Bill Shorten’s complaints regime could force banks to behave

The Australian 7:49am February 27, 2019

Robert Gottliebsen

Bill Shorten’s plan to increase the number of government and bank funded financial counsellors from 500 to 1000 sent a shiver though many bank branches and lending departments.

Those who were there during the lending frenzy of a few years ago know better than many bank senior executives how the staff bonus incentives encouraged many to “sell” loans harder than was financially prudent.

A lot of people borrowed beyond their ability to repay. But everything was fine as long as property values kept rising, because that injected equity into the loan arrangements.

But thanks to the tighter lending rules we’ve seen recently, dwelling prices have fallen, and a lot of borrowers now find themselves owing more than their dwellings are worth - a negative equity situation. And now Labor says there are to be 1000 people, paid by the government using a bank levy, examining these loans and requiring detailed answers from banks on a loan by loan basis.

If house prices were to continue to fall then banks could potentially be liable for a portion or all of the losses on many of these loans on the basis that the lending was irresponsible.

At the moment borrowers are unlikely to tell their bank that they had borrowed too much because of hard selling by that bank. But according to Bill Shorten, these financial counsellors will provide “invaluable assistance”, free of charge, to Australians who are in dispute with their banks and other financial service providers. Obviously, the counsellors will cover many issues apart from overlending and banks will be hoping that overlending is not high on the financial counsel agenda.

Nevertheless, it represents the biggest time bomb facing the banks.

On a second front, law firm Maurice Blackburn has repaid its bank overdraft so that it would not have a conflict of interest with the class actions it is running against a number of banks for allegedly irresponsible lending.

These issues create a paradoxical situation. Suddenly the banks have an additional interest in maintaining house values, because if they fall too far, there will be an avalanche of claims from people who will say they were irresponsibly urged to borrow an imprudent amount.

It was clear at last weekend’s auctions that banks were not being as strict as they had been prior to Christmas and this extra flexibility boosted the auction clearance rates.

It is impossible to determine just how much more flexibility banks will give in the longer term, but this was the first sign that they realised that they went too far before Christmas.

Of course, waiting on the sidelines is the ALP negative gearing policy, which means that if Labor wins the May election, in 2019-20 and beyond those buying an existing house will be still able to claim the interest and other charges against the existing dwelling’s income, but will not be able to claim it against their salary and other non-property income. The situation will be different if the borrower is the first owner and built the dwelling.

Once that legislation is in place, my view is that it is likely that real estate investors in used dwellings will be looking for positive gearing, where the rental income covers the interest rates. That will push dwelling prices lower and rents higher.

So what is happening with financial counselling needs to be put into the context of other pressures being placed on the banks.

ASIC officers are going to embed themselves into some banks and examine the decision-making processes to make sure they meet current requirements to look after customers.

At present, people having problems with their bank normally go first to the bank to try to sort them out. But too many banks simply don’t have the staff to handle the complaints and very often customers are shunted off to international call centres, which are usually next to useless if the matter is complex.

Under Labor’s plan, people who can’t get satisfaction quickly will now go to the “government” financial counsellors, who will require speedy action from banks. The banks will have to invest in considerable staffing resources to handle the greater number of complaints. And, of course, those complaints may increasingly come to focus on bad banking practices of the boom times — especially if housing prices fall further.

I don’t think Australia has ever seen an extensive government operated complaints network aim “machine gun” issues at a company.

And there will be a bank-funded settlement processes, which will have the banks paying out large sums unless they have the staff and systems available to handle complaints.

I am not suggesting this will intensify the credit squeeze, but the banks are going to have to divert a lot of resources to complaints, including serious complaints. It will affect profitability. Institutional investors will not be pleased when they see bank costs rising faster than they anticipated. Yet as we know, it was the institutions that demanded boards be much more profit-orientated and appoint mangers who put profit over risk and responsible lending.

Part of that process was to downgrade complaints.

Indeed, had Commonwealth Bank taken the early Storm Financial scandals seriously and seen them as an alert, the banks might not be in this situation.

Very quickly we will discover which banks have loaned badly and which banks have the best systems to resolve complaints. Those that have bad systems and have loaned poorly face a difficult period ahead.

Footnote: NAB has announced it plans to retrench another 180 people from its branches. It better make sure they are not experienced in the old bank systems and practices. Banks may need to rehire experienced bankers because recently recruited bankers may flounder when faced with the looming avalanche of back claims that require knowledge of past practices.