Parliamentary inquiry into bank practices
A parliamentary inquiry is to examine any bank practices of using what is called "constructive default" in order to impair bank loans and thereby, it seems, unfairly benefit the bank.
The Parliamentary Joint Committee on Corporations and Financial Services is conducting the inquiry and is to report by 31 March 2016. It calls for submissions by Friday 24 July 2015.
Terms of reference
The matters to be examined are, paraphrased as necessary:
- The practices of banks and other financial institutions (banks) in Australia using a constructive default (security revaluation) process in order to “impair loans”. The terms constructive default/security revaluation are said to mean the engineering or the creation of an event of default whereby the bank deliberately reduces, through valuation, the value of securities it holds, thereby raising the loan-to-value ratio resulting in the loan being impaired;
- the role of property valuers in any such security revaluation process;
- any practices of banks using non-monetary conditions of default to impair the loans of their customers, and using punitive clauses such as suspension clauses and offset clauses;
- the role of insolvency practitioners as part of this process, presumably in being appointed by the banks as controllers, thereby becoming subject to obligations under s 420A of the Corporations Act in selling the property;
- the implications of relevant recommendations of the Financial System Inquiry Report of December 2014 (FSIR), particularly recommendations 34 and 36 which relate to non-monetary conditions of default and the insolvency regime respectively;
- the extent to which borrowers are given an opportunity to rectify any genuine default and the time period typically provided for them to do so;
- the provision of reasonable written notice to a borrower when a loan is required to be repaid;
- the appropriateness of the loan to value ratio as a mechanism to default a loan during the period of the loan; and
- conditions and requirements to be met prior to the appointment of an insolvency administrator.
In undertaking this inquiry, the Committee is to take evidence on the incidence and history of loan impairments; the forced sale of property; the effect of such forced sales in “depressed market conditions and drought”, presumably in rural areas where the borrowers have defaulted on their borrowing; and the comparisons between valuations and sale price; and any related matters.
The inquiry is to also examine the adequacy of the legal obligations on lenders and insolvency administrators including under s 420A of the Corporations Act to “obtain fair market value for the forced sale of property”, but accurately stated as being required to take all reasonable care to sell the property for not less than its market value, or if it has no market value, the best price reasonably obtainable, having regard to the circumstances existing when the property is sold.
The committee has decided that it would not investigate or seek to resolve disputes between customers and banks; but where the experiences of customers may inform the committee about the practices of banks, the committee says it welcomes submissions that explicitly address the terms of reference.
There are and have been inquiries and reports into some of the insolvency issues raised by this inquiry, many of which lie with government for decision.
Recommendation 36 of the FSIR called for yet more consultation on possible amendments to the insolvency regime “to provide additional flexibility for businesses in financial difficulty”. These include that directors should be protected by 'safe harbour' provisions in any restructuring process; and that ipso facto or termination clauses be suspended from operating during the restructuring efforts. These two issues have been recommended to government by ARITA from as far back as 2007.
Those recommendations are presently with government, since March 2015, following the FSIR, and are also the subject of present inquiry by the Productivity Commission, due to report later this year.
FSIR 36 also noted:
- other complexities between corporate and personal insolvency, another issue on which recommendations to government have been made;
- complaints and dispute resolution processes, an issue being examined by the Productivity Commission; and
- that elements of insolvency regulation “are not technology neutral and efficiencies available from digital processes are not being used”. Again, the government has the recommendation of the FSIR that this issue be referred to the Productivity Commission; see also FSIR 39 on technology neutrality.
FSIR recommendation 34 refers to the extension of unfair contract term protections to small businesses and the need to encourage industry to develop standards on the use of non-monetary default covenants.
ARITA will be making a submission and otherwise seeking to assist this inquiry. Any member input is invited.