff within the major banks, but he is wary of the risk of ‘regulatory capture’; via InvestorDaily.

At a public hearing of the House of Representative Economics Committee on Friday, Liberal MP Trevor Evans asked ASIC chairman James Shipton about an ASIC proposal to ‘embed’ its agents within financial institutions.

Under the proposal, ASIC staff would monitor the culture and compliance of the major banks from within rather than at legalistic “arm’s length” – a proposal Mr Evans endorsed.

“It’s a style of collaboration which would be less legalistic, quicker and much more efficient in the use of regulator resources instead of arm’s-length legal tussles,” Mr Evans said.

“It would hopefully, with the cooperation of a lot of businesses, tease out the noncompliance that sits there in a non-deliberate, minor, systemic sort of way,” he said.

In response, Mr Shipton acknowledged ASIC has approached Treasury about the matter, saying there is a “productive conversation” underway.

The ASIC chairman said that by embedding his staff in the major banks, the regulator’s supervisory teams would become “more knowledgeable and understanding of particular institutions” and have a more “real-time” assessment of emerging risks – both financial and non-financial.

“We will be better able to be honest and speak back the same language the financial institution uses so as to get effective change,” Mr Shipton said.

However, the ‘embedding’ idea does not come without its risks, he said – primarily among them the notion of ‘regulatory capture’, whereby ASIC staff could become complicit in the poor cultural or compliance practices of an institution.

“We have been very mindful of the experiences of overseas supervisors in this regard,” Mr Shipton said.

“There are a number of lessons to be learned and to be aware of such as the risk of regulatory capture, which I am very mindful of,” he said.

The Liberal MP questioned whether ASIC required extra funding to carry out an ‘embedded’ function.

“This could be core regulatory business and I think that ASIC already does have all the powers and authorities to enter into agreements and MOUs with businesses,” Mr Evans said.

ASIC Admits AMP Inaction

ASIC has acknowledged it was aware prior to the Royal Commission that AMP was allegedly attempting to mislead the regulator according to Financial Standard.

Appearing before the House of Representatives Standing Committee on Economics in Canberra today, senior leaders at ASIC admitted they were not surprised by the revelations about AMP publicised via the Royal Commission.

ASIC chair James Shipton said the issues raised at the Royal Commission are the exact issues the regulator has been investigating for some time now.

Acknowledging sensitivities around commenting on ongoing investigations, Shipton said: “What I will say is that those matters identified by way of AMP testimony at the Royal Commission was known to us. We have an ongoing investigation that includes those matters and there is a very limited amount I can say more, other than we were not surprised at all by the confronting matters.”

Committee deputy chair Matt Thistlethwaite pushed further, asking why the regulator didn’t make its findings public in the best interests of consumers, particularly AMPs tens of thousands of customers.

ASIC senior executive leader, financial services enforcement Tim Mullaly responded: “We are subject to confidentiality and are also acutely aware that the announcement of an investigation – even if they are later found to have done nothing wrong – can have detrimental effects on entities and people.”

Mullaly then acknowledged ASIC had been provided with the now-infamous Clayton Utz report in October 2017 – six months before it was revealed by the Royal Commission – leading Thistlewaite to question why ASIC had allowed AMP’s board members to continue in their directorships if it was aware of the many alleged breaches and attempts to mislead, including the mischaracterisation of the report as independent.

ASIC deputy chair Peter Kell said confirming or suggesting that the law had been broken by individuals was “going a little too far for us.”

“I think there’s a couple of things to keep in mind, one being that we have a substantive investigation ongoing as to the underlying issues there, which are deliberate conduct around fees for no service and deliberately misleading ASIC,” Kell said.

The provision of the report and the characterisation of it as independent hasn’t been a significant part of ASIC’s investigation, he added.

Mullaly said ASIC should be in a position to finalise its investigation into AMP “after September”, saying about half a dozen staff are working on it.

“There’s only so much we can say and the sanctity of the process is very important. The ability for our teams to investigate thoroughly, diligently and appropriately is of paramount importance to us, but I will give you my assurance that we at the commission are taking this matter with the utmost seriousness,” Shipton added.

NAB to change remuneration arrangements for frontline bankers

NAB says it will change the remuneration structure for more than 4000 frontline staff nationwide from 1 October 2018.

Bankers who work in NAB’s branches and consumer call centres will be moved from their current incentives arrangements to NAB’s Group Short Term Incentive (STI) Plan. This change is in line with NAB’s commitment in April last year to implementing the recommended reforms of the Retail Banking Remuneration Review (Sedgwick Report).

NAB Executive General Manager of Performance and Reward, Lynda Dean, said these changes demonstrate NAB’s continued focus on its customers.

“We want our customers to be confident that, every time they deal with us, they are receiving a strong customer experience, and products and services that suit their individual needs,” Ms Dean said.

Under the NAB Group STI Plan, NAB employees are rewarded based on a balanced scorecard of customer advocacy, compliance with risk, process/quality improvements, and financial performance.

“We believe that how our people demonstrate NAB’s values as they do their job is just as important as the job itself – that’s why we’re moving all frontline bankers to the Group STI Plan.”

“This change is one of many things NAB is doing to make banking better for our customers, and to help bring to life our vision to be Australia and New Zealand’s most respected bank,” Ms Dean said.

This change means NAB’s reward structures are compliant with the reforms that independent expert Stephen Sedgwick AO recommended be introduced by 2020.

It follows a number of changes NAB has already made to its employee remuneration structure over the last 18 months, including:

  • In 2016, NAB moved away from performance-based, fixed pay increases for customer service and support staff. These staff receive a standard pay rise of 3 per cent per year, under the 2016 NAB Enterprise Agreement.
  • As part of the 2016 NAB Enterprise Agreement, product sales targets are no longer considered when determining pay increases for Group 3 and 4 employees, who include many branch managers and business bankers.
  • On 1 October 2017, NAB made changes to the remuneration structure for over 700 retail branch managers, assistant branch managers, and sales team leaders in consumer call centres – moving these employees from product-based incentives to the Group STI Plan.

“We have moved away from product-based rewards, to using a balanced scorecard approach for our staff – measuring and rewarding the ‘how’, not just the ‘what’,” Ms Dean said.

“Over the coming 12 months, we will continue to review our practices to ensure they align to delivering great customer outcomes.”

Introducing NAB Home Lending Specialists

NAB has also created a new role for bankers – NAB Home Lending Specialists – who will be specially trained to offer customers expert advice in home lending.

“We are investing in our people so that they have the capabilities, skills, and training to provide a simpler, faster, and better customer experience,” Ms Dean said.

NAB’s Home Lending Specialists will complete a Certificate IV in Financial Services, and undertake a tailored training program. Their remuneration structure from 1 October 2018 is also in line with the Sedgwick recommendations.

Former CBA boss weighs in on broker commissions

A former CBA chief executive has expressed his views on a potential “dilemma” with mortgage broker commissions and suggested that borrowers and brokers should be liable for the information they provide to lenders; via The Adviser.

Speaking at the American Chamber of Commerce this week, former CBA CEO David Murray AO, who commenced his role as AMP chairman on Thursday (21 June 2018), said that brokers acting on behalf of borrowers “should be liable for compliance” with lending obligations and “should stand with the borrower in any representations made in the loan contract”.

He added that this would require brokers to carry insurance against claims “as others do in like situations in the financial sector”.

Mr Murray’s argument is that when third-party advice is involved in the lending process, then the “advice regime” that financial planners are required to work under should also apply to mortgage brokers.

“The idea that lenders should make reasonable inquiry of a borrower is fair in that it limits malpractice and serious mistakes where some people should never have borrowed. Where lending is clearly accompanied with advice, for example to leverage assets into further investment, then the advice regime should apply,” the new AMP chairman said.

He also reiterated what’s been recommended by the Productivity Commission through its inquiry into competition in the Australian financial system that “any commissions should be disclosed by the broker and made visible by the lender in the loan statement, as happens with lenders’ mortgage insurance”.

“It would be a retrograde step to deny borrowers the value of ‘shopping around’ afforded by brokers. But if they do not know the cost, they cannot make the trade-off,” Mr Murray said.

The insinuation that such disclosures are not made by brokers has been refuted by the broking industry by figures such as the executive director of the Finance Brokers Association of Australia, Peter White.

“The PC suggests there is no transparency in broker fees, yet the commission disclosure requirements under the NCCP are extensive,” Mr White said at a Productivity Commission hearing in March.

Broker commission transparency by lenders a “dilemma”

The AMP chairman additionally acknowledged the challenges associated with lenders making the commissions they pay to brokers transparent in loan statements — in particular, the fact that the commissions depend on certain aspects of the transaction, which are in turn influenced by a range of market forces.

Mr Murray explained: “At present, residential mortgage loans are priced on the basis of a standard variable rate less discount (if applicable). As an established market practice, this has left the industry vulnerable to the allegation of gouging when interest rates change due to the slower repricing of the ‘back book’ which has been of concern to the Productivity Commission and others.”

He continued: “This pricing methodology varies from the more established practice for other variable rate lending, which is typically priced from a base rate (for cost of funds and volume and other costs) plus a margin for risk for the individual loan.

“Under this approach, it is much easier to add third-party costs, making all of the loan costs more transparent to the borrower and overcoming the ‘front book’, ‘back book’ problem.”

The AMP chairman also pointed out the importance of customer accountability, saying that borrowers “should be able to be held to the representations they make in their applications which form part of the loan contract”.

Any change in regards to transparency around broker commissions requires a “first mover”, according to Mr Murray, who noted that it is a “very tricky decision”.

“It is therefore open to the [Productivity] Commission to recommend some form of reference to the ACCC to allow industry practice to change,” the chairman added.

He also warned of the potential consequences of customers using responsible lending legislation and guidelines as excuses for not being able to meet their loan obligations, one being “moral hazard”.

The AMP chairman explained: “The knowledge of potential debt avoidance encourages increased borrowing for higher-risk assets with increased risk of asset bubbles and systemic risk in the economy.”

He likened the potential outcome to the “hand back the keys’ rules in the US which compounded the GFC”.

The other possible consequence, according to Mr Murray, is that lenders “reprice and/or ration credit”, which may not have a significant impact on “the more creditworthy in the community”, but first home buyers, for example, would have to bear the brunt of “more onerous” lending terms.

The AMP chairman implied that overregulation could be counterintuitive to efficiency and effectiveness in his speech, saying that legislation should only apply to cases where the information provided by the borrower to the lender are “clearly inconsistent, meaning that the lender must make some inquiry and judgement”.

Can the law change culture?

Mr Murray also remains unconvinced that legislative reforms or the introduction of new legislation would be effective in changing bank culture, even saying that it is “impossible to regulate for culture”.

He said: “Regulation alone cannot drive a change in behaviour as it can result in a convergence of leadership models and organisational structures, and this limits diversity and competition.

“Organisational behaviour is an intangible asset that is cultivated uniquely by each institution. This makes it hard to set prescriptive guidance and comprehensive minimum standards for all organisations.”

However, Mr Murray endorsed Australian Prudential Regulation Authority’s (APRA) recommendation for a “systems-based approach to culture”, which it presented in its report on governance, culture and accountability within the CBA Group.

Mr Murray said: “Trust will not be restored until institutions revisit existing governance frameworks that may be inhibiting cultural reform.”

Moreover, the AMP chairman believes that oversight of responsible lending obligations should be with APRA, rather than ASIC, pointing to the “systemic dangers of moving from caveat emptor to caveat venditor in the lending market” (or, in other words, going from the principle that buyers are responsible for their purchases to the principle that sellers are responsible for informing buyers of their goods and services).

In his concluding remarks, Mr Murray said: “Given the potential for moral hazard risk to create systemic risk in the financial sector and the economy, caution is needed in allowing contract law to drift from the principle of caveat emptor to caveat venditor.

“Nevertheless, there needs to be protection for consumers given information asymmetry.”

Federal Court Approves AUSTRAC CBA Settlement

Commonwealth Bank of Australia (CBA) notes the approval by the Federal Court today of the agreement between CBA and the Australian Transaction Reports and Analysis Centre (AUSTRAC) to resolve the civil proceedings commenced by AUSTRAC on 3 August 2017.

As noted in CBA’s release on 4 June 2018:

  • CBA will pay a civil penalty of $700 million together with AUSTRAC’s legal costs of $2.5 million.
  • AUSTRAC’s civil proceedings are otherwise dismissed.

CBA will recognise a $700 million expense in its financial statements for the full year ending 30 June 2018, which will be released on 8 August 2018.

Bananacoast Community Credit Union pays $50,400 for misleading advertising and provides remediation to consumers

ASIC enforcement action has resulted in four infringement notices totalling $50,400 to Bananacoast Community Credit Union Pty Ltd (BCU) for potentially misleading statements in several online advertisements, as well as remediation to affected consumers.

The advertisements, which ran in 2017, offered a special interest rate for home loans and personal loans but did not clearly or prominently disclose that the consumer was required to pay for consumer credit insurance (CCI) for five years to receive the advertised lower interest rate. Some advertisements included a fine-print disclaimer while others did not display any further information.

The advertisements that did carry a disclaimer did not give suffient prominence to important conditions and did not adequately explain how some of the conditions operated.

ASIC considered that the ‘click through’ facility used on some websites, which provided additional information on other webpages, was not adequate to  correct the misleading overall impression.

ASIC Deputy Chair Peter Kell said, ‘A promotional offer with conditions attached must not bury the conditions in fine print or elsewhere, particularly when the promotion involves a potentially poor value product such as CCI’.

In response to ASIC’s enforcement action, BCU has:

  • Withdrawn the concerning advertising;
  • Offered to cancel the CCI policies and refund the premiums to customers who purchased CCI; and
  • Refunded all premiums paid where the CCI policy had already been cancelled.

The total amount repaid to customers is $91,600 including interest. BCU are also honouring the advertised loan interest rate(s) without the requirement for customers to purchase CCI. BCU has paid the $50,400 penalty.

Read the infringement notices

Background

BCU holds Australian Credit Licence 241077.

CCI is a type of add-on insurance sold with credit cards, personal loans, home loans and car loans. It is promoted to borrowers to help them meet their repayments if they lose their job, become sick or injured or die.

ASIC has taken wide-ranging action in response to CCI sold in different distribution channels, including most recently in car dealerships. In 2016, ASIC released three reports covering its review of the sale of add-on insurance through car dealerships, which found that the insurance is expensive, of poor value and provides consumers very little or no benefit (REP 470, REP 471, REP 492). ASIC subsequently also negotiated over $120 million  in remediation to customers sold these products. See media releases on Allianz, Swann, Suncorp, QBE, Virginia Surety.

ASIC is undertaking a broader review of CCI sales practices by lenders, see 17-255MR Banks to overhaul consumer credit insurance sales processes.  This follows on from ASIC’s Report 256 Consumer credit insurance: A review of sales practices by authorised deposit taking institutions (REP 256) which included a number of recommendations by ASIC, after the review found deficiencies in the areas of sales practices, disclosure, training programs and monitoring. One of the recommendations is that lenders should make a clear statement that the purchase of CCI is optional.

Consumers should think twice before purchasing CCI. ASIC’s MoneySmart website has guidance for consumers so they know what to consider before buying CCI.

ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.

ASIC issued four infringement notices for representations that appeared in various online advertisements through search engine results and webpages, including BCU’s website, during the period 15 August 2017 to 31 October 2017. These infringement notices relate to some, though not all, of BCU’s advertisements used in its OMG Home Loan and Car Loan Special advertising campaigns.

The payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions.

Royal Commission Looks At Experiences With Financial Services Entities In Regional And Remote Communities

The Royal Commission has announced that the fourth round of public hearings will be held in Brisbane at the Brisbane Magistrates Court, 363 George Street, Brisbane from Monday 25 June to Friday 29 June, and in Darwin at the Supreme Court of the Northern Territory, Supreme Court Building, State Square, Darwin from Monday 2 July to Friday 6 July.

The fourth round of public hearings will focus on issues affecting Australians who live in remote and regional communities, which relate to farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.

The Commission presently intends to deal with these issues for the purposes of the public hearings by reference to the case studies set out below.

  Topic Case Studies
1. Farming finance
  • CBA (Bankwest)
  • Rabobank
  • NAB
  • CBA
  • Bendigo and Adelaide Bank (Rural Bank)
  • ANZ (Landmark)
2. Natural disaster insurance
  • Youi
  • Suncorp

The case studies will consider issues arising from:

  • Tropical Cyclone Debbie in March 2017;
  • the hail storm in Broken Hill in November 2016;
  • the bushfires near Wye River in December 2015; and
  • the floods in the Hunter Valley in April 2015.
3. Interactions between Aboriginal and Torres Strait Islander people and financial services entities
  • Select AFSL, trading as Let’s Insure
  • ACBF Funeral Plans
  • ANZ

During the hearings, evidence will also be given by consumers of their particular experiences. The entities that are the subject of consumer evidence will be informed by the Commission.

Further topics may be included and the list above will be updated accordingly before the hearings commence.

Commonwealth Bank’s $700 million fine will end up punishing its customers

From The Conversation.

The Commonwealth Bank of Australia (CBA) this week agreed to pay a record penalty to settle its violations of anti-money laundering and counter-terrorism financing laws. The A$700 million fine plus legal costs will become final upon the approval of the Federal Court.

The deal was met with market approval, and has allowed regulators to claim victory. Given the public’s current hostility to banks in the wake of revelations from the Banking Royal Commission, politicians also joined the bandwagon and applauded CBA’s loss.

What if the penalty is a sign of mob justice, rather than just deserts? And given the scale of the payout, will the fine also end up further punishing customers and shareholders?

Answering these questions requires a close look at the case. CBA was alleged to have violated the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, in several specific ways.

First, it introduced Intelligent Deposit Machines (IDMs) without conducting an independent risk assessment and/or instituting mitigation procedures to tackle money-laundering. Unlike older ATMs, IDMs process cash deposits and make the funds available for transfer immediately. Clearly, criminals could use these features to launder cash gained through crime. CBA wrongly believed that its existing ATM monitoring processes covered these risks.

Second, it was warned about these risks and could have minimised money laundering by imposing daily limits on accounts. CBA refused.

Third, CBA failed to provide transaction reports within 10 business days for cash deposits greater than A$10,000. This violation referred to 53,506 transactions totalling about A$625 million. The failure was due to a coding error – the software was not updated to pick up a new code created for IDM deposits.

Fourth, CBA failed to report transactions with a pattern of money-laundering – apparently misunderstanding its legal obligations.

Fifth, CBA failed to report suspicions about identity fraud – for example, in relation to eight money-laundering syndicates. Therefore, AUSTRAC and law enforcement were unaware of “several million dollars of proceeds of crime mostly connected with drug importation and distribution” that passed into accounts held by CBA.

Sixth, CBA was deficient in monitoring accounts despite warnings from law enforcement – 778,370 accounts were not monitored. CBA was slow to act even after suspicious accounts were terminated, facilitating money-laundering.

Clearly these are significant violations. However, the statement of facts agreed by AUSTRAC and CBA state that the bank did not deliberately or intentionally violate its legal obligations under the relevant laws.

Considering that CBA’s violations were inadvertent, due to technical glitches, and attributable to a mistaken belief about existing systems satisfying legal obligations, the A$700 million fine might be excessive.

International comparisons

By international standards, the fine seems to be very high. This week the UK Financial Conduct Authority fined the British division of India’s Canara Bank £896,100 (A$1.58 million) for “consistent failure” in its money-laundering controls, and for failings “affecting almost all aspects of its business”.

The FCA said the bank’s failings “potentially undermine the integrity of the UK financial system by significantly increasing the risk that Canara could be used for the purposes of domestic and international money laundering, terrorist financing and those seeking to evade taxation or the implementation of sanction requirements”.

In the United States, the Justice Department fined US Bancorp US$528 million (A$694 million) for criminal violations of money-laundering laws and for concealing its behaviour from regulators.

CBA’s fine is far higher than Canara’s punishment for similar violations, and roughly on a par with the sanction meted out to US Bancorp – albeit the latter was for more serious criminal wrongdoing. It is also comparable to the US$665 million (A$874 million) penalty imposed on HSBC (plus US$1.26 billion in sacrificed profits). Unlike CBA, HSBC was punished for “willfully failing” to maintain proper money-laundering controls.

Yet the proceeds from HSBC’s violations stretching back to the 1990s were staggering: at least US$881 million in laundered drug money; a failure to monitor more than US$670 billion in wire transfers and over US$9.4 billion in purchases of physical US dollars from HSBC Mexico; some US$660 million in sanctions-prohibited transactions; and evidence of deliberate sanctions violations by processing transactions to parties in Iran, Cuba, Burma, Sudan, and Libya.

A fair punishment?

The size of CBA’s penalty seems to be more in line with banks that have deliberately flouted money-laundering laws, rather than the smaller punishments handed to banks that did so unintentionally. It is tempting to conclude that this is influenced by the current prevailing mood to “send a message” to financial institutions.

What’s more, we cannot necessarily assume that the fine will act as a deterrent. The penalty is not paid by the CBA staff who acted wrongly; it is paid by the bank, ultimately by the shareholders.

Similarly, the cost of managing enhanced scrutiny and investing in additional compliance machinery will be passed on to customers in the form of higher charges and fees. Likewise, if banks become excessively cautious because of apprehensions about overenforcement, that will impact services and reduce profitability – again harming innocent people.

The punishment must always fit the crime. Excessive punishment is counterproductive and creates additional victims.

If the purpose was really to tackle wrongdoing, the CBA staff who were responsible for the violations should have been identified and penalised.

The A$700 million fine is good for political posturing but will hurt customers and shareholders the most. Bank-bashing has a cost, and it is paid by ordinary people, not politicians.

Author: Sandeep Gopalan, Pro Vice-Chancellor (Academic Innovation) & Professor of Law, Deakin University

RC hearings too short to cover ‘breadth’ of cases: Ombudsman

From The Adviser

The Small Business Ombudsman has called for another set of royal commission hearings to investigate more cases of inappropriate practices pertaining to small business loans.

Speaking with The Adviser, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, said that the “dilemma” with the third round of royal commission hearings (which focused on the provision of credit to small businesses) was too short, resulting in only a limited number of cases being investigated.

“The royal commission was called on because of a huge amount of agitation from many small businesses, a joint parliamentary inquiry, a range of cross-benches that indicated they might cross the floor because they had small business constituents, who believed that they hadn’t had an opportunity to have their cases heard,” Ms Carnell told The Adviser.

“I believe that they need to do another two weeks [of hearings] or another set of cases.”

She added that the few cases heard in the third round of hearings is “[not] representative of the breath of cases that exist”, though noted that the next round, which will focus on the provision of finance to customers in regional and remote areas, could bring to light further issues experienced by small businesses.

Ms Carnell cited cases where the banks had dragged out a loan’s sign-off process, then decided against the loan as little as 24 hours before it was expected to roll over, thereby not giving enough time for the business to find an alternative solution.

“Small businesses [are] getting very mixed messages… In a number of the cases that we saw, the bankers were telling [the small businesses] ‘no problem, we’ll refinance you’ and then two weeks (or in one case, 24 hours) before the rollover was due to happen, the bank said they changed their mind,” the ASBFEO said.

“There’s no capacity to refinance, to find another bank… and so the business ends up going into default, at which stage their interest rates double or even triple in some circumstances.

“The [cases] where banks actually told people one thing and then did something totally different and where timelines for businesses were just far too short to allow [them] to reorganise their operations… I don’t think were brought out nearly enough.”

Another issue that Ms Carnell argued didn’t get enough airtime at the last royal commission hearings is the nature of the relationships between banks and third-party valuers, administrators, and liquidators, which she said are frequently problematic.

“The small business pays for the liquidator or the valuer or the investigative accountant… but they have no input into the appointment in many cases,” the ASBFEO said.

“In our inquiry, we found it interesting and concerning that regularly the investigative accountants that gets sent in to have a look at the business to determine what should happen is then appointed as a liquidator, [which we thought] certainly didn’t look right.

“You could argue [that] an investigative accountant ends up financially benefitting from recommending a liquidation if they’re going to end up with the job… [This] isn’t an occasional scenario; it’s very regular.”

She also questioned whether banks are getting “friendly valuations” that work in both the bank’s and valuer’s favour.

“I’m not suggesting valuers and administrators aren’t professional people, but if their livelihood depends on bank work, there are some questions to be asked,” Ms Carnell said.

“Is [the] motivation for what you do in the interest of the consumer, who is paying you, or is it in the interest of the bank, who you rely on for work?

“In situations like that, transparency is really important… You’ve got to really know whether there are any kickbacks, any real incentives for people to act in particular ways [such as] provide a low valuation or a high one, or recommend a liquidation or not, recommend a particular loan product or not.”

Ms Carnell concluded that transparency around the banks’ relationships with third parties needs further exploration by the royal commission.