Westpac's provision of business loans will be under fire from Monday with the Hayne royal commission poised to take a detailed look at the bank's role in multiple case studies including examples where guarantors have lost their homes.
The royal commission's deep dive into business lending will be accompanied by the appearance of some of the most high-profile banking executives to date as well as Australian Banking Association CEO and former Queensland premier Anna Bligh.
Westpac has been largely untarnished by its appearances at the inquiry to date, as evidence has revealed that ANZ has charged customers the wrong home loan rate for years, a fraud ring has operated inside NAB's branches and CBA has charged dead customers for advice.
The second round of the royal commission led to revelations about wealth giant AMP's poor treatment of financial advice customers and deception of the corporate regulator. In quick succession, AMP's CEO Craig Meller, chairman Catherine Brenner and three other directors have all left the company early.
The third and current round of hearings, which will focus on loans to small and medium enterprises by banks, will feature a case on Monday involving a disability pensioner from western Sydney who lost her property to Westpac after acting as a guarantor for a business loan to her adult child.
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The pensioner signed a loan agreement with Westpac, with her home as the collateral, to assist a family member set up a small business. When the business collapsed, the pensioner then faced the prospect of losing her home to the bank.
After a series of protracted negotiations, Westpac agreed to provide the pensioner with a lifetime tenancy of the home at no cost.
The Australia Financial Review has spoken to the pensioner but agreed not to name her after concerns were raised about her health and the family's desire for privacy about the matter.
The issues raised as part of the case are expected to include the process the bank used to ensure the pensioner had independent legal advice and whether it was appropriate for the bank to have the pensioner act as a guarantor given their financial position.
It will also raise the more difficult issue of whether banks should allow relatives to use their house as collateral for business loans. Data from the Australian Bureau of Statistics shows there are 2.2 million small businesses operating in Australia with fewer than 20 employees as of June 2017. Around one-third of all small business lending is secured by residential real estate.
Westpac's general manager of commercial banking, Alastair Welsh, will appear for the bank in relation to the case study. Mr Welsh reports to Westpac's business bank chief executive David Lindberg. It is also understood that another Westpac veteran, Jim Tate, product manager for the business bank, will also appear for Westpac before the two weeks are out.
Banking code scrutiny
The hearings will focus on responsible lending, enforcement of assets pledged as security, account administration, the definitions of what constitutes a small business, unfair contracts and the code of banking practice. Sources within the banks say this round of hearings has seen the volume of information provided to the commission expand significantly, adding new pressures to teams already working around the clock.
On Monday the royal commission will also hear from consultant Philip Khoury who wrote a 242-page review of the ABA's Code of Banking Practice. Mr Khoury, the principal at governance advisory firm Cameron Ralph Khoury, criticised the code in his February 2017 report for being a "complex tapestry of obligations", which he described as being overly legalistic and lacking proper enforcement mechanisms.
The Hayne royal commission's terms of reference specifically asks it to consider the adequacy of self-regulation by industry codes. The banks' review of their code – which forms part of the contractual relationship between a bank and its customers –- was part of the ABA's ''six-point plan" announced in 2016 to attempt to avert a royal commission.
The new code was sent to the Australian Securities and Investments Commission for approval in December but the regulator is yet to give it the green light. ASIC will appear at the commission next week to discuss the code.
In the days that follow, a procession of senior banking executives will be led into the witness box with Commonwealth Bank of Australia chief risk officer David Cohen and Suncorp banking and wealth CEO David Carter among those expected to appear. Commissioner Hayne has not yet granted leave to executives from ANZ, NAB or Bank of Queensland as yet, but they are expected to be members of the executive team or their direct reports.
The banks have also begun to deal with requests for information about agribusiness and "vulnerable communities" as speculation builds that the following bracket of hearings will be moved interstate.
The Customer Owned Banking Association (COBA) will look to leverage any reputational damage from the hearings with the launch of a new campaign on Monday that encourages bank customers to "own their banking" by spruiking the benefits of the 70-odd customer owned mutual banks, credit unions and building societies.
Commonwealth Bank's former group legal counsel Mr Cohen is expected to answer questions about the bank's alleged mistreatment of Bankwest business customers. Commonwealth Bank acquired Bankwest during the 2008 financial crisis. Mr Cohen also appeared before Small and Family Business Ombudsman Kate Carnell in a series of hearings into small business lending in late 2016.
ANZ's former deputy chief executive officer Graham Hodges represented the bank at the same hearings but will not front the royal commission after resigning earlier this month after 27 years at the bank. Mr Hodges has been replaced by former group executive wealth Alexis George.
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