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SMALL BUSINESS LOANS INQUIRY HEARING – SESSION FOUR – WESTPAC TRANSCRIPT OF PROCEEDINGS AUSTRALIAN SMALL BUSINESS AND FAMILY ENTERPRISE OMBUDSMAN INQUIRY INTO AUSTRALIA’S FOUR MAJOR BANKS WESTPAC INQUIRY CHAIR: KATE CARNELL PARTICIPANTS: ANNE SCOTT ANNETTE CONNOY JILL LAWRENCE DAMIEN O’DONAVAN DAVID LINDBERG KIRSTEN O’DONOGHUE 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. We might get the show on the road. We all ready to go everybody? That’s wonderful. Thank you very much. Well, thank you very much, David and Kirsten, for joining us this afternoon, representing Westpac. Just to start off the proceedings today, as you would be aware, we’ve been asked to do an inquiry by the Minister for Small Business into impaired small business loans based upon a – the work that was done by the joint parliamentary committee. We had to identify some cases that had been identified in that inquiry that were of concern. We did that, and then we identified a smaller group for a deeper dive. Out of those case that we’ve had a look at, a range of issues have surfaced that are broad-based. We were asked by the Minister to come up with recommendations that could ensure that some of the issues that have caused problems in the past for small businesses could be addressed in the future. As I’ve said in previous sessions with other banks, the thing that surprised me in this whole process, as somebody has taken out a range of business loans in the past – predominantly with Westpac, I have to say – that when I took those business loans out I believed that as long as I paid back the amount that the bank asked me to pay back, that I ran my business efficiently and that I didn’t sell any of the bricks and mortar that the loan was secured against, then all would be well. The reality is, I’ve now learnt, that there are a range of terms and conditions in what are very, very complex contracts that allow banks to call – or to change the terms and conditions of that contract almost at will. In fact, David Murray made the comment in the Murray Inquiry that small – that loan documents were a bit like margin lending accounts that could be called at any time. And we will talk a little bit more about that later. The issues that we will cover today are one-sided contracts. And you would be aware that there is now unfair contract legislation that attempts to address that. We will talk about those. Non-monetary defaults – those are those terms and conditions in lending accounts that allow those contracts to – well, to be changed or to deliver defaults when the customer hasn’t missed a payment on their loan. Issues such a lack of transparency with valuations, insufficient timeframes where loans are called or decisions are taken not to rollover or – not to rollover a loan or to give a new loan at the end of a facility, where the timeframes have, in some cases, not allowed a customer time to refinance. Issues surrounding mixed signals from different areas inside a bank. That is, one area – possibly the customer relationship area – giving a client a different view than, say, other areas of the bank in terms of what the future, or even what the present, might look like in some circumstances. A lack of transparency, and even conflict of interest, or perceived conflict of interest, with regard to investigative accountants and also receivers. Issues surrounding access to justice for small businesses. The issues surrounding the financial ombudsman’s service – that works very well for individuals, but not very well for small businesses, due to caps expertise – and other issues have been raised. And issues surrounding the banking code of practice. So those are the areas that we will look at this afternoon. I’m sure you are aware – because everyone in the banking industry will be aware – of the large number of inquiries that have happened into the banking industry and will continue to happen into the banking industry. There have been something like 17 of those since 2008. And the concern for us is that the recommendations of those inquiries have been pretty similar, and in fact have raised the issues I’ve just run through, regularly. Regularly, there has been an

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acceptance that things need to change. In fact, over the last day and a half speaking to your colleagues in the other banks, there’s an acceptance that a range of things need to change, and there is agreement to those changes. The fact is that has been the case for a long time, and in my cases – most cases – that change hasn’t happened. So, before we go on to our questions, David – Kirsten – one of you might like to make an opening statement. MR D. LINDBERG: Yes. Thank you. And I guess, rather than making an opening statement, I would just like to maybe note two items. And the first of those two items is to reflect that, when we speak to our customers, it appears to us that there are really two matters that are most important to them – that they ask for us the most. And the first of those is access to credit. And my view is that, over the past couple of years, access to credit to this segment has improved tremendously. To give you a sense of that, over the last year we have grown our access to credit to the small business segment at twice the pace – in fact, slightly more than twice the pace – than we have grown the access to credit to the commercial segment. So there has been real improvement there. Secondly, more and more we’re being asked to provide not just credit or debt, but for our bankers to provide professional services. And so access to advice, access to specialists and experts – access, in fact, to the networks of the bank. And I think we in the industry have made a real investment to try to improve that. And, on both those measures, I think there has been a lot of progress recently. And what I request is some consideration, as we think through potential changes to legislation – that we do so in such a manner where we maintain that progress. So that’s the first point I wanted to note. And I wanted to be clear that those two items, specifically, in our view are particularly important to the small business segment. Secondly, I wanted to proactively give you some potential recommendations. We have, of course, read your terms of reference, and as we went through it we’ve given consideration to what could change in the industry. And maybe I will read, with permission, the five that we’ve come to – each of these five we’ve researched heavily. Each of these five, in cases where it affects customers, we’ve also done customer testing. So we’re confident that these five will actually be sensible in a board room, be sensible in an inquiry room, but also be sensible in the real world. The first of those is we will recommend that we remove all non-monetary covenants for new property secured exposures under $1 million. Now, that will encapsulate the majority of small business lending. Of course there is other small business lending, but the majority, in our view – roughly 96 per cent of small business lending – would be captured by that. So we think there should be no non-financial covenants whatsoever in our industry, for that segment. Secondly, we recommend to implement industry standardised default and enforcement notices, including mandated timeframes. And, as a part of that, we should also provide the contact details of our business hardship team right in that notice, so all customers and all cases have yet another channel to have access to that point of escalation. Thirdly, to report all bank-initiated enforcement action to you, the ombudsman, on a regular basis. We think, as a starting point, every six months, but you could decide to make that more or less frequent. But we think it’s important that you have access to that information, and you can then track performance of individual institutions over time. And also performance of institutions relative to the market. Fourthly, we recommend that the mandate for ASIC to approve the code of banking

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practice. It’s an important code to us. It’s important to the industry. It’s important to people’s views of the industry, and we think that, therefore, should be approved by ASIC. And we can talk in more detail about what we mean by that. And then, fifthly, to increase terms of reference for external dispute resolution schemes, particularly by increasing compensation. Today that’s at 500,000. We think it would be more appropriate for that to be lifted to 2 million. And also to increase the limit from 2 million to 3 million. So that will include virtually 100 per cent of all businesses that we would consider to be small businesses. So we would make a recommendation for those five, for your consideration. We think that would be in the interests of all participants in the system, but particularly to customers. With that, happy to take any questions on those five, or any other topics you might want to get into. MS CARNELL: Look, thank you, though. We do appreciate you being proactive in this area, which I have to say you have been throughout this inquiry. So, look, we might start with the issues surrounding non-financial default, on the basis that you just brought that up for businesses under a million dollars – with loans under a million dollars – not a million dollar turnover. When you say no no-financial defaults, does that mean – you know, in – I suppose, in layman’s language, back to my comments right at the beginning, that as long as I pay back the loan that I get from you and I pay the amounts I’m supposed to pay on time, and I don’t, you know, break the law or break the agreement, like, you know, sell the bricks and mortar that the property – that my loan is secured again, or any of those sorts of issues, that there are no other clauses deep inside that incredibly complicated loan document that can come – that you can use to default me. MR D. LINDBERG: The short and simple answer is yes. So the slightly more detailed answer would be this is something for that segment that we don’t do anyway. We manage this at a portfolio level, and we don’t use non-monetary defaults for that segment of the market. MS CARNELL: I accept that, but they’re in the contract. MR LINDBERG: And as we’ve suggested, that’s something that we think should, and could, be eliminated from not just our contracts but all contracts. MS CARNELL: So what would a small business loan contract look like, then? Because I have to say, I don’t think it works for small business. The comments that some of the other banks make: “Yes, we never use them. They’re in there, but we don’t use them.” I think they have to not be in there. If they’re in there, then there’s always an option. MR LINDBERG: Well, as I said, for non-monetary covenants under $1 million, we don’t think they should be in there, so we agree totally. MS CARNELL: Sure. There has been a range of discussions about what a non-monetary covenant or, you know, clause really looks like. That’s the reason I’m trying to just elevate the whole issue to something that the people who are listening or watching can understand. So we – you know, clearly – well, you’ve said that this is the case – as long as I pay back the amount of money that you’ve indicated that I – that my agreement with the bank says I should, on time, that I continue to run my business, that I don’t sell the property that the secured against, those sorts of basic sorts of things that I understand as a small business, that there are no other covenants, non-

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monetary defaults, capacity to revalue, the capacity to change the terms and conditions of the contract at fundamentally any time that the bank chooses to, which is what the current contract says. So that all of that goes. MR LINDBERG: Well, I think I want to be really clear. Non-monetary covenants – so now we exclude things like fraud – where a customer is in good standing in making their payments, in the segment under $1 million, which is the preponderance of the loans that we make to the segment, we’re suggesting that there are no provisions for non-monetary covenants whatsoever. If I were to take a step back for a minute and just talk about the principle and try to make it clear at the principle level. MS CARNELL: Yes. MR LINDBERG: The highest order of principle I think we have to aspire to is transparency, where a customer knows precisely what they’re signing themselves up for, and they know of the conditions of the loan agreement. You know, we do that in a number of ways but there are two that are particularly important. The first is applying what we call a plain language test, and we would be the first to admit that we don’t get that right all the time – for any number of reasons that we can discuss in this session. But point 1 is try, at all costs, to have as transparent, plain language English. I’m not a lawyer. Most of our customers aren’t lawyers. I’m sure there are good reasons for both of those things. We’re trying to apply that test, firstly. The second thing we try to do – and we’ve been making a lot of investments in this regard – is that we really shouldn’t be making loans to customers without a conversation occurring between a customer and not just a banker but a specialised banker, a banker that understand the business and the exact loan that’s occurring to the business. And that’s why we’ve made huge investments in particularly a capability called Connect. And we’ve now connected 100 per cent of the Westpac branch network to regionalised, specialised centres via video. So we have an expert who is capable of talking about every single loan of every single customer at point of origination. And that, to me, is the second real leg of the stool that creates transparency. Now, there are other things that we do, if it doesn’t work, to recoup when customers might not – when it becomes clear customer might not have that understanding deep into the loan term. But those are the two things that we try to do. At the beginning of the loan term we’re investing heavily in it. Now, do we get it right in 100 per cent of cases? I would be the first to admit that we don’t. But actually and culturally we’re doing everything we can to live up to both of those. MS A. SCOTT: So, David, just to – sorry we keep labouring this. It’s just making sure that we’ve thoroughly understood what you’re saying. So have those changes to remove non-monetary clauses and covenants been done as a response to the unfair contract terms, or do you mean you’re going to do it? MR LINDBERG: So, as you would be aware, on, I think, 12 November, new legislation came into effect for unfair contracts. That caused us to rewrite virtually all of our contracts. That was done. And that is now implemented. As a part of that legislation – that legislation didn’t speak to this specific change.

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MS SCOTT: No. That’s right. MR LINDBERG: So what I’m saying is as we reviewed our contracts it became clear to us that we have these covenants in place whilst never using them – with no intention to use them – with no history of ever having seen them used. And, as a consequence of that, we’ve decided to eliminate them. And that’s something that will be happening, in an actual way, over time, although it has happened, in a practical way, for many years already, and we’re further suggesting that that be something that could be adopted by the industry. MS SCOTT: And that’s great. And that’s – so, in the Financial System Inquiry Review, where David Murray raised this issue about non-monetary default clauses and covenants – indeed, one of the recommendations was about using the UCT legislation as a means to review these things in contracts, and also for the industry to adopt some standards around their use more broadly. So, from what I’ve understood from what you’ve said, you’ve done your response to the UCT, and then you’ve reviewed the contracts with a view to removing these clauses, but that will be done in the future. Do you know when? MR LINDBERG: I could come back to you on when that will be executed, but, to give you some certainty, we don’t use them anyway, and so really this becomes a technical issue of when we get them through our systems, and the changes get physically made. But I’m happy to take that on notice and come back with a specific date. MS SCOTT: So what do you mean you don’t use them anyway? They’re in the contract, but you don’t use them anyway? Is that what that means? MR LINDBERG: That’s true. MS SCOTT: So I guess – I mean, you will be understanding, from the hearings that we’ve held earlier, lots of banks have been saying that they don’t use them. And we get that, but the fact that they’re in the contract still means that you could use them if you chose to. So we really appreciate you saying that they’re still there but you don’t use them, but do you have to wait for the whole of the industry, or can Westpac go on their own to do this? MR LINDBERG: We won’t be doing this as a result of recommendations you make. We’re going to be doing this regardless of what the industry does. MS SCOTT: Okay. MR LINDBERG: So, for a million dollars and below – the majority of our small business lending – we will be eliminating non-financial covenants. MS SCOTT: All right. MR LINDBERG: Excepting things like fraud. MS SCOTT: Yes. Yes. I get that. MR LINDBERG: And a few other carve-outs that I think would be sensible.

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MS SCOTT: Yes. So, above 1 million, Kate? MS CARNELL: Look, we are very pleased with the 1 million. We think it’s too low. We think that there are – you know, again I come back to my experience as a pharmacists. Not too many pharmacies can you buy for less than a million dollars these days. They wouldn’t be much good if they were. So there’s an awful lot of loans in small business that are more than a million dollars. Anybody who is in the construction industry – at some point of a construction, probably, the loan will be more than a million dollars. Anything that has commercial property involved. Any rural property. All of those will be more than a million dollars. So we think that, you know, it’s very good for less than a million dollars, and yes, where the numbers of loans are – you know, actual numbers – you’re right that’s the majority. It’s also true that a million businesses don’t employ anybody and are subcontractors, and therefore their loans are significantly less than a million dollars. We know that. But the engine room of the Australian economy – small businesses that are growing their businesses; and they’re the people that we really want to get behind – are often in the plus $1 million dollar space. In fact, you know, we would suggest that you’ve got to look between five and 10 million to really bring those people into the space. And they’re still small businesses. So tell me about why $1 million? Where did $1 million come from? MR LINDBERG: Well, let me maybe take a step back and share with you our thinking, and starting with some of the data. So we’ve come to the view that the right way to define a business is based on the size of the loan. Now, that wouldn’t be, necessarily, your top choice for how you define what a small business loan is, but it’s the only data that banks consistently have, and therefore, you know, I think most of us would say it would make sense to define it based on loan size as opposed to turnover, or as opposed to the number of employees. MS CARNELL: We understand that’s the data you’ve got. Yes. MR LINDBERG: But what we wanted to do is we wanted to capture as many small businesses as possible, whilst of course also ensuring that we don’t take large commercial businesses and lump them in with protections, and different sorts of models, that might not be appropriate for them. So if I could share with you how we think about the data and the data mapping. If you took a standard definition of small business, it would be 20 employees and MS CARNELL: The definition in my Act is under 100 employees. MR LINDBERG: So what we’ve done is 20 employees – small business – and then, for manufacturing, we would increase that to 100. Or a turnover of $5 million and less. So let’s take that definition of a small business for the time being. Within that, 96 per cent of that group would be captured in under a million. If you extended it to 2 million – and, by the way, we do think that we need to be extending this to 2 million – in fact, 3 million. If you extend it 2 million, you get to almost 99 per cent of those businesses. So at 3 million you’re getting to 99.89 per cent of those businesses, which is why what we’re recommending as a definition for small business goes significantly higher than where APRA puts it today – at a million. So we think that goes up to three million.

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To try to answer your question, though, where we cure this is – under a million, there are just no financial covenants whatsoever, and that’s why we’re suggesting that we eliminate them from all contracts. Between one million and three million, what we find is we have the non-financial covenant – the non-monetary covenant – in the contract, but we don’t really apply it. And so what we’re separately doing – we didn’t make this a recommendation – what we’re separately doing is we’re reviewing that. And for roughly 95 per cent of that base we will also be doing a piece of work to remove the non-monetary covenant. Then there is a subset of that base – roughly five per cent – where we think non-monetary covenants are important – not for the bank, specifically, but for the system as a whole. And I will give you an example. If you’re doing a construction loan whereby a business is building a property and then selling the property, we would structure a deal – a loan term – whereby the loan would be repaid when the property was sold. That would make sense. But therefore we get no monetary data on how the company’s performing over the period of maybe two years. And so what we structure in that instance is a loan to value test, and then we will come in and say, “If something significant happens to the value of the property, then that would trigger a conversation”, which is essentially what that covenant would be. And so for that class we think covenants are an important part of risk management. So I guess what I’m saying is, for the 96 per cent we think there should be none – no non-monetary covenants whatsoever – and we will eliminate those from our contracts, and we would like the industry to do the same. We will then invite you to look at what we’ve done from the one to three, where you will see that we are removing – or have plans to remove – non-financial covenants from roughly 95 per cent. And, of those five percent, we continue to maintain that, for risk management in the system, it would be important. If we were to remove non-financial covenants from that class of loan – I want to go back to how I started out today, about saying that would be an instance where I fear that the industry would start to remove credit from that segment, and that would reduce the overall performance of that segment, which is MS CARNELL: What evidence is there of that? Because those are the same comments that were made when the consumer laws came in. You know, the changes in that space. And everybody said, “Oh, there won’t be any lending”. You know, “It’s shocking and horrifying”. It didn’t make any difference at all. MR LINDBERG: Well, you know, I guess all I can reflect is the best of my experience and the best of our experience to you today, and the best of our experience is, in this class of loan, if the bank did not have the right, in any interim way, to monitor progress with the property development, in this case, that that would increase the risk, and, as the risk increases, I would submit to you that two things will happen. One is the average price of the loan across the whole sector will go up and two is the amount of credit extended to that sector will go down. So that’s my opinion. MS CARNELL: Can I say I would agree with you, but nobody is suggesting for a moment that there is not a capacity for the bank to have particular clauses that are appropriate to particular loans in documents. The issue is the standard form contract with the quite significant number of clauses in the standard form contract that are fundamentally non-monetary default of covenant clauses that allow the bank to act – banks generally to act – in a particular way. In other words, act

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to be able to change the terms and conditions of a loan at will. Now, it’s those clauses. It’s not the particular clauses that are needed for a particular loan. MR LINDBERG: I think you will find that we agree. MS CARNELL: Okay. MR LINDBERG: And, again, the one million and below is, to us, very clean, which is why we made it a recommendation. It’s a little less clean because there are more caveats and carve-outs in the one to three, but in essence what we’re saying is that, for the stock standard loan document, we’re moving in the direction of taking out all non-financial covenants, and we’re retaining them for the five per cent where we think it’s absolutely necessary. MS CARNELL: Okay. MR LINDBERG: And I’m very happy to share the details of that with you. MS CARNELL: Can I then suggest a way forward with this. Because I think the great dilemma here – and Kirsten may have a view – as running the risk part – that you fundamentally need a different contract in these sorts of space. To try to fix your current contract, you know, with the 40 million pages, and all of the complexity about it, is going to be almost impossible. So if you’re not going to use all of that stuff, and all you want is the simple stuff, let’s see what a much shorter – easier to understand – contract looks like in that space. And isn’t that, I suppose, better, from a risk perspective? MR LINDBERG: Well, that’s the direction we’re headed in. MS CARNELL: Okay. MR LINDBERG: And I’m happy to share with you where we get to. And, as you would appreciate, this is – this would be evolutionary, as we try to simplify and simplify, but the first step we’re taking is the removal of non-financial covenants to the vast majority of these contracts. MS CARNELL: Can I have a list of the clauses you’re planning to take out? MR LINDBERG: I’m more than happy to send you that list. MS CARNELL: That’s fine. No, I don’t expect you to read it out right this minute. MR LINDBERG: My mind isn’t quite sharp enough to have a recall of all of them today. MS CARNELL: No. Because I suppose, having had a look at your response to the unfair contracts changes that you’re planning to make for the unfair contract legislation, I have to say what you seem to have managed to have done is made your variations significantly longer than the initial clauses that were in place, and have just as many out clauses for the bank as there was in the initial clauses. You know, I think – where are we? Here it is. This:

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If you – you the customer – notify the lender within the period that you don’t accept the changes – eg, you know, you had to have a bit that allowed the customer to say, “We don’t really like those changes”; this is, remember, inside a contract that’s in place – the facility will be repayable on demand by the lender. Great. That really solves the problem. So, “If you don’t like the changes you’ve got an opportunity to say know, but we’re just going to call the loan immediately”. I’m not sure that was what it was meant to do. I mean, I just don’t think that – I get it, but that’s what you’ve done. I’m not sure that that makes an unfair contract fair. MR LINDBERG: Well, I guess what I would say is – as it relates to conforming with the new legislation – that they absolutely conform. And I admit it MS CARNELL: Well, you don’t know that, because it hasn’t been tested in court yet. MR LINDBERG: I grant you that. So, to the best of our knowledge, it conforms. And we’re sure one day it will be tested in court. MS CARNELL: There is no doubt about that. MR LINDBERG: Having said that, I would be the first to concede that we want to make our contracts more and more simple over time. MS CARNELL: Again, I think that is really positive. I suppose I’m just disappointed, and not just with your response to unfair contracts – but yours is, you know, as bad as the others, really – that what you’ve done is made the terms longer, more complex, but with just as many outs for the banks as the initial clauses that would be deemed – well, even you guys – your lawyers – deemed to be possibly – well, would contravene the new legislation. Otherwise, you wouldn’t have changed them, I’m sure. You know, I suppose I just hoped for a little bit more, really. Or a little bit – a real effort to move away from contracts that allowed very big, very powerful organisations – like banks; like you guys – to be able to change contracts without the agreement of the other party. Now, what you’ve done doesn’t look to me to do that. MS SCOTT: It’s just the oddness of – this was an opportunity, I guess, to fix something that has been raised many times before and, as I said, the Financial System Inquiry looked at that as to be an opportunity to do this and then it has had the lawyer treatment on the response to the UCT and, yes, the response is what the lawyers anticipate will be acceptable for that legislation yet to be tested, but, I guess, going back to the thing is what worries us is we hear – we’re hearing very positive things and it’s great, but still things either don’t seem to eventually get implemented or they gradually get diluted down so that they become much smaller than was originally said would happen. And having

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missed this opportunity to actually do something, I guess what’s going to make a change now is – so we don’t have anything definitive about when these changes will be implemented, because we already passed the opportunity that we had. MR LINDBERG: So I hear your views. I concede that we want to make them even simpler. I also concede that contracts in a space are complicated, can be complicated, have been complicated and that goes against transparency, but I also think it’s important to apply another kind of test and that’s the customer test. MS CARNELL: Okay. MR LINDBERG: And the test of if you were to speak to the majority of the customers that had gone through a process whereby – and this is how we do it now – we have a specialised lender MS CARNELL: Yes. MR LINDBERG: have a conversation with the customer, explain the key terms of the contract knowing that legal language is difficult for anyone to understand, me included, and then have the customer leave with a firm understanding of that contract. And I think if you were to talk to those customers and ask them if they had a firm understanding, you would probably reach a more hopeful conclusion than the conclusion you would reach by only looking at the loan documentation. So the loan document is not something that, in isolation, represents everything that we do to create transparency with our customers and there is that customer test and I do hope that test gets applied as well, whilst conceding we have more work to do to make legal language a little bit more plain English. MS CARNELL: So does that mean when a customer goes through that process they end up with the one pager or something? Something in writing to say “this is what my loan says”. MR LINDBERG: In some cases we’ve taken that step and one of the things we are working through is creating a one pager with the key terms in there as it is – in all cases, the one pager is audible to the customer in the meeting itself, but that’s definitely something we’re looking at. MS CARNELL: Yes. But, look, we all know that a very large percentage of small-business owners, English is their second and third language, that levels of literacy – a whole range of things – are different from, possibly, those of your specialist bankers who are speaking to them. So looking at ways we can be confident that those small-business people, as confident as you can be, actually understand what you’re saying probably requires some level of something written that is understandable and in plain English. MR LINDBERG: We couldn’t agree more, but I do want to go back to the customer test. That’s the ultimate test. And I do think that if you spoke to our customers and if you ask them if they understood – and, more importantly, if they feel that they had been treated fairly, that the majority of them would say that they had been. And that’s the test that’s also important to apply and, as I said now I think three times MS CARNELL: Yes.

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MR LINDBERG: and I’m trying not to repeat myself, but we concede that, as it relates to the written legal material, there is more work we and the industry need to do. MS CARNELL: That’s great. So what are your – so right now the under $1 million is in place, that there are no financial covenants MS SCOTT: No, it’s not in place yet. MR LINDBERG: Right now we don’t impose financial covenants. MS CARNELL: Yes. No, no, but – okay. MR LINDBERG: But, strictly speaking, they’re in a contract and we’re committed to removing them from the contract and getting you the key dates for that. MS CARNELL: Okay. So you will get me the key dates for the under one million and the one million to three million, your plans to actually deliver this. I think it’s great. I think it’s MR LINDBERG: Thank you. MS CARNELL: good. It’s not high enough yet, but plans are good and actual real action, really, is important in this space. I just suggest that it would be useful as part of that to have a one pager or something that ensures that those discussions with small businesses really understand what’s there maybe in the run up to having a new contract. But it’s fine. If the contract that you’re putting in place is easy, can be understood by most – by small-business people and doesn’t have any of those clauses in it, then we will be happy. MR LINDBERG: Thank you. MS CARNELL: And I’m sure small businesses will be happy as well. And you’re going to send me the timeframes; I think that’s what you undertook. MR LINDBERG: Correct. MS CARNELL: Can we have a chat about valuations? MS SCOTT: Yes. So you will be familiar with this topic as well. Again, something that has been raised in many inquiries. So it’s around the issue of valuations that are, again, one of those fraught issues frequently misunderstood by the borrower. Frequently, they’ve got ideas about the value of their property, so it’s, I guess, looking at how to remove that anxiety about valuations and so when the borrower pays, they get to see the instructions, they get to see the report. So, David, you didn’t mention that on your list, so it’s just, really, where Westpac was with that? MR LINDBERG: Well, I’m happy – why don’t I step by step take you through how the valuation process works? So when we do request a valuation – and when we request a valuation it’s for the purposes of extending additional credit, so if customers ask us for additional credit we will often ask for a valuation. What we will do is we will sit with the customer and we will always give them a

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range of valuers that they can choose between. We think it’s important that they have a say in terms of what valuer we decide to use. Then we will contract the valuer ourselves. We do that because it’s cheaper and that saves the customer money. The valuer then will do their work, submit their valuation to us. We, as a matter of policy and process, then will transfer that valuation in detail, along with an instruction sheet that we originally gave to the valuer, so they see both the valuation result and the instruction sheet we gave to the valuer in all instances where it is up to us to do that. So that’s how it works. Now, as you know, it’s quite possible that someone might have a view of the value of their home that might be different to the view that somebody else might have. We then will give our customer the right to contest it. If that were to happen, what we will do is call a meeting between ourselves, the valuer and the customer. We will ask the customer to present facts that they believe to be salient that weren’t considered in the evaluation and if that moves the dial with the valuer, then we will have a new valuation. If it doesn’t and the customer continues to disagree with the valuation, we then, in many cases, will go and get a second opinion. At some point we have to concede that there are people who think that their houses are worth more than the market does and we can’t resolve that issue, but that’s how we go through it. So, in our mind, customer choice in valuer; customer then will receive the valuation and the instruction sheet whenever that valuation was conducted; customer will have the right, then, to oppose the valuation in the presence of us and the valuer and, in many cases, have the right to request a second valuation. So that’s how we think about it. MS CARNELL: That’s fine. MR LINDBERG: We think that’s the fairest process possible. MS CARNELL: Okay. We think that’s exactly the process we would like to see in place and for it to be very transparent, so that the client actually knows that they have a right to contest and they have a right to a second opinion. Let’s be fair, they’re paying, so they will pay for a second opinion and we all accept that valuations are one of those things that we all like to think our property is worth more than it is and so there will be disagreements. But if there’s a second opinion and a capacity, I suppose, to contest the basis of a valuation, then we believe that it is a reasonable way to go. MS SCOTT: And so how long have you been implementing that for, David? MR LINDBERG: As far as I know, we’ve had that in place for some time. MS SCOTT: Okay. MR LINDBERG: I’m not sure of the exact date when it was initiated. MS SCOTT: So, again, I’m just interested in the – some people have and some people haven’t done this in the banking industry. I guess were there any dramas from doing it? I guess, what’s stopping this thing happening universally?

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MR LINDBERG: It’s difficult for me to talk for my competitors, but MS SCOTT: Yes, I understand. MR LINDBERG: from MS SCOTT: But have you seen any dramas from doing that? MR LINDBERG: Well, no. From my perspective, it’s the most customer-focused way to behave and that’s usually the right way to go. It doesn’t cost us anything and, to be frank, sometimes it is true that a property owner will know things that are relevant to the valuation that a valuer might not pick up on, and so we’re interested in having that information. MS CARNELL: It is true, especially when you get into complex valuations that aren’t – that there’s not an easy market to look at. What about when the valuation is done in terms of a receivership; what happens then? MR LINDBERG: Well, there is a slight complexity there which is legal and so the way a receiver works is the bank most often will be the one that appoints the receiver. MS CARNELL: Yes. MR LINDBERG: But the moment the receiver is appointed, the receiver becomes an agent of the bank. MS CARNELL: That’s true. MR LINDBERG: And, as you would expect, the bank, therefore, loses the right to instruct the receiver. That’s done because the receiver becomes responsible for preserving the value of the assets for all the creditors, not just the bank. And so we lose the right to really instruct the receiver which, by the way, can be frustrating to customers and I understand that totally and I would love to make a comment on that process in a moment, but, essentially, that’s – in that case, if the receiver asks for a valuation, we don’t really have the right to mandate that the receiver then pass that valuation to the customer and in some cases a third party will also ask for a valuation. We don’t have the right to command them to do anything. Although, we would encourage it. And for all the reasons that I stated upfront, we would encourage it and we would – to the degree that you have any influence on that industry, we would encourage you to use it. MS CARNELL: It’s sort of MS SCOTT: So what MS CARNELL: I’m sorry. MS SCOTT: Sorry.

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MS CARNELL: It’s just an interesting one, David, though. If I’m paying for something –so the receiver wants a valuation. The fact is that the person who is in receivership is paying for that. Surely if you pay for something, you have some rights to it. MR LINDBERG: Well, I think you can tell from how we behave. When we have the right, we agree with you totally. And I would take a step back on the whole process of administration and receivership and say it really is one of the most difficult things for a customer to go through and I know you’ve been through it and I sit with customers and go through it. It’s a difficult thing. It’s an emotionally charged event. And there’s all sorts of structure and legalism around the event that makes it very opaque MS CARNELL: Yes. MR LINDBERG: and very frustrating and then, of course, you know, we have to concede on the other side of our customer there are creditors and the creditors are often small businesses themselves and so they’re very emotional about getting repair their debts. MS CARNELL: Yes. MR LINDBERG: So all in all it’s a very difficult process. It’s a process I know you wouldn’t enjoy, I don’t enjoy MS CARNELL: Yes. MR LINDBERG: and I think we should take all steps possible to – not just around valuations where I do think that the customer should have access to valuations that they’ve paid for. I agree with you. But also in terms of having some point of escalation for customers so that they can have a better understanding of what’s going on surrounding the receivership of their business. MS CARNELL: Yes. I think you would have heard us discuss this with other banks in terms of the dilemmas with receivers, but we will talk about that in just a moment when we get onto that area more specifically. MS SCOTT: So, sorry, David, I just want – so we’re crystal clear. So it’s to all valuations, commercial valuations as well. You share the instructions and you give them the report. MR LINDBERG: Crystal clear, that’s exactly what we do. MS SCOTT: Yes. MR LINDBERG: In all instances where we have the legal right to do it MS SCOTT: Okay. And that MR LINDBERG: that’s how we do it. MS SCOTT: includes investigating accountant’s end

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MR LINDBERG: So that MS SCOTT: rather than receivers. MR LINDBERG: That’s a slightly separate issue and I’m happy to address that if you would like me to. MS SCOTT: Yes, just so we’ve got the full picture. Yes. MR LINDBERG: So we use an investigative accountant in a very rare n umber of cases. And just to give you a scope of that, our biggest state, New South Wales, we looked at the data. We’ve appointed them twice in the last 12 months, so it’s very, very rare. When we do do it, it’s because a business is moving into a situation that they haven’t been in usually before and we bring in experts and they will talk the customer through how to deal with the difficult situation of potentially going into receivership or administration or trading themselves out of it. What we will do is we will, again, share a panel with our customers. We will give them a choice of who they want to work with. It’s a very similar process to how valuations work and then we will have the work conducted. That work, by its nature, gets shared with us first. We will then go and pass – in fact, we encourage the AI to actually go and talk specifically and directly with the customer. There are rare events where not all of that will be shared and the best example of that would be if they come back with a view that – the issue of the company’s management which they could do. It’s rare, but it happens and sometimes management isn’t up to running a company through that sort of a process. That’s less likely to be shared, but everything else – again, a company chooses them in the first place with our support, the work happens and then we encourage that work to be shared directly with the customer because, really, it’s in our commercial interest to make that happen. MS CARNELL: And if an investigative accountant wanted to have a valuation, obviously it’s in the same bracket, is it, as a valuation that would be done under normal circumstances with the bank? MR LINDBERG: Correct. In that case, we have the rights and, as a consequence of that, we pass the valuation on MS CARNELL: To the customer. MR LINDBERG: to the bank, unless it’s a third-party situation. MS CARNELL: Yes. MR LINDBERG: But in the preponderance of these situations – and, again, we’re talking – as I said, in New South Wales this has happened twice last year. MS CARNELL: Yes, okay.

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MR LINDBERG: It’s a very rare situation, but, as you can see, we try to give choice, we try to give transparency. When valuations occur in the construct of this situation, we also will send the valuation and instructions to the valuer to the customer directly. MS SCOTT: And does your receiver use your valuer panel, even though the receiver does it independently, or their own valuers? MR LINDBERG: A receiver will have access to their own valuers. As I said earlier, for good reasons, we do lose certain rights once a receiver is in place and so they have their own industry associations. They have their own codes of conduct. I think they’re subject to the Corporations Act 2001. So they’ve got their own sorts of ethics to live up to and we lose a lot of right in that instance. MS CARNELL: Okay. Can we go onto communication? So the communications issue that we raised with other banks, that in a number of the cases that we have been looking at over the last 10 weeks or so that we’ve been doing this inquiry, a lot of the issues that have surfaced have come from getting very mixed messages from different parts of the bank. Different messages from relationship managers who are really positive and, “Everything is going to be fine,” and then a very different view from, say, another part of the bank if things aren’t going that well. And that particularly comes about when a loan is up for renewal. So as you’ve hard with the discussions we’ve had previously, the view that it’s really important for banks to communicate in a timely fashion if they are planning or even contemplating not renewing or rolling over or offering a new facility to an actual customer. We all know that business loans are ongoing. They’re not like home loans where you borrow owe money, you pay it off, you might buy another house, but whatever; business loans tends to be you pay them back, but they tend to be ongoing. You refurbish, you do a range of things. So what’s your view in the timelines required for banks to give to people prior to a loan falling due? MR LINDBERG: Sure. Well let me try to talk you through how we think about it. First of all, we’ve tried different time periods, a notice to customers of – essentially reminding them that something is coming due or something is due for rollover. It’s interesting, I heard some other representatives talk about potentially a six-month – we tried that and what we often found was three months is the right time. It’s better than six months, ironically, because if you send someone something at six months it’s much more likely they will put it in the bin and it won’t have the desired effect. You send something at three months, so 90 days, and it had a better effect. It’s just one of those great examples of something that sounded good to us in the boardroom, in practice didn’t work as well. And so we did the behavioural testing and came to the view that three months the right time period. MS CARNELL: That’s when you give somebody – you notify them that it’s going to fall due. MR LINDBERG: Correct. Now, there’s then the separate and I think more important question as to rollover and let me start the answer by saying I don’t think we would have an example of this – I hope we wouldn’t – but I have heard stories where a bank would at the eleventh hour say, “Having talked to you about this for week after week or month after month, we’ve made the decision that we’re not going to roll your loan over. Good luck.”

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MS CARNELL: Yes. MS SCOTT: It’s actually at the fourteenth hour. It’s not MR LINDBERG: So – fourteenth hour, “Good luck.” MS SCOTT: Yes. MR LINDBERG: And I couldn’t think of anything more important than doing that for a customer. The primary purpose of banking, small businesses and businesses is, in general, to support their strengths and nothing could be worse than giving someone no time, pulling the loan facility and saying good luck, because what’s that going to lead to is a panic on the part of the banker, it’s going to lead to a stigma when they go and try and get alternative funding and quite likely it’s going to lead to them going bankrupt. MS CARNELL: Yes. MR LINDBERG: So not only is that abhorrent, but, less importantly, it’s bad banking, because when you do that you lose your loan. So let me start by saying that’s not the way anyone ought to behave in our industry. I absolutely support a principle that, if you’re going to say no to a rollover – which, of course, would be a financier’s right MS CARNELL: A bank’s – yes. MR LINDBERG: that they have to work with a customer to give them appropriate time, such that they can find alternative sources of finding, or – let’s imagine in some cases the business just isn’t doing what the business had hoped to do – that they unwind themselves in a way that is as successful as possible for them. So that principle, I think is important, and I – and we – would be happy for that principle to be codified. If you move, then, to the question of, well, how long is enough, that, to me, becomes a much more complicated questions. So, you know, one of the great examples – which I think you’ve used in the past, ombudsman – is the example of a farmer. And let’s imagined they needed to unwind. And so we have right now – in recovery motion, we have four farms over the last 12 months. We have four. MS CARNELL: Yes. Yes. MR LINDBERG: And we’re not talking 30 days or 90 days. MS CARNELL: No. MR LINDBERG: We’re talking years. MS SCOTT: Years. Yes. MR LINDBERG: And we will stay with these customers for years, and we will make sure that they unwind themselves appropriately, sell assets if they need to be sold, or find alternative sources of funds, if that’s what is in their best interests. That’s how we behave. And I think it’s more important to apply that principle that the timeline, because every single business is so different. So

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what you would have as a minimum timeline for a farmer would be long, but we also have to have a minimum that works for a pop-up shop in Surry Hills. There are companies that are started for the sole purpose of financing one trade that’s international. So it’s more difficult for me to give you a definitive of what’s the right minimum. MS CARNELL: And yet, if we’re going to codify, we have to. MR LINDBERG: Well, let me MS SCOTT: David, could I just – so – and obviously you’ve got very much more experience. I’ve only been looking at these particular cases that have come through. But I get what you say about the years afterwards. It’s almost like it’s in two parts. So there’s the part that leads up to the decision, and then there’s what happens after the decision. And what we can see is it’s almost the compression of time before the bank has made a decision which is maybe easier to codify than the bit that, once the decision’s taken – so where you’re talking about farms, we get that. We can see it takes many, many years for things to roll out. But where you can see the pressure and the mixed signals coming in is almost that lead up to the loan rollover, or the expectation of the rollover, or a new facility, or an increased facility. That seems to be the point where the timeframes don’t always seem to align with when the decision is made ahead of that date when the decision has to be made. Do you kind of get me? MR LINDBERG: Yes. I get what you’re saying, and, you know, I’ve – again, I don’t think this is something that Westpac has been accused of, but I have heard the stories. I find them abhorrent. I find them terrible banking, as an aside to that. And I think – to me, you know, there’s a real question as to what needs to be codified as a principle and what needs to be codified as a specific piece of detailed legislation. And all I’m suggesting is that we should not lose sight of how important codifying the principle is, in addition to whatever we want to legislate, because the principle is what’s going to outlive situations that we couldn’t possibly foresee from today. And that principle, to me, is something along the lines of you must give a customer of yours reasonable time in order to find alternative sources of financing, or otherwise appropriately unwind their business, or certain aspects of their business. As it relates to what sort of a minimum, you know, we happen to apply a minimum of 30 days. I’ve heard others say they might be willing to apply a period of 90 days. And all I’m saying is that, you know, we’re setting up codes that will live across a really broad industry for decades, and I think we have to be careful in codifying a minimum that might have unintended consequences that we haven’t quite studied yet. But I am conceding it is the wrong thing to do and we won’t do it. I’ve conceded that we should have a principle; that that principle should be codified. And then I would also concede that we should do something around having a minimum. But I would ask for some sensible reflection on some of the unintended consequences, because it has to be applied to every single business. As I said, a pop-up shop in Surry Hills won’t need the same sort of time, and it wouldn’t be appropriate to mandate a long period of time for that business as it might for an Australian farmer. MS CARNELL: We would absolutely agree. The problem is we do have cases. Now, I accept we don’t any cases from you guys in this case, but we do have cases, and it’s not just – you know, it’s enough for this to be a problem. Where what happened was the businesses we’re talking about – the farms, in certain circumstances – had no reason to believe

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their loan wasn’t going to be rolled over, or a new facility wasn’t going to be given. In fact, there was every reason to believe it would. And then a decision was taken not to, at the death knell. This is such a dramatic event. Because you’re right – perhaps a business where the board of a company like that has no choice but to call in administrators, because, you know, they’ve got to pay back the loan. They don’t have a facility. There’s not another option. You probably run around desperately for a few days trying to find somebody else who will pick up the loan, but unless you can do that then you’re gone, really. Or you would need to have an administrator in the business. So, because it happens, we need to make recommendations on what to do. Because the cases that we looked at – that we were asked to look at by the Minister – have highlighted that this does happen, you know, in at least a number of cases that we’ve looked at. Therefore, we need to make a recommendation with regard to it. I take into account the comments you’ve made, and fully accept that the issues surrounding, you know, complex manufacturing businesses or farms or whatever are much more complex, in terms of getting alternate finance, than the pop-up shop you’re talking about. But we actually need to nail this, because it’s hurting some people. So I’m interested in your comments about three months, because people – six months out, people put it in the bin. That’s probably a fair comment. So we’ve got to make sure that we alert people that their loan is going to roll over, and probably then, at that point, indicate to them that it is important for them, you know, to contact the lending institution and to start discussions. It’s important for small businesses to know that a rollover facility is not guaranteed, because lots think it is – you know, that it’s going to happen because the bank hasn’t said there’s a problem. MR LINDBERG: Well, maybe if I could maybe give you a sense of how I think about this, and what might be something that could be useful to codify. And, first, let me say I’m relieved that none of these were Westpac customers. MS CARNELL: No, they weren’t. MR LINDBERG: And I’m unsurprised. It’s not how we do business. The way I think about this is more and more our industry – the banking industry – is moving from people who provide debt and loans to a professional services kind of entity, or set of entities. And we are trying to move as fast as we can in that direction. And we think this whole notion of having a code of conduct that we hold our bankers to, and we hold the entire institution to, is a really important concept. It would be akin to a concept of how lawyers would regulate themselves, or how accountants would regulate themselves. And we have to start thinking of ourselves as professionals with codes of conduct that we have to adjure to. With that in mind, to me the right way to think about this is to create a principle that says, “When you are rolling over a customer, you would give them due time and you would take in due consideration of their business situation, such that they can reasonably take the steps required to protect their assets and protect their business when that’s appropriate”. And that’s why I think the idea of having principles, and codifying principles, and regulating these principles, and having penalties for individuals and for institutions when they don’t live up to those principles, is a really

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important and useful way to think about resolving a problem which, while not a Westpac problem, is an industry problem, I concede. MS CARNELL: Okay. That’s a good point. Well, we will talk about the code in a minute. So we take that on board. MS SCOTT: So, David, I’m very interested in – so different banks have raised different possibilities of what might be options, and I’m very interested that you say you’ve tried one of those and it didn’t work. So what do you have in mind that maybe the big four – how do you think the ABA, in its six-point plan and everything, and the code of practice, are going to come to a landing on what they think will work? Because, you know – so that’s very interesting – that experience you said – that it really didn’t work. And the last thing we want to do is put something either that doesn’t fix the thing that’s the problem or makes it worse. So what’s the best way of getting over that? MR LINDBERG: Again, it’s hard for me to answer what somebody else will do or will conclude, but my advice would be to really think about taking two steps. The first would be to ensure that, when we have an idea – that we actually ask that idea to be tested both by experts but also customer people. So we do customer testing on these ideas. And, if we don’t do that, it’s amazing how many times I’ve personally experienced an idea that seemed like a terrific idea, and then you implement it in the marketplace and it turns out the customers behave in a way that you didn’t expect them to. So step one, I think, is you have to actually take the time to test, with experts and with customers, how something will work in practice. MS CARNELL: Yes. MR LINDBERG: Step two is, I think – I’m a big proponent of principles as opposed to specific legislation, because principles live forever. And we have so many examples throughout history of principles that have been applied. They can live for centuries. So having thoughtful principles about the conduct of participants in an industry – codifying them; having specific penalties for when those get breached – to me is a superior way, in a lot of instances, to have the right behaviour, over time, and to incent the right behaviour over time, and to reduce the incidence of the wrong behaviour over time. Then codifying something that’s really, really specific, which over time we’ve all had lots of experience with legislation where something that feels right at the time that it’s put in place certainly has unintended consequences years down the track. So, you know, those are the two ways I would advise us thinking about handling that problem. MS CARNELL: Look, I do accept what you’re saying and, by the way, agree to a point. One of the great dilemmas with principles is they can very fuzzy. So you make the comment about principles with actual measurables. That’s sounding a little bit better. Because you must admit, the current Banking Code of Practice, there’s lots of principles in there and not much measurable and not much that’s enforceable – no, nothing that’s enforceable. So there’s a whole range of – you know, you can sort of say, “We’re all going to all – sort of, all going to act reasonably and we’re all going to tell the truth”, and all sorts of stuff. That doesn’t actually deliver anything from a customer perspective. So, you know, the challenge is what a principle-based approach that is measurable and enforceable actually looks like. MR LINDBERG: Well, I concede, I never said it was going to be easy, but

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MS CARNELL: No. MR LINDBERG: yes, having reviewed the code myself, and having read the code, I don’t think it’s very well written. MS CARNELL: It’s not very well written. MR LINDBERG: And it is difficult to interpret and it’s subject to multiple ways of interpreting it. So, you know, I – but I think it’s the beginning of something that could be really important. If we’re thoughtful about it and if we evolve the code in a way that took us in the direction of being a bit more specific, a bit easier to read and to understand, found ways to ensure that we were monitoring behaviour relative to the code in a consistent way, and had ways and means of holding people to account when they didn’t live up to the code. There are scant instances of us doing that well as an industry. And I think I would be a strong advocate of really improving on all of those elements, because the code is something that can be so important to us as an industry. It fits with my broader view of the future of our industry. If we want to be successful, if we want to have the trust of our communities, then we need to start thinking of ourselves much more as though we have to live up to very specific professional conduct principles. And that’s why I think the code has a bright future if we take some of those hard steps. MS CARNELL: As we’re talking about the code, we may talk about it a little bit more right now. You said you’ve read the code and it’s not very well written. I think, you know, I quoted the area this morning but I will do it again. I think 24 says: We will give you reasonable notice, not less than 10 business days, in writing of the variation – and this was a variation that the bank was making to a contract – unless we consider a shorter period of time is necessary for us – the bank – to avoid or reduce an increase in the credit risk to us. Now, you know, clauses like that in a code of conduct says, you know, “We will give you 10 days unless it upsets us or causes us a problem.” You can understand why the community, or many people in the community, would suggest that an industry that thinks clauses like that are reasonable in a code, a code that has been reviewed a number of times over the years, still believes those sort of clauses are reasonable, really shouldn’t be self-regulated. You could understand that somebody would perceive that doesn’t sound like self-regulation to me, doesn’t sound like what you’ve just said, you know, that this is a professional industry that’s – it just sounds like a clause that says, “Well, whatever we really want to do, we will, if it suits us.”

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That’s what it says. And it’s not the only clause, David. In the code it often says, “We will act this way unless – we will act this unless something else happens or it’s going to hurt us in some way.” The banking industry has had a long time to get this code right, a number of reviews. It’s still unenforceable. There is still no penalties, and the clauses in it fundamentally are wussy. MS SCOTT: And we’ve spoken to the people that have done some of the previous reviews and heard how incredibly difficult it was to get the banks to move even on the – so the ..... independent review, and then whenever the banks didn’t like something it just sort of then sort of fizzled away into being something diluted and not particularly strong any more. So I guess there’s an opportunity now with the review of the code now, but what would be terrible is if we have the same treatment again, which is what’s the barest minimum we can actually get away with, still having a code but actually really not changing anything particularly. MS CARNELL: At which stage, I come back to my question. Is – does that sound like the sort of clause – I could go through and quote a whole lot of others – that would give the community confidence that this is an industry – biggest in Australia, biggest companies in Australia – that should be allowed to self-regulate? MR LINDBERG: Well, met me try to be as clear as I can, because I’m quite passionate on this topic. The code as written is not clear enough. The code as written is not good enough. We’ve asked for the code to be rewritten independently. We’re seeing that come to us at the end of December. MS CARNELL: Yes. MR LINDBERG: My hope is that that comes much closer to the mark. Furthermore, we’ve recommended to you that that language gets reviewed by ASIC. We make that recommendation both because they’re independent and that they have a reputation of being independent and consumer-focused, and also because that will give perception – and perception is important as well – of that independence. So we’ve suggested that they assist and support and approve the rewrite, and ultimately it is in our interest, it’s in the system’s interest, it’s in economy’s interest that we have a properly regulated system in banking, and that self-regulation I think has to be an important part of that. Bankers have to start taking pride in living up to that self-regulation, and we have to start seeing ourselves more and more as professional services providers living up to very high standards. That’s the future of industry I advocate for, and I like to think that everything I’ve just recommended is proof of that. MS CARNELL: I – look, by the way, everything the – your recommendations are – you know, show a level of leadership, which I appreciate greatly. The dilemma still, David, is that unless people like you, Westpac, and other banks – as I said earlier to CommBank, unless you take some leadership in this space and actually, you know, sort of really drive it, it’s not going to happen, because if we still get this sort of view that, “Yes, we will do this, but the 25 members of the ABA have got all agree”, and all the rest of it, nothing will happen again, just like it hasn’t every other time the code has been reviewed; that the lowest common denominator bubbles up because everybody won’t agree.

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Having had a look at the survey we did of the various members of the ABA on a range of issues, we can see that you and some of the other big four banks are agreeing to a range of changes. But we see what happens after that, you know, in the banking industry, that there’s a range of people who don’t agree. And if the answer here is that “We’re not going to do anything unless there’s consensus”, it isn’t going to happen. MS SCOTT: Well ..... MS CARNELL: So I’m interested in where leadership – what’s the issue about – how do you make leadership actually matter here? You guys are leading this, not just hoping that there’s some form of consensus. MR LINDBERG: Well, let me tell you what we’ve done, but, more importantly, how we think about it. In any industry, the largest players need to lead it and we concede that and we’re one of the largest players and, through our actions and words, we do try to lead it. What we’ve done in this instance is, for precisely the reason you just articulated, we have asked for the rewrite to be taken out of the hands of the ABA and given to independent people. We’re further trying to strengthen that by making one of those independent people ASIC. We then would advocate for – as a right of inclusion in the ABA – that you live up to the code of conduct and we’ve advocated for it, we can’t force the ABA to do anything, but we think every single banking member of the ABA needs to submit to the code of banking practice and that that needs to be redrafted without their or our participation, by an independent party, and that’s exactly what we’ve advocated for and, in my mind, that is an example of the leadership that you talk about. MS SCOTT: But that’s it not then delivered, though, and then that person drafts it, they give the report and what has happened before that report has been given and then people didn’t like what was in the report, so the report got quietly put on the shelf. MR LINDBERG: I think in this case we’ve submitted to that not happening. MS CARNELL: Okay. So, I mean, we’re very positive about that, that the code needs to be plain English, it needs to be measurable, enforceable and registered with ASIC. Is that fair? MR LINDBERG: I would say that the wording – I would go a step further – the wording has to be approved by ASIC in our view. MS CARNELL: And then the code registered with ASIC. MR LINDBERG: I don’t know exactly what that means, but MS CARNELL: Yes. Well, that’s what ASIC thinks should happen. MS SCOTT: Well, they’ve got a mechanism to register codes of which not a single one has MS CARNELL: Been registered.

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MS SCOTT: been registered yet, but that would be a good step. MS CARNELL: Apart from anything else, it says to the community that, “We’re sticking by our code and we’re not going to just self – we’re not going to rely on self-regulation. We’re going to allow ASIC visibility of what’s happening here.” And I think that gives the – well, I believe that gives the community much more faith that a voluntary code is actually being adhered to, because, as you know – if you know – the current code – no bank has ever been seen or have never publicly been found not to comply with it. So it’s not terribly solid, is it, if in all of the years the current code and its various predecessors have been in place that nobody has been found not to comply? MR LINDBERG: Well, I think what you have from us is agreement on the principle and the direction and MS CARNELL: Yes. No, that’s fine. That’s good. MR LINDBERG: I would go a step further and say in our minds we are 100 per cent bound by behaving within the Code of Banking Practice and it’s also true that that has been found by FOS. That has been found by ASIC and, in fact, that has been found in rulings by the court. But I concede that the right way forward for our industry is to give total transparency for how we behave in a principled way, in a plain English way, in a way that we can be held accountable for and that’s the direction that we’re advocating that the industry take and, moreover, the direction that we’re trying to lead the industry towards. MS CARNELL: That is – look, I have to say, only if that happens, then there is a future for self-regulation. If it doesn’t, then I think that the only way forward is a mandatory code that has happened to in the supermarket space and in other areas where it has been perceived that voluntary codes don’t work. MS SCOTT: And overseas in the UK industry. MS CARNELL: And, let’s be fair, overseas we’ve seen a number of scenarios, in fact, where codes have become mandatory and not voluntary and not industry-led any longer. So, anyway, that’s fine. Let’s look at access to justice. For small businesses, I think you would agree – because you said it in the front bit – that the current scenario with FOS, with the Financial Ombudsman Service, works well for individuals with small loans, but for small businesses the cap, the compensation in its current form and also the expertise inside FOS is really not there. So tell us the way you would see that going forwards. You’ve already said upfront that you understood that, so tell me what you see a small business jurisdiction to actually look like or how you give small businesses access to some form of justice, some sort of redress. MR LINDBERG: Thank you. And I will try to keep my answer brief, but it’s quite a big topic. The principle is that every single – to the highest degree possible – every single small business should be given access to some sort of Financial Ombudsman Service that they know who it is and that that be rather complete as opposed to compartmentalised and, as a consequence of that, confusing. At the same time, we do know that as businesses become more complex and larger MS CARNELL: Yes.

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MR LINDBERG: they wouldn’t themselves want to be held in that system. They would rather be using the courts and we would be rather using the courts with them. The way we think about it is there are a couple of issues with the current construct, the first of which is it works well for a consumer, but, as you would appreciate, there’s a totally different set of skills required to support small businesses through complaint resolution. And so we do think that having something – it could be under the same entity, but something separate for retail complaints and small business complaints is important. So that’s step 1 and we think that we should take that step. Step 2 is the value of the claims today is too small and so we’re recommending moving the value of the claims from 500,000 to two million, so a much bigger MS CARNELL: Yes. MR LINDBERG: scope and also the kinds of customers that have access to it. Now, we have the right, as you know, to agree to give any customer access to it, but the way it’s written, the access level is at two million; we think that should be increased to three million. So that’s a second compartment of what we would recommend. And then the third compartment is at the Ramsay inquiry, as you would be aware, we made a recommendation of what we termed – and many have termed and I’ve heard you use the term of – a one-stop shop where you take banking, you take superannuation, you take insurance and you push them together. They can still be specialised, but you push them together under one area, so a small business customer that I just talked about knows exactly where to go and the expertise, more or less, exists to support the small business through the process. So, in a nutshell, that’s how we feel about it and those are the things that we think could move us forward and we’ve been clear on those opinions in the past. MS CARNELL: And that is really positive. I think we’ve got to make sure that what we don’t do is try to shoehorn small businesses into the consumer space, because lots of small businesses are much more complex than that. I think sometimes there’s a tendency to suggest that, you know, small businesses are just larger consumers, and they’re really not. And I think the industry generally wouldn’t want small businesses to end up in the same space – in the full Consumer Law space – either. So we’ve got to make sure that, whatever we do here, there is expertise in the small business space, and a capacity to be able to come up with solutions to problems quickly. In some of the cases that we dealt with – and I accept that FOS has got quicker of recent days – the timelines involved are just not acceptable for small businesses, because, you know, they’re not complaining because they don’t have a problem that needs to be addressed quite quickly. And so I think some of the issues are speed, as well, in the space. We are positive about that. What’s your view on farm debt mediation? MR LINDBERG: So, in short, we – as I believe our competitors – feel very favourable towards it. I think we’ve been through four instances in the year, and all instances worked out to our satisfaction, but, more importantly, the customer’s satisfaction. So we think broadening that – making that a MS CARNELL: To a national

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MR LINDBERG: nationalised scheme – would be an excellent idea, and we would support it, as we have in the past. And we’ve got experience with it now, so it gives lots of support to why we should be doing this on a national basis. MS CARNELL: Okay. Well, that’s – everyone supports that, so with a bit of luck – mind you, I suppose we end up with state governments and other things in that space. But that’s a good step forward. MS SCOTT: And have you got any issue of when somebody has been through mediation – if there’s a need for them to come back to FOS, that they’re not excluded. MR LINDBERG: I have to admit, in the four instances we’ve had this year, I don’t reflect on that having happened. So it’s hard for me to answer. MS SCOTT: Okay. MS CARNELL: At the moment, that would be the case. If you went to farm debt mediation and it didn’t – whatever – work, FOS would MS SCOTT: Well, you needed compensation. MS CARNELL: FOS would exclude the people because they’ve already been through farm debt mediation. So there’s some issues that really need to be addressed in that space to ensure, again, access to justice. One last issue that we raised with other banks is the issue around receivers. And, when we talk about access to justice, if a customer has a problem with a receiver, at the moment – as we talked about earlier, and you rightly said that a receiver – once you’ve appointed a receiver, you are not directly responsible for what the receiver does; in fact, you’re not responsible. But of course the consumer doesn’t have any – can’t go to FOS with a complaint about a receiver. Can’t afford to go to court. Do you see complaints against receivers being brought into this new one-stop-shop space? MR LINDBERG: It’s an interesting question, and, you know, again as I’ve sort of touched on already today, the entire process of receivership is a hard process, and it’s an emotional process, and it’s a process where we have to provide as much support as possible to everyone involved. So, as I’ve said, you’ve got somebody who has run a business – who had their dreams in that business, and then those dreams were quashed – and suddenly they’ve got a receiver telling them what to do with their assets. That’s a situation nobody wants to be in, and we’ve – you know, I’ve spent time with customers in that situation, and, no matter how it goes, it’s difficult. And, on the other side of that, you’ve creditors, who are usually small businesses themselves, saying, “You’ve got my money and I need to get it back, because if I don’t get it back I have my own issues with my own solvency”. So all in all it’s something that we like to see very rarely. If I can give you some facts and then reflect on the whole process and how we can improve it. We try to go as rarely as possible. In our portfolio over the last 12 months, we’ve had 62 incidents of bankruptcy. 61 of those were customer initiated. So they took the step to move into bankruptcy. And in one instance the bank initiated it. So it doesn’t happen as much as people would think.

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As it relates to repossessions, we’ve been involved – we have roughly a million customers. In the last 12 months we’ve been involved in 14 repossessions. One of them was for a piece of equipment; 13 were for homes. Three of those homes were bank initiated; the rest were customer initiated. So it doesn’t happen as often as people might think, but when it does happen it’s a really difficult and hard process. The issue I think we face is everything has to happen fast, because a receiver’s in there trying to protect assets that are usually going backwards in value at a rate of knots and they’re trying to do it for the purpose of protecting their creditors. That’s their responsibility. And so, you know, one of the things that I think we need to consider is having an escalation process for that industry. Now, they have their own industry body – I think it’s called ARITA – and they are subject to the Corporations Act, etcetera, but I also think that there is a place for a point of escalation. Now, whether that place is also the same place of escalation for our industry, I don’t know. I have a feeling not. I have a feeling they need something separate. But the idea that they should have someone that they can quickly go to and be heard when their assets are being sold, in some cases, is something that I would advocate for strongly, I think, as you can see. MS CARNELL: All right. MS SCOTT: So ARITA said to us that when a borrower comes to see them about then, then they won’t see them because they work on behalf of the bank. MS CARNELL: So they pushed it straight back to the bank, saying MS SCOTT: And then the bank says they can’t – because MS CARNELL: “We work for the banks”. MS SCOTT: under the Corporations Act the receiver actually works for the borrower. So we’ve got an Act that then is sort of strangely misinterpreted by different parties. MR LINDBERG: Well, that MS SCOTT: So all it ends up with is the person that has got the problem really hasn’t got anywhere to go. MR LINDBERG: I suppose – and I do hate to extrapolate on the basis of what one person said, but that would only support what I’m saying, which is that industry probably does need to think about a point of escalation for customers in a highly emotional state, and in a state where what happens over a short period of time is extraordinarily important to the overall financial outcome that they receive. MS CARNELL: Look, thank you for that, and that one person actually was the association, who represents something like 80 per cent – or more than that – of the organisation. But, for all of that, thank you for the support for something needing to happen in that space, and we will certainly be looking at what that should look like. Those are all the questions I’ve got. David and Kristen, can I thank you for that.

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And I have to say I really appreciate you starting with a range of recommendations that the bank was getting behind, and I think that those were a very good start. And you undertook to give us some timelines. So we appreciate that a lot. Thank you very much. MR LINDBERG: Thank you. MS K. O’DONOGHUE: Thank you. SESSION CONCLUDED