A comment under the headline "Comment: Sickening bank behaviour shows need for broader probe" in the Sydney Morning Herald of 21 April states "If one thing is becoming clear from the royal commission it is that our financial institutions see themselves as beyond the law."
As observed, "lying to the regulator, failing to invest money into proper compliance systems, delaying breach reports to the regulator, charging fees for ongoing services to dead people and covering up wrongdoing are just a few of the grubby antics on show."
That comment carries serious implications; a perception that financial institutions exist beyond legal constraints. This creates problems for lenders who genuinely attempt to comply with the NCCP Act and related legislation.
ABA Response and Payday Lending Concerns
On 5 April, Australian Banking Association CEO Anna Bligh urged the federal government to ensure regulatory changes remain balanced. She stated that "tightening access to small amounts of credit can push more vulnerable customers out of the regulated banking sector and into the far riskier world of payday lenders and the like."
This statement is problematic as non-ADI lenders are also subject to the National Credit Code requirements. Payday lenders face interest rate caps—48% in Queensland, NSW, and the ACT. Under Federal legislation, SACC lenders now face more legislative and regulatory requirements than any credit product including home loans.
Royal Commission Findings: Falsified Documentation
Counsel Assisting, Ms Rowena Orr, QC presented evidence of serious misconduct: "I want to put to you is that NAB knows, & you know, that there were unsuitable loans, there was false documentation, there was dishonest application of customers' signatures on consent forms & there was the misstatement of some loans in loan documentation."
A whistleblower revealed that at one branch, customers were told they could borrow $800,000 when valuations were only $450,000. Money was exchanged in cash envelopes over the counter, deposited at CBA to avoid NAB detection. Customers created fake payslips, fake ID, and fake Medicare cards, with bribers charging $2,800 per home loan customer.
These actions also breach AML/CTF requirements, though this was not raised during proceedings.
Failure to Verify Assessable Income
Ms Orr questioned a witness about brokers deliberately submitting applications to lenders with more lax credit assessment processes. When asked if a letter of employment is an easier document to falsify than payslips, Lynda Harris from Aussie Home Loans answered "Yes".
Widespread Misuse of Home Expenditure Measure
A major revelation concerns widespread usage of the Home Expenditure Measure (HEM) benchmark in its most basic form by banks. The NCC requires all lenders to properly assess borrower ability to pay under responsible lending requirements and ensure loan suitability.
Regulatory Guide RG209 clearly establishes requirements updated following Court comments in ASIC v The Cash Store (in liquidation) [2014] FCA 926. The regulator has repeatedly taken action against both non-ADI and ADI lenders for failure to comply, citing examples including Nimble, Zaam Rentals, Make It Mine, CBA and Bank of Queensland.
Ms Bligh's comments disparaging non-bank lenders were made despite the regulator consistently requiring proper factoring of borrower actual living expenses rather than benchmark figures. Benchmark figures should only be used for comparison purposes, with further enquiries made if necessary.
Failure to Assess Borrower Expenses
Ms Orr noted "The first issue I think that's worth mentioning this across home loans…it's a lack of questions & verifications about expenditure. When we ask for copies of their assessment, is that it looks much more likely that a benchmark has been used than they looked at the consumer's actually expenditure, which can vary considerably from a benchmark figure."
An ANZ representative acknowledged "ANZ recognised there were instances where it lacked evidence to show that genuine inquiries had been made."
Failure of Internal Controls
A CBA representative admitted to serious control failures: "It was the error we made in our serviceability calculation and the mapping the data flows … without overstating it, doomed to fail … having robust change processes, I think, was our failing and it's clearly an area of ongoing work."
Conclusions and Regulatory Implications
The Royal Commission findings validate arguments made in 2008: nothing has substantially changed. A UBS economist noted that "the royal commission had established misconduct was more severe than many observers anticipated, and irresponsible lending was already a key finding of its investigations".
APRA raised alarms regarding over-reliance on HEM benchmarks. Questions arise regarding ASIC's role in regulating the NCCP Act and why APRA concerns were not escalated. The evidence clearly demonstrates banks are not adhering to RG209 and NCCP Act requirements.
Many issues stem from banks requiring brokers to perform work on their behalf. However, financial institutions giving evidence demonstrate trouble complying with "soft laws" that are principle-based and culturally driven. Reasonableness remains based on perception, open to interpretation and cultural biases.
Rather than simply introducing more penalties, regulators must use existing powers in an even-handed manner across all lenders.