The Parliamentary Joint Committee on Corporations and Financial Services has released its report on Impairment of Customer Loans. The terms of reference for the inquiry into the impairment of customer loans required the committee to consider the practices of banks towards borrowers who they judge may be in financial difficulty and may have breached the terms of their loan contracts.

The majority of the evidence received by the committee addressed small business and commercial loans.

The committee did not discover evidence that demonstrated that there was widespread or systematic illegal behaviour by banks or that there were deliberate impairments of loans motivated solely by clawbacks or warranties associated with acquisitions of banks.

The Committee concluded that “With the benefit of hindsight (post GFC) and based on the evidence it has received, the committee observes that for many failed loans, including those with Bankwest, it is likely that irresponsible lending was the primary or significant cause of loan failure in a number of cases. However, the committee considers that the manner in which the banks facilitated the defaulting of loans, and the subsequent treatment of customers, was in many cases unconscionable.”

The committee recommended that responsible lending provisions become mandatory for small business loans.

The committee also recommended that appropriate legislation and regulations be put in place to:

• prohibit conflicted remuneration for all bank staff;
• require bank officers to act in the customer’s best interests for small business loans;
• require officers from lending and credit management departments to provide consistent information to borrowers, including copies of valuation reports and instructions to valuers and copies of investigative accountants’ reports and instructions to investigative accountants and receivers;
• require banks to ensure that the valuation instructions do not change during the term of the loan agreed in the loan contract, and that businesses are valued as the market value of a going concern, not just a collection of business assets, and that the market value of all security supporting the loan are taken into account, not just real property.