Commissioner Kenneth Hayne's lightbulb moment that the banks need to get back to basics hit a snag on Thursday when the CEO of the Australian Banking Association Anna Bligh made it clear that banks and customers don't agree where the battle lines should be drawn.
Arriving at Melbourne's Federal Court in all-black with an entourage shortly before lunch, the on-edge former Queensland premier scoped out the hearing room ahead of her highly anticipated appearance which was over after just an hour.
But it was long enough for Bligh to reveal a bitter stand-off between the ABA and Australian Securities and Investments Commission over the definition of what qualifies as a small business and who should be afforded the protections of the Code of Banking Practice.
An industry-commissioned review of the code by former ASIC executive Phil Khoury last year, called for the definition of small business to include loans up to $5 million. But the banks are lobbying hard for ASIC to sign-off on the code with a total credit cap of $3 million and an additional test for "annual turnover" of $10 million.
Hayne scolds NAB counsel over questioning
Surrounded by ASIC observers including banking regulator Michael Saadat – expected to give evidence on Friday – and ASIC's chief legal officer Chris Savundra – the seasoned Bligh calmly made the case for the banks.
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$5m threshold will hurt regional banks: Bligh
Bligh warned that setting the line between "unsophisticated" retail customers and "large, capable, successful commercially" borrowers too high could limit the supply of credit, force up interest rates and put smaller lenders at a disadvantage to the big four banks.
"They feel distinctly uncomfortable at the $5 million," Bligh told the commission. "That is more true of some of the non-major banks or banks that are smaller regional Australian banks who have smaller loan books ... that will put them ... at a competitive disadvantage against the four major banks," she says.
The banks have escalated their concerns to ASIC's new chairman James Shipton and both sides have agreed to wait for the completion of this week's hearings before Shipton and Bligh meet again next week in what will be one of Shipton's first big tests.
In terms of how the commission responds, Hayne had something of a lightbulb moment on Wednesday when he and CBA's chief risk officer David Cohen furiously agreed that bankers need to get back to basics: don't mislead or deceive, be fair, ensure a product is fit for purpose, exercise skill and care and lend responsibly.
No lawful entitlement
The problem comes when you get to the specifics which was driven home on Thursday by the case study of NAB customer Ross Dillon, who runs a musical instrument and supplies distributor called National Music where Dillon and NAB diametrically disagree about whether the bank was fair.
The visibly angry Dillon was "furious" when the bank unexpectedly seized all of the $2.2 million proceeds from the sale of his 40-hectare family home and horse farm called "Goanna Downs" in the Hunter Valley, NSW when his business began to struggle.
Counsel assisting the commission, Michael Hodge, QC dropped the day's biggest bombshell when he revealed that NAB did not have a direct legal entitlement to use the proceeds of the sale of Goanna Downs to pay down the debt of National Music.
NAB's general manager of the strategic business services division Ross McNaughton only realised the mistake when preparing his statement for this hearing.
The revelation also came as news to the NAB customer Dillon on Thursday: "I had no idea," he told the Financial Review outside the hearing.
Despite the revelation, NAB's McNaughton insists the bank acted fairly, honestly and responsibly at all times.
The inescapable conclusion is that Hayne will have to go further than issuing principles about fairness if he hopes to dissect the malaise between customers and the banks.
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