Small business at the banks royal commission
Even before the listing of her ills, it was obvious that Carolyn Flanagan was desperately unwell.
She appeared before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by videolink on Monday, her doctor deeming her too unwell to fly from Sydney to Melbourne. She appeared gaunt, with unfocused eyes and apparent trouble speaking.
Senior counsel assisting Michael Hodge, QC, began the catalogue of her medical conditions with glaucoma. She is legally blind. He asked if she could read documents. “No,” she said. “I can’t see a thing, love.”
The list of other health issues was extensive. Surgery for nasopharyngeal cancer in 2004 had removed tumours from her throat, along with half her tongue. It caused her pain to speak. She had chronic obstructive airway disease, diverticulitis and pancreatitis. She had suffered multiple broken bones as a result of osteoporosis, and currently was recovering from a fractured pelvis. She also suffered depression.
As well as all that, her memory was shot, a reality which, in most legal proceedings, would have made her a terrible witness. But in this circumstance it made her testimony all the more compelling.
This much she could remember, at least when prompted by Hodge: in 2010 her daughter had come to her seeking help to get a loan so she and her partner could buy into a pool maintenance franchise, Poolwerx. Flanagan agreed to be guarantor for the loan.
She “vaguely” recalled being taken twice to a Westpac branch where somebody read to her the contents of a lot of documents that she could not read herself. She signed where they pointed.
But there was much she could not remember clearly: whether she had been told to seek independent legal advice, whether she had received such advice before signing, whether she had talked to a valuer sent out to her house, who witnessed her signatures.
Flanagan told Matthew Darke, SC, for the bank, that she had been aware she was putting up her house as security for the business loan taken out by her daughter and partner. But she maintained she thought she was only on the hook for $50,000.
Long story short, the business folded and in 2012 Westpac came after her for much more than $50,000. Flanagan, who was on a disability support pension, had no way to pay except by way of her only major asset, her home.
Flanagan said she was unaware of letters sent by the bank, advising that it was making a claim against her. She could not recall her ex-husband, Ron, reading them to her.
“I never saw them. I was in the— with my daughter, after I had the strokes for a time, and I never received one letter from the bank,” she tried to explain.
She did recall in June 2014 seeing Dana Beiglari, a senior solicitor with New South Wales Legal Aid. “Yes, she was nice.”
Beiglari made a complaint to the Financial Ombudsman Service on Flanagan’s behalf, and sought that she be given a life interest in her property, allowing her to stay until she died or sold.
Westpac refused and the ombudsman process concluded with a determination in the bank’s favour. A subsequent approach to the “collections hardship” area at the bank, however, succeeded in having the decision reversed.
An agreement was made for a settlement of $170,000 plus 3 per cent annual interest.
Alastair Welsh, general manager of commercial banking for Westpac, agreed with counsel assisting that policies regarding the use of immediate family as guarantors are structured to recognise “a risk that parents are going to be taken advantage of”.
He conceded it should have been obvious to the banker making that loan that Flanagan suffered a range of debilitating health conditions as a result of which she had difficulty speaking and could not read or write.
Yet for all that, neither this case study nor others from this latest round of hearings, relating to small business dealings, fits neatly into the “banks are bastards” mould of earlier testimony.
Unlike previous outrages – for example, where people, including dead people, were charged for services never received – these cases were not open and shut. They involved an element of choice and the questions they raised were more nuanced: about the degree to which those choices were informed, and the extent to which banks should be required to protect people from themselves.
When Flanagan was asked by Hodge whether, given the way she felt about her daughter at the time she entered into the deal, she “would have signed the guarantees in any event”, she said:
“I would have signed anything, love, for her, in hindsight. I have to be honest about that. If you can’t help your children, who can you help?”
Even if Flanagan presents as a victim now, she apparently did not feel victimised then. And had the business prospered, she would not have been a victim at all.
Who is responsible? Should we blame Westpac, which is doing the right thing by letting her stay in her home? Or should we blame her daughter and her daughter’s partner, who enlisted her to their dream, and who will presumably eventually pay the cost when their inheritance is reduced by the amount owed to the bank? How does finance account for love?
Commissioner Kenneth Hayne reflected on the issue at a couple of points.
Unlike other financial dealings, he posited, a parent’s decision to guarantee a loan made to a child is dictated by considerations other than commercial considerations. A parent might provide a guarantee as “a sign of support for, or endorsement of, the child’s ambition”.
In an extended exchange with Kate Gibson – giving evidence in her capacity as a former head of small business lending for ANZ, and not involved in the Flanagan matter – Hayne put a hypothetical scenario in which a prospective guarantor had “the characteristics of a parent, no income except social security payment, and is about to pledge the only asset they have, which is their residence”.
He asked her how the notion of the “care and skill of a diligent and prudent banker” set out in the Banking Code of Conduct applied in such a case.
She sought a little time to think, “because that’s not the circumstance that I probably have given huge thought to … prior to being here today”.
She said that if the business failed “it would seem inevitable” that the bank would seek recourse to the home, which would cause hardship.
“I suppose, personally, I’m uncomfortable with, with that sort of scenario, but I understand that parents – and I am a parent – might … want to provide that support to their children and shouldn’t be prohibited from doing so.”
Hayne suggested that there was a time when the “intersection between parental feelings of duty and support and affection and sentiment, and the commercial assessment of the transaction, would have been seen as matters wholly for the guarantor and only for the guarantor”.
He wondered if the notion of the diligent and prudent banker spoke to such a circumstance at all, and if so, “What’s it saying?”
For her part, Gibson was uncomfortable, both as a parent and a banker, with the prospect of a bank deciding “that it should be in the business of telling parents whether or not they can support their children”.
If Flanagan was the hardest case, there were plenty of hard realities thrown up by other case studies, of people whose small business dreams had gone bad.
In one, an Adelaide teacher, on the promise of $280,000 funding from the Bank of Queensland, entered into an agreement to purchase two Wendy’s franchises, only to have the bank change the terms of the loan from seven years to three, doubling her monthly repayments after settlement.
Others were less clear-cut acts of bastardry. There was the case study of the couple who borrowed $220,000 from ANZ to set up the first Australian outlet for a New Zealand franchise selling gelato.
The owners complained to the Financial Ombudsman Service that the loan should never have been approved, because they could not service the debt, and the ombudsman found in their favour.
Gibson agreed the loan should not have been made, because of multiple data entry mistakes. But much of the questioning in the commission related to the business case put forward on the borrowers’ behalf. It contained unrealistic financial forecasts as well as pages of what Hodge called “clip art”. One picture, for example, featured an ice-cream rather than gelato.
And there was this claim, made in the business plan:
“The store will have an intimate, romantic, sophisticated atmosphere that encourages people to bring dates and to have couples arrive.”
Hodge read it out to Gibson.
“It’s a Westfield kiosk,” he said.
“I know,” said Gibson.
The commission explored why the bank did not see such obvious flaws in the proposal. But the question might also be asked: why did the loan applicants not see it?
It appeared they left it largely to a broker to act on their behalf. And the broker, it seemed, was worried more about getting a commission. At one point, the broker emailed the bank to urge approval of the loan: “Mate, my neck is on the line.”
Banks may be the apex predators in the small business jungle, but there are plenty of others – franchisors, brokers and mall owners. In another case study, of two women whose Pie Face franchise went under, part of the reason was that renovations to the shopping mall cut their customer numbers.
The future will likely require more regulation but without going so far as to make it more difficult for small business to get finance. And one has to wonder, as indeed Kenneth Hayne wondered, how helpful hard cases such as that of Carolyn Flanagan are when it comes to drawing the line.
This article was first published in the print edition of The Saturday Paper on May 26, 2018 as "Rickety business". Subscribe here.