With political supineness as background, the banks’ foreclosure process has sucked up and compromised other sectors, in particular the receiver/manager sector and the property valuation sector.  The public bankruptcy trustee, the Insolvency and Trustee Service Australia, lacking resources, has lapsed into a cowardly neglect of its responsibilities to those who have been trapped by bank bankruptcy proceedings.

But the centre of the larger problem is the legal profession and the judiciary.  The NAB public relations machine recently tells it thus: ‘All if the material [put forward by foreclosed complainants] has been the subject of exhaustive investigation many times by ourselves and by multiple courts of law. In each case the courts have found the allegations to be unfounded’.

Very convenient for the NAB to hide behind the fulsome integrity of the Australian legal system.  The public relations entourage can sleep soundly at night because it is its role to write the script to order.  The detail conveys a contrary story. -- Evan Jones

Ironically, the Whitehall report reproduced uncritically propositions from the flawed ACCC report.  In turn, the general conclusions of the Whitehall report have been reproduced uncritically, not least by ACCC Chairman Samuel in the November 2004 AGSM speech.

As I have written elsewhere (unpublished document), ‘We are thus witness to a peculiar phenomenon in which reports blessed with official status are interpreted as denying the existence of large retailer market power although the reports avoided an examination of the issue.  The reputed absence of retailer market power has thus acquired definitive status, although the grounds of its declaration are hollow.  Wishful thinking has been converted into tangible reality.’

The ACCC and bank-borrower relations in particular

One returns to the blank sheet that is actions by the ACCC regarding bank malpractice.  I refer to a letter from an ACCC staffer to a complainant seeking assistance.  This letter is representative in tone of letters sent to complainants regarding alleged bank malpractice (‘we can’t help you’), but it is more fulsome in detail, and thus merits attention.

Carmen Walter (principal of the Wodonga brewing/restaurant business defaulted by the NAB, outlined in my April 2004 dossier) wrote to the ACCC on 17 April 2001.  Ms Walter received a reply from Angusha Kangatharan, ACCC Senior Investigator, on 24 April.  The letter states, inter alia:

           Under Part V of the Trade Practices Act 1974 (“the Act”) businesses are prohibited from engaging in misleading or deceptive conduct. Thus, in the present case, based upon the information you have provided the conduct in question may raise concerns under section 52 of the Act.

           However, the Australian Competition and Consumer Commission (“the Commission”) is unable to pursue all matters that are brought to its attention. Its efforts are aimed more towards achieving compliance with the Act for the benefit of the public as a whole, than towards achieving resolution of particular complaints. The Commission’s selection criteria for matters which it will pursue include the following;

           (i) an apparent blatant disregard of the law;

           (ii) significant public detriment;

           (iii) the potential for action to have a worthwhile educative or deterrent effect;

           (iv) a significant new market issue; or

           (v) an opportunity to test the reach of the Act in appropriate circumstances.

           Furthermore, the Commission does not as a matter of policy become involved in matters where private legal action has been taken. Accordingly, I regret to advise that the issue you raise is not one this office can pursue.

Apart from the message of the last paragraph, a regular and key component of ACCC letters to such complainants, and the failure of the writer to mention section 51AC as being of possible relevance to the Walter inquiry, the middle paragraph merits attention.  The author writes of the necessity for selectivity in choosing arenas to pursue, listing selection criteria.  Ms Kangatharan fails to take the small step and a natural application of logic to note that most of the criteria listed fit closely the circumstances complained of by aggrieved small business borrowers.  It is readily arguable that there is no more worthy arena deserving of the ACCC’s resources that would be directed ‘towards achieving compliance with the Act for the benefit of the public as whole’.  The ACCC has not taken this step.

Ms Walter then wrote to the Hon. Joe Hockey, then Minister for Financial Services and Regulation.  Hockey’s office replied in mid June, saying (as per usual) that it was inappropriate to intervene in a private matter, but that she should contact the ACCC.  (An ACCC press release was appended to the Hockey letter, in which the ACCC was trumpeting success against the NAB with respect to a personal guarantee case.  It would not have been clear from the ACCC press release that the NAB has, to this writer’s knowledge, never lost a court case except on a handful of personal guarantee cases, for which there is established legal precedent supporting the hapless defendants.)

Ms Walter wrote again to the ACCC, care of Ms Kangatharan, on 9 July 2001.  The essence of the letter was that, if the ACCC could not intervene in the Walter case, ‘we would expect the responsible government bodies to take action outside our personal case to prevent matters as ours in future (sic)’.  The ACCC did not reply to this letter.  A follow up letter from Ms Walter on 13 August 2001 met with a similar silence.

Enter the Australian Securities and Investments Commission

As if s.51AC was already not a damp squib, into the equation comes ASIC, which is handed responsibility for business to business unconscionable conduct in relation to financial dealings in March 2002.  Whoever is responsible for the conception and execution of this handover should be taken out the back and shot. 

ASIC’s skills and associated culture are incommensurate with the skills required to regulate unconscionable conduct.  Even were ASIC interested in acquiring skills, which it is not, ASIC does not have the resources to regulate unconscionable conduct.  There appears to have been an implicit but mistaken belief that one could readily tack on the regulation of business to business unconscionable conduct to the management of consumer protection. 

In correspondence with me in relation to ASIC’s coverage of bank malpractice, letter dated 15 June 2004, ASIC’s Greg Tanzer (for Greg Kirk), wrote, inter alia:

To date we have not relied upon the unconscionable conduct provisions in any proceedings involving credit.

Tanzer proceeded to elaborate at length on the difficulties, constraints, and so on. 

One might also highlight that Bruce Ford, sometime CBA victim (Tratzea) spent an inordinate time with ASIC personnel before and during 2004 in trying to get ASIC to take seriously the use by banks of the ‘shadow ledger’ system for customers in the process of being defaulted.  The shadow ledger system facilitates extraordinary discretion for banks to manipulate customer indebtedness, with implications not merely for the hapless customer, but also for reporting accountability to the Tax Office and to the banking regulatory authorities.  Ford was heard on a personally sympathetic level, but the issue ultimately was shelved.

The plot thickens.  I quote from an article in the Australian Financial Review, dated 18 February 2005 (authored by David Crowe and Alesandra Fabro):

           The crackdown on property spruikers was being hampered by overlaps between two key regulators, prompting ‘intense frustration’ among investigators as they tried to prosecute offenders, a senate committee heard yesterday. … [ACCC chairman Graeme Samuel] described the situation as ‘less than satisfactory’ after the separation of financial services regulation under ASIC. …

           The Productivity Commission last month described the overlaps between ASIC and the ACCC and other bodies as a ‘source of confusion to industry’. Mr Samuel said there was ‘intense frustration’ among some ACCC staff when they needed to refer matters to senior counsel to determine whether they had jurisdiction to investigate a case. …

           Labor consumer affairs spokeswoman Kate Lundy described the overlap as a ‘dog’s breakfast’.

To this writer, Ms Lundy’s evaluation is on the generous side.  The situation, to be kind, is a shambles and a disgrace.  The outcome?  There is effectively no regulatory oversight of business to business unconscionable conduct in financial services.

The broader parlous environment for small business bank victims

There is no doubt that confronting the abuse of the structured imbalance of power by corporates is a Herculean task.  Even by these demanding standards, banking malpractice is in its own elevated category.  Even if s.46 and s.51AC had robustness, and if ACCC personnel had both sympathy and commitment to small business complainants, the broader environment remains unappetising.

The political class declines to go near bank victims.  Democrat Senator Paul McLean was forced out of Parliament in 1991, McLean himself experiencing exhaustion and disgust at the lack of integrity of Parliament on this issue.  The Martin Banking Inquiry closed down the issue, and nothing has been heard from Parliament since (except for the very occasional intrusion from backbenchers putting in their two bits for constituents during the Adjournment Debates, to be immediately ignored).

With political supineness as background, the banks’ foreclosure process has sucked up and compromised other sectors, in particular the receiver/manager sector and the property valuation sector.  The public bankruptcy trustee, the Insolvency and Trustee Service Australia, lacking resources, has lapsed into a cowardly neglect of its responsibilities to those who have been trapped by bank bankruptcy proceedings.

But the centre of the larger problem is the legal profession and the judiciary.  The NAB public relations machine recently tells it thus: ‘All if the material [put forward by foreclosed complainants] has been the subject of exhaustive investigation many times by ourselves and by multiple courts of law. In each case the courts have found the allegations to be unfounded’.

Very convenient for the NAB to hide behind the fulsome integrity of the Australian legal system.  The public relations entourage can sleep soundly at night because it is its role to write the script to order.  The detail conveys a contrary story. 

Anyone who has cared to examine a court case or two from the foreign currency litigation would already have acquired a less sanguine view of the Australian legal system (with some honourable exceptions).  It is more of the same with recent bank litigation.  A representative case is the Heinrich v CBA litigation in South Australia.  It is a disgrace.  Hyland J settles the case for the Bank by preferring the credibility of the corrupt lending manager Saunders to the credibility of the hoodwinked farmer Heinrich.  The a priori presumption of bank staff integrity, rather than a forensic investigation from available documents and testimony, determines the outcome.  Why bother wasting resources going through the motions when the outcome is predetermined?

In principle, the structured asymmetry of legal firepower to the banks’ advantage should not inhibit the bench from looking behind the rhetoric.  Yet we have learned members of the bench perennially displaying contortions of logic, acts of faith in bank personnel and documentation, and selective appropriation of evidence to find in favour of the more powerful party.  Judges perennially accept statements on faith by bank staff on events and claims regarding the debt quotients.  There is a pervasive ignorance of bank procedures amongst the judiciary, and a pervasive lack of interest in acquiring a workable knowledge of such procedures. 

In particular, the issue of who the receiver/manager owes allegiance to – the mortgagor or mortgagee – provides a colourful legerdemain.  The law says that the receiver/manager owes allegiance to the mortgagor, but the practice is that the receiver/manager is the chattel of the bank.  Spender J, in National Australia Bank v Freeman, FCA 244, March 2002, more honest than most, exposed the distortions necessary to turn the law to the advantage of the practice.  Those in more of a hurry to dispense with niceties (such as Dodds-Streeton J, in National Australia Bank v Walter, VSC 36, February 2004) merely crash through the inconsistencies to find the desired result. 

Some judges come to office having acted for banks, not surprising as banks are most prevalent in litigation and have the resources to match the demand.  Such has been the position of Paul de Jersey, now Queensland Chief Justice, with Westpac; ditto Richard Chesterman, now Queensland Supreme Court, with Westpac; ditto George Fryberg, now Queensland Supreme Court, with the NAB (Fryberg was senior counsel for the NAB in the Kabwand/Somerset case, another disgraceful outcome). 

We then find judges presiding over cases in which a previous long term bank client is one of the parties.  Thus did de Jersey J preside over a decision for his previous benefactor Westpac in the crucial foreign currency case Westpac v Potts, Queensland Supreme Court of Appeal, No.657 of 1991, April 1992, a case resulting in what Queenslanders in the know consider to be one of the worst decisions in recent judicial history.  This decision had the not inconsiderable effect of not merely reversing the lower court ruling in favour of Potts but also a series of decisions in the Federal Court against Westpac in Chiarabaglio, Thannhauser and Ferneyhaugh, whose cumulative impact was threatening to damn Westpac comprehensively over its foreign currency loan debacle.  With the Potts reversal, the significance of which was duly advertised to all and sundry by Westpac, Drambo was subsequently won for Westpac.   As with the equally culpable CBA, the remaining foreign currency loan casualties were left to rot and dissolve unlamented into history. 

Similarly judges routinely preside, without embarrassment, over litigation in which one of the parties is the bank with which they have a financial interest or a personal banking relationship.  Judge Dodds-Streeton admitted to beneficial interest in NAB shares worth a quarter of a million dollars in National Australia Bank v Walter, but claimed that impartiality would prevail on her watch.

Chief Justice de Jersey has admitted to a personal banking relationship with the NAB.  And yet His Honour presided over a Summary Judgment Hearing in early 2001 on the matter of Troiani as guarantor and majority owner of Wide Bay Bricks.  The Judge delivered a decision in favour of the NAB and judgment on debt which allowed the NAB to proceed to pursue the Troianis to bankruptcy.  The NAB offered no proof of debt, and there was no transcript of the hearing.  The additional advantage of this summary judgment was that there was nil discovery of documents, documents which would have disclosed a telltale path of how the Troianis were defrauded by the NAB.  Curiously, Sante Troiani was not present on that fateful day because his then barrister, a friend of the court, had advised him against attendance.  Estimate of net debt at time of appointment of receiver/managers in 1999 is impossible due to apparent widescale NAB manipulation of accounts (as an instance, the NAB stole $3.985 million from WBB accounts shortly before appointment of receiver/managers), but a rough estimate would have the Troianis’ net equity in Wide Bay Bricks at $40 million.  Add $20 million in personal assets, and the NAB has neatly appropriated $60 million from the Troianis through a judicial auto-da-fé.

‘Exhaustive investigation’ indeed. 

In sum

At present in Australia, banks are effectively above the law with respect to small business customers.  Banks operate, self-consciously, in the realm of the law of the jungle.  The public image of the Australian regulatory system is that the rule of law prevails.  The ACCC, ASIC, APRA, and so on, are the public face of this public image.  The public image in this domain is a lie. 

Most victims, good law-abiding citizens, have lapsed into passivity, which suits the banks and the regulatory agencies perfectly.  The less fuss the better.  The victims have been reduced to idleness (when not futilely seeking assistance from politicians and regulators), supported by relatives, and/or are on pensions at public expense.  Family breakdown is par for the course.  Suicide is not unknown, especially amongst farmers (drought is a contributing factor to depression in the bush, but bank thuggery is also a contributing factor, well known to those affected but suppressed by the media and rendered oblivious to those in authority).  Frankly, one can understand if bank victims took the view that they could achieve better justice if they themselves took the law into their own hands and operated according to the same law of the jungle. 

It follows

The intellectual and moral frailty of the legal profession is a larger problem, but there are lessons for the bailiwick of the ACCC.

1. The ACCC needs to confront that there is a problem with bank malpractice in this country, and that it is systemic.

2. The ACCC should lobby the government post-haste to retrieve the unconscionable conduct in financial services provisions from ASIC.

3. The ACCC should cease to pretend that the current s.51AC has any guts and should support the small business lobby’s current efforts to have it strengthened.

4. The ACCC should consider mounting a test case or two in the courts against bank malpractice.  There is no shortage of cases to choose from.  The ACCC’s existing selection criteria regarding prioritisation, as outlined conveniently by Ms Kangatharan above, highlight that the ACCC already has the tools to hand to expedite this process.  The availability of a quality legal team to a bank victim would be a welcome change to the perennial dependence on lesser talents or the inability to hire any legal assistance because of penury.  ACCC involvement would also bring much needed publicity to an arena starved of publicity, given the extent to which financial journalism has been cowed in matters of banking malpractice.

5. The ACCC should hire an individual experienced in bank procedure and culture, preferably someone from an asset structuring division who has seen the light and wishes to reclaim his/her soul.

Yours sincerely

(Dr) Evan Jones
Political Economy
University of Sydney
Email: evanj@econ.usyd.edu.au

Phone: +61 2 9351 6617
Fax: +61 9351 8596 

cc.

Mr Graeme Samuel, Chairman, ACCC
ASIC (Greg Kirk, Compliance and Campaigns, Consumer Protection Directorate; directed to Robert Drake, Acting Assistant Director)
Various relevant Members of Parliament
Various small business organisations
Various bank victims and friends