The impairment of customer loans

Submission 87

Parliamentary Joint Committee

on Corporations and Financial Services

John Dahlsen
Tuesday 181h August 2015

The platform of the submission to the inquiry:

GSI should not have failed.

GSI was solvent

It had $27 million in cash representing 24% percentage of its loan book and
18%percentage of its assets;

But for the intervention of the Trustee, there was a clear surplus of both shareholder
funds and NTA;

It was making an operating profit with the income comfortably exceeding the
operating costs.

GSI is a small company

It is important to recognise that GSI was a very small non-bank financial institution.
It had:
- a loan book of about $117 million funded by about $143 million debentures,
- 250 loans,
- cash of about $27 million and 15 loans comprised about 50% of the loan book,
- a head office in Bairnsdale with few staff, and
a limited number of offices in East Gippsland and Warragul.
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Submission 87

This is very important for the events that followed in terms of the huge and heavy
handed Receiver's costs and associated fees which to

3rd

March 2015 amount to

around $10M or 7 Cents in the dollar and rising.

This paper does not attempt to address the societal damage (particularly the
people and reputation damage) or the huge loss to the Gippsland Community of a
valuable non-banking financial institution.

Solvency

Case law establishes that a company can still be solvent even though there may be
a deficiency of shareholder funds or NTA and there is very good accounting
reasons for this;

The Rescue Group could have easily saved GSI with a capital injection, minor
reengineering and strategic change;

The NTA calculations, the deferred asset of tax losses of $3.5M had value to the
Rescue Group because those losses would have been used and so a shareholder
funds calculation was more appropriate;

The Court is difficult pace to establish solvency or otherwise. The Rescue Group
did not have adequate opportunity to explain its position. The affidavit process and
tactics and grandstanding of the QC make it slow, tedious and very expensive to get
to the real issues;

Overall the Judge gave a quality judgement, she had worked in the area and
showed she understood the issues.

The impairment of customer loans

Submission 87

Where did the money go?

Event

Suspension Order
Receiver Appointed
First Payment
Second Payment
Third Payment
Fourth Payment
Fifth Payment

Date

Amount

Accumulated Amount
(cents in the dollar)

19 July 2013

3 September 2013

4 October 2013

15 cents

15 cents

20 December 2014

10 cents

25 cents

17 April 2014

55 cents

80 cents

13 August 2014

5 cents

85 cents

16 April 2015

3 cents

88 cents

1 cent

89cents

Forecast Payment
TOTAL Projected Payment

89 cents

The deficiency of 11 cents in the dollar, has been caused by massive fees and
discounts on transactions. Of the 11 cents, at least 7 cents ($1 OM) was the Receivers
and associated fees.

Of the remaining 4 cents, the huge discount on the quick sale of

the Loan Book and the fast forced real estate sales would have been considerably
more than 4 cents. These discounts could have exceeded interest on the debentures
for the entire proceeds.

The alternatives for GSI could have been:

a) the continuation of GSI in the East Gippsland community.

It had been a valuable

source of loan funds and deposits for locals not catered for by the trading banks.
With the assistance of a Trustee open to GSl's continuation rather than its demise,
it was possible for GSI to trade on or at least ensure the return of 100 cents in the
dollar to depositors. This was quite achievable by simply doing what the Receiver
ultimately benefited from - continuing to receive the income from borrower loan
repayments for say 12-18 months and not having to pay interest to depositors.
Given the size of the loan book (after allowing for those loans in default and
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Submission 87

perhaps not paying interest) and the overall interest rate the loan book was
returning (8.8%), the inflow of funds was around $9.5M per annum and well in
excess of any capital deficiency. This would also have allowed the Company to
benefit from the $3.5M in deferred tax assets which were lost entirely when the
Receiver was appointed. The ignoring of this option by the Trustee only adds further
weight to the suggestion that Trust Company was committed to divesting itself of all
its Trustee roles with debenture issuers;

OR
b) alternatively the Rescue Group could have carried out an orderly rundown of the
business with:
debenture holders receiving hundred cents in the dollar plus interest,
shareholders with a smaller surplus;
In the view of the Rescue Group, this was a decision for debenture holders and under
the Rescue Group's proposal, debenture holders would have been given a chance to
vote on the course they wanted to adopt against the background of appropriate
information so that in effect, the debenture holders were in the same position as the
Trustee.

Who was the Rescue Group?

The Rescue Group was a Group of local business men and according to the Judge,
"although the realisation proposal is complex and has substantial execution risk and
issues to be addressed it had persons of considerable commercial reputation and
apparent wealth as it proponents";

The Rescue Group comprised the following individuals:

John Dahlsen.
Neither the

lnor Dahlsens were lenders, investors or depositors in GSI. Two of

them had a small interest in a property joint venture with GSI at Paynesville.
was a depositor.

lwas either directly or indirectly a lender,

depositor or investor in GSI;

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Submission 87

The Rescue Group had ready access to cash and sufficient amounts to save GSI;

$1.975M was paid into a bank account within 5 days and $8.95M was promised in 8
working days as A Class $1 Convertible Debentures ranking parri passie with
existing debentures. This was after very minimum contact by 2 or 3 persons with
potential investors given the limitations imposed by the prospectus provisions in
raising funds in the Corporations Law;

The Rescue Group spent $245,000 of their own monies on the project most of
which went to the lawyers,

who gave

excellent advice particularly with litigation at heavily discounted rates. The Rescue
Group spent considerable amount of time pro bono, including John Dahlsen legal
time which together would have been valued at well over $200,000.

What went wrong?

The Trustee Company or The Trust Company of Australia (now a subsidiary of

Perpetual) had a toxic relationship with the Directors of GSI;

This toxic relationship was handed on to the Rescue Group notwithstanding the fact
the Rescue Group, except for one individual, had no business dealings with GSI.
They are literally a group of well-intentioned, local persons, intent on saving this
local company;

The views of the court are important to note as follows:

-

The Trustees view that only the Trust Company is competent to make a
judgement about the recapitalisation is misplaced, the role of debenture
holders to make decisions should not be displaced;
It is difficult to maintain a position that a Trustee is better placed than a legally
competent, properly informed beneficiary to make decisions that affect that
beneficiary. It is the noteholder who would bear the consequences;
It is highly desirable that debenture holders be consulted and given the
choice. This is especially so because the external administrator notoriously
affects the prices at which assets can be realised;

The impairment of customer loans

Submission 87

Further the Trust Company acts in a "fiduciary capacity" its powers are
conferred for a fiduciary purpose and are not rights. Submissions of this kind
about rights were concerning;
When the Court is called upon to exercise discretion, its primary concern is
the interests of debenture holders, not validating the rights and powers of the
Trustee.

Many of the Trust Company's submissions reflected the latter.

The investigating accountants report (by EY) did a great deal of damage;

The agent appointed to value the properties, particularly those owned by

was a Melbourne based valuer
knowledge.

with no local

The Valuer was well-known in Melbourne for giving receivers and

liquidators very low valuations of property, bordering on being contrived valuations;

The Melbourne valuer did not contact local valuers to get a view of the local market;

The valuer assumes a fire sale of the properties not an orderly sale which is in fact
what happened;

The Directors of GSI were concerned about this valuation and its effect and pleaded
in the interest of Debenture holders, with the IA to get a further independent
valuation and to give GSI the opportunity to review the valuation with the Melbourne
valuer.

Both requests were declined without explanation. The course was set and

nothing was going to stop the train;

Had the Trust Company dealt constructively with the Rescue Group, it could have
easily saved:
the funds were available;
only minor strategic change was necessary;
some people were in place;
GSI Board wanted it;
more importantly an informal soundings of debenture holders agreed.

One area where I strongly disagreed with the Judge was her comment that the cost
of the Scheme of Arrangement was too low;
-

There has developed a whole industry for the lawyers, accountants,

Investment banks with Schemes of Arrangement;
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Submission 87

Massive due diligence is undertaken a great deal of which is box ticking and
minor and irrelevant disclosures;
Risk adverse Directors have the comfort of hundred pages of due diligence.
Most of the material and it is an absolute waste of professional time;
-

ASIC valiantly attempted to stop this but have failed;

The Judge worked at some stage with

and would have part of the

industry;

Further with many wanting to help pro bono and with little help from ASIC
recognising that it was very small company and avoiding over disclosures we would
have handled the Scheme within the budget.

Examination of the Directors

The Rescue Group recognised at the outset that there was no fraud by the Directors
or management of GSI otherwise they would not have got involved.
locals.

Locals know

It was a case of mistrust relationship with the Trustees with both at fault;

ASIC insisted on an examination of the Directors under Section 596A. of the

Corporations Act despite a recommendation of the Receiver not to do so;

The cost to Debenture holders for these examinations is yet to be divulged by the
Receiver but are likely to be several hundred thousand dollars with no adverse
findings;

It cost the Directors of GSI $43,000;

Debenture holders if asked would not have wanted the examination but preferred
the money that was spent instead;

ASIC insisted on ticking the boxes; it cost ASIC nothing.

The impairment of customer loans

Submission 87

What are the lessons?

The Trust Company's behaviour should be examined;

Why was it antagonistic with the Rescue Group;

Why in the early days did they put roadblocks in front of the Rescue Group and not
attempt to engage them in the interest of debenture holders;

Did they have cause;

Why didn't they seek the views of the debenture holders;

Why did the Trustee Company encourage ASIC and get ASIC to come to the Court
to support their position;

Why was it that in such a small company, high-priced advisors from skyscrapers in
Sydney overlooking the harbour used for such a very small Victorian country based,
enterprise;

Why wasn't the work undertaken in Melbourne as opposed to Sydney;

Why did the Executives of The Trust Company not disclose to the Court that he was
an ex-employee of ASIC.

ASIC

Why was ASIC so difficult;

Was ASIC trying to regulate out rather than regulate in, small non-bank financial
institutions;

Why wasn't ASIC interested in the views of Debenture holders;

Where did ASIC get the authority to make it difficult for small non-bank financial
institutions;

ASIC put very little information to the Court to justify the position it took;

It is noteworthy that not only was the Executive at the Trust Company handling the
transaction an ex-ASIC executive, so was the Judge;

Is the one size fits all appropriate regulation;

Why is ASIC making it difficult for NBFI to find licenced Trustees and why is it
almost impossible to get Trustee licences;

Where is the public policy on this today?

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Submission 87

The Receiver

Why did the Receiver accept the role of undertaking the investigating accountant's
report and the receivership;

Surely it is a fundamental conflict. The basis of the receivership is investigating

facts which may or may not have been correct;

Would a receiver take a course different to that which was in his Investigating
Accounts Report? Clearly the Receiver is much more likely to act and work in a
way that justifies his reporting;

Won't a receiver present a dooms day scenario with no view on the future in order
to get the receivership;

If it was not possible to fill both roles then it is likely that those doing the
investigating account reports might have my have a greater interest in trying to
preserve the entity rather than falling into receivership where investigating
accountant will receive many times the fees received as receiver as opposed to
doing investigating account report;

The Accounting Firms discount the fees for IA Reports in hope to get the money
back out of the Receivership.

Receivership are far more profitable;

If IA knows that he or any associated or friendly entity cannot get the Receivership,
the Receiver they might focus more on the survival of the entity;

For instance, what circumstances need to exist for the Company to survive;

Should it be given a second chance and under what conditions;

Has the IA helped the Company to survive;

Every option should be on the table;

Receivers cause massive destruction of value as do the IA investigations;

If the investigating accountant and receivership work is to be separated it will be

important to avoid firms sending the other activity to a related or friendly firm.

Each

role undertaken must independent and at arms' length. This must be capable of
being tested otherwise will be abused. Maybe ASIC should supervise them;

Why did the Receiver dismiss all staff and use high-priced personnel in his own
office, whose hourly rates would be much larger, plus the margin that professionals
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Submission 87

want on the on the time spent.

(See appendix on time costing);

Why wasn't any local professional people used;

Why didn't the receiver encourage a meeting of debenture holders to find out what
their view was about situation rather than being manipulated by the Rescue Group
in the situation by hands up at an informal noteholder meeting and pressure from
local politicians?;

Why is there inadequate discloser to debenture holders of the cost of the

Receivership?

Currently the GSI Receiver posts 4-week reports on the GSI

website showing the hourly charge rate for employee levels working on the matter
and the actual fees and disbursements charged against those employee levels
under various task headings.

It fails to give any cumulative total to those amounts

nor details of the source and destination of funds, making it impossible to

understand the total cost to date and where the money has gone. At the time of
writing, the latest 4-week report covers weeks 77 to 80 inclusive. Only those keen
enough will pay the necessary ASIC fees to obtain the three 6-monthly filings made
by the Receiver to date, to try uncover the actual receipts and payments of the
Receivership.

There is a need for a serious review of the role of Receivers

There is no real accountability for receivers other than to their debenture holders
and some statutory restraints.

It doesn't matter how much it costs because the

cost was being born by unsecured creditors or in this case the debenture holders;

Where a bank will have a deficiency with the debt there is a better chance the bank
will drive the Receiver performance because that means greater recovery for the
bank;

By separating the role of investigating accountants and receivership, it could lead to

some firms specialising in salvage and others in receivership.

This would be

healthy for the market particularly the professionals;

Unfortunately the receiver is basically a contractual arrangement between the

debenture holder, often the bank, and the receiver itself reflecting the terms of the
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Submission 87

security giving rise to his appointment.

This is subject to some statutory

constraints placing some obligations on the receiver;

Whilst a lot of law has developed on these constraints and obligations, they are not
effective in dealing with the many abuses that are currently taking place;

It is well known that several accounting firms have become multimillionaires as a

result of their receivership work;

There is a significant case running in Western Australia at the moment where the
fees charged were absolutely outrageous but neither ASIC nor APRA have
intervened which means the only joy to the applicants is the limited statutory rights
that you have;

The reality is that at the moment there is an unfair balance between the rights of
debenture holders and the unsecured creditors;

Does this matter? Economists would argue that it does not matter that companies
fail because capital is being released and presumably can be more efficiently
invested in new enterprises.

Thus to go to great lengths to save questionable

companies may not be economically sensible;

There is fundamentally an information imbalance. Whilst receiver is under some

obligations to file reports, these are fairly meaningless in terms of the commercial
control of receivers activities and the engaging of unacceptable conduct;

What can you do about this balance?

a) At the moment receivership's, unlike liquidations do not have management
committees although the professional association recommends that receivers
do voluntarily appoint committees as a conduit for discussion with debenture
holders;
b) In the case of GSI, receiver appointed the committee, was a whitewash and
was fundamentally used to suit the receivers interest not those of the
debenture holders;
c) Would it be appropriate to consider giving committees statutory powers and
by regulation defined more appropriately their activities?

What about

Committees for Inspection under the liquidation provisions?;

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Submission 87

d) Would it be appropriate for there to be a representation of unsecured

creditors and maybe an independent chairman;
e) Would it be appropriate to have the receiver with its control of the assets and
the cash, fund any application that a member of the committee might want to
make to the court for what he considers to be inappropriate actions by the
receiver;

This is an extremely difficult area because those representing the banks will not like
any interference with their power to appoint receivers.

Banks will want an

untrammelled right to exercise their security with minimum statutory interference

after all the secured creditor entered into a contract with the debenture holder and
that was the time that other terms could be negotiated that may have been fairer on
unsecured creditors. That is a proper discussion no bank would enter into;

This is a proposition that is unrealistic in that negotiating alternative arrangements

unless there is some kind of industry intervention and code of conduct, unlikely to
get anywhere.

Receivership Reporting

Receivership reporting is very poor.

It is difficult to understand and requires

numerous questions of the reporting to make any sense. With an initial report and
6 month reporting thereafter, it would make a lot of sense to change the nature of
the reporting so it can be understood by unsecured creditors and others;

Invariably the debenture holder gets confidential reports and briefings the
presumably satisfies the debenture holder;

Again this is a question as to whether the unsecured creditors are disadvantaged;

The Receiver's report seems to focus on a trial balance of cash in and cash out,
usually this is brief and needs to be broken down further;

There is no attempt to deal with the assets and advise as to the proceeds against
book, current value and realisation.

Costs are very substantial and are not

allocated to any class;

There is no attempt to explain how fees were calculated and on material items, to
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Submission 87

what firms they were paid;

There is no plan of action or strategy on how the Receiver is conducting the

Receivership or any timelines;

Clearly if a Receiver was doing a job properly, he would have a plan of action.
Why isn't this revealed?;

The Receiver should be capable of being questioned to explain many details;

Theoretically this was a role for the voluntary committee of management but my
understanding is few questions were answered adequately;

In short I would have thought that work could be done by the professionals on pro
forma reporting and guidelines to help the third parties understand the material after
all this is what an accountants report is;

The clear message you get is the current reporting is designed to confuse you and
is incredibly difficult to assess the performance;

The accounting firm could set up some formats.

Unconscionable conduct

In another context, takeovers code, unconscionable conduct is called unacceptable

behaviour.

Whilst the notions are well entrenched in the law they have limited

practical application in relation to banking;

If there was well-developed, unconscionable conduct law in relation to banks at all

levels this enquiry that is currently taking place would not be necessary because
many of the actions in the GSI case would have been covered by the unacceptable
conduct provisions;

Further it would avoid many further Senate inquiries which could well emerge as a
result of greater knowledge of bank behaviours and the role of greed;

There is suggestion that unconscionable conduct can only happen at the lower level
of banking. This is incorrect. Unconscionable conduct applies to all levels;
'Struggle Street' which is usually disadvantaged by contracts of adhesion or
mass contracts with standard terms where one size fits all;
'Main Street' or Middle Australia, where there is uneven bargaining power and
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Submission 87

information between borrower and lender;

'Wall Street' (on the case in Australia, Pitt and Collins Street) where banks
have manipulated benchmarks, which are currently being investigated.
These are contrary to the interests of the large borrowers and lenders to the
banking system.

Here there has been information imbalance;

It is noteworthy in the retail sector, the retailers have been pushed into a code of
conduct which deal with the day-to-day problems existing in the supply chain to the
supermarkets. This has under the Competition Law, the force of law;

The prospects of getting the banks to agree to various levels of codes of conduct
would be a great result but how practical it is;

In Section 12BF of the Corporations law, there are extensive conscionable conduct
provisions that apply to "contracts predominantly as proposals, for the acquisition
for proposed domestic or household use or consumption";

These are very good provisions for the banks but they are limited to individuals in
'Struggle Street'.

They could be adopted for 'Main Street' and 'Wall Street'.

Minister Billson has announced a proposed extension of these provisions to small

business.

In fairness to the Murray Inquiry, the inquiry did recommend the

extension of these provisions for small business.

The above extension applies

where one party has 20 employees and the value of the dispute is less than
$100,000.

Examples of unfair contract terms include:

The dominant party asserting a right to unilaterally vary terms,

Rights to terminations and legal redress that are not reciprocated,
-

The application of arbitrary costs and automatic renewal clauses, and,

Payout requirements and obligations without reasonable grounds;

This is very commendable but nowhere near far enough;

Maybe it might be better for the banks to agree to a code of conduct at all levels
rather than have a royal commission;

In any event, unconscionable conduct is going to continue to emerge in the

Australian banks and their reputation is only going to deteriorate if these issues are
not addressed;
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Submission 87

See an interesting article by Professor Bob Baxt in Company Directors Magazine,

October 2013, where he argues for special legislation to deal with unconscionable
conduct;

Neither the Murray Review or the Harper Review followed his recommendations;

In the ACCC v Lux (2013 FCA case) the Court acknowledged the usefulness of the
legislature doing some standard setting which helps to illuminate, elaborate and
develop norms of value.

This assists the Court in determining fairness.

The

Consumer Law provisions in the Corporations Law reinforces the recognition of

societal values and expectations of consumers to be dealt with honestly, fairly and
without deception or unfair pressure;

As I have argued elsewhere, this should apply to all banking activities;

There is as much abuse at Pitt or Collins Street as there is in Struggle Street;

The benefit of these norms is that they are moulded to suit the particular sector and
similar provisions should be developed for many other sectors where there is
repeated abuse;

Again, I repeat that this Inquiry may not have been necessary had unconscionable
provisions existed at all levels of banking and including companies in difficulties,
receivers and liquidators.

This would have stopped The Trust Company and

Receivers conduct in respect to GSI;

Given that many other sectors require unconscionable conduct standards there
could be a proliferation of unconscionable conduct standards which would give
weight to Bob Baxts view that special legislation should be developed to deal with
this and not be part of the Corporation Law or the Competition Law.

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Submission 87

Mediation

Mediation often takes place too late, where it is then ineffective. The bank only has
one option on the table - foreclosure.

There is no scope for creative solutions

because the borrower is generally in too deep a hole;

Costs and energy of monitoring a borrowers financial rehabilitation is often seen as

unsustainable from the bank's perspective. By the time people start thinking about
mediation between banks and lenders, a loan is typically labelled as beyond
rehabilitation;

Sometimes it is the bank's fault for taking too long to intervene. Banks sometimes
put bad debt on the backburner and don't step in while the borrower still has some
equity.

It is often in the interests of both parties if banks stepped in to mediation or

other action earlier before the borrower's equity is completely eroded;

Internal incentives for bank employees. Salary increases, promotion opportunities

and future job prospects are dependent on justifying outcomes to their superiors
and/or failing to reach agreement with borrowers;

American bank experiences, similar to Australian experiences:

Bank officers in charge of collections are more number-oriented than
people-oriented,
The difference in personalities between the officers in the collections
department with the personalities in the sales departments;

Sometimes it is the borrower's fault that mediations don't arise, or don't arise in a
timely manner. The stakes when approaching or entering insolvency is especially
high for SME's. This can often lead to borrows being evasive or outright fabrication
as borrowers try to keep afloat for as long as possible. This obviously displeases
the bank when the business inevitably goes belly up. The stakes are particularly
high for SME's because it is often the borrower's life's work, family home/business
that is in danger - this can make the situation emotionally charged.

When

borrowers fabricate elements of how their business is performing, it becomes

difficult for the banks to tell the difference between genuine battlers trying to keep
their livelihood together, and fraudsters who rip off banks and then declare
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Submission 87

bankruptcy;

Comparison with US and UK:

Overseas banks appear to act much earlier than Australian banks in cases of
default and arrears,
In the US action is taken to explore business/financial restructure when
insolvency first occurs (within two months of default). Where business viability
cannot be demonstrated, it takes an average of 9 months to process a case
from insolvency to foreclosure and termination of the business,
Many Australian borrowers have been insolvent for several years,
Barclay's Bank has a policy where the debt collection team has to reverse the
thinking process: they have to justify why a particular case is not suitable
mediation before involving external lawyers for litigation. When the account
is in early stages of default the debt collection unit offers the relationship
managers negotiation and mediation services;

Mediation becomes more difficult where a greater number of people are involved.
Where there are a lot of people internal to the bank that have an interest in a
dispute (for example, because it raises an important issue of bank policy) then the
dispute resolution can become emotive and inefficient;

Experience of the Farm Debt Mediation Act 1994 (NSW) had the effect of achieving
an "orderly exit" more so than being a process of exploring options.

When

mediation was mandated late in proceedings it was perceived as a threat, not a

promise or opportunity from the borrower's perspective;

Recommendations:
That mediations occur earlier in proceedings when there is more than one
option of the table,
Have shorter mediation sessions over a longer period of time to help defuse
the emotions of the situation that can come from both sides;

It is difficult to make mediation compulsory although some Judges adjourn cases

and insist on it.

As indicated above, there are inherent difficulties with bank

situations because they often require immediate resolutions. This explains why not
many banking type cases go to mediation or are inappropriate for it;
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Submission 87

My only suggestion is that it should be unconscionable conduct not to agree to

mediation in the early part of a dispute.

The Murray Report

Why are we having another Senate inquiry when they recently been an enquiry on
the banking system;

The Murray Report was led by an banker CEO and no attempt was made in that
inquiry to deal adequately with the reputation and cultural issues that banks are now
facing;

A recently retired CEO of NAB, prior to his retirement, expressed a view that unless
the banks faced up to the poor reputation they have in the marketplace that there is
going to be continual problem.

It is no wonder that banks are being subjected to

more and more regulation, more and more scrutiny and more and more resentment
in the community. The Murray Report recognised this but did nothing about it;

It is noteworthy that the four trading banks are now the four top companies on the
ASX now ahead of BHP.

It is incredible that the concentration in banking in

Australia exists nowhere else in the world;

Australian banks are very profitable.

Murray in his report indicated that on

individual basis they were not at the top list of profitability but his analysis is
incorrect on looking at the sector as a whole they are one of the best performing
sectors;

The relevance of this is that the banks have huge profit capacity to deal with the
kind of issues they are facing which in effect is to be much more customer focused
and generally more interested in fairer customer outcomes;

Whilst the Murray report was handled by an ex-banker, the earlier Campbell and
Wallis Inquiry were chaired by people outside the industry.

There was a

consequence, a greater focus on looking as the sector as a whole and how it fitted
in to the community;

The Wallis Inquiry was concerned about the power of The Reserve Bank and
Treasury and began the process of diluting this by establishing APRA to diffuse this
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Submission 87

power.

But this was nowhere enough;

People might argue, why did the banks resist raising extra capital? This was a
'clayton's' argument designed to show the banks were not happy with aspects of the
Murray Inquiry whereas most of the Inquiry suited then substantially particularly in
the areas that the enquiry did not address;

Strongly capitalised, Australian banks are central to the success of the sector and
Australian competitive advantage.

It is incredible that the banks did not consider

the National interest but were only concerned about their own profitability. There
are great competitive advantages in having:
One of the best capitalised bank system in the world,
-

With the rule of law a great competitive advantage for Australia in a very
competitive world.

Murray Report - Further Observations

The Final Murray Report makes a number of comments about competition, the role
of APRA and the reputation, values and culture of the banks.

But little will change

as there are inadequate practical recommendations to deal with these issues;

You cannot argue about the noises that have been made but my view is much more
is needed to:
1. Reform APRA and give it a revised mandate. This itself justifies a report;
2. Competition.

A much greater analysis needs to be undertaken about

competition and how to induce more competition.

The banks are all the

same and the competition is very limited;

3. Culture, Values and Reputation. There is no analysis of this. An analysis
of this would show huge community concern and anger, just ask the various
Senate Inquiries.
At the very least unconscionable conduct should apply to all levels of banking;

My conclusion is that if the Murray Inquiry could have dealt with above, a more
appropriate way it would not be necessary for the current inquiry to take place;

In my view, as things stand, little will change.

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Submission 87

APRA

APRA is a very powerful silo and fiefdom which has limited objectives;

APRA has been wonderful for the banks. It has encouraged the cartel type central
behaviour and limited and defined the way in which bank compete.

Many other

sectors would love this advantage where competition is so defined;

Further the licencing of bank is so difficult to achieve that then of itself creates
enormous barriers for new entrants;

Apart from the technical disruption the bank face little competition. There are no
foreign banks competing and any technology disruption is threatened with massive
anti-competitive regulation;

APRA has been neglecting the small player and regulating out, not in.

No

advantages are given to help new entrants, in fact, the degree of one size fits all is
not in our economic interest. It is systemic risk policy that is all powerful with little
balance;

There was some focus in the enquiry on the accountability of APRA;

The reality is that The Murray Inquiry did not deal adequately with the balance of
systemic risk on the one hand, the need for competition, on the other, this should be
deeply embedded into the objectives of APRA not just a bland statement;

Whilst recommendations have been made about widening the objectives of APRA
with a 3 year review and annual oversight by a supreme regulator, it is very
questionable whether this will be powerful enough to deal with the major issues
being faced by the banks.

The objective of APRA needed to be flushed much

more and recommendation how was APRA going to handle this operationally.
APRA did succeed in stopping the appointment of an independent and mandate
board as requested by me. This is a huge subject in its own right.

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The impairment of customer loans

Submission 87

Valuations

The fate of GSI was largely determined by th~

valuations which

raises serious questions about valuations;

Where valuations play an important role in the issue of insolvency or otherwise

much more care needs to be undertaken;

Valuation methodology is an imprecise activity.

We

all know of massive

differences in valuations undertaken at the same time;

The choice of Valuers and their instructions needs to be revised;

Valuers should be aware of their massive responsibility;

Here the GS! Directors registered their issues with the Receiver but he rebuffed
them despite the fact that debenture holders would have backed the GS! Board;

Why didn't the Receiver let GS! Directors make comment? Why not get another
Valuation? Who was the Receiver really acting for?;

Clearly in this situation:

1. Two valuations would have been appropriate;
2. The Receiver I IA should have listened to the GS! Board;
3. The Valuation should be done or as is basis and a going concern basis;
4.As an imprecise science ranges should have been given with appropriate
assumptions;
5. The GS! Board in hindsight should have constructed their own independent
valuations and this may have been valuable to the Court. The Receiver may
not have taken any notice of it, but the Court may have;
6. The Debenture holders would have wanted the GS! Directors to have had a say
in the valuation process;
7. The Debenture holders had more confidence with the integrity of the GS! Board
than the Trust Company or the Receiver.

ASIC, the Accounting Standards Board and Professional Accounting Association

should all play a role in developing this area and avoiding the GS! pitfalls.

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The impairment of customer loans

Submission 87

Statutory Reform

Statutory reform is extraordinary difficult to achieve;

By its very nature, many people and processes are involved which make it difficult
to achieve much;

Parliament has a huge legislative burden and it's hard to get into the queue;

Perhaps the threat of a Royal Commission and what it would disclose maybe a
weapon of getting some kind of reform;

To get reform, a massive amount of work has to be done on the legislative change
and a justification for it;

The banks have massive fire power to fight any proposed legislation restriction:
All the major accounting law and consulting firms, all have as their largest
client, a bank;
Their organisations are willing players to fighting legislation inhibiting the
banks;
The banks have one of the most powerful lobbies in Canberra so it is great
challenge requiring much determination;

It is better for the professionals associated in respect to receivers to agree to a code

of conduct deal with receivers and their operating activities;

The banks to do the same. This could be given the force of the law and could deal
with all the issues set out the Terms of Reference;

Amend the Corporations Law or create specialised law (Bob Bax!):

to expand those subject to unconscionable conduct activities;
to give committees of unsecured creditors statutory powers like the
committees of inspection for liquidation;
Contemplate requiring the clause of Chairman of Committees Inspection
being experienced insolvency practitioner from the Accounting or Legal
profession;
given committee access to the receivers funds to make appropriate
application to the Court;

This opens the idea of a formal division of the Federal Court being created for
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The impairment of customer loans

Submission 87

financial matters. This could be done at no extra cost as existing judges could be
allocated;

The roles of bank Boards should not be forgotten (see appendix) and the power of
APRA to require action;

ASIC to be replace by APRA;

APRA to be required not only to consider competition policy but supervise in a way
suitable to smaller NBFI (see writers paper on the Competition and Financial Policy
and writers comment on the Murray Inquiry;

A major research project needs to be undertaken to understand what are the

competition issues and regulation issues in banking so that APRA can be
appropriately resourced. The Murray Report did not do this:
NBFI (regulate in or regulate out) as entrants,
Foreign bank entering,
Not one size fits all,
Does regulation have a cartel like effect;

Economic justification for the decision of APRA.

This requires Productivity

Commission style reports justifying the decision:

What is the cost I benefit,
How practical is it,
Is this the only way to deal with the issue.

John Dahlsen.

In writing this paper John Dahlsen has had the assistance of Johnathan Rose a juris
doctor student at Melbourne Law School, The Rescue Group, Peter Murphy (WGM),
Glenn Sanford, Michael Kenny (Gadens) and Michael Syme (Corrs).

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The impairment of customer loans

Submission 87

Appendix 1

Time Costing

When you are working as a professional on a time costing basis which is usually budgeted
by hours charged multiplied by charge out rate to derive revenue there is the opportunity for
lazy habits to emerge;

In the case of GS! and other similar situations there is no effective clients or player to
monitor the situation and without having an alternative it means that the professional can
abuse the situation;

There is no budget for hours worked during receivership or on a particular project so there
is no inducement to be efficient in the use of your time;

Further, when professionals produce a very good result on a small amount of hours there is
a temptation to change the charge methodology to one of value adding by upping the
charge rate.

So in other words, on mundane work, the idea is to increase the number of

hours whilst on short-term work, it is to increase the charge out rate for so called value;

There is no one to check the justification of the hours spent or when premium charges are
going to be allocated;

The mere disclosure in a table on a website as to the professionals will after event with
controls does nothing;

Professionals make higher margins on some employees than on others but no one is a
party to how they allocate their staff to any particular project;

The debenture holder of course is merely concerned about getting his money back and not
what happens to the balance or how much of a balance there will be;

ASIC and APRA are not the slightest bit interested. There is a current case in Western
Australia involving ANZ Bank where there is an incredible, unrealistic and probably
fraudulent abuse of costs by the investment bank lawyer and accountant where they have
taken no interest in.

It will be interesting to see what the Court has to say.

It is unlikely to

be nice;

The receiver does not look at alternative ways of undertaking work, whether in some case,
it would be cheaper to outsource the work or to allocate it to a smaller accounting firm with
must lower charge out rates;
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The impairment of customer loans

Submission 87

If the payer, usually the debenture holder or the bank is getting a penalty interest which is
usually much higher than the ordinary rate, then the bank has no desire for the receivership
to finish earlier because they will get a higher return on their funds without cost when there
is little going to the unsecured creditors;

A receivership is a great revenue stream for the accounting firms and it is remarkable how
long some receiverships run for a long time which make them almost like an annuity;

It is not surprising that there has been a lot of abuse and concern about receiver's
expenses.

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The impairment of customer loans

Submission 87

Appendix 2

Bank Boards

Bank Boards have a huge responsibility and accountability in trying to change the culture,
reputation and values within the bank. What is required is a change paradigm which not
only needs a Board to be committed but also the CEO and Senior Executives. We cannot
rely upon the Courts, the media, Senate Inquiries or Royal Commissions;

The public are now used to bad bank behaviour, it has simply become accepted. Another
issue just doesn't surprise anyone;

Bank reputations are unlikely to change unless something fairly significant happens.
believe some bank Directors will be concerned about the feedback they get in the
marketplace about the activities of their bank;

On a trust index in the community at the moment, the banks ranking would be declining and
is likely to continue to decline;

Politicians of all political persuasions are concerned about this and in many electorates they
are inundated with complaints about the banks. If they were prepared to get involved with
these complaints they would have large queues at the doors;

Australian banks put ROE above client interest at all times;

APRA has warned the banks that it is concerned about this issue but what will happen?
This is a difficult issue for a bank board and executive team because at present it would
have much detail on where the problems and issues are. In my view, the starting off point
is to have a clear information, division by division, product by product, of where the
complaints are and who are generating them and why;

It is only with this knowledge that a strategy could be put in place to deal with it. This
course would be a consultant's dream world;

I've asked myself, what would I do, if I was the bank director at the moment.

I think my

answer would be that I would appoint a General Manager reporting directly the CEO who
was to be in charge of culture, values and reputation of the bank. By this appointment, the
bank would be showing to the organisation and the outside world, the need to deal with the
problem;

Apart from getting an understanding of how deep and wide the problem is, a huge amount
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The impairment of customer loans

Submission 87

can be learnt from talking with staff;

In the project, I encouraged!

at the ANZ to do in respect to engaging the

staff at several branches to test some propositions on customer service, it became

apparent that the staff knew exactly what was wrong and right and contributed to make a
number of very good suggestions for improved performance;

Over a period of two months with no capex, just simply listening to staff and instituting many
of the excellent ideas they had, the performance of the branches under trial improved quite
dramatically.

This involved using an operations team to listen to the staff, to see that

necessary changes were made and reported back to the coalface;

It was not unlike the role that operations people play in the retailing. This kind of approach
would be an excellent way to deal with the problems of bank values, culture, reputation on a
bottom up basis where changes can be put in place immediately after being tested by small
number.

I think there are other models that could be adopted but I have no doubt if there

is a willingness by the bank boards and banks to generally deal with this issue, that it could
be solved and in my view, without any loss of profitability;

One interesting way of looking at this, is the comparison of the use of big data as opposed
to small data.

Banks will be more interested in the big data, the analysis of the broad

range of their activities, assessing the risk issue with little regard for the small data, that is,
the information available to them at the coalface, which information can be extraordinarily
valuable in making a decisions.

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