- The Hayne royal commission has now turned its attention to lending to small business over the next two weeks of hearings.
- After a blind women guaranteed her daughter’s business loan, which defaulted, Westpac launched legal proceedings to sell her home.
- Legal Aid NSW intervened and eventually the bank settled allowing her to stay in the house until her death.
- The bank says it “technically” followed the correct process but concedes it should have acted earlier to find a resolution under hardship provisions.
Carolyn Flanagan, 67, is legally blind from glaucoma, had a stroke and suffered from cancer, which makes it difficult to speak.
She calls people “love”, including barrister Michael Hodge when she appeared via videolink from Sydney at the Hayne Royal Commission into misconduct in the financial services industry.
Flanagan lives on a disability pension, has depression and her memory is failing, although a sense of humour remained when she appeared as a witness. Her long list of ailments would “give anyone depression” she told Hodge while testifying about going guarantor on a 2010 business loan from Westpac to her daughter.
Because Flanagan couldn’t see, the documents she signed had to be read to her before she was directed on where to put her signature.
And when things turned sour just two years later, Westpac began legal action and ultimately sought to evict Flanagan from her home. Thanks for invention by a Legal Aid solicitor, a deal was eventually struck that allows Flanagan to remain in her house until she dies before the bank gets its money back, but not before the bank fought her hardship plea and initially won the case when it went before the Financial Ombudsman Service (FOS). She now has a “lifetime tenancy” deal the bank had previously told Legal Aid NSW was “unlikely”.
The latest painful case study before the Commission, as attention turns to loans to small business, led to an admission from Westpac’s Commercial Banking general manager, Alastair Welsh, that things could have been handled better in Flanagan’s case.
But having reviewed it, he was happy that the bank had “followed the process that I would have wanted” in getting the elderly pensioner to guarantee the loan.
“There wasn’t a problem with the technical process,” Welsh said.
In his opening address on day 20 of the Commission, Michael Hodge QC said more than 11% of the 5,540 submissions to the commission – that figure has jumped by 3,500 since the first hearings began – are about small business.
Using the family home as security on business lending is one of the key concerns raised, along with loans being put in default or terminated by the bank even when payments are current.
Today’s first witness, Philip Khoury, a former ASIC general manager who reviewed the Australian Bankers’ Association’s (ABA) Code of Banking Practice as a consultant, delivering his report early last year.
“The law doesn’t provide a huge number of protections for small business in their dealings with the banks,” Khoury told the commission, which made the code of practice vital in dealing with the sector.
But some of his 99 recommendations were resisted by the banks, including a $5 million cap on the value of loans in the definition of small business, while “weasel words” were inserted in the code that was already complex and too legalistic for borrowers to understand.
But the banks wanted a $3 million limit, plus caps on workforce numbers and turnover, rejecting “community expectations… around fairness”.
“It’s not tilting the balance of power dangerously away from the banks, so we didn’t think the concessions were so enormous that the argument that this would be grossly unfair to banks was particularly compelling,” Khoury said.
Other recommendations making banks strictly adhere to process on guarantor provisions were not adopted, with the banks concerned they would be “gamed” by borrowers.
But, Khoury said: “The new draft code goes a fair way towards strengthening protections for guarantors” including a three-day cooling off period, more information on loan underperformance and assurances that if the loan is called in, the borrower’s assets are the priority rather than the security offered by the guarantor.
The updated code was submitted to ASIC last December, but has yet to be approved by the corporate regulator.
Carolyn Flanagan told the commission told that while her memory was not good, she recalled being asked to be a silent partner in her daughter and partner’s business in 2010. Their names have been suppressed by the commission.
“If you can’t help your children, who can you help,” she said to explain why she got involved.
Hodge told the commission that Westpac produced the signed documents relating to the loan just before Flanagan appeared in the witness box.
Under cross examination from counsel for Westpac, Matthew Darke, Flanagan conceded she understood her house was security on the loan, but she believed loan figure was $50,000, and did not recall seeing a solicitor.
Westpac is owed $170,000.
Commissioner Kenneth Hayne subsequently observed that while Flanagan met with a solicitor, as per the bank’s advice, there was no record of the questions asked of or answered by the guarantor, it “just says they went to see a lawyer”.
Legal Aid NSW senior solicitor Dana Beiglari took up the case in 2014 on financial hardship grounds. Westpac fought the case before the FOS and won. Beiglari then used back channels into the bank to settle the case, and stop Flanagan’s house from being sold out from under her.
Beiglari told the commission that she often acted for elderly people who’d guarantee loans for their children
“My clients might find it difficult to say no to a financial arrangement that’s being put forward to them by their son or their daughter,” she said, so they say yes “in order to preserve the relationship”.
Asked by counsel assisting about the steps Westpac takes to assess the potential impact on a guarantor, Alastair Welsh told the commission that the bank only focuses on ensuring there’s enough value in assets covering any debt.
“And they don’t need to be satisfied as to what financial position that would leave the guarantor in if the guarantee was called upon?” Hodge asked.
“That’s correct,” Welsh said.
The bank’s policy in 2010 warned loan officers to “exercise extreme caution” when accepting guarantees from parents, so Hodge asked if bankers should be checking for “vulnerability” in the guarantor.
“Yes, they should be,” the Westpac executive said.
The third round of public hearings over the next fortnight will look at responsible lending to small businesses, the approaches of banks to enforcement, management and monitoring of loans, and the current legal and regulatory regimes, as well as self-regulation under the Code of Banking Practice.
CBA, ANZ, Suncorp, NAB, Bankwest, and Bank of Queensland are due to appear before the Royal Commission, as well as the industry group the ABA and the regulator ASIC.
Hearings recommence on Tuesday at 9.45am.