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SMALL BUSINESS LOANS INQUIRY HEARING – SESSION THREE – CBA TRANSCRIPT OF PROCEEDINGS AUSTRALIAN SMALL BUSINESS AND FAMILY ENTERPRISE OMBUDSMAN INQUIRY INTO AUSTRALIA’S FOUR MAJOR BANKS CBA INQUIRY CHAIR: KATE CARNELL PARTICIPANTS: ANNE SCOTT ANNETTE CONNOY JILL LAWRENCE DAMIEN O’DONAVAN ADAM BENNETT DAVID COHEN LOCATION: PULLMAN MELBOURNE ON THE PARK 192 WELLINGTON PARADE

EAST MELBOURNE, VICTORIA DATE: WEDNESDAY, 30 NOVEMBER 2016 TRANSCRIBED BUT NOT RECORDED BY AUSCRIPT AUSTRALASIA PTY LIMITED

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*Check against delivery MS K. CARNELL: Okay. Thank you very much. And can I welcome David and Adam this morning from CommBank to our hearing. Let us do start with the inevitable housekeeping. The bathrooms are opposite the stairwell. Tea and coffee are outside and will be there for the whole time. And for those long-suffering people who sat through all day yesterday, as well, welcome again. You really probably will need coffee – maybe something stronger. Can everybody put their mobiles on silent, please; that would be great. As everybody would be aware, these proceedings are streamed. There are both visual and audio available around Australia. Now, the reason we’re doing that is for lots of people who are interested in this hearing, they’re obviously in many cases not able to join us here in Melbourne, and we were very keen for them to have the opportunity to hear and, in cases, to see the proceedings. There will be no questions taken from the audience. All of the proceedings are between Anne and I and members of the bank that are at the front table today. Most – well, certainly everybody here – for the benefit of those people watching it online, the Australian Small Business and Family Enterprise Ombudsman’s office was asked by the Small Business Minister to do an inquiry into small business impaired loans. We were asked particularly to focus on small business loans that were identified in the joint parliamentary inquiry that looked at these sorts of things, for us to identify some of those cases, do some more work on those cases, and then pick some of those for a deeper dive. That’s what we’ve done. And we have had private hearings with the banks – and thank you very much for being part of those – and have had the opportunity to listen to the stories of some of those cases in a more in-depth space. What we are doing in the hearing today – and that was yesterday and today – is hearing from all four of the big banks. And what we’re focusing on here is looking at a range of the issues that have been raised and how we might go forward. What the Minister has asked us to do specifically is to come forward with recommendations that will hopefully ensure that some of the issues that have happened in cases in the past are avoided in the future. So our job is not to determine whether – who did the wrong thing, you know, what are the issues around any individual cases, but to identify the issues in those cases and look at how those might be addressed going forward. Today we’re going to run through a range of issues. Now, many of those issues have been raised in the past. We have had a roundtable with the big four banks before, and they’ve certainly been raised in the hearings and in discussions that we’ve had with the cases involved. Now, I would like to just start by saying, to some extent, how surprised I’ve been by these – by the proceedings, what I’ve learnt over the last 10 weeks or so. As a small business person myself, I have had a number of loans from the banks over the years. I have to say I believed that as long as I paid back the amount of money I borrowed from the bank, I did that in a timely fashion, I paid back my monthly repayments, I ran my business vaguely successfully, I didn’t sell the property that my loan was secured against, that fundamentally I was doing what I had to do. I think, like many small business people, I really had no idea about the range of the clauses that were involved in the significantly complex contracts that exist for small business loans. I suppose they’re the same contracts. Well, not totally the same. But these are the contracts that are used for business generally. I have been significantly surprised that there is a capacity for

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some of those clauses to be used to default people even when they’re paying, but were going to get paying their interest on time. And we will get onto that a bit later. Now, as I’m sure David, you’re aware, because I expect you’ve been involved in a few of these, since 2008 there has been something like 17 inquiries of varying types and sorts into banks. In fact, I suspect you would be having a full time area looking at inquiries. In fact, I understand the Senate might have been looking at another one as of yesterday. The thing that also surprised us when we started to look at this, is when you look at the recommendations, how many of those recommendations are very similar over a whole range of those inquiries. And yet many of those recommendations that have come forward over lots of years now, from varying groups, right from the Murray inquiry – a body of real standing, obviously – we’ve got CommBank here today, so – through to Senate inquiries, joint parliamentary inquiries, productivity inquiries. All sorts of people have come forward with similar recommendations. And yet many of those haven’t been implemented, and I think that’s a real concern – should be a concern for the banks. It’s certainly a concern for our office. And with me today asking questions as well is Anne Scott. Anne works with me in the Ombudsman’s office and has been in charge with running this inquiry. The other two people, Annette and Jill, work with us in our office as well. The areas that we will be focusing on are the areas that have been highlighted on many occasions in those 17 inquiries I talked to you about. They include one-sided contracts, contracts where I suppose the banks, being the big party here with all the power, can unilaterally change those contracts without the agreement of the other party. So one-sided contracts, non-monetary defaults, a lack of transparency with valuations. That’s valuations that are paid for by the customer but not available for the customer to see or have input into the instructions. Insufficient timeframes, so decisions that are made by the bank that impact upon the customer which insufficient timeframes to actually – for the customer to be able to act or to achieve whatever the bank wants them to achieve. Mixed signals from different parts of the bank – one part of the bank telling a customer one thing, another part, another area. I think one of the things we would probably all agree is, from a customer perspective, there’s only one bank. In fact, that’s probably what CommBank says, really. There is only one bank, not different bits, of the – of a bank. So mixed signals is a real problem for a customer, for a small business. Lack of transparency and conflict of interest between investigative accountants and receivers. And also a – in lots of cases a complete lack of access to justice for small businesses. That means small businesses really not having the time or the money to be able to use our court system, and also, of course, that the very large and complex contracts that small business signs being put together probably by the best lawyers in this country over many, many years, are pretty impenetrable to a small business and to their lawyers, assuming they can afford them. Those are the basic areas that we’re going to look at today. And before I start with any questions, David, would you like to make any comments, or Adam? MR D. COHEN: Well, Adam will open up, Kate, thank you. MS CARNELL: Okay. And if you just introduce yourself, as well.

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MR A. BENNETT: Yes. Thank you very much. So Adam Bennett, the Group Executive for the Business and Private Banking Division at Commonwealth Bank, so the majority of our business clients would fall under my responsibility and thank you, again, for the opportunity to appear before you today. Commonwealth Bank considers the issues the inquiry is examining are vitally important and not just for banks and for small businesses, but for the broader Australian economy. Banks such as ours play a fundamental role in financing the growth and operations of small businesses which, in turn, provide jobs in our economy and play a critically important role in their local communities. And I’m very privileged in my role to meet with many diverse small-business owners and operators around the country which provides great insight into what’s on their mind and how they are performing. And while small businesses play this critical role, it is an unfortunate fact that a high proportion of small businesses do fail, many of them in their first years, thus, presenting a material risk for lenders to manage. And when a small business fails, as their bank, we too fail. So that requires us to maintain a very careful balance between managing risk on the one hand, but also funding businesses to grow that we see as one of our key roles as a financial institution. And if we’re too cautious, we risk curtailing growth in economy, but if we’re not cautious enough we can do serious and long-lasting damage to the financial wellbeing of small-business owners, put our depositors’ funds at risk and also potentially fuel a more systemic risk in the economy and this systemic risk impacts not only our shareholders, but, as I say, the economy as a whole. Overall, we believe that our current lending practices are appropriate and do strike the right balance between managing risk on the one hand, but also supporting customer outcomes, but we do recognise the concerns that have been raised through this inquiry and, as you say, previous inquiries and particularly as they relate to terms and conditions of contracts. So, in response, we are proposing four points of reform that we think are designed to provide greater confidence to borrowers. They formalise practices that are largely already adopted, but maybe not formalised and also, where appropriate, drive some degree of standardisation across aspects of business lending in the industry. So, firstly, we propose that we would remove any financial covenants, such as a minimum loan-to-value ratio from all business loan contracts under $1 million in value. Secondly, for business loans over that amount, we would propose, at a minimum, 13 days of notice is provided before a lender takes enforcement action following default of a covenant or other condition in the contract. There may be instances where a more rapid response is required, such as where the customer asks for that action or there might be an insolvency event where the assets might be at risk, but, generally, we would provide, at a minimum, 13 days of notice. Thirdly, as we had communicated through the PJC inquiry, we do support the sharing of valuation reports with customers to the extent that they’ve paid for them. So we can talk about that, but we do support that. And we also support the industry looking at a standard around default interest, which I think has been another topic of discussion in previous inquiries. And then, finally, we also support the establishment of a national Farm Debt Mediation scheme and some of the other measures around the jurisdiction of FOS that the ABA has provided input to that we can provide more commentary on.

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But we do believe the question of how businesses access finance and manage that lending, whilst of great importance, is only one of the aspects of how we manage our relationships with small businesses, which is a, we would say, fairly complex and multifaceted issue. And it’s a lot more than just lending prudently and monitoring risk and enforcing contractual rights. Our absolute purpose is to work very closely with businesses to understand their needs, helping business owners and operators to strengthen their skills in financial management and their overall financial literacy and be very supporting in responding when their circumstances change. And I think particularly on the point of financial management skills and financial literacy, this is something that we’re very committed to and recently we’ve launched a version of our Start Smart financial literacy program that we operate in schools, but we’ve extended that and particularly tailored it to the needs of small-business owners and operators; a program known as Pathways which is offered free of charge and includes practical advice on matters like applying for funding, managing cash flow and budgeting. So we do think that that opportunity to uplift the financial skills of small businesses is very important. We also understand that running a small business is challenging and that financial management isn’t always the core expertise and that circumstances can change and that meeting the conditions of their loan contract can be difficult at times for small-business owners and operators and particularly, as I say, when those circumstances change for reasons beyond their control. But it’s very important to recognise that in the event that a customer is unable to service their repayments or defaults on other conditions of the contract, it’s always in our mutual interest, but certainly in the bank’s financial, legal and reputation interest to work very collaboratively with the business owner and look for how we can support them to restore the loan to a more satisfactory position. And it’s only when it’s clear that the customer is in such financial difficulty that we will need to start to look at other avenues and potentially look to recover the assets that underpin those loans, but we really appreciate how difficult those circumstances are. And we’re always guided by our values and not solely by the contractual rights that we might have in the contract. And we look to support our businesses over time, understand their needs and, in the very last majority of cases, those relationships are far from adversarial; they’re very positive, they’re cooperative and pragmatic. So, as I said earlier, we do believe that the question of accessing finance for small businesses is one of great importance. We welcome this inquiry and we certainly welcome the opportunity it presents for us to listen and to potentially look for opportunities to further improve how we service those important needs. So we’re very happy to answer your questions and we hand over to you, Kate. MS CARNELL: Look, thanks very much, Adam, and, again, David, for being present today. As you guys know and we all know that the big four banks – and the Commonwealth Bank being the biggest – are the biggest companies in Australia. These are or you are a very, very large company. With that, obviously, comes responsibilities. Interestingly, though, as the biggest companies – amongst the biggest companies – in Australia, it is unusual for an industry this big to be self-regulated.

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Now, it’s absolutely true that APRA set financial monetary requirements that are in line with international requirements and so on, so put that aside and I fully accept that there is that regulation. But in terms of other issues, this is a self-regulated industry. The code of conduct has been around for a while. That has been revised a range of times and is in the process of being revised again. Now, I will just start with a quick quote from the ACCC. This is a document that the ACCC puts together on, I think it’s called, guidelines for developing effective voluntary industry codes of conduct. The ACCC says: Effective codes potentially deliver increased customer protection and reduced regulatory burdens for business. I mean, that’s what you have them for and I think you would – well, I hope you would agree with that. Now, I would have to say, I think, the code is being revised at the moment and a range of the things that we will talk about I think will need to go into a new code. The problem with the current code is it’s unenforceable and there’s very few – almost none – measurables in the code. And I will give you just – I will just read one clause and there are many of these. The reason I’m going to use this one is you mentioned the 13 days a minute ago. This is in changes to terms and conditions. It’s 20.4 and it says: If you’re a small business with a banking service, being a credit facility, and we – the bank – make a variation to only the terms and conditions of your credit facility – that is, not the terms and conditions used generally for other small business customers – and we reasonably consider the variation will be materially adverse to you, we will give you a reasonable period of notice, not less than 10 business days – I understand you’ve just said 13 which is good. MR COHEN: Actually, Adam was referring to 30, three zero. MS CARNELL: Three zero. Okay, that’s fine. Sorry, I thought he said 13. But that’s okay, 30 is good. But then, as you said, Adam – I will just read this again: …we will give you a reasonable period of time, not less than 10 days currently in writing, of that variation unless we consider a shorter period of time is necessary for us to avoid or reduce an increase in credit risk to us. Now, that’s the code. Back to the ACCC view that a code is not supposed to be about protecting the bank; it’s supposed to be about protecting – well, making things better for the customer. For the life of me, I can’t see that sort of clause and we could spend the rest of this morning going through every clause and a very large number of the clauses in the code do exactly that. They say, “Here’s this, unless we think something different really.” Now, do you perceive that to be reasonable or in line with the ACCCs view on what good practice code looks like?

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MR BENNETT: Well, I think broadly, Kate, the way that you’ve characterised the purpose of the code is exactly how we would see it. It’s something that the industry develops to ensure that there is a degree of transparency and the customer have some confidence about how they will be dealt with. I think equally, as you’ve called out, the code has evolved over time and that’s why we’re very supportive and participating in the review of the code. And I think particularly for small business it has kind of been kind of added into parts of the code and we think that there’s an opportunity to make the provisions of the code as they relate to small business more overt and more specific. MS CARNELL: Yes. MR BENNETT: And equally we would see that it would be a good vehicle for a number of the measures that potentially come out of this review to be formalised. MS CARNELL: Okay. And I ask the question: do you think that’s actually in the customer’s interest? For a scenario to say, “We will give you at least 10 days or maybe 30 now, unless we believe that we need to protect ourselves,” which is what it says, that would mean that clause is worth nothing to a small business because a bank could just say, “Look, you know, we need to protect ourselves and therefore the 10 days or the 30 days is not relevant,” because that’s what it says. Is that reasonable? MR COHEN: Well, Kate, no. MS CARNELL: I mean, it’s reasonable from the bank’s perspective. MR COHEN: And I think MS CARNELL: I’m talking about from the consumer perspective. MR COHEN: Yes. And so, Kate, what I would say to that is that, firstly, the code does need updating, number 1. Secondly, in this particular context with this particular clause, yes, the perception of it is that when it suits the bank, it will give a MS CARNELL: That’s what it says, really, David. Let’s be fair. MR COHEN: When it gives a – when it gives a – it will give a period of time and when it doesn’t suit, it won’t. MS CARNELL: Because that’s what it says. MR COHEN: And, yes. And I think this is part of the updating that is needed, because the reality of situations when banks are dealing with customers is that almost invariably a lot more time is given and so I think the code should reflect that, number 1. Number 2, the fact also is that it’s usually never in a bank’s interest to, in an urgent way, not give a customer interest, unless there is genuine risk of, say, an asset being destroyed, for example, and that’s a pretty rare circumstance. So I think to reflect the concern here there is ground here for saying, “Well, why, if the banks actually don’t in practice act suddenly, why not have a code that reflects the reality?”

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MS CARNELL: Do something. Across our hearing this morning we’re going to end up in this space a lot, because I can absolutely understand, probably because I’ve been around various places like this, if you let lawyers anywhere near anything – sorry for all the lawyers that are here – you’re going to end up with those sort of clauses, which you have in your contracts, in, you know, your T and Cs. I mean, you’ve got – I think the reason you’ve ended up, and banks generally, with a code that fundamentally says, “Look, we’re going to be nice unless it suits us not to be,” on and on and on. You can see that what has happened is your tribe of lawyers have come in and said, “We might just need a little bit of protection there.” Now, this seriously is not – well, it’s certainly not in line with ACCCs, you know, what is good practice and you could really understand that people could ask the question, “Well, if that’s what the code looks like and it has been revised a lot of times, a number of times since it was put in place, but it still looks like that, should we let the bank self-regulate?” Should we have an independent entity determining what a code looks like?” Could you understand why people would think that? MR COHEN: Certainly. And I think part of the evolution of an industry code needs to reflect current circumstances. And I think it’s fair to say that over the years there has been a heightening of focus on customer position, both from within the industry and outside the industry, and that’s a sensible thing to happen, number 1. Secondly, I think that the fact of the matter is that, in putting together a code what can happen in the future and perhaps hasn’t happened as much as it could have in the past, is the extent of consultation with business groups, for example, small business groups, COSBOA and MS CARNELL: Yes. Look, consultation is in the eyes of beholder, David, you know. MR COHEN: It is. It is, but I suppose what I’m getting at here, Kate, is that actually letting people know about how things are potentially taking shape, rather than just saying, “There’s the code. It’s all done and dusted. Nobody has any input,” is more the old way than the future way. MS CARNELL: I agree. Do you think that consumers could be forgiven for believing the code in its – well, in its various forms that we’ve see up and to date, is a document to – is a bank document to protect the bank – the banks? MR COHEN: I’m sure. I would almost be sure that most people, when they read it, would not see it as a code that necessarily promotes their position as a borrower. MS CARNELL: And that would, I suppose, flow through to the outcome, and that is that, to my knowledge, a monitoring committee has never publicly found a bank guilty, shall we say, of not complying. MR COHEN: So that’s part – I think that’s part of the proposed evolution of the code. MS CARNELL: Problem. MR COHEN: Exactly right. And that’s why it does need to be looked at. And I think you’re probably aware, Kate, that, you know, there has been one case, I think, that has gone to court following

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MS CARNELL: That is. I accept that. MR COHEN: But it’s tiny. MS CARNELL: And it was Supreme Court and, you know, it was in another context. MR COHEN: Exactly. And why do you have to go to court anyway? All of those sorts of questions come up. MS CARNELL: So the monitoring committee I establish with the bank to monitor the code has never actually found publicly a bank to have done the wrong thing. So saying as you have, and I understand what you’re saying, but remember the 17 inquiries, remember the incredible number of times, David, you’ve sat in front of groups like this and said almost the same stuff, not necessarily about the code, but you would probably even said it about that, because you’ve, you know, done many of these, and talked about, “We’re going to consult. We’re going to talk about it,” and nothing has happened. MR COHEN: And so why hasn’t it happened, I think is your question, Kate? MS CARNELL: Yes. Why hasn’t it happened? MR COHEN: Yes. MS CARNELL: And is it because the banks perceive that you can convince the government of the day not to do anything? MR COHEN: No. Personally, I don’t think that’s the case. I do think it’s the case that some of these issues are quite thorny and they have not always gone down a path that has led to an easy solution. MS CARNELL: Sorry. The solution is really easy, really easy. As the supermarkets found, what happens if you don’t do it? You end up with not a voluntary code put together by somebody else and enforced by somebody else. MR COHEN: Correct. Correct. MS CARNELL: That, you know, look MR COHEN: I agree. I agree. And that, you know, and I think from an industries perspective, it’s obviously more desirable not to have a one size fits all imposed, because that can have unintended consequences. MS CARNELL: Yes, inevitably. MR COHEN: That’s right. And so I think just across industries generally, not just small business lending, it’s obviously in the interests

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MS CARNELL: Yes. No, I’m talking about – I agree with you. MR COHEN: Yes. It’s in the interests. Look, it has been difficult and we have dealt with this in a lot of inquiries. I don’t think the industry – to be honest, I don’t think the industry needs to see this ongoing process any more than borrowers do. So it would be in the interests of people to actually nail some of these things. MS CARNELL: So why don’t you just look at what has happened overseas, UK, Ireland. There’s a whole range of places that have had to deal with this already. So when you say it’s hard, it’s actually not hard, because it’s any amount of evidence, of examples of whatever, because, let’s be fair, Australia isn’t unique in the world, that in some of the issues that have beset the banking industry. It’s certainly true that the banking industry in Australia has been much more stable than other parts of the world, which is great. But, you know, so another sort of, “Yes, we will talk about it. We will consult. We’ve got an inquiry,” but you’ve had lots of them and it hasn’t changed anything. MR COHEN: I agree. It has been a frustrating process for all involved. As I said, I MS CARNELL: Are you sure it’s frustrating for you? Isn’t it exactly what you want? MR COHEN: No, it is. No. No, actually MS CARNELL: No change? MR COHEN: No, it’s not. If we step back a second and look at how business and banking intersect, it’s actually not in the interests of the industry to continually being at loggerheads with customers. MS CARNELL: I understand that. MR COHEN: It really isn’t. And so – and I understand the concern around inaction over a period of time. The fact of the matter is that banks continue to appear before inquiries where recommendations are made and things don’t happen is not a satisfactory process. MS CARNELL: Okay. So what’s going to change? And I’m just interested in Adam’s comment a minute ago, which, you know, not having a go, Adam; that’s what we’re not doing today, but when you talked about 30 days, which I was pleased, you then said, “30 days, unless the bank believes there’s another reason, you know, to do something.” So you’ve put exactly that caveat on your statement today and that’s the stuff that’s not all right. It’s not acceptable. When you’re going to give people 30 days, you have to give them 30 days. If they decide to do something else, that’s not an issue, because nobody is going to argue about that. The issue is it’s if the bank decides to do something else that’s the problem. So 30 days not enough, and we will talk about that in a minute, but it’s better than 10 days. The issue here is the caveats you guys put on everything to say, “Unless we pick something else,” is the thing that has got to change. So how is it going to change, David?

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MR COHEN: So if I can go to that specific example that Adam raised. So you’re right; we said 30 days unless certain circumstances. Now, those certain circumstances, though, are limited, Kate, and, to be honest, they’re not unreasonable. One of those circumstances is if the customer actually goes into insolvency. So – and we – you know, Adam specifically mentioned that. And that’s a very important one, because if a customer has an administrator appointed, or another lender appoints a receiver, it’s actually not reasonable to ask a lender to sit around for 30 days, or more, and watch that process unfold without being able to protect themselves. So that’s a very specific circumstance. MS CARNELL: We will get onto that in terms of non-monetary default a little later. Sometimes it’s actually the bank that produced that – that – you know, the bank has said, “Well, we’re not going to – we’re withdrawing funding.” And so, you know, the person become – well, the board of the company has no choice but to MR COHEN: Yes, Kate. You’re talking about where the bank may have – sorry to cut in, but I think you got talking about specifically where, say, the bank may withhold funding, that produces insolvency, and then the bank – no. Sorry. What the circumstance we’re talking about here is – and we often see this MS CARNELL: Yes. MR COHEN: is that a customer may have loans from a number of different institutions and may not be in default in respect of say, Commonwealth Bank’s loan – so no payment default, for example – but is in default with the other bank. And the other bank takes action and puts them into receivership. MS CARNELL: I understand that. MR COHEN: So that’s one of the exceptions we’re talking about. MS CARNELL: So one of the things that, you know, needs to happen then is absolute definition of what you’re talking about. MR COHEN: Correct. I agree. MS CARNELL: Not, unless we, sort of, feel that we might want to do something. You know. MR COHEN: Yes. MS CARNELL: And that’s what your code looks like at the moment. MR COHEN: Yes. MS CARNELL: Look, just to ask another question – and this is for you, Adam – are you supportive of having an area of the code that is – that focuses on small business? At the moment, you have to go all over the code to

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MR BENNETT: Yes. In short, yes, Kate. I think that some of the provisions in the code that relate to small business – I mentioned that being kind of interwoven throughout the document. And I think if you’re a small business owner and you wanted to understand more definitively, how does this apply to me, I think that’s a very reasonable suggestion and one that we would support through the broader review. MS CARNELL: Are you willing, with the new code review, for that code to comply to the ACCCs best practice stated document? I mean, I assume you would be, because MR COHEN: There is no reason why it should not. MS CARNELL: Well, it doesn’t at the moment. MR COHEN: No. I know. MS CARNELL: And it has been MR COHEN: And what I’m saying is, there is no reason why in the future it should not. MS CARNELL: The answer then is, yes, you are happy to ensure that the new code does comply? MR COHEN: Yes. MS CARNELL: Are you – and we’ve asked you this before so – and you’ve said yes – but are you happy – are you willing to – not happy – willing to support the code being registered with ASIC? MR COHEN: Yes. MS CARNELL: Now, the reason for that – I know you – you’ve said yes, and I appreciate that. MR COHEN: Yes. MS CARNELL: Now, the reason for that, as you know, is to give the consumer a view that there is – that there is somebody external keeping an eye – well, having a look at the code in terms of its MR COHEN: Yes. MS CARNELL: of how it’s working. MR COHEN: I think that makes MS CARNELL: And, of course, for ASIC to – for it to be registered with ASIC, then it has to be enforceable. MR COHEN: Yes. I agree. The only comment I would make, Kate – I agree with all of that – commensurate with that, it will be important to ensure that ASIC has the resources.

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MS CARNELL: Look, absolutely. And I’m sure ASIC will be working very hard to ensure that. MR COHEN: Yes. MS CARNELL: And we will – we will support that. From a consumer or small business perspective, the problem at the moment is that, say – well, the code is wuss. There’s a whole lot of wuss that we’ve talked about. It’s not enforceable. Nobody gets held accountable, so it just doesn’t produce the outcomes for the consumer that you would want that to happen. But I’m pleased that you have agreed that this has to change. I would be really keen on some timelines around this, and we will be, certainly, in our recommendations, suggesting some timelines. But I would be very keen to get feedback from you on when a – you know, the new code can be delivered in the form of – in line with, you know, ASIC recommendations with agreement from, as you said, the business community, consumers, and other interested people, that it is a code with teeth. We’ve certainly spoken to ASIC, and ASIC is very keen for the code to be registered with them. So tick in that box. I might hand over to Anne for a moment just to talk about one other area of the code that we’re concerned about. MS A. SCOTT: Yes. So, Adam, just sort of starting on your point that you made about – and I know we’re coming on to valuation later – but where you say the bank supports something. I think the thing that was very – an interesting finding from the bank representatives yesterday was there was lots of nodding of heads and say, “Yes. We support this” which is actually not that definitive about what the bank is actually going to agree to do. And the other interesting thing that was said was, well, basically, all these previous recommendations that have been raised in various reviews since 2008, they weren’t really worth doing anyway. And the way that actually we make sure that nothing happens is those recommendations actually get put into another review. And that’s what we see, is this cycle of a nodding of heads, sort of saying, “Yes, we support this”, and then the things get shovelled and shunted to the side. Nothing actually gets done. So I guess, all we’re really interested in today is to find out what CBA is actually going to do, not what you support. It will be really helpful. So coming on into terms of the code, we’re interested in some of the hardship aspects. And it’s just drawing on some examples from some of the varied cases we’ve seen that have covered a lot of different bank cases. But we’re interested in the CBAs provisions for hardship, and obviously we would think that would be an element of the code of practice. But the sort of example I’ve got is where a borrower has been identified subsequently as probably never should have had the loan in the first place. They were unable to service the loan even from the point of time it was given. Their marriage subsequently breaks down, and the partner who was making part of the payments can no longer make payments anymore. The bank then takes recovery action, then takes recovery action against the commercial premises so any revenue that that person was making, they now can no longer pay. And we’re interested in, after all that – those stages are gone through, what the bank would do in recognising that person’s hardship in the fact that they could never pay, now their partner is gone, and they can’t – that partner doesn’t pay. The commercial premises have been recovered, and so the commercial revenue is no longer that. When the family home is about to be taken, what does

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CBA do to sort of work with that person to minimise the hardship they’re going through? Are there provisions that CBA have? MR BENNETT: My first comment would be, whenever you hear those type of personal situations, I mean, they’re always very distressing and challenging for the individuals involved. MS SCOTT: They are for the individuals concerned. MR BENNETT: So, you know, they’re – you know, they’re things that are a challenging part of the job that we do. I think, if I could take one step back and cover your first point around our obligations up-front to make sure that the business has the ability to service the loan based on everything we know at that point in time, that’s a core obligation that we have. So it would never be in our interests to be lending money to a borrower that there would be a likelihood that they’re unable to service that. MS CARNELL: I think, in that particular case – so we’re not talking about cases – but that case, FOS agrees with you. MR BENNETT: Yes. MS CARNELL: Because FOS said it wasn’t alright. MR BENNETT: Correct. MR COHEN: Well, in part. MR BENNETT: Yes. So MS CARNELL: In part. I accept that. MR BENNETT: So I think in a situation where, for whatever reason – I think they would be very, very limited in number – but, for whatever reason that the bank had made a mistake and that we shouldn’t have extended that credit upfront, then, you know, we would obviously make the appropriate provisions to support that customer in the situation that you’ve described. So that would be a very unusual situation. I think, generally, when a situation changes – and you gave some good examples – it might be a marriage breakdown, it might be other things going on in the individual’s life, and they fall into hardship – then we have very clear processes and training to our frontline and mechanisms so that we can identify that hardship, and that we can work very openly with the customer to make arrangements that ensure that we are being very compassionate and supporting them to the extent that we can. So I think absolutely those hardship practices are very mature inside the organisation. MS CARNELL: So in that particular – not talking about a particular case – in a case where somebody puts forward another option rather than selling the family home, is there a reason why you wouldn’t look at that really seriously and give it a shot?

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MR BENNETT: I think one of the – I think the broader compositions is that we take a very case-by-case example with every customer that falls into a position where they either can’t make their repayments or have any other kind of challenges in the business that they’re operating in. Now, our first principle would always be how can we support the customer so that they can get back to a position where they can service the loan? MS CARNELL: So if somebody says, “Why don’t we try selling an investment property I’ve got, rather than selling my business, so that I can still possible have a revenue”, why wouldn’t you give it a shot? MR BENNETT: We – we MS CARNELL: Now, it might not work. MR BENNETT: No. We absolutely would. I mean, I think the – you know, the sale of a family home would be, I would argue, the last resort in this type of scenario. So, you know, we would look for all of the other mechanisms to get the customer back onto an even footing. MS CARNELL: Adam, you’re a really big organisation. How do you ensure that happens on the ground? MR BENNETT: I think it’s really fair challenge, because we are dealing with hundreds of thousands of customers. We’ve got lots of staff. But I think we have good mechanisms in place to train and support our front line, but also to create mechanisms for customers that, if they feel like they have a grievance, that they can raise that through multiple channels and that we would have a very kind of formalised, independent dispute resolution process outside the organisation. MS CARNELL: Okay. That problem MR COHEN: Kate, what I would I say just to – specific to your question MS CARNELL: Yes. MR COHEN: how do we make it happen, so any application for hardship is referred to a very specific area in the organisation, so it’s not sort of lost in the ether. MS CARNELL: Look, that’s true. David, you always choose your words well, I’m very impressed with that. Application for hardship. What if somebody doesn’t – you know, there is not the bit of paper, you know, of whatever it is – application for hardship. The person involved tells the person you’ve got on the ground that their marriage has broken up and their partner is unwilling to pay their part of the loan, but doesn’t put in – if that person then said, “Look, put in an application for hardship,” is it in – because that person doesn’t know they have to do it. MR COHEN: No. I agree. So our process is that a customer would contact, or be put into contact with, the hardship area, firstly. MS CARNELL: So what happens if they weren’t?

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MR COHEN: Sorry? MS CARNELL: What happens if they’re not put in ..... MR COHEN: Well, if a customer has difficulty and is speaking directly to, say, our Business Service Centre, which is where they might go if they don’t have a direct relationship with a bank, for example. They might go there and if they were to say, “I’m having difficulty, then they would be referred to the hardship area.” MS CARNELL: So you’ve got Adam in your Small Business Banking space and so on – a lot of people, so you would have in that space, sort of KPIs or whatever, or requirements that if that – you know, if the person says, “Look, I’m having this problem,” you know, somebody is sick, husband has left, something like that, your people, KPI would have, as part of the things they have to, make sure that person puts in a hardship request. Is that what would happen? Because I know in big organisations it’s really hard to make things happen, particularly culturally. MR BENNETT: Yes, I think the first principle will always be that the frontline staff would be looking to understand the issue that the customer has and work with them to MS CARNELL: Yes. They should be, but what makes them do it? I just don’t know, you know. MR COHEN: Well, one of the things that makes them do it, Kate, is that actually they are motivated not just by hard KPIs but through the vision of the organisation in our values. They’re actually motivated to help customers. That’s actually what we’re here for. Now, that might sound like fluff to you MS CARNELL: Does. MR COHEN: but in actual fact it is a value, and it is an element of our purpose that we emphasise every single day and that every single person genuinely does take to heart. It’s not just a mission statement that is out there. People actually do take to heart. So in terms of how does it actually happen? Our people care for our customers, so if a customer does contact them to say, “I’m in difficulty,” that’s not just relegated to a long to do list: people take it seriously and act on it, and we do actually have in – speaking of KPIs – within our KPIs, we absolutely do have an element that is around customer satisfaction, and whether the customer is a customer that is in good financial health or is in financial difficulty that same customer satisfaction requirement applies. MS CARNELL: I personally, having done lot of customer satisfaction things, don’t believe that actually achieves the outcome, because, you know, generally we’re not talking about customer satisfaction – you know, your broad base of customers: we’re talking about dealing with individual difficult cases. So it’s absolutely true, you know, that you guys are huge. You’ve got a lot of customers that are more than happy with their interface with you, because they haven’t had a problem. Be interested in customer satisfaction from people who have had a problem, not people who haven’t. You know, you can make your customers stats work any way you like. You know that. We’ve all done it.

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MR COHEN: Yes. Yes. Yes. MS CARNELL: So how do you ensure that those people feel that they’ve been given a reasonable situation? And I fully accept that I’ve spent the last 10 weeks hearing from people who really aren’t happy MR COHEN: Yes. MS CARNELL: so I have a – you know, a group and my role at the Small Business Ombudsman is to hear lots of people who really aren’t happy. So generally, you know, the way you deal with those people, at least from my perspective, needs some help. MR COHEN: Yes. And they are the most distressing cases MS CARNELL: ..... MR COHEN: and they are the people who are most likely to be dissatisfied – in some cases, regardless. I doubt that you would have heard from many of the customers who have actually given us compliments around the way we have handled their situations when they are in financial difficulty, but we do get those. MS CARNELL: No. I’m sure you do. MR COHEN: And just to give you a sense of that, at the sort of small business and larger business end, we do have a team, as you know, that is responsible for dealing with a file or a case or a loan when it is in difficulty. Approximately 40 per cent – actually, more than 40 per cent of those are actually rehabilitated, so that they are in a good state going forward. So I understand entirely that you would have heard all the bad stories, but there are many good stories as well. MS CARNELL: Look, I don’t doubt that, but in any business, particularly one with the community responsibilities that the biggest company in Australia has, the issues of how you deal with people, like the case we were talking about a moment ago, is pretty fundamental in terms of, you know, corporate social responsibility and other things MR COHEN: Yes. I agree. MS CARNELL: and all I can say is, from my perspective, you’ve got some work to do still. MR COHEN: Yes. And, Kate, we agree with that, and the fact of the matter is even if we are getting high customer satisfaction scores, the fact of the matter is a single customer who has a bad experience, whether they’re in financial health or not, is something that we should be worried about and something that we have to improve on. MS CARNELL: And that’s, again, where you’ve got to get a whole range of the checks and balances and measurables right, and so far you’ve sort of – no KPIs, codes a bit woozy, there’s some timeframes – anyway, we will go on to access to justice. I think you would agree – well, you’ve indicated it in your initial statement, and I think you probably do, that, you know, FOS deals

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with customers really well. You know, that – individual concerns with banking practice really well, but the cap, the compensation, the expertise doesn’t really fit with the small business space. It might with very little businesses. Now, we all know that 97.5 per cent of businesses in Australia are small or small to small-medium businesses, so the vast percentage of businesses are little. A million of those don’t employ people, so they’re contractors and so on. So for that group they act – they’re a bit like consumers, I suppose, but for the vast percentage of Australian businesses, they’re not consumers: they’re businesses. And FOSs cap or compensation levels or even expertise are not appropriate. So for those particular businesses – you know, that’s the engine room of the Australian economy – where’s their access to justice at the moment? The court system is too expensive. You would be a brave person to take on a bank in our court system, taking into account your 5000 page contract and 4 million lawyers and all the rest of it. You know? Fairly obviously, it would not be a reasonable decision for most small businesses to go down that path, so where do they go? MR BENNETT: I think the point you make is well made, and I think the current FOS definitions and jurisdiction does limit some businesses that might not have the resources or the knowledge to go through other channels, so we do support increasing that threshold and whether that’s FOS or a subset of FOS or a more appropriate body, I think we will let broader review that’s underway across the industry kind of work out the best mechanism, but I think, in principle, we would agree with your general point that there needs to be, for those businesses that are not kind of the very, very, very small, but equally not kind of medium and large that we would want to broaden that definition. So we think the – you know, the limit of $3 million for a facility would be a more logical kind of upper threshold for the definition of that kind of dispute resolution process. MS CARNELL: Understand that figure, and it’s the one been put forward by the other banks as well. 3 million isn’t going to cover even a pretty basic construction project or commercial property purchase or a rural property loan, so for a range – 3 million is really low – these days. A very large percentage of houses in Sydney cost more than that, and here in Melbourne probably as well. So if you’re thinking about a large number of quite small businesses, they’re going to be over the 3 million in a minute. MR BENNETT: Look, I think a couple of – a broad comment and then a specific one. I mean, I think kind of coming up with a universal definition for what is a small business is very challenging. I think if you look across even different government departments and different pieces of legislation MS CARNELL: Don’t try. Okay. MR BENNETT: there’s more definitions that you could find. And I think what that reflects is that there are so many businesses operating in different industries with different structures and coming up with a universal definition is very hard. So I think, inherently, whenever you’re trying to put a threshold in it’s challenging for it to kind of get the right outcomes all of the time. So that’s MS SCOTT: But inevitably, Adam, the threshold is usually very, very low MR BENNETT: I think some of the current thresholds MS SCOTT: and so there’s pressure to make the threshold as low as possible.

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MR BENNETT: I don’t think there’s pressure. I would agree with you that, certainly, the FOS threshold is low. So I think you then need to work out what’s an appropriate threshold, particularly in this case as it relates to external dispute resolution. And we would say that $3 million is a reasonable number that covers the vast majority of businesses that have borrowings. I think – and it was touched on yesterday – the ABA did some research, and that – and more than 98 per cent of businesses have lending below $2 million. So we think it does cover a broad spectrum of the type of businesses that would that type of access to this. MS CARNELL: Why do you want to drive it down? If 98 per cent are in that lower level MS SCOTT: ..... does it matter? MS CARNELL: why not go to five or 10 mill? That’s not many businesses on your figures. MR BENNETT: Yes, I think those cases become very complex. I think they would potentially bog down the process to deal with the MS SCOTT: So what do they do, then? MR BENNETT: Well, I think those businesses, we would suggest, do have the sophistication, typically, and the resources to look to more traditional channels. MS CARNELL: What evidence have you got to suggest that’s true, that these are people with – you know, with lawyers that are sophisticated or whatever? It could be just a person building a – sort of a unit complex over the road. It could be somebody – a pharmacist: “My business loans were pharmacy-related. I want to buy the premises – the commercial premises that I’m operating out of.” A range of those things could take you over three mill. That doesn’t make you not a small business. MR BENNETT: You know, it’s a fair challenge, I think. Coming up with a fixed threshold is challenging. We think that that’s a reasonable threshold for this particular purpose that would cover MS SCOTT: Where do those people go, then? MR BENNETT: I think they would go through the normal legal processes that would be available to them. MS SCOTT: So they’re going to be able to do that, are they? MR BENNETT: I think on our – on the whole we would expect that they would. MS CARNELL: Taking into account that your contracts – the contracts that have been put together by lawyers over lots of years and so on – do you think the court system actually creates, sort of, justice for those people, taking into account that they’ve go the local lawyer, because that’s what they can afford, and you’ve got the

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panel of lawyers that have put together contracts that are pretty watertight. Do you think that’s a fair – does that look fair to you? MR COHEN: So, Kate, if I can comment, I suppose my experience generally, not just in the last 10 years or so but going back beyond that, there’s no doubt that the litigation system generally is slow MS CARNELL: And expensive. MR COHEN: it’s expensive, it’s complex as well, which drives expense and the time. So it’s not ideal, there’s no doubt about that. Along the way, various alternative dispute resolution mechanisms have been proposed, whether it be mediation, conciliation, etcetera, arbitration. Unfortunately, they all tend to be legally based, which leads to complexity. From the perspective of – one of the things we recognise is that a single customer dealing with a very large organisation like ours, can be a daunting experience. So whilst we have our complaint resolution area, that can nevertheless take them through a process which they might not be happy with at the end. So one of the things that we are doing – and you will have seen it was part of the ABA’s proposals as well, but it’s one that we think actually has a serious place, and that is the customer advocate role. So that when a customer does, say, go through our normal complaint channel and is dissatisfied, they have a right of appeal that doesn’t take them and force them into the courts, for the very reasons that we just talked about. So that’s an important element that we see we should build, because it is challenging for customers to (a) deal with a large organisation, (b) get your individual situation looked at or appealed, if you like; and then, thirdly, of course, the external one, which is even more daunting. MS CARNELL: It’s – look, it is difficult. It’s always going to be difficult when you get such a huge power imbalance, you know, between this little business and this big bank with – you know, I always find that, sort of – and with your loan documentation as it is – and, understandably, you’ve got lots of lawyers who have spent lots of time on it. But things like the loan documentation, as you know, defines all the securities, including things like director’s guarantees – which I always find really interesting – as primary securities. So from the moment – so that sort of enables the bank to demand full repayment of a loan from a director on the day you call it. That’s what the loan – that’s what it would allow to happen. So you could send a director into bankruptcy before you even started to sell the securities. Your document lets that happen. MR COHEN: Technically that is correct. MS CARNELL: Technically. So MS SCOTT: Yes, so that means it can happen. MS CARNELL: So MR COHEN: So technically that’s absolutely right. Now, of course, the reality is that a bank, if it has to enforce against security in order to recover the money that it has lent, it’s always going to be preferable to sell an asset than it is to sue an individual on their guarantee.

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MS CARNELL: That’s true, but once you’ve sued somebody on their guarantee, then you can do the rest. MR COHEN: Yes. What I’m saying, though MS CARNELL: It doesn’t stop you. MR COHEN: No. MS CARNELL: In fact, it allows you to. MR COHEN: In fact, Kate, it doesn’t stop you, but what I’m saying is, from the practical point of view of recovering the money that was lent, it is far more feasible to proceed by selling an asset. That actually takes a much shorter time than it does to pursue an individual on their guarantee. MS CARNELL: Look, I understand. MR COHEN: That’s why banks take security. MS CARNELL: And, of course, your documentation gives the bank power of attorney the moment this happens as well, so you can take money out of their accounts. You can do anything, really. MR COHEN: And you are correct. The – in an enforcement situation or a default situation that hasn’t been remedied, the rights of the bank to recover its funds – which at the end of the day is money belonging to depositors and shareholders, and that’s why we have the whole prudential regime around what banks must do – but you are right, Kate, in the sense that at that point the power imbalance is weighted in favour of the bank. There’s no doubt about that. And that’s for partly a prudential reason, because banks have to recover the money of their depositors, part, therefore, a risk management reason, to ensure that that loss that the bank might face is minimised. MS CARNELL: In fact, it was put to me that one of the ways to save a whole lot of money – you know, sort of, you’re keen to save money and to make the whole thing clearer, that fundamentally to get rid of your contract and say, you know, the contract should say, “We are lending you money today”, when they call a loan at any time for any reason, “If you do not repay it immediately, we will take all of your secured property, your personal property, including your home, from you and bankrupt you under the director’s guarantee. Sign here.” Because that’s fundamentally what the contract says. MR COHEN: Well, that’s not actually MS CARNELL: It is what the contract says. MR COHEN: No, what the contract says, actually, is that there are various steps that a borrower has to undertake, yes. MS CARNELL: And if they don’t, that’s what happens.

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MR COHEN: And if they don’t – and I suppose, yes, if we step back and look at – okay, is that a fair balance of power? MS CARNELL: No. MR COHEN: No. So not a fair balance of power. If we step back, though, and look and say, why do banks have the powers or the provisions or their loan agreements to secure their position? It’s not done – those provisions aren’t there just to preserve in perpetuity the power imbalance. The original intent, and the nexus, I suppose, of these provisions is to enable a bank to manage the risk of lending money. MS CARNELL: I get that, David. MR COHEN: So to the extent that – to the – I understand the point around the fact that these provisions are going too far. MS CARNELL: Well, even David Murray called it a margin lending scenario. I mean, David, who might know something about this, suggested that loan agreements were fundamentally margin lending; in other words, they could be called at any time. MR COHEN: Yes, that – he did say that. MS CARNELL: He did say that, yes. MR COHEN: I agree he did say that, and he has certainly been in the position of running a bank, so he has had lots of experience. Our view is that there are provisions in the agreement. They do allow – and the should, frankly, they really should trigger a conversation between a borrower and a bank as to how a borrower gets out of difficulties. MS CARNELL: So there’s no conversation. MR COHEN: Well, actually, Kate, I would disagree with that. There are plenty of conversations, and both Adam and I can MS SCOTT: You can choose to have a conversation, but you can also choose to view the other things. MR COHEN: Yes, and on the face of the document – and you are absolutely right – there is nothing there that obliges a conversation. You are absolutely correct in saying that. And the reality of how one does business with a customer is that of course you’re going to have conversations. MS CARNELL: In lots of scenarios – I mean, in business life, whatever – you will inevitably attempt to shore up your own position. And if you’re the biggest company in Australia, your capacity to shore up your own position – and the other banks, not just you because I think your contracts aren’t all that different from the others – I can understand why you’ve shored up your position, why you’ve produced loan documents that fundamentally allow the bank to do anything

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they like, really – I understand – but should you be able to? Is that – it just shores up a power imbalance. It ensures that small businesses have got no power. MR COHEN: Yes. And we agree that the imbalance that gets reflected, particularly when a customer is in a difficult situation and that’s when the imbalance MS CARNELL: Yes. MR COHEN: becomes most apparent, that is at the most difficult time and then, unfortunately – and this might lead to part of a MS CARNELL: Yes. MR COHEN: solution. That, unfortunately, is often the only time when a borrower might look in detail at those provisions in the contract. And so that does lead to a situation around MS CARNELL: Yes. Well, I started by saying that was me as a small business owner. MR COHEN: Exactly, and MS CARNELL: I never looked at them. MR COHEN: No, exactly. And that’s the reality. When borrowers enter into a loan, almost invariably what they are most focused on is growing their business, buying the plant and equipment, buying the property, whatever it may be. So it’s all much more positive in context. Then when things don’t go as well, people start looking at the terms and conditions in detail and, I think, as you were intimating, people get surprised about what’s in there. MS CARNELL: Can I just give you an example, though, of where the bank uses its power – well, I think unreasonably. And this was put to me by a very, very senior person who used to run a bank, okay. Okay. So I want to by a pharmacy, okay. I’m negotiating with the person I’m going to buy the pharmacy from. We negotiate, we determine what the sale price will be, what the terms and conditions will be. I go to my bank and say, “Here’s the proposition. Will you lend me X amount of dollars?” The bank has a look at the documentation. I have given my security that I have and will say yes or no. Say, now the bank says yes. The bank sends me the email or the whatever to say, “Yes, Kate. Got your stuff. Happy to lend you this amount of money at this per cent for this period of time based upon the business case you gave us.” Good. I go to the person I’m buying it from, say, “Great, got the financing. The bank will say settle in 30 days,” whatever or might. So I say, “Okay. Happy to do that.” Sign the contract, settle in 30 days, everyone’s happy. Then what happens is you give my contract to the lawyers and they negotiate the terms and – you know, the covenant bits. My lawyers talk to the bank about the document that I’m going to sign, but I’ve got to settle in 30 days. What choice do I have to negotiate terms and conditions or that you want to call on something or have bits in there that aren’t acceptable. So even at that point I’m now tied into a contract with the person I’m buying the business from based upon what I thought was reasonable and all of a sudden there are things in the contract down at page 407 clause whatever that I think are really, really unreasonable. Like, all of a sudden you want a director’s guarantee,

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even though my security is significantly positive, so I’ve got enough security for the loan easily, but you still want a director’s guarantee. Why? And we’re not saying about a director’s guarantee. MR COHEN: No, no. MS CARNELL: We could go into that MR COHEN: Yes. MS CARNELL: and you just force me into things like trusts and all sorts of things which I think is – anyway, I suppose the legal fraternity like this, but it seems an incredibly expensive way for you to operate and also for me to operate, instead of having a simple contract that makes it clear from the beginning. MR COHEN: Yes. So I think the issue of simple contracts is a real one and we have taken an approach, as many banks have and I don’t think we’re unique in this respect, but we have taken an approach whereby the contract that we use for small business is also the contract we use for larger business. MS CARNELL: That’s right. MR COHEN: So that can lead to a bit of an issue there. That has some advantages as well, perhaps, but – for larger businesses – but we can come to that later. MS CARNELL: Doesn’t have many for small businesses. MR COHEN: For small – no. Let’s just focus on the small business for the moment. MS CARNELL: Yes, the 97.5 per cent of Australian businesses, those ones. MR COHEN: The small ones, exactly. What you’re highlighting there is a real timing issue. So we have this tension between, on the one hand, wanting to provide a prompt answer to the request for finance to enable the transaction to proceed MS CARNELL: Yes. MR COHEN: and, therefore, to foster business growth on the one hand. And on the other hand the terms and conditions or the dotting of the i’s and the crossing of the t’s which then comes as a surprise, as you say, when people get into the detail. And this goes to my point a little earlier, Kate, that at the time of entering into a loan, often the focus is not so much on the detail. Now, the issue I think that you’re raising fairly and squarely is at the time you get the approval for the finance MS CARNELL: Yes. MR COHEN: you probably haven’t seen the terms and conditions at that point MS CARNELL: Because they haven’t been written yet.

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MR COHEN: because they haven’t been drafted and sent to you. MS CARNELL: Yes. MR COHEN: That’s right. And so there is that timing issue, so this is the balance between giving a quick response to enable you to proceed with the transaction on the one hand, and then following up with the paperwork which might, once people look at it, say, “Gosh, I didn’t realise that was going to be the case at the time I made my offer,” and that is the difficulty. One of the issues there that perhaps we could address – and it would have to be on an industry-wide basis I think – but one of the issues we could address is, well, how do people get a sense of what the terms and conditions are at the time that they’re seeking the finance? I mean, is there, for example, a summary document of what is likely to be MS CARNELL: Thank you. That’s where I was going to get to. MR COHEN: Yes. And, look, I think there is some merit in this because it can lead to the misunderstanding – and the communication issue, which we have spoken about previously, can be problematic. MS SCOTT: It also sounds really expensive and inefficient for the bank to go through this big exercise. I mean, surely there’s a proportion of loans that could be more streamlined and standardised where you don’t have to have this. MR COHEN: And that’s what Adam was referring to earlier. One of the suggestions are that loans below $1 million, let’s just take out some stuff, so MS CARNELL: Yes, but $1 million is just too low. You can’t buy a pharmacy for less than a million, so my example, which is just a straight small business example, surely there are scenarios where you say, “Well, if your LVR is below such and such, we’re happy with the business case because we wouldn’t have given you the loan if we weren’t.” As long as your whole thing is in these – sort of dot point, dot point, then the contract is simple. Why does it need all those bits? MR COHEN: Yes. And I think that throws up a really good challenge around can not only the wording be simple, but can the documentation be shorter, can it be standardised, if you like, to suit a large number of situations. And I think that is worth looking at. And I don’t want to make this more of a consumer issue, but if you take home loans, for example, that’s exactly what happens in home loans. MS CARNELL: That is exactly what happens in home loans and the world hasn’t ended MR COHEN: No MS CARNELL: but getting rid of all the crap, shall we say. MR COHEN: No. Equally, Kate, I suppose just the thing we all need to be aware of in that context is – and this is a whole different line of inquiry; it’s not to do with the terms of reference

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here, but, equally, I think, home borrowers would say, “Well, I didn’t get much of a chance to negotiate my standard-form contract either.” MS CARNELL: We might talk about standard-form contracts in a minute MR COHEN: Yes. MS CARNELL: as you MR COHEN: But you can see the issue that MS CARNELL: Look, I can. MS SCOTT: But they do have protections though. MS CARNELL: There are consumer protections that don’t exist MR COHEN: Yes. MS CARNELL: for small businesses. The interesting thing, though, is that the pharmacy I’ve just bought is secured against the same property that is probably secured against my residential property MR COHEN: Yes. MS CARNELL: or investment properties. MR COHEN: Yes. MS CARNELL: So the security is identical for the two – potentially, those two loans. It just happens that one is a commercial loan. So to make them so much more complex for what are small businesses just seems – well, it seems to me like it’s a huge cost to the bank, it’s a huge cost to small business. It makes the power imbalance hugely worse, lots worse than it was because you’ve got the lawyers at 20 paces scenario, you’ve got the timeline issues and so on. And is there any real – does the benefit outweigh the cost? And I would be fascinated on whether you believe it does. MR COHEN: Yes. No, it’s a really good challenge and I think it is an area where – I suppose the one thing I would say upfront is that we do have to be careful. We shouldn’t equate too much – and I understand your point around secured by residential home, small business. MS CARNELL: Bricks and mortar. MR COHEN: Therefore, it’s all looking consumer-like. The fundamental driver of the business’ ability to service a loan, however, is very different and MS CARNELL: Look, absolutely agree and so the point – when I said I’ve given you my business case with all the things you want

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MR COHEN: Yes. MS CARNELL: and I fully accept that in the dot points that there are some things that I need to comply with. I need to keep running my business. I need to fundamentally be in line with the projections I’ve given you. I’m very happy to have a clause that says and if those projections aren’t being met, I have an obligation to talk to you. Don’t have a problem with any of that. MR COHEN: Yes. MS CARNELL: But I just got rid of a very large number of non-financial default clauses, covenants, things that I have no capacity to understand. And by the way, I’ve always used lawyers in every – you know, so it’s not like my lawyers were raising these issues with me either. You know, so it’s just assumed, well, everyone has got to get advice. Well, we do as small businesspeople on the whole, but if there’s no change to change the clauses, well, there’s no chance to change them, are there, so what’s the point of having an argument? MR COHEN: Yes, it just costs more. MS CARNELL: It just costs more to have an argument. MS SCOTT: Yes. We had an example the other day where a lawyer was looking at the contract and they could see that the clause was a real problem, but they said, “Well, take it or leave it.” MS CARNELL: Taking about take it or leave it contracts and we will just move on to one sided contracts and so on. The Unfair Contract legislation is now law. The Unfair Contract legislation was put in place specifically to address these sort of contracts, you know, contracts where one side has a capacity to change the terms and conditions of the contract without the agreement of the other party. David, I’m disappointed with the response of you guys on this. I mean, fundamentally you’ve used – you and your colleagues in other banks – seem to have used the thing unless this might cause, you know MS CARNELL: Commercial. MS CARNELL: commercial damage to the big guy, to avoid really getting rid of many, if any, of the clauses that allow you to change the contract unilaterally without the support, without the agreement of the other entity. I mean, you seem to have allowed your lawyers to play. MR COHEN: Well, the first thing I would say, Kate, is that, as you know, the extension of the Unfair Contracts regime to small business, first of all, sets out the types of clauses that no longer can be in documents, so there’s some legislative guidance as to what should be in there. As you probably also know, there are circumstances that actually do justify a change of the terms and an example – and these are examples that are not or ought not to be detrimental to the customer, but an example of that is where there’s a legal change and actually banks have to do something or customers have to do something. That needs to get reflected in the contract. We had a recent example ourselves where we recently amended our business loan produce so that customers could redraw what they’ve previously repaid and they could do that online.

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MS CARNELL: Yes. MR COHEN: So we did actually amend the – unilaterally amend the contract to basically include provision that allowed for that product enhancement. MS CARNELL: I understand that. MR COHEN: So some of them are beneficial is all I’m saying. They’re not all negative. MS CARNELL: Well, that’s absolutely true, but the basis of the Unfair Contracts legislation is unfair. MR COHEN: Yes. Well, what I’m saying is that that legislation makes very clear what terms can no longer be in contracts. MS CARNELL: It does. MR COHEN: And so we, along with the industry MS SCOTT: Unless there’s a commercial imperative. MS CARNELL: Unless there’s a commercial imperative, and that’s what you’ve used. MS SCOTT: Yes. MS CARNELL: It looks like that’s what you’ve used to keep a number of clauses in. MR COHEN: Well, the way the legislation is framed, it’s not quite as broad as unless there’s a commercial imperative. Remember, it does talk about causing undue harm to the other party, and so all of those protections are built in. And so in our standard terms, for example, we do list very specifically those areas where a change of terms is provided for and they’re the types of examples that I’ve just given you. MS CARNELL: Yes. And it’s absolutely true, David, that this is something that will be tested in court without any doubt. The problem comes is we’re back to something having to be tested in court. MR COHEN: Yes. I agree. And why go down to that length? Now, unfortunately, as we know, it is, I suppose, the history of legislation is that legislation gets introduced. Where there is some uncertainty to it is exactly to what its parameters are. It generally gets sorted out by a court which starts setting those parameters. That’s an unfortunate fact, perhaps, but it is the way often that legislation is framed and then refined. MS SCOTT: So can you explain – so in your response to the UCT, so do you still have non-monetary default covenants and clauses in the contracts now?

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MR COHEN: Yes, we do. Yes, we do. MS SCOTT: Can you explain which ones they are? MR COHEN: There’s a range of them and so various things, say, for example, a customer usually under our terms of contract has an obligation to ensure the security probably. MS SCOTT: So what we’re really interested in is those clauses where it’s outside of the borrower’s direct control. MR COHEN: I see. MS SCOTT: So the clauses and covenants have been discussed in the past is where cases we’re specifically interested in where borrowers have been paying everything they should be under the loan, that the business is running reasonably well, but there’s something external to the borrower, usually about the state of their industry or the industry sector or the economy in their locality, which has really got nothing to do with them running their business. MS CARNELL: Value of assets, value of security. MR COHEN: So loan to value ratio, for example. MS SCOTT: So are those things still there? MR COHEN: Yes. In some loans they are, yes. And Adam can probably speak in a second to some of the specifics, but in some contracts, depending on the type of loan, there will be, for example, a loan to value ratio clause, yes. MS SCOTT: So Adam, are you able to explain? So the banks yesterday explained why they’re there. And I guess the thing we’re interested in is we have the whole thing about it’s to have a conversation. It’s an early warning sign that the business might be in trouble. I guess our concern is, is the way it’s written in the contract in the way that Kate described is that the bank may decide to do exactly what it wants. So you could have a conversation or you could default. So in the new wording you’ve got under UCT, how have you landed those provisions that would be a way that you couldn’t decide to default or not have that conversation that you said that you might have. So do you understand the question I’m asking? MR BENNETT: Yes, I think I do. I mean, I think if we just take a step back and I think different terminology, I think, being used around non-monetary defaults, and when we think about it there are kind of, I think, two categories of non-monetary conditions, if you will. One is undertakings from the client. That might be undertakings to provide us with certain information from time to time. MS SCOTT: Yes. We’re not interested in those things. MR BENNETT: It could also be obligations they have around insuring a property, you know, complying with the necessary regulatory or environmental protections, not taking on borrowings from another lender. So there’s a number of things that are quite

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MS SCOTT: So Adam, if we could concentrate on the ones that are external to the borrower, the ones that are outside of their control. We get all the other stuff. It’s the ones MS CARNELL: Look, if a borrower doesn’t do what they’re supposed to do, we get that. MS SCOTT: We get that. MS CARNELL: Let’s go to the others. MR BENNETT: Yes. I think the second category would be what we would typically call financial covenants. They’re not used universally in contracts. They’re used very specifically in client situations where, depending on the industry that they’re in or the nature of the performance of their business, there are particular risks that we’re trying to monitor and mitigate. So if it’s a business that servicing the loan is driven by certain cash flows, we would want to look at what the – kind of the buffers would be in terms of their ability to service that debt. If it’s a construction kind of client, then yes, the valuation of the property might be important. So we typically don’t apply those financial covenants in a universal sense. They’re quite bespoke to the individual client and I think there’s quite – well, there is, you know, clear conversations up front around why they’re being put in place and what the obligations of the client are in those situations. And I think when there is a trigger event, if those triggers have been set, then first and foremost that is an opportunity for a conversation with the client and for us to understand what’s going on and to work with them to make sure that we can shore up the business so that we don’t get to a position where the business is in such a state of distress that it would be challenging for the business to turn around and obviously would put more risk in terms of the loss that the bank might incur. MS SCOTT: All right. So coming back to the question, which is we get how the banks say they use them to have a conversation about an early warning sign, but they’re still written in the contract in the way that the lawyers have put those terms that, if you chose to, you could go straight to default. MR BENNETT: You could. MS SCOTT: Yes. So that’s the thing we’re asking about. So are they still in there in that, if you chose to, you could go straight to default? MR BENNETT: Yes, you could. I think the proposal I put forward this morning was that we would want to codify the fact that there would be a reasonable notice period, so that you would MS CARNELL: Yes, but a reasonable notice period is no good, because you put that other caveat to say except when it suits you not to. MR BENNETT: I hear that, Kate, but I think the – you know, the challenge with these things is you’re trying to put universal provisions in place to deal with every scenario and there are a lot of different circumstances that might be at play in relation to the individual business. So our approach to these things, the conduct of ourselves, and I think, you know, broadly the commentary

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yesterday from the other banks is that it’s not in our interests to accelerate the demise of the business or for us to lose money. I mean, the intent and the mutual objective is for the client to get to a position where they can get below those triggers or thresholds and to get the loan back in order. MS SCOTT: Yes. But the way the contract is written you can, if you choose to. MR BENNETT: You can. That’s correct. MR COHEN: Yes. That’s right. And as you know, there are sort of cure periods, etcetera, that have to expire before the action can be taken. But you’re right and that literally it could lead to a default, as called by the bank, yes. MS CARNELL: So based upon what you’ve said, and the other bank said, and you’ve said before, that you don’t use non-monetary defaults – and we will use that broader – very often at all – you don’t use those very often at all, wouldn’t it be better to get rid of them out of the contracts for small business – back to my comment about what the small business loan would look like – and just add those specific clauses that you talked to somebody about that suits – that is in line with their specific business. So there might be a clause with regard to valuation, or something, for a particular type of business. So get rid of them all. Add ones back that are necessary, you might think, and agree between the two parties. Why do you need non-monetary default clauses at all for small business loans if you don’t use them? MR BENNETT: I think – I think it’s largely what we’re suggesting. So we’ve said that for loans below a million dollars we wouldn’t have MS CARNELL: A million dollars is MR BENNETT: any financial covenants and MS CARNELL: A million dollars is tiny. MR BENNETT: And above that, they are put in place on a bespoke basis based on the particular risk and the particular client involved. So those type of financial covenants are not kind of standard terms of the contract. They’re things that would be negotiated on a case-by-case basis. MS CARNELL: Okay. So you will get rid of a capacity to go in and revalue assets – or no, for a performing loan? So my view – what I’m saying is, where a loan is performing, eg, people are paying back what they said they would pay – you know, they haven’t done any of the issues that I’ve raised before – why would there be a capacity for the bank to do anything like come in and revalue the asset, change the LVR – do all those things that are actually standard in those – in a standard contract – standard loan contract? MR BENNETT: I think the important principle, Kate, is that whilst the monetary default is kind of a late warning sign that the business in trouble, you really need to bring the conversation a lot earlier and create the opportunity to support the business to turn their business around before you get to a point where there may not be that opportunity.

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MS CARNELL: You don’t need the clauses for that. You just need that clause that I made the comment earlier that I will provide documents to you, and if we – if you see any straying from those proposed – those projections I put in place, there will be a conversation. I’m happy with that clause. Get rid of all the others. And there’s lots of them. You know there is. MR COHEN: Yes, Kate. There are various covenants in place, but if we come to the example that you gave then around customer who’s meeting their payment obligations, so they’re paying interest, or repaying principal as well as interest along the way, then it’s not in our interests, of course, to find circumstances where the customer is in default. In the case of the LVR that you spoke about, if we do have an LVR covenant in a loan it’s because the value of the security is integral to the business’ cash flow and how it earns it – sorry. If it was a property development, for example, clearly there, a loan-to-value ratio goes to the heart of the undertaking – the business undertaking. It’s not just something on the side that could be used. So what Adam was saying is that we do tailor the loans. To take your specific example of the LVR, if the value of the security has fallen dramatically because, for example, the customer has sold a licence that’s essential for the value of that property, such as a poker machine licence in a pub, for example, or the water licence on a fruit farm – those sorts of things – they’re much more specific and go to the specific nature of the business and the loan. And there, even where the customer is continuing to make payments, if there is a risk, however, that the value of the property is substantially different from what it was when the bank commenced the loan, and that was the basis on which the bank decided to lend a certain amount of money – because of the value of the security – there is a real issue to be looked at. MS SCOTT: But you have security. I mean, usually you would make sure you have security over things like water licences, because that’s got an integral value to the plan. MR COHEN: Well, some of – and the situations that we’ve encountered in the past – and these are real situations, they’re not just hypotheticals – is where – literally that example I gave you where somebody has actually transferred the poker machine licence from the pub, and it immediately cut the value of the pub MR ..........: That’s fraud. MR COHEN: substantially – substantially. So that – you know, whether they should do that or not, we all know the answer to that. But the fact of the matter is, there can be actions taken that go to the heart of the value of the security, and that obviously is of concern for the bank even where at that point MS SCOTT: So what sort of industry sectors do you have LVR clauses MR COHEN: I beg your pardon, Anne? MS SCOTT: What sort of industry sectors? You said property development. What other industry sectors would you typically use the bespoke clauses and covenants?

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MR COHEN: Well, property development would definitely be one. Circumstances where a company might be a greenfield residential developer – so, you know, buying large tracts of land in a land banking company – might be another. Those are circumstances – a pub would definitely be one of them, for example. Maybe a – maybe a specialised business that has core licences attached to it like, as I was saying, an irrigated fruit farm, for example, with a licence attached to it. MS SCOTT: Is that all the industry sectors? MR COHEN: Anne, I can’t give you the definitive list right now, but MS SCOTT: So there’s many industry sectors that it could be applied to? MR COHEN: There are some MS SCOTT: Yes. MR COHEN: There are a number examples. Yes. MS CARNELL: Can I say that I don’t – that I get what you’re doing, and we’re talking about really specific circumstances. In the standard form contract there is a range of these sorts of issues that give the bank the opportunity to treat the loan as, to quote David, as – well, we won’t go back there. Okay. There are a range of those clauses which allow you to do things like revalue the property that I have the business secured against, and reset the LVR, eg, the amount of money you are willing to lend me. Say, in pharmacy, you’ve decided that pharmacy now is a more risky business than it was before. The pharmaceutical benefits scheme – something has happened. You can change the amount of money you are willing to lend me – change the LVR, change a range of things which will say to me, “Look, Kate, we lent you a million dollars. We’re only now willing to lend you – we’re now only willing to have, you know, an LVR of 50 per cent and before it was 60 percent. Can you give us the money back?” Your document allows that to happen. MR COHEN: So, Kate, that would only happen in a circumstance – so if we’ve entered into a loan agreement to lend you, say, a million dollars MS CARNELL: Yes. MR COHEN: we’re bound by that commitment, and we’ve lent the money out the door. The circumstance that you’re describing would normally arise in circumstances where the loan was to be renewed. So when a loan is to be renewed, we assess the loan again – not as if it was a brand new loan, because we already know the business, but we do look at, then, the fundamentals such as security value. MS CARNELL: That’s absolutely true. But there is a capacity for you to revalue the MR COHEN: Mid-term, you mean. MS CARNELL: the mid-term.

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MR COHEN: Mid-term. Yes. You are correct that – you are correct, from memory, when I think of our certain terms and conditions. If one was going to take a draconian view of how to act MS CARNELL: Yes. MR COHEN: it could allow that. The point that Adam was making before is that is, almost invariably, never in our interests. MS CARNELL: Okay. So get rid of them out of MS SCOTT: But you can. MR COHEN: Sorry? MS CARNELL: So what we’re saying is, you’re right in a – I’m accepting that in most cases you don’t do it. So why is it in the document? MR COHEN: Unless – and, look, it goes to your point that you made a little earlier which is, is it necessary to have such lengthy documents with so many provisions in them, many of which don’t apply MS CARNELL: You say you don’t use. Yes. MR COHEN: Which don’t apply, and we don’t use, and it’s not in our interests to use. Why not just have a simplified form? And I think it goes – that would help with the issue that you raised around the timing between a credit approval and the documentation. I MS CARNELL: It would save you lots of money. MR COHEN: Yes. And there’s inefficiency involved. I agree. MS SCOTT: Because the other point with where you’re using bespoke things for different industry sectors, is the other thing that has been put to us from industry experts, is that a lot of the risk you’ve – you’re foreseeing across the economic cycle in a particular industry sector, or, you know, property development, you’ve already taken into account. And so what you’re then doing is having these clauses that allow you to then, if you see a risky situation emerging rather than one you’ve already taken into account, you can then manage that risk too. And the risk goes on to the borrower. So that’s the perception of what these MR COHEN: I accept. MS SCOTT: the way that this risk is – so you’ve got the risk you’ve already taken into account, and you’ve got another clause in the contract that lets you take into account any other risk that’s purely to the benefit of the bank for anything else that happens. And that’s the way it’s perceived.

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MR COHEN: Yes. And maybe this is a failure on the industry’s part to communicate what prudent risk management needs to encompass. MS CARNELL: The other day when we were speaking in private hearings I asked the question about performing loans and particularly Bankwest performing loans when you took over the portfolio on 19 December. And I made the comment I think at the time that I remember there was something like 1900 performing loans that were moved against at that point. I went back and checked and it was 1958 performing loans that were moved against. So when would – and taking into account you guys have said time and time again you don’t move against performing loans; it’s not what you do; why did you on what’s such a large number in this space? MR COHEN: So yes, I can give you lots of reasons. So Kate, I think, as I explained the other day, and certainly as I explained to the PJC when this came up, there were those 1960-odd – well, let’s call it 1960 loans that, as at the day we became the owner of Bankwest, were classified as performing loans. MS CARNELL: In other words, what does that mean? Help me with a performing loan? MR COHEN: So a performing loan in that case, the client was meeting their financial obligations, so they were either paying their – making payments on time, had continued to insure the property, for example, so it was not in default. MS CARNELL: Yes. Yes, they were doing what they were supposed to be doing. MR COHEN: Correct. So in your example of the chemist at the very beginning, you’re making the payments that you’re obliged to pay. MS CARNELL: Yes. MR COHEN: So they were performing at that point. This was at the end of December 2008. MS CARNELL: Yes. MR COHEN: In the period through 2009 and 2010, when the GFC started to really take hold, particularly in some areas, those loans fell into default. Now, when I say fell into default, it’s very different from, I think, Kate, the characterisation you gave, which was that we put them into default. That’s not the case. So those loans in the end turned from performing loans, where people were meeting their payments, to loans where they weren’t meeting their payments. MS CARNELL: And what was the – I know that there are 2000 of these just about, but there’s a range of reasons people fall into default. MR COHEN: Yes. MS CARNELL: And in a number of the cases we’ve looked at and we’ve spoken about the initial movement of the bank was at a time when people were paying. So they didn’t end up financially defaulting, like not paying their interest for quite a long time on a range of the cases we’ve looked

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at and potentially a range of these. So when you say they moved into default, I think people listening or watching would think that means they stopped paying their, you know, their payments. Now, that might be the case in some of them. MR COHEN: Sometimes, correct. MS CARNELL: But that’s not necessarily what we’re talking about, are we? We’re talking about people whose interest coverage might have fallen, who – there’s a whole range of things that could have happened. MR COHEN: So there are, Kate, but in those cases, so in those – so I think we should probably clarify what we’re talking about when we’re talking about a payment default. So as you point out, in some cases people are continuing to make their interest payments. What we discovered over that period, 2009, 2010, that many loans expired and so the time for repayment arrived and the customer didn’t repay. The customer did continue to make interest payments though. MS CARNELL: Yes. MR COHEN: But at some point the customer needs to repay the loan. And when requests were made to repay and the customer couldn’t repay, then that fell into the category of no longer being a performing loan. So we have interest payments, important. Equally important is repayment of the principal sum. MS CARNELL: Absolutely. Do you know what the total value of those 1958 performing loans was? MR COHEN: Off the top of my head, Kate MS CARNELL: I would be really interested in the figure. I mean, I think I’ve got your MR COHEN: Have you got it from the transcript there? MS CARNELL: Well, it doesn’t have it in here. It has the amount of money you lost. It just doesn’t have the total value of the 1900 loans. MR COHEN: Yes. So no, I don’t know the total value. The amount lost on those was quite a high proportion of the total value. MS CARNELL: Yes. No, I’ve got that. But I’m just interested, because that’s a – 1900 performing loan – 1958 performing loans, it’s quite a lot of loans. These were people who were paying. MR COHEN: Some of them, Kate. MS CARNELL: No, no. Sorry, no. Okay. MR COHEN: I think we have to be clear. We have to be clear here that some of these loans were just straight out failing to make interest payments along the way, not just all expired facilities.

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MS CARNELL: I accept that. Look, I absolutely accept that. And it’s also true that, if that the reason people are not in a position to pay the total loan back, you know, when the loan falls due, are many and varied. And often, as we know from the cases we’ve spoken about, because there was no indication from the bank that they were going to have to. So there’s a reality. If I’ve just bought the pharmacy we were talking about earlier and I’ve got a three year loan or a five year loan or whatever, there’s very little chance, in fact almost none, that I’m going to pay the whole principal back in that first period of time, so I’m going to have to refinance at some point. That was what I would have planned on. MR COHEN: You would. MS CARNELL: And what almost all businesses would have planned on. And of course MR COHEN: And the banks too, probably. MS CARNELL: And the banks too. MR COHEN: Yes. MS CARNELL: And maybe halfway through that loan I’ve decided to do a major refit. I’ve gone to the bank and said, “I’m going to need this amount of money. Are you willing to lend it to me?” So I’ve upped the – there’s a range of things you do. Your relationship with the bank isn’t like a house, where you borrow the money and you pay it back. MR COHEN: No. MS CARNELL: It’s ongoing. MR COHEN: Yes. MS CARNELL: So when a bank decides that they say, “Well, I’m not willing to refinance you,” a business has to go and find someone else to finance them, don’t they? MR COHEN: Yes. MS CARNELL: So can I just ask some questions about timelines around that and what’s reasonable. MR COHEN: Yes. So and we’re aware of the MS CARNELL: The discussion yesterday. MR COHEN: The discussion yesterday. Yes, of course, and Adam and I can both give our thoughts on that. But at a high level we understand exactly the points that were being made, namely that isn’t it appropriate that the small business owner be given notice some time before the facility actually – the loan expires.

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MS CARNELL: Yes. MR COHEN: Some time before then. And also be given an indication as to whether or not the bank intends to roll that loan over, enter into another loan or not, because it makes all the difference as to what the business then does. And so we heard that yesterday and we’ve heard it before. We think there’s some merit in that and Adam can talk about, you know, what we think might be a sensible approach there, and I think some of it was canvassed yesterday. MS CARNELL: Yes, so Adam? MR BENNETT: Yes. I mean, I think the first – the question is just the reminder to the client that the loan is coming up for expiry and I think MS CARNELL: So six months out, as we’ve suggested. MR BENNETT: Yes, yesterday. MS CARNELL: Or more. MR BENNETT: I mean, I think those conversations are happening, but I think, you know, some formality around them, I think, would be reasonable. I think then the second question is the decision around whether the bank is or isn’t willing to refinance. I think, again, reasonable notice is appropriate. I think the only thing to colour that a little bit is that the practical realities that we often find that to make the determination about refinancing we’re reliant on the business providing certain information back to us. MS CARNELL: Yes. I understand that. MR BENNETT: And invariably when things get to a position of expiry and that we are technically in a default position and from a regulatory perspective, if it’s expired 90 days, it actually has to be classified as impaired is because we’re waiting on certain information from the client. So I think the boundary of MS SCOTT: Yes, so even more reason then to start that earlier. MR BENNETT: No, I agree with you. So I think the earlier engagement is very, very important, but the definitive position about will I refinance or not, I think there’s a lot of dependencies on both sides to be able to make that definitively and we just have to be cautious around being able to apply a very binary position to that. MS CARNELL: So yes, I get that you’re coming from the bank’s perspective, but from the business perspective, I’m going to need – I have a loan that has got to continue and that’s the reality. I mean, it’s not because I haven’t done the right thing. It’s not because I’m not paying back. It’s not because I’m not willing to give you the documentation that you’ve asked for. I’m a good client, so that’s the case. But for whatever reason you’ve decided or at some point you decide that, you know, you’re overweight in property development in North Queensland or in pharmacies or in something and you want to reduce your exposure.

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So you’ve decided, not because I’m a bad client or I’m not paying, but you just decided you don’t want to – it’s just a loan you don’t need on your books. So how am I – well, to start with, if I was to come to you – I’m with another bank now – if I was to come to you and say, “Hey, I want to refinance. I’ve got a loan with, you know, bank over the road. I want to, you know, I want you to pick up that loan.” How long would it take from the day I walk into the bank to the day you say you’re willing to pick up that loan? You know, what is the timeline? MR BENNETT: I think, again, it’s very variable, because it will depend a lot on the nature of the business and how long it takes to get the information from the client. But typically from the point that we would have that information captured in an application, we would be able to get back to the client anywhere from 24 hours to maybe a couple of weeks, depending on the complexity of the borrower. MS SCOTT: Would that be with the full terms and conditions? MR BENNETT: Not necessarily, Anne. I think that might be what you call kind of a conditional approval, but there might be some further documentation that’s required that would occur after that fact. But in terms of the – you know, the broad willingness to extend finance, then that would be kind of a typical timeframe. MS CARNELL: But that’s actually true, Adam, except the problem is that you also think you’re – you know, that pharmacy’s a bit of a risk now, because something has happened. I mean, the same reason that the initial bank suggests that they’re a bit worried about it. So these things often do take quite a long time, don’t they, for you to pick up the debt of another bank? Unless it’s really simple. MR BENNETT: It’s highly variable, Kate, in terms of timeframe. MS CARNELL: I know. I get that. Okay. That’s the point. MR BENNETT: Yes. MS CARNELL: It’s highly variably; therefore, the timelines of expecting a customer to be able to find another bank who’s willing to take on the loan – for that loan to be refinanced, and for that to happen seamlessly, takes time. MR COHEN: Takes time. MR BENNETT: Yes. MR COHEN: It does. MS CARNELL: It doesn’t take 10 days MR COHEN: No. MS CARNELL: as of the current code.

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MR COHEN: No. MS CARNELL: And it may take longer than 30 days that you have in that initial space. And remember that, if it doesn’t happen, all sorts of bad stuff happens. MR COHEN: Of course. MS CARNELL: If my loan expires and I don’t have a rollover, I default – my interest rates go up – you know, all manner of things start to go seriously wrong. In fact, I could end up in receivership because you ask for the money back. MR COHEN: Yes. So, Kate, we agree with the premise that customers should be given sufficient notice about when their facility is going to expire, firstly. MS CARNELL: Yes. MR COHEN: And, secondly, should be given sufficient notice whether or not the bank is going to extend the loan or rollover the facility into a new loan. And that’s fair enough. MS CARNELL: Yes. MR COHEN: We think that’s fair enough. MS CARNELL: So what’s the MR COHEN: I know there’s some discussion about what’s the timeframe. MS CARNELL: Yes. MR COHEN: What timeframe should that be? And yes, I think in your discussions there was discussion around a three month notice period, and giving the customer at least three months to make alternative arrangements if the bank was not going to proceed with the existing loan. MS CARNELL: We put that as a minimum of three months. MR COHEN: Yes. MS CARNELL: I said I didn’t think three months was long enough, sometimes. Particularly if it happens, say, to be a rural property or a particularly difficult MR COHEN: Yes. Specialised, for example. MS CARNELL: loan. A specialised loan, or something. MR COHEN: Yes. Yes.

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MS CARNELL: That would be a very short period of time. MR COHEN: Yes. MS CARNELL: It might not be for a pretty simple loan. MR COHEN: That’s right. MS CARNELL: So how are we going to progress this? Fairly obviously we’re going to make a recommendation along these lines, but you’ve accepted, as did the banks yesterday, that this is something that needs to happen. So we’ve all agreed, so far. Haven’t spoken to Westpac yet, but everyone agrees it should happen, so what’s going to happen to change this? MS SCOTT: What are you going to do? MS CARNELL: What are you going to do? MR COHEN: Well, in terms of what we’re going to do, I think, A, if we had the whole industry agreeing, or the recommendation was that this should be the industry standard – that might be your recommendation – the issue, I think, Kate MS CARNELL: So if I had another round table with all four banks, you all agree, we get MR COHEN: Well, I think it’s also important to bear in mind here not just the big four banks. I’m talking about the whole industry. And so not wanting to complicate it, but let’s make it an even playing field. MS SCOTT: So we’ve got 25 people round the table. MR COHEN: Well, ideally you would want to do this through the ABA so you don’t have to have 25 people round the table, but, for the moment, we will set the mechanism aside. The principle should be, I think, that MS CARNELL: In terms of small business loans, the four major banks have got the vast percentage. MR COHEN: Yes. And I agree we ..... MS CARNELL: So why do you need all these people who don’t do small business loans around the table? MR COHEN: Well, no. What I’m saying is there are other small business lenders. MS CARNELL: There are. MR COHEN: And it’s important to recognise that. So let’s concentrate

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MS CARNELL: But they’ve got a twincy bit. MR COHEN: on the majority. Let’s concentrate on the majority for a start. MS CARNELL: You know, you guys have got 80 per cent, haven’t you, between the four of you? MR COHEN: Yes. So let’s concentrate on the majority, therefore. MS CARNELL: Maybe more, really. MR COHEN: I think the issue, Kate, to be solved here, is, given that there is variability in the type of circumstance of borrower, what’s the minimum period – where you might say “no less than” whatever months notice it is. MS CARNELL: Yes. MR COHEN: And, you know, we’ve got a view that three months was a good period. I know your view was actually it should be longer. MS CARNELL: Yes. MR COHEN: And the answer is somewhere in that range, I’m sure. But, in terms, Anne, of what are the banks going to do about it, at the risk of throwing more into a revised code, there’s one option – is actually put in a code. A code that you say is enforceable – has teeth, is properly monitored and has proper regulatory oversight of it. So that’s one option – that – so that it becomes an industry standard. And that would address that small percentage that are not the major lenders. MS SCOTT: So the only issue with the code, David, is it then does require all 25 members to agree to what’s in the code, and you have this sort of stalemate about actually getting anything done. MR COHEN: Yes. I would like to think, Anne – and I don’t think this is an entirely naïve view – I would like to think that, actually, in the current environment, there is much more focus by the banks on what the banks need to do in order to rebuild trust. And I genuinely believe that. And I see that amongst my colleagues the industry. So, whilst I take your point that in the past, perhaps, it has been difficult to get the whole of the industry to agree, I do think that we are at a point in time now where the ABA is very minded – and the members of the ABA are very minded – to actually make some proper change. MS CARNELL: I suppose – maybe what I’m saying is that you guys are really good at saying, “Yeah, yeah, yeah, we’ve really got to change. It’s really important”. You’ve said that a million times. You just haven’t changed. I think it’s – and I have to say, from a leadership perspective, you are the biggest company. You’re the biggest bank. Surely you have a leadership role in this. MR COHEN: So, Kate, if you’re asking can we not just go and do it ourselves and

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MS CARNELL: Can’t you lead it? MR COHEN: So we can actually do it ourselves. As to what our competitors do, that’s entirely up to them, of course. MS CARNELL: Yes, but they’ve all agreed that – well, the four of you who have got the vast percentage of the business in this space have all MR COHEN: Yes. MS CARNELL: Well, we haven’t spoken to Westpac yet, but I think they will be fine. MR COHEN: Yes. So MS CARNELL: But I might be wrong. MR COHEN: So I think that’s what you’re seeing, in terms of the industry leading rather than waiting to have things imposed. That’s what you’re seeing in the form of the ABA initiatives and the six-point plan. That is the industry. MS CARNELL: So I see a plan. I see a plan, but I don’t see change. MR COHEN: Well, in fairness, Kate, actually the plan that the ABA announced MS CARNELL: Okay. MR COHEN: and the six points in it – actions are taking place on each of them. Some of them are being publicly reported. Quite a number of them. So you’ve got Phil Coorey looking at the code. MS CARNELL: Look, you’ve MS SCOTT: We’ve spoken to him. MR COHEN: Yes. So MS CARNELL: It’s true you’re really good at reviews. MR COHEN: But Kate, in fairness it makes sense to look at things properly and then to act, rather than just to act and not – and do it half-baked. MS CARNELL: There have been 17 reviews, David. MR COHEN: Yes. MS CARNELL: You know what the answer is. So do we. But look, that’s okay. Let’s keep moving here.

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MS SCOTT: So can we go onto communication and transparency that comes off the back of that notice given thing. So one of the most consistent things that came through the cases that we looked at is to do with changes in loan facilities or where loans were coming up to expiry or rollover. You know, something happening in the process. In an awful lot of cases, there was this expectation by the borrower that the information they were getting from the bank was what the bank thought. And then you have this almost schizophrenic approach in the bank where you’ve got the relationship manager, or the person in the branch that the person’s doing their day-to-day engagement with – and, as you said, Adam, lots of conversations about what the business is doing – what their strategies and plans are – and the relationship manager making lovely positive noises about “that all sounds very good”, and, you know, talking about increasing facilities or rollover, even to the extent of preparing and providing documentation to the borrower. Now, if I was on the other end of that, that would give me every comfort, and in fact I would have the expectation in my head that, “Okay, well that’s the bank saying to me that they’ve got a positive view on this and that that’s likely to go forward”, especially if I get a document. And then what happens is, out of the blue, there’s a 180 degree shift and you’ve got another area of the bank – usually in the credit or restricting area; maybe in Melbourne or Sydney, so not my normal relationship manager – and all of a sudden I get a completely different story, but coming at a point in time where I’ve no longer got room to manoeuvre anymore. And so what you’re saying about the banks having these conversations with people – well, the cases have uniformly said those conversations just aren’t clear, and they just give the wrong – and mixed – signals to the borrower about what the bank is actually thinking about the risk associated with their loan. So have you got any views about how that could be – I mean, banks are obviously very big organisations. We understand there’s different areas that deal with different aspects of a loan impairment life, so what are the formal steps that the bank takes to inform the borrower that their file is moving from their relationship manager – or is likely to move – to the credit area and the reason why they’re moving and what’s going to happen when they get there so that they understand the circumstances they’re about to enter in, because usually in the cases it’s a complete surprise about why they’ve ended up there. MR BENNETT: I think it’s a good question, Anne, and I think – in the vast majority of cases – I think that communication is very aligned and if we look at it through different stages of the lifecycle, when you’re having the conversation upfront with the client borrowing for the first time, obviously the relationship person is having the conversation with the client, they may or may not have the delegation to approve that themselves. They may be relying on another part of the bank – typically the credit function – to make that final determination, but the relationship person would be the primary interface to the client. And is there a risk of that getting misaligned? Yes, but I think it’s fairly kind of unusual. You’ve then got the situation where you’re up for a renewal or expiry. I think, similarly MS CARNELL: Yes, that’s the one.

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MR BENNETT: Similarly to the earlier conversation I think, very important that the client is reminded that they are due for expiry and what information is required and then working through, I guess, the credit reassessment process around the willingness to extend and the terms of that. I think, again, ordinarily that would be the direct responsibility of the frontline relationship person to be providing that to the client and I think it would be unusual, but possible, that you might get a situation where, at the end of that process, there might be a final determination that was different, but I think that would be very unusual. MS CARNELL: Well, it’s the case in at least two of the cases that we’ve been talking about lately that the client has got emails indicating that a facility will be provided in writing MR BENNETT: No, I think it’s MS CARNELL: and then all of a sudden it’s not. MR BENNETT: Yes. MS SCOTT: A few days later, in fact. MR BENNETT: No, I think it is unusual, but possible, given that until there is a final credit assessment and a final loan document, then obviously it’s open to the dialogue. MS SCOTT: But can you see how the consequences would be dramatic for the business, just being told that? MR BENNETT: No, I think in the isolated occasions I think, yes, that can be a difficulty position. I think that MS SCOTT: But why being an isolated occasion does that make that all right? MR BENNETT: Well, I’m not suggesting that it is all right, Anne. I’m just suggesting that it’s very unusual for that situation to transpire as you’ve outlined. MS CARNELL: You know the problem is that almost all of the cases we’ve been looking at, that’s what has happened. They’re not all yours. A few of them are. But that’s what has happened. The perception of the client MR BENNETT: Yes. MS CARNELL: because of the relationship they’re having with their relationship manager MR BENNETT: Yes, and I think MS CARNELL: is that everything is fine. MR BENNETT: No. And I think that’s fair and I think when you talk about the understanding upfront about what might happen, situations of default – that’s one category – but I think the

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refinance risk is one that I think is important that the client does understand upfront, that even though there’s a likelihood that we will continue to extend that loan in perpetuity, there’s a possibility that, for whatever reason at that point in time, that – I think that is important – that the client appreciates that risk exists and that they’re given early warning to be able to respond. MS CARNELL: So, again it’s about, you know, we all agree, so can we make it happen. Now, if the bank doesn’t – like happened in a couple of the cases that we’ve been talking about privately – and all of a sudden from the client’s perspective the bank says, “No, we’re not going to refinance you,” then the only option for that company is to go into administration, isn’t it? Because they’ve got 24 hours. MS SCOTT: Especially when that MS CARNELL: They’ve been told they haven’t got a loan, they’re out – in both cases because things have – well, in one of the cases they’re past their due date MS SCOTT: Yes. MS CARNELL: because negotiations have happened, things have happened so they’re past due day, haven’t got an extension, all of a sudden the answer is no. What responsibility does the bank have, that you are fundamentally, by making that call, giving the company no choice? Well, there isn’t a choice, is there MR COHEN: So MS CARNELL: because your chances of getting another – and somebody else to pick up the debt after you’ve just been knocked back in 24 hours is zero. MR COHEN: So, Kate, if I could it address generally rather than by reference to the specific cases MS CARNELL: Yes. No, no. That’s true. MR COHEN: and I completely understand the fact that the cases that you’ve been presented with and that you’ve looked into MS CARNELL: Yes. MR COHEN: are the cases where people have had an unsatisfactory experience, this being part of it often. MS CARNELL: Yes, it is. MR COHEN: So I completely understand that. Setting aside the fact that, thankfully, those are the vast minority of cases, but just setting that aside for a second, from the bank’s point of view it is only disadvantageous to put the customer in a position where they’ve got to refinance in an extremely short, unrealistic space of time. That’s actually to our disadvantage. So it is not in the

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bank’s interest to do that, so I think if that’s accepted, the question is, well, what is an appropriate period of time if that is a decision that is communicated to the customer and it might be unexpected on the customer’s part to receive that news? So what is an appropriate time? And at the moment, as you know, there is no guidance or rule or regulation around what period should be given. And at the moment the industry works on the basis that it’s in the bank’s interest to ensure that the loan is successfully refinanced. It’s never in the bank’s interest to see the customer fall into default, because that’s MS SCOTT: Only if you don’t want that loan any more. MR COHEN: No, but – and even if we don’t want that loan, in almost every single case where a customer falls into default and recovery action is taken, the bank loses money. So that’s not in our interest to lose money. That’s losing our depositor’s money and that’s something that APRA is naturally concerned about, so it’s actually not in our interest. Even it’s a loan that we no longer want to continue with, it’s not in our interest to see the customer fall into default and then to take recovery action. MS CARNELL: I accept that, but the difference in damage is pretty dramatic still. Over here the MR COHEN: I agree. I agree. MS SCOTT: And you don’t always ..... money either. MS CARNELL: The ramifications for the company MR COHEN: Huge. Huge ramifications for the individual borrower, absolutely. MS CARNELL: And for the MS SCOTT: And so you look at who has lost the most money. So you get all the secured assets, so you minimise what you lose, but the borrower, they’ve lost everything. MR COHEN: Yes. And so that comes to the point so what’s a reasonable period – if the customer is in that situation, what’s a reasonable period for them to obtain refinance, because that’s obviously the best thing for both parties. MS CARNELL: And there’s just one other question, though. What is the responsibility of the bank to communicate consistently? MR COHEN: Yes. That’s a good question and I think, as you know, we’ve seen it in a couple of troubled cases. We have seen examples where the relationship side of the bank is hopeful that, for example, a loan will be extended or rolled over. And we will say sometimes – and we’ve seen examples, as we know, so MS CARNELL: I’ve said that

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MR COHEN: And I want to emphasise Adam’s point here. This is a really small minority of cases. The fact that it happens at all is an issue and so we have seen some of those cases where the relationship side has been hopeful that credit approval will be received. And when that hasn’t turned out to be the case, that has been late breaking news which has been MS CARNELL: Look, I MR COHEN: Puts the customer in a really difficult position. MS CARNELL: I absolutely agree that it is the minority of cases. The ramifications of these minority of cases are huge. MR COHEN: Are huge, they are. I agree. MS CARNELL: And, therefore, need to be taken as MR COHEN: Yes. MS CARNELL: pretty fundamental as MR COHEN: I agree. So, operationally, if we think about the actual communications with the customer, there’s an obligation on us to make sure that we’re not misleading customers; even wittingly misleading customers. There really is an obligation. MS CARNELL: Yes, I agree there is. MR COHEN: And our frontline bankers need to understand and, generally, they are well trained and they do actually communicate very openly with customers, but we have to guard against unwittingly giving false hope. MS CARNELL: It was interesting, we spoke to one of the – well, the relationship manager of one of those cases after we spoke to you. And what was really interesting is, from his perspective, his role was to be introducing that customer to areas of the bank that would still like to sell him stuff. So he was introducing him to the security people and ..... because that was what he thought his job was because he believed that the direction that that particular company was great; you were lending them money, everything was hunky dory, his job was to keep introducing them to parts of the bank who would be able to sell him – so that was the message and that was his view to us just recently. He was doing his job and he had no reason to believe that there was a problem. So even your own people – because by that stage you guys were telling us there was problems, but he didn’t know that or MR COHEN: No. And so, that goes to my point earlier, I think. You know, our responsibility is to ensure that our frontline relationship people – and this is, I think, what Adam’s team does very well generally MS CARNELL: Yes, it is. MR COHEN: is openly communicating with the customer on a

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MS CARNELL: So if you don’t do it MR COHEN: very honest basis. MS CARNELL: and the customer ends up losing everything, what’s the ramification for the bank? Okay. You lose some money. He loses everything and 2000 people lose their jobs. Is it a punitive damages issue? What’s the damage? What happens to the bank if you do stuff that leads a customer into a – I’m not saying in this case, just MR COHEN: Kate, I think the high level outcome there is if the bank has done something legally wrong MS SCOTT: Yes, legally. MS CARNELL: So it’s not legally wrong, you know it’s not. MR COHEN: So – no, no, no, no. In circumstances where we have misled someone, that’s legally wrong. We – that’s actually a breach of the laws. So we can’t go and mislead people. That’s clearly wrong. MS SCOTT: So making somebody a letter of offer and sending them documentation, is that leading them to assume something? MR COHEN: Well, here we have, Anne, a really difficult situation where, you know MS SCOTT: There has been many cases where that’s the case. MR COHEN: Exactly. And – but you will have seen those letters of offer, which are very clear about what the subject to’s are. Now, we all MS CARNELL: Yes, look MR COHEN: hate subject to’s, right, we all hate them. But it is a fact of business that sometimes decisions are made on the basis that further steps have to be taken, and that’s documented. MS CARNELL: And, look, we get that, and in this particular case you’re right. You had all of those things I spoke about before in the code saying, “Here it what is, unless we decide something else.” And that’s what those documents said. It’s absolutely true that, you know MR COHEN: And it’s subject to approvals and all those sort of MS CARNELL: Sorry. But even when, you know, “We’re going to give you a 12 month rollover but it can be pulled at any time down here.” You’ve got good lawyers. You guys don’t break the law very often at all, but in terms of

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MR COHEN: I should hope not. MS CARNELL: Well, I would hope not, too. But I’m just making the comment. Where is reasonable behaviour in this? You know, is it reasonable to lead somebody to the view, even the relationship manager, to the view that the relationship was ongoing, and then for it not to be? MR COHEN: So it’s incumbent on us to ensure that communication within our own organisation is sound. MS CARNELL: Okay. It is. MR COHEN: So that is incumbent on us, and if that doesn’t happen on some occasions then that’s very regrettable. Number one. MS CARNELL: And so what happens? MR COHEN: And so – well, generally what has happened to date, Kate, is that the bank has looked at whether or not – and so, for example, we’ve had circumstances where a complaint along those lines has been made and it has come through our complaint process and we’ve looked at it. In some cases, we have actually said we do see that from the customer’s point of view, whilst not legally sound, there is merit, just on a reasonable basis in terms of what they are saying, how they feel they have been treated. So we have many cases that come through our group customer relations, which is our complaint area, where we look at it from the point of view of what’s reasonable, not what’s legal. And so that does happen. The cases that you’re talking about specifically, Kate, are the ones that we’ve talked about before. We held a different view as to what the customer knew and what the customer was told. But if I abstract from that to the general, we’re not an organisation that in dealing with complaints, seeks to rely purely on the letter of the law. Now, does that mean that we will forgo all legal rights? No, of course it doesn’t. But from a customer relationship point of view, from the point of view of trying to do what we think is appropriate from the point of view of our organisation’s purpose and from a customer’s financial wellbeing viewpoint, we do try to act reasonably. MS CARNELL: I don’t doubt you try to do that, but perception is a lot in the – you know, in a whole range of the things we’re talking about. MR COHEN: Yes, I agree. MS CARNELL: So – and the issues that have existed around community and consumer – or the community view of acting reasonably probably needs some harder – not “probably” – needs a lot of harder edges to ensure you behave reasonably, not just saying you do. MR COHEN: Yes. MS CARNELL: Because for some people you – they would argue you haven’t.

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MR COHEN: No. And, Kate, we understand very well that the perception in some of these areas is very much weighted against the banks, and the banks actually – we have to, through our behaviour, not just through our words – to your point earlier – but we do through our behaviour have to actually show that we are acting reasonably. Now, there will always probably be points of difference between an individual customer and us. MS CARNELL: Yes, you do. MR COHEN: But at a broader level, at the broader community level, we’re very aware of the fact that we need to address that perception in substantive terms. MS CARNELL: That’s good, because that will mean you will agree with all of our recommendations and that will be fantastic. Valuations. You said earlier that you were comfortable for valuations to be – where a consumer pays – a client pays for the valuation to be provided to the consumer. Does that include the instructions to the valuer? MR COHEN: So to date we haven’t. MS CARNELL: No, you haven’t. MR COHEN: So our policy to date has been to provide the valuation where requested, and so we’re very conscious of the fact that that, where requested, needs to be addressed so that it is automatically provided. And that’s what Adam was proposing. MS CARNELL: And it needs to be the whole valuation, not just be the MR COHEN: Not just an excerpt or a redacted version. That’s correct. That’s correct. MS CARNELL: That’s it. MR COHEN: And so we completely support that view. So provide valuations where the customers is paying for it, is very fair. Your point around should they also be given the instructions – so you’re probably aware that when a valuation is provided, the written valuation report sets out the instructions. So to date we have worked on the basis that when the valuation is provided, the customer gets to see the instructions, i.e. the basis on which the value had proceeded. And so from that point of view we think the customer gets both the instructions and the valuation. MS CARNELL: Okay. And what if the customer disagrees with the valuation? Is there a method of appeal, a capacity to get a second opinion, you know, the MR COHEN: So we sometimes – interestingly, we – it flows both ways actually – we sometimes MS CARNELL: I’m sure it does – except you can always get another opinion. MR COHEN: No. So – well, no. So we sometimes have a situation where a customer will come to us with valuations already in place. And so we then make a decision as to whether we will accept those valuations that the customer has obtained, or whether we will ask the customer to fund the cost of a new valuation. And it varies according to how we respond. So it can proceed

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both ways. In terms of if the customer disagrees, what we’re talking about here mainly are what we call “going in” valuations, so when the loan is initiated and a valuation is obtained. Sometimes it’s an existing property that the customer already owns. Sometimes it’s a property that the customer is purchasing as part of the transaction that we’re funding. In those circumstances, we don’t usually find that there actually is a lot of disagreement around the going- in valuation. Sometimes where we do find an issue arising is when a roll – when a loan is extended or renewed and a new valuation is obtained at that point. So to date we will discuss with the client what their concerns are. We will usually have the client and the valuer confer, because the valuer actually needs to talk quite a lot to understand some of the fundamentals of the property. We usually find that in the course of that, the customer is given the opportunity to present their views. Where the customer disagrees at the end of the day, we don’t actually at the moment have a practice of going out and getting another valuation. And I’m aware that was discussed to some extent yesterday MS CARNELL: It was. MR COHEN: which is an interesting practice. of going out and getting another valuation and I’m aware that was discussed to some extent yesterday MS CARNELL: Yes, that was. MR COHEN: which is an interesting practice. But we’re generally fine that it’s not a point of contention, but we’re always open in dealing with a particular customer MS CARNELL: Okay. MR COHEN: as to how to deal with a disagreement that they’ve got. MS CARNELL: Well, as we said yesterday, some of the cases or the situations we’ve had is a customer does have a problem with a valuation, goes to the valuer, the valuer says, “We can’t talk to you. We work for the bank,” the customer goes to the bank and the bank says, “That’s a matter for the valuer.” So there’s MR COHEN: That’s interesting. MS CARNELL: So that’s actually the problem. MR COHEN: Is this a going-in valuation, Kate? MS SCOTT: An ingoing. MS CARNELL: Look, it’s valuations generally. MS SCOTT: Yes. MS CARNELL: So that the reality is

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MR COHEN: Okay. I can imagine that in the context of MS CARNELL: the consumer who is paying has no way of addressing an issue. MR COHEN: Well, that’s interesting, because our experience – and talking to our teams that actually work with the valuers and the customers – our experience is that we actually have quite a lot of discussion and are often putting the valuer and the customer together, particularly on that going-in basis. I acknowledge, Kate, that in circumstances where, for example, a receiver is obtaining a valuation MS CARNELL: I was going to ask you in the next question about what about a client in default. MR COHEN: Yes. So that is a trickier situation, I agree. MS CARNELL: I’m not talking about receivership. I’m now talking about just in default. A consumer is in default and you’re revaluing assets to a customer in default. MR COHEN: So the circumstance where we’re actually getting new valuations simply because a customer is in default is rare. In circumstances where recovery action is being taken, however, then it’s a very normal course of action for another valuation to be obtained. MS CARNELL: Yes. MR COHEN: So that would be where there’s some form of insolvency administration, for example. MS CARNELL: Yes, yes. Absolutely. So can the client see the valuation in that situation? MR COHEN: Generally speaking, the answer is no. And the reason for that, primarily, is that from a receiver’s viewpoint they have an obligation, as you know, to obtain fair market value for an asset that they’re selling. In order to ensure that they are complying with that obligation, receivers will generally want to ensure that the potential range of people who might bid for the purchase of that asset when it is put up for sale are all on the same footing in terms of knowledge. And what receivers often find is that an associate of the borrower will seek to bid for the asset and that providing the borrower with the valuation gives that particular potential bidder a lot more information than the rest of the market and that actually puts receivers in the slightly difficult position as to whether or not they are getting – can be said to have taken all reasonable steps to get the fair market value. MS CARNELL: I get that, but you’re looking at a minor – you know, as we’ve talked about, that’s a case that could happen. MR COHEN: Yes. MS CARNELL: But the person or the small business, or whoever it is, is paying for the valuation even when they’re in receivership. They pay for everything then. Let’s be fair. Is it vaguely

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reasonable when you pay for something, even if it’s being asked for by the bank, you have no rights to that? MR COHEN: I understand the point, Kate, and you have this sort of clash of what’s the reasonable thing to do with the customer and how does a receiver satisfy their legal obligation. It’s a difficult tension. MS CARNELL: Well, the legal obligation – yes, it is, but the legal obligation MR COHEN: It’s a difficult tension. MS CARNELL: is to get the best possible price. MR COHEN: Yes. MS CARNELL: The fact is, it’s my asset that the receiver, at this point – it’s about not to be, but that the receiver is selling. Surely I have some sort of rights to see the valuation. I paid for it, heavens. MR COHEN: Yes. So I think MS CARNELL: Why doesn’t the bank just pay for it? MS SCOTT: What’s the problem is the valuation could change or – so, I mean, surely the valuation has been done in the most expert way by MR COHEN: Yes, and so they’re independent valuers, etcetera. MS SCOTT: proper valuers. MR COHEN: That’s exactly right, so MS SCOTT: So it is what it is. MR COHEN: Yes, that’s right. And the issue is if it’s Kate’s property that’s being sold and you, as Kate’s sister, are going to bid for that property and Kate passes that valuation onto you, you have an unfair advantage MS SCOTT: So what’s to stop me and Kate getting our own valuation then? MR COHEN: None whatsoever. Kate can do that. MS SCOTT: Okay, so MS CARNELL: So what’s the difference?

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MR COHEN: So the point is the receiver, though, is there under an obligation to ensure that fair market price is obtained. He could well be under attack from others if, in fact, you have proceeded in that auction, for example, with the knowledge of the valuation that no other bidder has. MS SCOTT: So then why does the borrower have to pay for it? MS CARNELL: So why doesn’t the bank just pay for it and be done with it? Then there’s no problem. MR COHEN: Yes. So I suppose what we’re focusing into here is the range of expenses that a borrower pays as a bank undertakes recovery action. So, as you know, valuation fees are one. Secondly, there will be legal fees. There will be the marketing costs associated with the property, for example. The auctioneer’s fees, for example. The real estate agent’s commission. So there are a range of fees that are wrapped up in selling an asset that the borrower does pay for. Valuation fees are one of them. MS SCOTT: So can I just go back. So you said about the – so the thing that we’ve seen from the cases is valuations are greatly misunderstood by lots of people and so the value you get for a property, you know, the valuation industry will say it has got a validity of three months. MR COHEN: Yes. MS SCOTT: So there’s things that are poorly misunderstood about people having what they think their property is worth actually what it is actually worth at that moment in time. So you know, there’s some perception of conflict of interest when processes are not transparent. Okay. So it’s almost like the bank could do a whole lot of thing about clearing away a misunderstanding just by having transparency around these sorts of processes and investor accountants and receivers, which we will come onto in a minute. So you said, you know, that you withhold your instructions because the instructions were in the valuer’s report. Well, if it’s the same then why just not have that open? MR COHEN: Yes. I understand. MS SCOTT: So because immediately you restrict information people will mistrust what you’re trying to do. MR COHEN: Yes. I think it’s a really valid point. And the question of transparency generally is a really valid point and I think the heritage, if you like, of bank lending has not been marked by lots of transparency, and I think that’s just a fact and it’s something that we need to address as an industry. So I take your point completely that transparency actually can avoid a lot of the misunderstanding or a lot of the perception issues as well. MS CARNELL: It’s absolutely true that if somebody gets told, “No, you can’t see it. It’s a secret,” they believe that there’s some conspiracy happening. MR COHEN: Yes, of course. Yes. Yes.

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MS CARNELL: I don’t actually believe there is. MR COHEN: No, either do I. MS CARNELL: But the fact is that if you were in that position, what would you think? MR COHEN: Of course you would. No. I agree, Kate. And I’m genuine in saying that I do think the transparency here can only be for the benefit of both borrowers and banks. MS CARNELL: So in this case valuations, instructions, valuation transparency, the frustration again for me is everyone agrees that it has got to change. MS SCOTT: Since 2008. MS CARNELL: It has been recommended since 2008. This is one of the ones – the recommendations that have been – David, you’re really good at agreeing and understanding and doing nothing. Sorry, not personally. MR COHEN: No, no, I understand. I understand. MS CARNELL: But so if everyone desperately agrees that this needs to change, now some of the banks have suggested they do it now, but what’s stopping you tomorrow changing? MR COHEN: Yes. It’s a very good question. Operationally, Adam, literally nothing. I think that’s a fair answer, isn’t it? MR BENNETT: I think specifically in terms of valuations, putting aside the category that you were just talking about, I think that’s something that is entirely reasonable to expect that we would just get on and do. MS CARNELL: Okay. Look MR COHEN: And we do, Kate. I mean, that is our policy. I think what we have to be better at – and admittedly, the cases of the past that we’re looking at were in a different era when the policies weren’t the same. MS CARNELL: Yes, I know. I accept that. MR COHEN: But we do have polices now that actually do require valuations to be provided. I would be hopeful that, as that policy has taken root and practices have changed, that there is one issue that doesn’t become an issue in the future and that it actually is an indication of banks changing. MS CARNELL: So like, we can be confident then today you are making instructions and valuations available to the client who pays for them. MR COHEN: As of this morning

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MS CARNELL: Yes. MR COHEN: As of this morning, Kate, I can’t tell you that in every single case we are providing valuations and instructions. MS CARNELL: Yes. MR COHEN: Your point we completely take, that is, it’s up to us to make sure that does happen. MS CARNELL: Yes. MR COHEN: And that is what our policy requires us to do and that’s what we need to do. MS CARNELL: And valuations for customers in default or administration is something you’re going to look at seriously, because more transparency can only help. MR COHEN: Yes, that’s an interesting one. Yes, I MS CARNELL: I accept in this case you’ve got to speak to the administrator. MR COHEN: I agree there. So we do need to think about, well, how do those tensions interact? And I think that does mean, you know, talking with receivers, given that they’re in the firing line. MS CARNELL: Okay. MS SCOTT: So just one thing on valuation. So we talked about the closed door situation when somebody has got a problem. So also an issue is if somebody – so there’s – you know, there’s somebody questioning a valuation, which may be just because it’s a fraught issue. There’s also the question of if there’s an access to justice thing around a valuation that has not been conducted well. So at the moment there’s nowhere for somebody to go, because FOS won’t accept any issues with a valuer because they say, “Well, it’s outside the jurisdiction of FOS because we’re only dealing with bank issues, but the thing is it’s a third party that has been instructed by a bank”. So we get, when we’re talking about valuations, that they’re done, broadly, in the outside world. What we’re talking about is valuations that have been instructed by a bank. Why is it that – whatever the access to justice body that the Ramsay review comes up with, can valuations – access to justice issues – not be considered because that’s a third party that the bank has employed? I mean, at the moment there’s nowhere for those people to go with an access to justice issue. It has been raised by FOS. It has been raised in previous inquiries. MR COHEN: And is it the case that the typical circumstance that you’re talking about here is a valuation in the course of selling assets, or is it a going in valuation as well? MS SCOTT: It could be any access to justice issue relating to a valuation.

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MR COHEN: Okay. So I suspect – and I don’t know this for a fact, but I suspect – that most of those concerns would be associated with the sale of an asset, as opposed to commencing a loan. I imagine. MS SCOTT: Yes. MR COHEN: In those circumstances – and here, again, there’s a balance that needs to be struck – at a high level I can understand the concern around, well, how does a borrower get to object to a valuation that is then used as the basis for selling their asset? And I don’t have an immediate solution for you. The one thing I can say is that one of the considerations that needs to be taken into account is can a construct be created to give a borrower that ability which in turn isn’t either the cause of delay for the sale of an asset or is abused as a stalling tactic. Now, that might sound like a cynical banker talking, but the reality is that, quite often, a delay in the sale of the asset is only going to exacerbate the financial indebtedness that the customer owes, because if, for example – so I suppose – and, to get right to the nub of it, if there was to be some means of having a customer challenge a valuation that is used in a sale process, one of the key principles of that hearing or appeal process needs to be speed and expertise, I guess. MS CARNELL: And, you know, as Anne says, access to justice. MR COHEN: Yes. MS CARNELL: For the person not to be able to complain anywhere MR COHEN: No. Sorry, Kate, what I’m assuming is MS CARNELL: That’s not MR COHEN: if there was MS CARNELL: Yes. No, I accept that. MR COHEN: an avenue MS CARNELL: It needs to be quick. MR COHEN: it needs to be quick and it needs to have the appropriate expertise in it, because there is a real risk here of further disadvantage, both to bank and to customer, in fairness. MS CARNELL: Okay. MS SCOTT: So, just on investigative accountants and receivers, there’s kind of a similar transparency perceived conflict of interest type thing then. Again, another very fraught area. And, in the interests of dispelling concerns about the processes within the bank, transparency is really good here. So what we’re interested in is how the bank actually goes about selecting the investigative accountants, and what sort of arrangements you’ve got in place for that. Again, the

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borrower will pay for all of that, and it’s in the interests of transparency. It’s about the selection of the investigative accountant, what input the borrower has got into that, what the borrower’s expecting to happen and then the report that comes out the other side. What we understand is the borrower may get a heavily edited version, and the bank will get other sections that they don’t see. So this is IA stage; not receivership stage. MR COHEN: Yes. Yes. MS SCOTT: So can you give us your thoughts on that part. MR COHEN: Yes. Certainly. And Adam can – he will have some additional thoughts, too, from the borrowers’ perspective. So the perception issue is that the investigating accountant is somehow in the pocket of the bank. MS SCOTT: Yes. MS CARNELL: That’s right. MR COHEN: And the reality is that investigative accountants are selected from a panel. The panel is selected on the basis of expertise, capability and breadth of resources, and their location. So obviously we need to cover the nation. MS CARNELL: Yes. MR COHEN: It is true that the borrower doesn’t have a say as to who is appointed as the investigating accountant. And when the investigating accountant goes in, in terms of addressing your point around the interaction – does the customer even have interaction with the investigating accountant – the answer is absolutely yes. In fact, it’s quite essential because the investigating accountant can’t actually perform their role of understanding the business and then coming up with any recommendations, without working closely with the borrower. In terms of the last element there, namely, the report and how much of the report is provided to the borrower, we do provide the report to the borrower to do a factual check to make sure that the borrower agrees that the facts on which the investigating accountant is proceeding are the correct facts. It is true that the whole of the report is not provided, that some sections are redacted. The reason for that is – and I understand the transparency point and what suspicion it can drive, but the MS CARNELL: Does drive, yes. MR COHEN: reason for it, it’s a substantive reason, and that is often the investigating accountant will be making comments around the capability and the quality of management, i.e. the customer. MS SCOTT: But surely you’ve already had those conversations with those people. MR COHEN: No.

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MS CARNELL: But if you’re trying to help those people go forward and they’ve got a management problem MR COHEN: Yes, but what I’m talking about is that here the investigating accountant will actually make statements around their view of the quality. And, secondly, the reason is because sometimes the investigating accountant will be making recommendations that the bank simply doesn’t agree with. And our experience has been to provide that to the customer often unnecessarily aggravates the situation or upsets the customer because of recommendations that the bank has no intention of pursuing. MS CARNELL: But surely you can get over – overcome that by telling the people that they’re not – you’re not planning to MR COHEN: Well, yes, although that is perfectly logical, the reality, Kate, is, though, when it’s in a report and it’s in writing and there’s a recommendation there, it immediately – understandably, too, from the customer’s viewpoint – sparks a fear that that is what the bank is going to do. MS CARNELL: You know, they’re grown-ups. They can MR COHEN: I understand, but – I do understand, but I’m only reflecting to you what actually happens is people do get MS CARNELL: Yes, I understand that. MR COHEN: And I think it’s justifiable that they would get concerned at a recommendation. MS CARNELL: And they get concerned about big bits being out of the report. MR COHEN: And they do, and I – that’s why I completely agree with you that the perception that creates is not – is the negative one. It’s a negative perception. I agree with you. So again it’s a case of how do we balance – sorry – how do we deal with those issues that I raised, versus how do we actually not sort of shoot ourselves in the foot by creating a perception that’s not true. MS CARNELL: Do you give the client, the customer, the instructions that you’ve given to the investigating accountant? MR COHEN: Not as far as I’m aware of, Kate. No. MS CARNELL: That could solve a few problems. MR COHEN: Yes. MS CARNELL: Perceptions that you’re sending them in to give advice on how to put them into bankruptcy, is really bad. We have – you know, in one case we have a stat dec from a financial officer saying that the investigating accountant showed no interest in revenue at all, only costs – in fact, wasn’t even in interested in looking at revenue, only costs – which gave everyone the view

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that all they were really looking – or really looking at is what was going to happen once it moved to the next stage, into receivership. MR COHEN: The – Kate, the only other point I would make there is that often the instructions to an investigating accountant are not extensive instructions. So the instructions are to go into the business to understand the business’s cash flow particularly. That’s very important. Secondly, to understand the quality of management to see whether the business is being managed well. And, thirdly, to recommend way s in which the financial performance of the business could be improved. So they’re not really MS CARNELL: That’s fine. MR COHEN: But your point is well made, if that’s all they are, then MS CARNELL: Then MR COHEN: Yes. And it just hasn’t been a practice to date, and it is – I’m not saying it’s a practice that has problems with it at all, but – and it probably would help address that perception issue. MS CARNELL: Well, there you go. There’s a solution. MR COHEN: So, yes, it’s a fair point. MS SCOTT: Okay. Lovely. So the only other thing is, again, the situation where somebody has got an issue with an investigating accountant. Where would they go to raise a concern, or if there’s an access to justice issue? MR COHEN: And the current situation is that if they have a concern with, say, the outcome of such a report, their only avenue, literally, is to come to the bank and to talk about it. Now, what I will say is that we will always have discussions with the customer about the action that we’re going to take, having learnt what we have learnt from the investigating accountant’s report. So there is an active discussion, as you can imagine, because often that leads to a situation where the bank is going to be making decisions about how to proceed with that customer. But at the moment the customer’s concerns around the investigating accountant’s report will be directed to the bank. MS CARNELL: So unfortunately, this business is now going to move into receivership. Is it reasonable for the same company to be used and doesn’t that produce a perception of conflict of interest? MR COHEN: It does create that perception, I agree, and MS CARNELL: So MR COHEN: you’re probably aware, Kate, of the work we did at the time of the Parliamentary Joint Committee hearing into impaired loans and we looked at the level of investigating accountant appointments, how many were then appointed as receivers. And the answer is it was a low level, but, nevertheless, the perception is that there could be a conflict there.

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MS CARNELL: So wouldn’t it be sensible not to use the same companies MR COHEN: From a – addressing the perception point of view, I would agree. There is a practical aspect MS CARNELL: Yes. MR COHEN: which I’m not saying is an override, but it is an aspect to be considered. MS CARNELL: Yes. We’ve seen it, that, you know, they’ve already done the work so it stops things being done twice. MR COHEN: Yes, exactly. And MS CARNELL: But if you add a court-appointed administrator, they would have to start from scratch is what – you know, so MR COHEN: Absolutely, they would. They would. You’re absolutely right. And so it would address that perception, I agree. Sometimes it will add additional cost, but the perception is you would be sold. MS CARNELL: That is true. So it would seem like a good thing to look at quite seriously. When a client has a problem with the liquidator, where do they go? Another access to justice issue. FOS won’t deal with those, with administrators, with MR COHEN: Receivers, that’s right. MS CARNELL: receivers. MS SCOTT: And when you go to talk to the receivers, they’re – that industry association says, “Well, we work for the bank so we won’t really consider any complaints or issues from the borrower because we’re –” even though the Corporations Act says things slightly differently, they say, “No, it’s not – you go to the bank.” And then they go to the bank and the bank conveniently says, “Well, under the Corporations Act, actually the receiver is working for you,” and it’s bizarre. MR COHEN: Yes. So a bit circular, yes. MS CARNELL: And this is really life investor for a lot of people, you know. They really MR COHEN: Yes, we’re talking recovery stage now. MS CARNELL: We’re talking recovery stage. MR COHEN: Yes. MS CARNELL: It’s a nasty time.

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MR COHEN: Yes. MS CARNELL: It’s very emotional. MR COHEN: Yes. MS SCOTT: Yes, and this is where people are desperate. MR COHEN: Yes. No, I agree. MS CARNELL: And they’ve got no one to MR COHEN: I agree. So I think the way you’ve characterised it – namely, that the customer doesn’t have a tribunal to go to or a one-stop shop to go to – the only avenue available to a customer at that point is the courts under the current regime. MS CARNELL: And that’s not terribly likely at this point in time, is it, really? MS SCOTT: Well, we got – you see, this is the ..... MR COHEN: No, and MS SCOTT: It was a technicality that they didn’t have the money to take them to court. MR COHEN: And given what we’ve said before about the cost of litigation, etcetera, even more so. So your point is well made that (a) it’s a difficult time, (b) the financial resources at that point are at their lowest ebb. The only recourse at the moment available is to the courts and that’s an expensive and slow process. MS CARNELL: And also they wouldn’t – where they are, they’re with the receivers. They don’t have any money. MR COHEN: Yes. That’s what I mean. MS CARNELL: Yes. MR COHEN: They’re at their lowest ebb and so the ability to actually fund litigation in courts is generally not there. MS CARNELL: No. MR COHEN: It’s an extremely difficult situation and, again, from a policy perspective, what we’ve seen in the past is this weighing up rights of a secured creditor versus the rights of the borrower. And, unfortunately, from a policy perspective, the route taken to date has been that’s what the court system is there for. Now, as we’ve just discussed, there are some real practical limitations to that.

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MS CARNELL: So have you got any ideas on who should be – taking into account it is the bank that appoints the receiver when we’re talking about these sorts of scenarios, therefore, the bank has some level of responsibility and we have talked about social responsibility and being a very, very large and important part of the Australian economy. MR COHEN: Yes. MS CARNELL: So responsibility is real, so MR COHEN: It is. It is. So one thought – and I think this is partly lying behind the ABA proposal to ensure that every bank has a customer advocate – is to actually have an internal appeals process, because, as you say, the customer is only able to deal with the receiver or the court. It can come to the bank. And at a point where things are pretty desperate, I guess what’s point most important here is that there be an independent, but speedy, review. And I think there is scope there for the customer advocate. Now, at the moment that’s not a mandated arrangement at all. T he way we have set up our customer advocate service is to particularly look at situations where a customer has gone through, say, a complaint process and it hasn’t been satisfactory from the customer’s point of view. And therefore, a second view can be taken from a team that is actually separate from the business, separate from the complaints team as well, so they actually stand separately. I know that’s not genuinely and truly independent in the strictest sense of the word, but they are independent from the business that has the dealing with the customer. They are independent from the team that is dealing with the first point of complaint contact, so I think there is some benefit in that. MS CARNELL: So the advocate could deal with a complaint against a receiver. MR COHEN: Yes. And that’s my point exactly. MS CARNELL: Yes. MR COHEN: So that the advocate could actually hear the concern that the customer has. MS CARNELL: They couldn’t MR COHEN: They’re still our customer. Notwithstanding the fact that they might be in receivership, they are still our customer. We still have obligations towards that customer. The advocate could actually hear the concern that the customer has about the receiver and perhaps be the MS CARNELL: What could the customer advocate do about it? MR COHEN: Well, that’s a very good question, Kate. And what we are trying to work out now is exactly how does the organisation respond to the customer advocate’s findings, for example? And it’s something we are working on now. But I think in the spirit of what a customer advocate is about, it has to be more than just hearing the customer and then siding with the business all the time.

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MS CARNELL: Yes. MR COHEN: And that clearly would be unacceptable. MS CARNELL: It certainly would be. And not being able to – and not having a capacity to actually act and act reasonably quickly if there was a problem is pretty fundamental. MR COHEN: Yes. Correct. I agree. I agree. MS CARNELL: So I think the dilemma with people who – a smaller group of people who have a problem with you and with the banks and things that happen is that they aren’t usually very happy with you at the time. They’re not sure that the trust is high and for all sorts of reasons. And so whatever process is in place has to be, not just arm’s length, but to be seen to be arm’s length. MR COHEN: Yes. MS CARNELL: To be seen to have the capacity to do something and to actually, you know, show that that’s the case. Some of the dilemmas, even with FOS, is that, as FOS reported, there’s a whole range of even decisions FOS has made that the various members of FOS haven’t actually acted on. MR COHEN: Yes. MS SCOTT: Well, they’re supposed to be binding and nobody goes and checks. MS CARNELL: They’re supposed to be binding, but then they’re not. And then FOS says, “Well, it’s not up to us to actually make our members pay.” MR COHEN: Yes. Yes. MS CARNELL: You can understand how that – I’m not saying that’s you. MR COHEN: Well, thank you. No, I do understand. Look, as you know, that’s not the experience of the large banks, but that has been an experience that FOS has recorded, particularly in relation to smaller financial advisers. MS CARNELL: Equally, you do have some capacity, you know, to determine how FOS operates. Well, you do because you own it. MR COHEN: Well, I’m not so sure, Kate, that we have the capacity. In fact, it’s really important that we don’t have a capacity to influence how FOS operates. We certainly fund FOS. MS CARNELL: You certainly ..... MR COHEN: But the governance there is very important. The governance is such that we don’t have the ability to influence FOS, otherwise it would potentially debase FOS findings.

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MS CARNELL: I understand that and we could get into that on another day, but that’s fine. MS SCOTT: Can I just ask a few more questions about the customer advocate. So how long have you had the customer advocate in place? MR COHEN: Not long. A couple of months now. It specifically arose as a result of internal work that we were doing and then the ABA also decided that the industry should ensure that every institution has a customer advocate. MS SCOTT: Yes. So it has been put to us it’s a pretty difficult gig in terms of, again, it’s one of these things that looks good, but how effective that person is in the organisation, you know, it can be a really, really difficult role. MS CARNELL: Interesting making a finding against you, Adam. I mean, it won’t be, but, you know, against your staff. MR BENNETT: Yes. I mean, the only comment I would make is even our customer relations team that manages complaints currently and long before the customer advocate was in place, I think, has a degree of objectivity and does challenge the business and tries to take an objective view. So I think the customer advocate is building on already what is seen to be a, you know, well functioning internal dispute resolution process. And I think I can only comment on our institution, but the individual who has been put into that role, the credibility that they have and the way that they’re engaging, I think there’s a lot of genuine desire from the organisation to ensure that they’re set up to have the impact that delivers on the intent. So I certainly would not want there to be seen that it’s kind of just a rouse on what the ultimate objective is, which is exactly as David described. MS SCOTT: Yes. So, you know, these things are a lot of talk. What’s then again put to us is a very effective code – a strong code of practice, a very effective access to justice, a very effective internal complaints and customer advocates systems – is entirely dependent on transparency and the information that’s shown to everybody about how those things are functioning. MR BENNETT: Yes. MS SCOTT: You know, you can have those things, but they are not effective if they’ve got no teeth and there’s no monitoring and transparency around what those people are finding. So MR BENNETT: I think those principles MS SCOTT: with a customer advocate – so how are you publishing the issues they’re finding? And I mean, specifically, the issues they’re finding – not just wrapped up into stats. MR BENNETT: Look, I’m not sure that the exact approach to that is determined at this point in time, but MR COHEN: Not yet.

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MR BENNETT: I think the principle of what you’ve described – not just in terms of the customer advocate, but in terms of the end-to-end process around transparency – that they’re being effective – I totally support, and I think that MS SCOTT: I mean, it’s just interesting, again, that you can put in a customer advocate and not think about that. MR COHEN: Yes. So – well, far from not thinking about it MS CARNELL: Yes. MS SCOTT: Well, you just said MR COHEN: And in fact MS SCOTT: you didn’t know what it were. MR COHEN: No, no. That’s very different from not thinking about it. MS SCOTT: Okay. MR COHEN: So, far from not thinking about it – and, in fact, the team that we have put in place is actually working through exactly – not only how they’re going to operate, but how they’re going to show the world that they’re operating. MR BENNETT: Yes. MR COHEN: So one of the things that we are very keen on doing is, through our general community responsibility reporting – and this would be an element of it – is to – how do we actually report customer advocate activities? I think you were getting, Anne, there, in part of your question – you know, not only high-level stats – how many MR BENNETT: Yes. The individual cases. MR COHEN: issues but individual case outcomes. MS CARNELL: Yes. MR COHEN: And right at the moment we haven’t thought out how we’re going to do that, partly because of privacy reasons. So, to an extent, it might depend on whether the customer is prepared to allow that to happen. So that might mean it’s an individual case-by-case arrangement. MS SCOTT: If MR COHEN: But it very much is part of the thinking. And that’s important for us, too, for the very reason that you highlight. There’s absolutely no value in us putting in place and spruiking the value of a customer advocate if in fact we’re not going to, A, take it seriously, and, B, show the world

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we’re taking it seriously by opening it up to a level of transparency that people can actually form their own views. MS CARNELL: But you can understand – you know, the stats around internal dispute resolution are pretty ordinary. MR COHEN: Yes. Yes. So – no, and, look, the high-level stats themselves MS CARNELL: Are pretty ordinary. MR COHEN: aren’t necessarily very meaningful to the people who are in an individual case situation. MS CARNELL: Maybe you should do some customer stats – satisfaction – using the people who utilise your customer advocate and your internal dispute resolution, to see the people who have got a problem – what they think. MR COHEN: Yes. Actually, Kate, that’s a very sensible thought. And currently we do look at the degree of satisfaction and dissatisfaction through our customer complaints section. So, that we currently look at. And it will be the same, I expect – we’re yet to design it fully, but I expect it will be similar, if not the same, through our customer advocacy, because otherwise we don’t have a barometer against which to measure. MS CARNELL: Well, that’s true, but, in terms of your internal dispute resolution – that bit – your statistics in that space aren’t any good, or aren’t terribly useful to have a look at. I mean, they’re macro MR COHEN: You mean our public statistics, Kate? MS CARNELL: Yes. Your public statistics. You might have internal ones that are better, but MR COHEN: Yes. We have a lot of internal ones. MS CARNELL: But the ones that you publish are pretty meaningless. MR COHEN: Well, I guess they’re sort of percentage of disputes, disputes – over what period of time before they’re resolved, etcetera. MS CARNELL: Yes. MR COHEN: And they’re high level. I agree they are high level. MS CARNELL: So you would want to do a whole lot better with the customer advocate. MR COHEN: Customer advocate. I think that’s an important element of it. I genuinely do. I think we’re not going to be taken seriously, and our customer advocate function isn’t going to be taken seriously, unless we give some transparency.

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MS CARNELL: Okay. Thank you, guys. MR BENNETT: Thank you. MR COHEN: Thank you, Kate. Thank you, Anne. MS CARNELL: We really appreciate it. There was one question. I did ask the question on the total value of the 1958 cases. MR COHEN: Yes. MS CARNELL: I would like that to be produced. MR COHEN: The actual value of those loans. MS CARNELL: The actual value of the total loans. MR COHEN: Not just the losses. MS CARNELL: I know the losses in the document, but MR COHEN: Sure. Okay. MS CARNELL: I would like the total value. That would be great. MR COHEN: Happy to. MS CARNELL: Fairly obviously, there’s a range of things that we talked about today that will be in our recommendations, and I’m very pleased that, with a large number of them, you’ve already agreed. Thank you very much. MR COHEN: Thank you. MR BENNETT: Thank you, Kate. MR COHEN: Thank you. SESSION CONCLUDED