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SMALL BUSINESS LOANS INQUIRY HEARING – SESSION ONE – ANZ TRANSCRIPT OF PROCEEDINGS AUSTRALIAN SMALL BUSINESS AND FAMILY ENTERPRISE OMBUDSMAN INQUIRY INTO AUSTRALIA’S FOUR MAJOR BANKS ANZ INQUIRY CHAIR: KATE CARNELL PARTICIPANTS: ANNE SCOTT ANNETTE CONNOY JILL LAWRENCE DAMIEN O’DONAVAN

GRAHAM HODGES KATE GIBSON JO McKINSTRAY LOCATION: PULLMAN MELBOURNE ON THE PARK 192 WELLINGTON PARADE

EAST MELBOURNE,VICTORIA DATE: TUESDAY, 29 NOVEMBER 2016 TRANSCRIBED BUT NOT RECORDED BY AUSCRIPT AUSTRALASIA PTY LIMITED

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*Check against delivery MS K. CARNELL: Can I welcome everybody here today, those people who are online and who are going to listen to our streaming report of our public inquiry over the next two days. We are starting our questioning of the four major banks with the ANZ here today. We have Graham Hodges, who is the Deputy CEO; Kate Gibson, who is the General Manager of Small Business Banking; and Jo McKinstray, who is the Customer Advocate – a very important position, Jo. And we really really thank the ANZ for coming along and also for their ongoing input during this inquiry. I think that everyone would be aware of the basis of this inquiry and that is that the Minister for Small Business asked my office, the Australian Small Business and Family Enterprise Ombudsman’s office, to do an inquiry into impaired small business loans, particularly focusing on loans that were identified in the joint parliamentary inquiry into small business loans. We were asked to look at a range of cases that had been identified as possibly having issues involved and to identify a small group of those for a deeper dive. What we have done since then is spoken to the 20-plus cases that we identified in it to get a better understanding of those cases and then we had private hearings with the banks involved and the people involved for a small subset of those cases. What the Minister has asked us to do is not to try to determine right or wrong – we’re not a court of law, we were not trying to arbitrate or conciliate between the parties. In many cases there have been courts involved, FOS involved in others. What our job is and what we will really be focusing on in the next couple of days is looking at recommendations to go to the Government on what we can do to change the current system, what needs to change to ensure that some of the issues that the small businesses involved – well, some of the things that happen to some of those small businesses that cause the problems that they had and if we can get rid of those issues or moderate those issues or increase understanding then hopefully the sorts of pretty catastrophic outcomes that happened for many of those small businesses won’t happen in the future. So our job is to make recommendations to the Government to go forward with approaches that will make things better for small businesses who are borrowing from the banks in the future. Now, I needed to start this by possibly saying just how surprised I was with this whole approach. I bought my first small business in the very early ’80s and had a number of business loans over the years and I have to say that I’ve just been – it has highlighted to me how little I knew about what was actually possible to happen. I believed that if the bank lent me money to buy – as it was for me – pharmacies, that if I paid back what the bank asked me to pay back and I paid it on time and it didn’t sell my house or the bricks and mortar that my business loan was secured against and I ran my pharmacy reasonably appropriately then everybody would be happy. Now, I have to say my experience was that that was the case. What I found which surprised me in this whole process was a lot of the clauses in contracts, in loan contracts, that can affect small businesses are pretty, I suppose, muddy or certainly not transparent to small businesses. I was, I suppose, unaware that things like non monetary defaults could mean that the bank could choose to, I suppose, change the basis of my loan, even the amount that I was lent at any time. Now, I fully accept that that is not done very often but I was surprised that non monetary defaults where a lender can foreclose on a borrowing where the client hasn’t missed any loan payments but have breached one or more of clauses that – at least from my experience which shows I’m a bit

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naïve – didn’t know even existed in those contracts. So I have to say I’ve learnt a lot about what really can happen to small businesses that are – let’s be fair – not necessarily sophisticated borrowers. What we’ve done in this inquiry – and with me today I have Anne Scott who has run this inquiry. Annette Connoy is sitting up at the end here and Jill is over on the far table. What my team has done is we started by having a look at obviously the Joint Parliamentary Inquiry and what was said and recommended there. We had a look at the Murray Inquiry and then we started to have a look back and found that there has been something like 17 inquiries of various types into banks and issues affecting small business since, I think, 2008 so lots of inquiries and I’m sure the banks will nod and say, “Yes. We know; lot of inquiries.” But the thing that surprised us was that a lot of the recommendations are similar. So the recommendations – and I will run through what some of those are – have been repeated constantly but haven’t necessarily – in fact haven’t been implemented in a lot of situations. So the sorts of things that we are going to look at today in our questions of the ANZ are issues surrounding one-sided contracts, that’s contracts that can be changed by the banks unilaterally without the agreement of the borrower. I mentioned before non monetary default situations where even where the customer is paying the amount they believed they had to pay on time and operating, you know, within the law, can have the terms of their loan changed or even moved into default with a range of the issues surrounding that. Those issues have been raised regularly. Other issues – lack of transparency and conflict of interest with valuations – I don’t know about everybody here but I’ve always had a bit of a view that if I pay for something I might have a right to have a look at it and with valuations we know that the approach in the past has been that the bank can require a valuation to occur, can determine who does it, can determine what the instructions to the valuer are, get the valuation and not make it available to the client. The only thing the client gets to do is pay for it. We don’t believe that passes, you know, we don’t think that would pass in the court of public opinion really and that has been raised quite regularly. Issues surrounding insufficient timeframes – people getting notification of having to reduce loans, do a whole range of things with quite short periods of time around those. Mixed signals from different parts of the bank – banks that are on one side selling you new products, encouraging you to increase a loan. while over here suggesting you have to decrease it; a range of issues. We understand banks are big organisations but customers only believe there’s one bank; they don’t believe there’s lots of different bits of the bank. A lack of transparency and conflict of interest with investigative accountants and receivers – lots of issues around those and, of course, the thing where this all comes together and that’s a problem with access to justice for small business borrowers. We know and we believe that FOS does a good job, the financial service Ombudsman’s service, and does a good job for consumers but the caps are pretty low and their expertise isn’t in the more complex side of small business loans and time and time again we have heard cases where the only option is the courts but the courts weren’t an option because small businesses simply didn’t have the money to take on a bank in court which is not terribly surprising. So those are the issues, the broad issues, that have been raised during this inquiry and during the 17 other inquiries – various parts of those – over the last 10 years or so. We’re hoping that we might be able to deep drive into some of these with some questions and get some – well, it would be nice to think that we had agreement on how to go forward but those are

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the bases of what we are planning to put in our final report but we’re really keen to talk to banks on what they might look like and what the doable changes might be. I think it’s important to also state that when we talk about small business we’ve heard all sides of politics and the community generally talk about the engine room of our economy, that small business is the engine room and unless we can get small business powering along that we really, you know, can’t get growth back into our economy. 97.5 per cent of businesses in Australia are small businesses. That figures goes up if you suggest that small businesses are businesses with turnovers less than 10 million so it’s the vast percentages of small business – of businesses in Australia are small businesses. They range from people operating from home through to quite significant operations so these aren’t people having a hobby on the side; these are people who, you know, are running businesses that employ seven million Australians – the majority of our GDP – so this matters to ensure that we get these settings right for those people. So, look, that’s just to start the whole procedure, to set the scene. I am now going to hand over to Graham Hodges to have an opening statement and then we will get stuck into some questions on the issues that I raised. Graham, over to you. MR G. HODGES: Thanks very much, Kate. Good morning. With me today, as you’ve mentioned, is our head of our Small Business, Kate Gibson, and our customer advocate, Jo McKinstray. Kate is responsible for ANZs approximately 500,000 small business customers. And I guess I would note that less than half of those actually borrow commercially and that’s sort of typical of the segment. Jo handles our most complex consumer and small business customer disputes. It’s now a year since I first appeared before the Parliamentary Joint Committee on Impaired Loans which examined many of these same issues that you’re looking into, as you’ve mentioned. That is how do the banks treat their business customers, and particularly those customers who are struggling. For the record, I note that the PJC Chair reported to Parliament on the inquiry’s work, that when he did report ANZs approach to supporting its agro business customers in distress was commended. ANZ is committed to treating our small business customers fairly and offering services and products that are easy to understand, priced competitively and meet their needs. Growth in our small business segment indicates that overall we’re succeeding in this aim. Our lending to small business increased nine per cent and the number of small business customers increased six per cent in our financial year 20015/16, and this follows a number of consecutive years of double digit growth in our small business balance sheet. And as you say, right now it’s probably the most vibrant part of the economy. At the Impaired Loans inquiry and in response to your work, it has been put to us that there’s a power imbalance between banks and small business customers. It’s inevitable that comments like these would emerge, given the parties involved. I especially understand a struggling small business customer might see this to be the case. To help provide greater transparency and to reinforce ANZs commitment to support our small business customers, I will briefly address a number of the proposals that have either been put forward by the PJC which you’ve discussed with – or which you’ve discussed with us and talk to those propositions. The Government’s recent small business unfair contract changes implemented this month are aimed at responding to this debate about the power imbalance. As a result, we’ve made sure that

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the circumstances in which ANZ may vary contract terms are clear and reasonable, and reasonable notice is given. A small business customer’s right to end their agreement is clear if they do not accept a proposed change or variation. And the grounds for a default in a small business agreement are reasonable and proportionate to the bank’s legitimate business interests. I note that our compliance with this does not end abruptly at the legislation’s definition of a small business contract, i.e., up to $1 million or contracts 12 months or longer. It helps us to have that work through our significant customer base. Regarding our approach to dealing with small business in difficulty a couple of quick points. We’ve moved away from imposing higher interest on customers in default where they’re working – where we’re working together. Key decisions such as a move to enforcement must be elevated to a senior manager for approval. And we’ve strengthened our instructions to staff to explore every opportunity for a business to remain a going concern. These are all in response to the PJC work. We support taking a number of additional steps to give small business customers greater transparency and certainly about their banking, and improving access to dispute resolution if things go wrong. A number of these can be put in place through the current review of the code of banking practice. ANZ supports extending the Financial Ombudsman Services small business jurisdiction to businesses with loans for business purposes up to three million. Where banks require valuations and customers pay for valuations, these valuations should be provided to customers. This has been and will remain ANZs policy. If we seek an investigative accountant’s report on a customer, we will always give a copy to the customer. We support requiring lenders to provide small business borrowers with reminder notices of at least six months prior to the expiry of their commercial loan where the customer is not in default, with at least three months notice if a decision is made not to rollover or extend that loan and the loan is not in monetary default; and a requirement for banks to set out in loan contract terms the types of changes that a bank can make, and the period of notice a bank will give a customer in relation to each of those changes. ANZ supports the proposal that banks provide borrowers with a summary of key covenants and the potential consequences. So it’s about the transparency issue raised. Relating to this, we support an industry developing a good practice guide, so it’s the whole industry, on the use of non-monetary covenants including enforcement and external administration. Our view of non-monetary covenants in business lending contracts is that they are an important – important for customers, for the bank and for system stability. And that’s through the whole of the business market. They are used as an early warning indicator that a customer may face difficulty. We define non-monetary covenants as either of two categories. Financial indicator covenants such as loan to value ratios, interest cover ratios, debt to EBITDA, and there’s many more in the larger end of the market. They allow a bank to contact customers and review lending where a customer’s financial condition is deteriorating. Without a contractual term based on financial measures the bank may not be able to initiate a review or a discussion even where there’s an obvious increase in risk or deteriorating in financial conditions. The second area is the specific event covenants, such as fraud in the business or an insolvency event. These are particularly important for making sure that the bank’s lending is consistent with its risk appetite and regulatory requirements.

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We would support making breaches of financial indicator covenants a review event rather than a default event for small business facilities. That is for individual facilities up to three million. We also see value in banks reporting quarterly to you on small business enforcement action over the next 12 to 18 months. This will allow you to satisfy yourself that insolvency and administration actions meet good practice standards. Finally, in earlier discussions with us it had been suggested that banks should not be able to make changes to contracts during the loan period in response to external events. I’m concerned that a move in this direction would have unintended consequences on small business customers. Restricting banks’ flexibility to change contract terms will likely adversely impact the price and/or the availability of finance to this sector. My colleagues and I would be very pleased to take your questions. MS CARNELL: Thank you. Thank you very much, Graham. I really appreciate that. So you’ve answered my first question, at least, to some extent. When a small business customer comes to the bank at the beginning of a loan facility and indicates, you know, they want to borrow a certain amount of money for their small business, what information do you provide to the small business customer at the beginning of the loan with regard to what’s required of them and what happens if things start to go wrong? Now, taking into account that still today loan documents are huge and a capacity for a normal human being to understand those loan documents is significantly – well, isn’t very high. And, as I say, for somebody like me who has borrowed from banks for business purposes over lots of years, I had no idea of some of the issues, some of the things that could happen that were nothing to do with my actions. So what do you do to ensure that a small business person understands what the contracts – what the loan facility does and what may happen if things go wrong? MR HODGES: Well, I’ve got a booklet which, obviously, every person who takes out a loan MS CARNELL: How many pages in that? MR HODGES: Now, this – well, obviously, it depends on the size of the booklet. I don’t – I don’t have MS CARNELL: It is little print, I know. MR HODGES: No, it’s about – small pages, but there’s about 80 pages in here. And this is – this is, effectively – it looks like this because of regulation that we’re required to put in here. So – but it’s relatively – it’s simple language and you go through. It’s easily marked. It’s well indexed. As well as that, obviously, you’ve got the contract that you would go through and sign and that would, obviously, set out its clauses in plain English. We’ve got a simple contract. Maybe I will just pass to Kate, given that she does this every day in her business, she can talk to the details of how managers do that and what they do. MS K. GIBSON: Thank you, Graham. So, as Graham said, the finance condition reviews do set that out. I would agree with you that at 86 pages it can be potentially daunting for someone to read all of that. That’s why we do support the proposal to call out – have a very simple, short cover sheet as a key covenant for the terms of the loan. It’s also worth noting that for the customers that

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my team look after where – customers who have less than a million in lending, we don’t use financial covenants in those loan contracts. And so your comments that things that the customer might not be aware of that can happen to them through nothing that they’ve done, is not something that plays out in small business – as we define small business contracts. In terms of the steps that we take, there is a conversation. We call it an A to Z review. That’s the conversation that our banker has with a customer to actually understand their business before we actually enter into a loan contract with them. That’s part of understanding their business and understanding their needs that they have and why they need the lending. In terms of the talk about the conversation around what could go wrong, that is something that is explained to the customer, but we do give them the document to make sure that they have that information. MS CARNELL: So, Kate, in that document MS GIBSON: Yes. MS CARNELL: just go back to my experience borrowing money for pharmacies. Would you tell me that if the pharmaceutical benefits – if the Federal Government decided to reduce the amount of money they paid for pharmaceutical benefits that you could move on my loan? Would you tell me that? Because you could, because it’s an external event. MS GIBSON: I think – I think it would be fair to say that the conversation we would have with customers would be about understanding the business plan that they had MS CARNELL: Yes. MS GIBSON: and the cash flow. I think it is – given the general nature of lending in small business, it is not possible that every banker understands all the potential future events that might occur in an industry across all of the industries that we support. We have customers here and across Australia. MS CARNELL: Yes. What made you – the bank – decide that $1 million was the right figure for small business? It’s a pretty low figure now. And I think in the EU and other places it’s now acknowledged that – you know, that that is too low. MS A. SCOTT: So one million dollars – one million Euros were set two decades ago. MS CARNELL: As the definition of small business, yes. He has broken the microphone. MS GIBSON: But we will fix it. MS CARNELL: It’s all right. We will put it back together. It’s okay. MR HODGES: Thanks. There we go, Kate. Yes, I will just swing it in future. Well, if you go through the numbers of businesses and the businesses that we would bank, I mean, all of Kate’s businesses essentially are less than a million dollars. When you look through the – the customers in Australia, we think up to three million would be the maximum that you would think in terms of a small business category and small to medium, if you like. We have the small business category at

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a million, because – at that level and below – because at that level that picks up the vast majority of our small businesses and it also means that at less than the million dollars we’re able to use more measures – sophisticated ways of assessing credit without them having to fill lots of additional forms out, which would require a larger business to do in terms of their financial reporting, etcetera. So we’re using techniques. And that’s largely in response to the feedback we’ve had over quite a number of years around the access to finance. So the sector has been told for a number of years that it has to simplify access to finance for smaller businesses, not make it too complicated. And I think – so that process really is, in part, driven by the way that the regulatory rules around what we’re allowed to do at certain levels within the business. MS SCOTT: So, Graham, the regulatory rules are just being reviewed and it’s well-known in Europe that the levels that have been identified for SMEs are now considered to be well out of date and too small. The same thing is applied in Australia with a limit being chosen by APRA and then the banks considering things at one million. It’s an arbitrary figure and I would suggest it’s not a figure that meets lending practices of small businesses currently. MS CARNELL: Can I tell you MR HODGES: I would just MS CARNELL: that you couldn’t buy a pharmacy for less than that, so I would be out before and so would the 5000 other pharmacists that are in this space. Buying a going concern, let’s say, a decent restaurant – I’m just looking at standard small businesses, you know, you would be pushing your luck to buy a decent one underneath that sort of – that sort of limit. Fit-out is half a mill, you know, those sorts of figures. So it’s a very low figure. And, yes, it will work for start-ups at home, for maybe contractors, you know, carpenters, those sorts of people. Yes, it will work for them. But for anybody buying a going concern or setting up, you know, a major restaurant, a major, you know, retail outlet, a major – you know, I mean, fundamentally most businesses, a million dollars is a very low figure now. MS GIBSON: I agree that there are many businesses who would be borrowing more than $1 million from us who would absolutely consider themselves small businesses, and I know that from talking to them. MS CARNELL: Yes. MS GIBSON: The point you make, Anne, is well taken, that the figure is arguably a reasonably arbitrary one, but to Graham’s point, it’s the figure at which, under that level, we have the agreement with the regulator that we are able to use retail credit approaches to providing credit to the – those customers, and that gives those customers the benefit that they can access credit with a more streamlined credit approval process. It also gives them the benefit that, once they have a loan with us, if they continue to pay their loan, to your earlier point, Kate, we don’t require them to turn up each year and provide new financials. We don’t have the same obligations around reviews that we do when we are in a wholesale credit

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environment, which is what happens on the other side of a million. I appreciate that that is under review. We are constantly looking at ways that we can extend the efficiencies of the processes we have below a million to customers who are on the other side of that divide, because we appreciate that it is a reasonably arbitrary number. MR HODGES: And just, I mean, the ABA numbers which date from 2015 – I mean, if we look at the numbers of small businesses, there’s just over a million business loans which are under 2 million, so that’s a very large part of that, sort of, population. I mean, when you look at the average size of those loans, more than sort of 60 per cent of them are under 100,000. So, you know, there is a – sort of a wide range here. You – sort of less than 10 per cent of them are between 500,000 and 2 million. So, you know, in a way, it is heavily skewed to the smaller end of small business. Once you start to get in the sort of over a million to 2 million, the size of the business does step up and, obviously, people have got equity in there, as well. So, you know, the size actually is – it becomes more significant, and the amount of debt that people are carrying in that and their ability to manage them with – must – it must involve more inquiry around, you know, how that business is going, which is why you move into what we call the wholesale credit approach, which is a more intrusive, more time consuming and a more expensive process to sort of go through. MS SCOTT: But that’s only because the limit has been set at 1 million. MR HODGES: Well, not necessarily, Anne. It has been set at 1 million for quite some time now. MS SCOTT: Yes. MR HODGES: But it’s because, as you get into more complex businesses, you’re – even if you try to model the outcome of that, it’s more subject to variability and obviously there’s more at risk. So, you know, at some stage you want to – you can use modelling as an early indicator of financial performance, but in terms of providing loans you would want to do more due diligence around what that business was about. So I think there are limits to which you can use modelled outcomes based on customer transaction activity and what you’re going on. You clearly at these levels want to know people’s personal situations, as well as their business situations, and the business situations, you know, beyond $1 million is – can become quite sophisticated, particularly in terms of corporate structures. People will start to use trust structures and things like this rather than sort of simple structures which smaller businesses will use. So I think all of that requires inquiry, and obviously it does require, you know, review in terms of the legal position of the borrower, etcetera, and most of those borrowers would obviously have both accounting and technical – legal, you know, sort of backing to what they’re doing. MS SCOTT: So, Graham, do you know how long the 1 million has been in place? MR HODGES: I beg your pardon? MS SCOTT: How long 1 million is – the cap has been in place?

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MR HODGES: As a MS CARNELL: As a definition of a small business. MR HODGES: Well, I think as a definition for us in terms of the way we’re managing small business, that would have been in place for probably 10 years or so. MS CARNELL: Maybe longer. MR HODGES: Yes. No, I’m not saying maybe longer. MS CARNELL: Yes. MR HODGES: Kate is saying it may be shorter. MS GIBSON: So, just to clarify, it’s – the million dollar threshold is – we are saying is the limit at which we will use a retail credit and we have agreement from the regulator to use retail credit. That hasn’t been a decade. That has been a shorter period of time. You know, we – if – like every bank, we choose to organise ourselves around our customer segments and we have to pick a point MS CARNELL: Yes. MS GIBSON: at which we say this is small business and this is now our middle market or our business bank or our regional business bank. We have chosen to align that organisational structure with the transition between a retail credit model and a wholesale credit model, because it speaks to the skill set that that staff who face into those customers need to have around their credit skills. MS SCOTT: So the EU is currently considering removing any cap, because, by its nature, a cap goes out of date very, very quickly, and to come forward with a definition of SME rather than having it capped. So I guess it’s a point that when the changes come in in December of January that there’s a point there about reviewing about the adequacy of those caps. MR HODGES: Sure. Anne, I wouldn’t say the EU is a model of banking at the moment MS SCOTT: No, no. MR HODGES: frankly, and just MS SCOTT: But the fact that they’ve recognised that it’s not a suitable limit for small businesses where exactly the same proportion of small business is in those economies there, as well. MR HODGES: Yes, and I think – well, actually, the way we would look at this, we think the current definition is – it broadly covers that sector quite well and clearly what we do is we move through the million and into the three to fives, you know, the – up to 3 million, and, you know, where our

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sort of next segment level would be, approximately, then through five to 10 is increase the level of sophistication in terms of the way we manage those accounts, so – Kate, did you want to MS GIBSON: Yes. I will just say, I think there is a distinction between how we define small businesses for the purposes of what legislation applies to them, for the purposes of what dispute resolution avenues are available to them, and then for the banks in terms of how we structure ourselves to face – you know, and meet with our customers, you know, if the definition for the purposes of where you can use a retail credit model is changed, then that’s something that we as a bank would need to align with, but the – we recognise that for customers that line is arbitrary. It’s not one that necessarily makes a lot of sense to them, because they don’t see that they are fundamentally a different business the day they move from $950,000 of lending to a dollar over a million. That’s the reason that we have, you know, the finance conditions of use that we would report – showing you before. That doesn’t change when you move from a banker in my segment to a banker in one of my colleagues’ segments in the middle market. It’s the same document, and the reason we’ve done that is because we recognise for the customers that transition is an internal definition that we have rather than one for them. MS CARNELL: Look, I understand what you’re saying, Kate, Graham, but, from where we sit, if we want to have contracts, conditions and – and I think we all do – that are understandable for a group of people who matter to our economy, small business owners that don’t have in-house lawyers, that don’t have in-house accountants, then we’ve got to make the system as simple as possible, understanding that the banks, like any business, need to manage risk. But I think the important issue here is manage risk, not avoid risk, and I think, you know, there’s the – you know. Therein lies the balance. You made the comment that you didn’t have a nonmonetary default – default clauses, covenants and so on for business contracts under – for small businesses, under a million MR HODGES: Under a million. MS CARNELL: $1 million dollars. MS GIBSON: Sorry. Could I just clarify. It was the financial covenants MS CARNELL: Okay. MS GIBSON: in the loan contract terms. MS CARNELL: Okay. So what do you have in place for small businesses under $1 million, and then I will ask the question on what – you know, what happens in the next phase. MS GIBSON: Yes. MS CARNELL: Businesses up to 3 and 5 million. MS GIBSON: So what we have is the loan contract, which will spell out the term of the loan, the nature of the product and the interest rate that applies.

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MS CARNELL: Yes. That’s the bit we all understand. MS GIBSON: Yes. And we have the financial conditions of use. So when we – as Graham said earlier, when we talk about nonmonetary defaults, we have in our mind that those are financial covenants and specific event covenants, and the specific event covenants are covered in financial conditions of use. MS CARNELL: And so what’s the specific – what do they say? What does specific event covenant say to a small – for a small business loan? MS GIBSON: Look MR HODGES: I think MS GIBSON: probably reading it out is the only way I can make sure that I get it absolutely MS CARNELL: No, I don’t need it to be absolutely true. But what it – what they are, as I understand it, is when things change externally to the business, eg, there’s a downturn, you know, in – you know, in construction in North Queensland – you know, there’s some issue that happens external to the business – that’s an external event – an event that is not within the control of the business borrowing money. MR HODGES: Are you saying that’s in there, or are you asking the question? MS CARNELL: No. I’m saying that my understanding of an external event, using that bit, is something that happens, you know, on an industry base – a regional base – an economy base – something external to the actions of the actual business. MR HODGES: Yes. MS CARNELL: Financial covenants and others regarding the actual business are different. I’m interested in the external. MR HODGES: The specific event ones that I talked about in my opening comment were more around the use of the funds. MS CARNELL: Yes. MR HODGES: So, if they were lent to someone for a certain use and then they – we found that they weren’t being used for that use, then that would be a specific event. MS CARNELL: That’s fine. MR HODGES: If there was fraud in the company – if another creditor took enforcement action, that would be a specific event as well. So they’re the specific event covenants that we’re talking about.

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MS CARNELL: So a downturn in the economy in North Queensland MR HODGES: Yes. That would be more a general issue that that business would face, and MS CARNELL: Yes. Well, the business would face it, but I think even in some of your own documents you’ve suggested that, you know, a specific event could be a downturn in an industry – you know, a change in the economic conditions. MR HODGES: Sure. That would be a, what I would call, more a general economic issue that’s facing that business. MS CARNELL: Okay. So that couldn’t MR HODGES: And that could lead to the bank and the customer having a conversation about how that customer was, you know, dealing with that event and what was going on. MS CARNELL: So it couldn’t be a default. MR HODGES: Well, it’s not MS CARNELL: It was surprising, because some of our cases look like that’s what happened. MR HODGES: It’s not a default in a sense of the business that Kate’s talking about, and even in other parts of the business. So, in larger clients, it would likely trigger a conversation because if that business was adversely affected through a deterioration in an economy – and, particularly, if you took North Queensland, where it was a regional economy – things were hit – then that would likely show up in the financial indicators which are monitored as part of that particular business, and if they – if those financial indicators – so interest covers or, you know, sort of, debt to EBITDA changes – were triggered, then that would, again, lead to a conversation with the bank to say, “Look, the business is not looking healthy and, therefore, what are the actions that the customer is proposing to take to manage the business in those events”, and MS CARNELL: Okay. Look, that’s really good, because I think it’s those external figures – those external issues that, fundamentally, the client has got no capacity to do anything about – are some of the issues that really – so getting rid of any, you know, external events as being the basis for revaluations or whatever would be a really good thing. MR HODGES: Well, I’m not saying we would get rid of that. I think, actually, the bank wants a right to be able to talk to clients in the event of a deteriorating economic position or, you know, rapid industry, as to what that client’s doing, and I think that’s why we said, again, in my opening statement, we would see ..... for the segments that have those financial indicator covenants that they would lead to a review event where the bank can review what’s going on in that environment with that business to understand how that business is dealing with that. Now, it’s not an event of default. It’s a review event is what we’re saying. Ultimately, even if there’s no monetary default in that, I think it’s really important for both the business and the bank to sit there and have a dialogue about what’s going on and what actions the

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business is planning to take about that, because once you get to a default, then you obviously are further down the track and there’s less options available for a business in those circumstances. MS CARNELL: Okay. MR HODGES: The earlier you can get to any issues that might be affecting the business, the better, which is why we have those, if you like, trigger review events that are sitting in the bank covenants. MS CARNELL: Okay. Where the problem lies, Graham – and I’m sure that you would know this, as would Jo and Kate – is that sitting down and having a discussion that the economy is, you know – or issues around pharmacy of change – the economy has changed in a particular area – a particular industry is, you know, having a bit of a downturn – is absolutely fine and reasonable. Using that for somebody who is paying their – you know, the payments that their contract requires them to pay on time – continuing to run their business – yes, there’s a downturn – that’s what’s happening – all that’s fine. Taking the next step to change LVRs, to do other things, unilaterally, is where the problem lies. So is that what you’re doing, because you’re sort of indicating you don’t, and that would be really good if that was the answer. MS GIBSON: Well, I can tell you that, within the customers that sit within my business, we don’t. The only time that we would, would be in a position where we are issuing a letter of default, where it’s one of the specific events that I talked about before and Graham outlined. But it is when a nonmonetary – sorry – a monetary default has occurred, and it usually MS CARNELL: So getting rid of the things I’m talking about, because you don’t do it, wouldn’t matter? MS GIBSON: Well, I think the challenge that we have is to Graham’s point. The financial ratios, we believe, are a useful tool to see early warning signs MS CARNELL: Yes. Yes. No. We agree. MS GIBSON: and have a conversation – trigger a conversation with customers. MS CARNELL: But you can do that, anyway. MR HODGES: And I just – if I could say, look, in Kate’s segment, as we define small business, that doesn’t exist. Okay? So they are as we’ve said. MS CARNELL: Yes. MR HODGES: In the next segment up, absolutely we have those, and I think they’re really important, and it’s important because, in my long period in banking, the earlier a client recognises that there’s an issue in that business and they work to address that, then much more likely they are to deal with it and work and be successful in actually getting the business out of issues. So we think these are very important for the banker-client relationship – to encourage – in some cases, to

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require the businesses to come to the table and have a conversation about what’s going on in those businesses. MS CARNELL: No problems with conversations. Conversations are good. MR HODGES: And that’s what I’ve said. We said, at the start, up to three million. We think that we’re very happy with that to be a review event, not a default event. So, where there’s no monetary default, but where’s a breach of these financial indicator covenants, we would be quite comfortable with that being a review event, which is, sort of, not a default event. Okay? MS CARNELL: Okay. MR HODGES: It’s where the business and the bank get together to discuss the – what has happened, why is it happening, what is management or what is the business doing about it, and what can the bank do to support them in dealing with that. MS CARNELL: Okay. That bit is really good, because that sounds like partnership. Where the problem has been – and we’ve got a number of cases – is where that discussion has led to evaluation – an LVR change because of, say, an interest coverage issue – because of a downturn MR HODGES: Or not rolling under a loan. MS CARNELL: and that has moved to what is a significant event – like, a change in the current agreement. MR HODGES: Well, if I could say, if a business’s cash flow performance has deteriorated sharply, it’s not unexpected that you’re going to get some changes. Now, if it’s evaluation because it’s a service sector business and it’s valued on the basis of a multiple of cash flows, obviously it’s going to affect the value of that business – what someone will pay for that business. So there’s no denying the fact that, actually, changes in the financial performance of the business will both affect valuations. It may affect the value of a property. I mean, we’ve seen that in the case of farmers. If yields drop – if the sectors are down, then what a person would pay for that land or that property would be affected. It doesn’t necessarily mean that the bank moves against the client. What it means is that the client and bank are working as to how they best deal with those situations, and that’s we mean by review event. MS CARNELL: Look, just one second. MR HODGES: And sorry MS CARNELL: Yes. MR HODGES: As we said at our Parliamentary Joint Committee last year, of the – we took a snapshot of the accounts which were in our areas where we had taken action against clients – so had been put into administration – of the 116 clients in work out at that stage, 113 had been in monetary default, so we hadn’t used nonmonetary defaults as a way of triggering, sort of, action against a client, if you like. That’s not what we do.

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MS CARNELL: Look, I understand what you’re saying. MR HODGES: Yes. MS CARNELL: The problem is a lot of the cases we’ve looked at indicate that, yes, by the time you go into administration there’s often financial – people haven’t – have missed payments. But back at the beginning when possibly LVRs have changed, customers have been asked to reduce their loans, have asked for – a whole range of things have happened. When they’re paying the amount of money that the contract says they have to pay on time, they’re doing everything they can but there’s a downturn in the economy, you know, something has happened and what small businesses do, you know, is they tighten the belt. They have Vegemite on toast. You know, they – I mean, they fundamentally do whatever they have to do to keep paying the bank and their landlord and their staff. That’s what they do. And the problem is that the bank then comes in and says, “Oh, dear” you know, “there’s a downturn and your business – you know, your business is a bit flat.” The discussion is good, the discussion – so what are your plans, Mr Small Business person, on who you’re going to get through this economic downturn? So far, so good; that’s exactly what should happen. If then the bank changes the LVR, requires a reduction in loan, puts up interest rates, puts on new terms and conditions, all it can do is exacerbate the problem for the small business. I give you that what the bank is doing is moving risk, but therein for us – for me lies the problem. You know, when you end up in situations like that those are the times when, you know, there’s a bit of risk sharing happening, not “Oh, dear, we will move all the risk to the person who can least handle it.” MR HODGES: So let me just say that there is a Goldilocks’ view of small business and then there’s another side. Okay. So we’ve got a lot of unsecured small business borrowers who will just walk away from their debt. You know, we deal with the whole range here. MS CARNELL: Sure. Yes, 80 per cent are bricks and mortar secured, 80 per cent. MR HODGES: Well, I think these numbers have moved over the last few years so MS GIBSON: I’m not able to talk in detail about the middle market but I know within – the customers that sit within my segment, only 50 per cent of the secured lending is residential security. And a large number of the customers actually do have unsecured loans. Now, they’re much smaller. MS CARNELL: They’re tiny – they’re $50,000 loans you’re talking about. They’re really little loans, aren’t they? MS GIBSON: They are. MS CARNELL: I mean, trying to get anything much more than that unsecured, you know, yes, you can whistle Dixie really. MS GIBSON: Again it depends on

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MS CARNELL: Unless you’ve got a business and you’ve had one for a hundred years or something but MS GIBSON: Well, it depends on the nature of the industry and the nature of the customer and, as you say, their prior experience. So we do have customers who have unsecured loans that are larger than $50,000. MS CARNELL: But very, very few. And their people with significant experience and significant assets. MS GIBSON: Possibly more than – look, I think it’s difficult to sit here and speculate MS CARNELL: Yes, I know, but in reality that’s the case. Going and getting an unsecured loan from you guys who are doing some great work in making money available – but getting anything more than a fairly small loan in an unsecured space, well, I would be fascinated to have a look at it because our experience is not that. MS GIBSON: I think the – the point that I would like to take is around your comment that, you know, how we’re working with the customers. I think what we have taken some steps to do is make sure that our bankers are far more aware of the opportunities we have to work with our customers in our hardship team so that when customers, as you say, are in that situation and they are trying to make sure that they can make payroll and they can pay the landlord, if they know that that situation is happening or if we become aware of it, we have put considerable effort into training our bankers on what are the options available for the customer to come and work with us, and how might we be able to restructure the lending to make it more possible for them to continue for the loan to be in order rather than looking at it and saying, well, you know, you’ve just got to make the payment. And I think Jo would be well placed to talk to how those hardship processes work. And we have seen, as we put more effort into training frontline about those processes, that we are seeing more customers avail of that when it’s appropriate. MR HODGES: And, again, just back to your comment, where we do look to vary the conditions, the customer has a right not to agree to that and, in fact, must agree to it. If they don’t agree to it, then they have rights as well to move their finance MS CARNELL: Yes, but you really don’t for them if MR HODGES: They do have those rights. MS CARNELL: Sorry, it’s true. You’ve lent me a couple of million dollars – okay, one million to try to make it inside your scenario, to buy the pharmacy and you’re varying the contract. And I’ve got every right to say no, and I get to pay you back immediately and try to find another lender, you know MR HODGES: Not immediately. We would obviously give you a notice period. You would say, I’m sorry, the bank MS GIBSON: What notice period would you give me? What notice period?

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MR HODGES: We would at least look at a 90-day period where you would then go get refinance. It’s not in our interest to say, “Kate, you’re not paying, you don’t agree with the terms here, we’re going to wind you up.” We would say to you, “Look, we believe we’ve got good reasons to vary the contract here.” And some of them may be environment. You’ve talked about that. Others may be – and risk. Others may be, it’s just there’s a change in law and so, therefore, we vary the contract because of changes in the law, or other reasons why we might do that so which are more, if you like, universal. And we would do that across all our customers. But if we do that, and then we would sit down and have a conversation with you, we would say this is the reason why we’re doing this, and this is the way you can respond to that. You can either look at changing the way you’re running the business or improving the business. You can come in and then, you know, sort of say, we don’t accept that and, therefore, we will go and refinance. It’s a very competitive market out there. And we would obviously be mindful of what we felt were competitive terms and conditions for you in the sector that you’re working in. MS CARNELL: So do you agree, and this is a really simple yes or no answer, that the wording of covenants and clauses give the banks the unilateral right to trigger a default? MR HODGES: Well, I think that’s more a legal question MS CARNELL: It’s easy, it’s yes or no. MR HODGES: and I would say MS CARNELL: It’s yes or no. MR HODGES: No, I would say the answer is – in my understanding, it would be no. We don’t default. We don’t – as a practice we do not default. MS CARNELL: I said right, and I accept that. The issue is, do they give you the right? MR HODGES: Well, just let me ask my lawyer. MS CARNELL: Okay. The answer is yes. MR HODGES: The answer is yes. MS CARNELL: Okay. MR HODGES: So – so the answer is that we’ve got default issues listed in our terms of contract. It has to be in default of one of those to be put in default. So if it’s not, it can’t be. So that’s – that’s sort of set out in the terms and conditions. There are requirements in there which would say, these are the events which would cause a default. If you’re in breach of those, then we could put you in default. If they’re not in breach of those, we can’t. We’ve got no right to do that. MS CARNELL: So the

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MR HODGES: So that’s sort of clear from the contract MS CARNELL: So MR HODGES: on what that is, or the terms and conditions. MS CARNELL: So can – so the answer is yes. And we get back to MR HODGES: No, sorry, the answer is no, unless it’s an event that’s listed on there which you are in breach of. MS CARNELL: Okay. Which is what, the terms – what the wordings of the covenants and clauses on the whole do. So that – you know, there’s a range MR HODGES: I’m sorry, they actually list the issues that would put that loan in default. If you breach those, then we have a right to default you. MS CARNELL: Yes. MR HODGES: The principal is we would – we would rarely do that. We would – we would then have a conversation with the customer to find out what’s going on and we would work with the customer to try to correct that issue. MS CARNELL: Yes. I suppose the importance of saying, okay, you have a unilateral right to revalue the property that my business is secured against, and to change the LVR. You do. Maybe not on under a million dollar contracts but the three MR HODGES: No, I’m sorry. Above a million dollars we would have a right to – you know, to obviously understand what’s going on. If we felt that – you know, it’s rare that we sort of just rely on LVR. So our basic approach in terms of the way we look at dealing with our customers is largely on cash flow and ability to service the loan. An LVR is a secondary, you know, sort of signal if you like of – of the strength of the business. So, you know, if the loan and value is near a hundred per cent, then clearly what we’re saying is that looks more like an unsecured loan to us. If they took out a secured loan, you see the valuations are falling away, you know, I think that is – is a period where you would obviously sit down with the client and have a pretty sensible conversation about what is causing those valuations to fall. Is it because of the particular circumstances in the businesses which means that the cash flows are lower and, therefore, the value – the value of the use of that, if it’s a property, is falling? Is it a market broad – a broad market circumstance, or what that’s driving that. And it would be – depending on what it is, that would trigger the conversation with the bank. It would be possible that the bank might say, we would prefer that you brought that LVR back within a broader range and what we would be the – what are the options to do that. MS CARNELL: Okay. How do I do that? Now, I’ve – you know, the reason I’ve borrowed money from you is to buy my business or to extend my – to do something. I’ve done it so I don’t have the

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money and – I don’t have lazy money sitting around my balance sheet as a small business person, but nobody does. So if you change the amount you’re willing to lend me during a contract, during the five years you gave me the money for, how do I pay it back? MR HODGES: Well, that’s why I said earlier that when we looked at those accounts which were, effectively, in bank administration, of the 116 113 had monetary defaults. They weren’t non-monetary. MS CARNELL: Yes. MR HODGES: That’s why we said at the PJC we actually don’t use non-monetary defaults to put clients into administration. MS CARNELL: Okay. In which – I mean, there’s two things, putting them into administration and the other one is putting – you know, is requiring money back. What I’m saying is, you know MR HODGES: Well, it does seem MS CARNELL: you’ve changed the amount of money you want to lend me. I don’t have it in my balance sheet, so where do I get it from without impacting upon the cash flow of my business or, alternatively, if I might have some other form of revenue. I think I’ve borrowed from you a certain amount of money for a period of time on the basis I keep paying it back. And I’m very pleased with what you said about not using non-monetary defaults. The concern I’ve got is in the cases we’ve looked at by the time you get to administration – you’re right – that almost everybody by then has ended up with those financial defaults. Let’s go back to the beginning of the time – of when the bank first changes the rules. Like, changes the LVR, changes, you know, the rules around my loan. How many people haven’t financially defaulted when the bank uses a non-monetary default or a non-monetary clause to change the basis of the contract? MR HODGES: Well, I honestly can’t tell you stats around that. MS CARNELL: Because that’s the interesting bit. MR HODGES: But I can say – I understand what you’re saying, but the practice we would have would be to trigger the conversation with the client to say MS CARNELL: Yes. MR HODGES: what is the – what are the actions that are taken to – you know, from the customer, by the customer, to try to ensure that that facility that remains broadly – you know, again, this is above Kate’s threshold level – remains within the broad terms which we agreed when we took out the loan. And we would work with the client to do that. It’s sort of not in our interests in an environment where a client is under pressure just to sort of sell them up. We don’t tend to do that as a sort of an approach.

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MS CARNELL: So in line with, say, the Murray inquiry and a range of other things, if it got rid of non-monetary defaults or, say, loans up to 10 million – you know, I’m even happy to talk at five – okay – what would happen? What horrible thing would occur apart from a whole lot more security for small businesses, taking into account – you could still sit down and you could still have those conversations. MR HODGES: We’ve agreed that we can have those as a – so the financial indicator covenants as a review event, so not a default event. That’s just what – we’ve said that already. MS CARNELL: Okay. So we can move to a scenario MR HODGES: Up to three million, we said. Yes. MS CARNELL: Well, we reckon that’s still a bit low, but for all of that we’re having the discussion. So for non-monetary – so we’ve just got to get rid of default, because they’re no longer default. So non-monetary MR HODGES: So I think you need to use a different term than “non-monetary”, because that includes a wider range. So some non-monetary defaults we would absolutely want the ability to act quickly. So MS CARNELL: So tell me which ones we’re willing to say would never be defaults and which ones would? MR HODGES: Well, that’s what I’ve said, the financial indicator ones. So interest cover, LVR, debt to EBITDA, those sorts of ones we would say we’re happy for it to be a review event. If someone is, for example – you know, they’re running a horse stud and the horses are being mistreated, we would want to be able to default that immediately and get – you know, sort of take charge of it. So that would be animal cruelty, for example. MS CARNELL: I have no problems where people break the law. MR HODGES: If there’s fraud, if there’s – if other creditors have taken action against the client we would want to be able to act immediately. So they’re the ones where we – the specific event ones where we would want to be able to move as a bank to protect our interests and/or the facilities that are there. We would need to move very quickly. For those other ones, which you’re saying are more relating to conditions – you know, sort of LVRs or interest covers or debt to EBITDA, we’re very happy for those up to three million to be a review event, not a default event. MS CARNELL: Okay. Thank you. MS SCOTT: Okay, so, Graham, we’re moving on to a different topic now MR HODGES: Sure. MS SCOTT: which is valuations. MR HODGES: Yes.

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MS SCOTT: So touching on Kate’s point that she raised earlier – and this is, again, a point that has been made in many reviews and inquiries before. So it’s where a borrower pays for a valuation to undertake an LVR type exercise and the question is – is why can’t they see the valuer’s instructions and the valuer’s report? So, I think, in your response you had some words to say on the ANZs view on that. MR HODGES: Well, our policy has been, and will remain, that we – if a customer pays for the valuation we would show them the valuation. And we would show them the terms of which the valuation was – was requested, so that they’ve got full access to that. I mean, I think, that makes a lot of sense. I mean, it’s the customer’s, you know, business or assets which are being valued and they will likely have some input into how a valuer, you know, assesses that because they will have more intimate knowledge about it. So, actually, that’s our policy and we’ve been applying that for some time. MS SCOTT: And in your plain English documentation do you explain to a customer – because there’s a lot of misunderstanding about valuation and market price and stuff like that where people misunderstand the valuation figure that comes out at the end of the report. In your plain English documentation do you explain what the valuation is actually doing and what the valuation report is actually assessing and also that that valuation is only valid for a three month period? Because, again, from our cases that we’ve had people sort of clung on to valuations they’ve had quite a considerable time earlier, not really appreciating how values have changed over time. MR HODGES: Yes. Well, I would have to refresh my mind in terms of what’s exactly written in our terms and conditions, but, you know, a valuer – if we were asking a valuer – and just so you understand, I mean, we would have a panel of potential valuers that we would use. We would clearly look at who was the appropriate valuer for a particular asset, because some have different expertise, and we would select someone from that panel. The client might or might not be engaged in understanding who that valuer is. If the client objected to that I’m sure the bank would then look at whether we had a different valuer. So we wouldn’t tend to use the same valuer that a client might have used, so you’ve got more independence. We would expect that valuer to assess that valuation on the basis of market value in a normal sort of business circumstance, so not a compressed timeframe. Because, you know, I think, that would, obviously, lead to a lower valuation. So it would be in the normal circumstances of a sale of an asset. The more you might say to them, “I want to sell that within, say, two to three months” or something, you would obviously get a slightly different answer. And that’s why understanding the context of the commissioning of the valuation is important for a customer as well. So, look, I mean, I believe our terms and conditions would be reasonably clear around that. I would expect them to be. MS GIBSON: I think I would also just comment that within – okay, within my business – the period by which we would rely on a valuation that we had had done previously is not three months. It would vary between six months and 12 months based on a view of how fast property prices and business prices were moving in that area. MR HODGES: Yes.

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MS GIBSON: In terms of your question, Anne, around, you know, how do we simply explain that to customers, I suspect there is room for improvement in how the way the valuation reports are written in terms of their accessibility to a lay person in understanding them. Having, you know, read valuation reports they’re not always the easiest of documents to read. MR HODGES: But, I think, Kate made a good point. I mean, typically where we’re – in the normal course of events we would rarely want to, you know, sort of request a valuation in less than 12 months. So you would expect a valuation to hold for, at least, 12 months in normal circumstances. MS CARNELL: Yes. MR HODGES: In an environment where there’s rapid change, you know, it would be still largely – probably 12 months that you might request a renewed valuation. But I would certainly expect when the valuer is looking at something that they would have a shelf life way beyond three months, except in very unusual circumstances. MS CARNELL: So we would agree. It’s just that we’ve had some cases where there was a valuation and when the customer has tried to rely on that valuation the comment from the bank was that, “It was only valued” – it was only – you know, “It was only a three month valuation so you can’t rely on it”. MR HODGES: Well, I guess my judgement around that would be in almost all circumstances it should have a shelf life, you know MS CARNELL: So a clear shelf life on the valuation. MR HODGES: well beyond three months and probably MS CARNELL: Okay. Good. MR HODGES: towards 12 months, but in a very rapidly moving environment that may well not be the case. That would be very unusual circumstances. MS CARNELL: So we could comfortably say that, with valuations, a client or customer, you know, should see the instructions, should be able to access – well, should see the instructions, hopefully be able to input into them if they don’t – if they think they’re a bit off, but, you know, they can see the instructions, they can get a copy of the valuation and the MR HODGES: Yes. MS CARNELL: valuation will be clear how long it’s valid for, taking MR HODGES: Well, I mean, that’s a MS CARNELL: into account there might be MR HODGES: You know

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MS CARNELL: scenarios where the valuation time – there’s quick changes, whatever. If it’s a quick-changing market, you know that. MR HODGES: Well, I think that’s up to the valuer; isn’t it? I mean, I’m not an expert there, but I would have thought it may be worth your inquiry MS CARNELL: We’re doing that. MR HODGES: seeking that view from the valuers, because they’re the ones who are the experts on that. So we MS CARNELL: At the moment, they say three months. MR HODGES: Sorry? MS CARNELL: At the moment, they’re saying three months, and it just, I guess, shows it’s a – an indicator. It’s MR HODGES: Yes. I mean, the extent to which a valuer extends that term, it puts them more at MS CARNELL: Yes. MR HODGES: At risk MS CARNELL: That’s why they say three months. MR HODGES: in a sense, if you like, and I think the issue for us is that would be more unusual. MS SCOTT: Sorry, I don’t think MR HODGES: If you force a valuer to increase their – the term in which they suggest that that’s still valid, then clearly that will carry some risk for the valuer around that MS SCOTT: So, Graham MR HODGES: and that’s a question of how they price that risk, to be honest. MS SCOTT: Graham, I don’t think it’s a question for the valuers in terms of how long they think their valuation. I think it’s how useful that valuation is to the bank and the amount of time that the bank is using that as an indicator. It’s slightly two different things. MR HODGES: Well, if the valuer says it’s only valid for three months MS SCOTT: In their industry, because, you know MR HODGES: Yes.

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MS SCOTT: that’s how they MS CARNELL: They get sued if they’re wrong. MR HODGES: Our – yes. Our normal – I would say our normal practices, generally a valuation would be done, at the earliest, sort of annually MS SCOTT: Yes. MR HODGES: but only less – in less time than that because of unusual circumstances. MS SCOTT: Yes. MR HODGES: Yes. MS GIBSON: And just if I can clarify again within where we use retail credit methodology, once we have initiated a loan, once the customer has drawn down their funds using a valuation, it’s only if they come back seeking additional lending and that valuation is now 12 months out of date that we would seek a new valuation. So when I’m talking about that six to 12 months, that’s the period of time in which we will rely on the previous valuation rather than requiring a new one. MS SCOTT: So, Kate, that’s where we’ve seen a degree of misunderstanding. So it’s just having clarity around if you’re coming to extent your facility, if you’re anticipating a rollover, you know, this might come into the equation, and I guess it’s forewarning people about valuations and how long that they can rely on and not then thinking that the valuation that’s coming with the renewal of the facility is, you know, explaining why that’s required, because it’s misunderstood. Can I just say MR HODGES: It’s misunderstood as to why they need a valuation, or MS SCOTT: Why they need a valuation. MR HODGES: a renewed valuation; is what you’re saying? MS SCOTT: And then when the valuation MR HODGES: Yes. MS SCOTT: comes back MR HODGES: Yes. MS SCOTT: how that can MR HODGES: Yes. MS SCOTT: then cause a change

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MR HODGES: Yes. MS SCOTT: in the loan circumstances. MR HODGES: Yes. MS SCOTT: And that’s not anticipated. MR HODGES: Yes. So one would need to be careful about being too prescriptive in the documentation, but I think you could find a form of words which explain that it may vary on circumstances, but typically it may be something a rather. So I think that’s something which, you know, obviously you can have a look at, but I think being prescriptive that it must carry for a certain period, I think, wouldn’t be appropriate. MS SCOTT: No, but you can describe what generally happens. MR HODGES: Yes. MS SCOTT: Yes. MR HODGES: I think that’s absolutely true, yes. MS SCOTT: So the only other area with valuations is when small businesses have an issue or a problem with how the valuation is conducted, they go to the bank and the bank will say it’s not our problem, it’s the valuer’s problem. They then go to the valuer and the valuer will say I can’t talk to you MS CARNELL: We work for the bank. MS SCOTT: we’re working for the bank, and so you’ve got this circular situation and there is actually nowhere for a borrower to go if they’ve got a query about the valuation and get anybody to listen to them. MS CARNELL: It’s sort of interesting taking into account it’s the client who’s actually paying the bill, and yet they’ve got no ..... MR HODGES: But the valuer – I think – if I, again – it’s my understanding that the valuation is directed to the bank and it must be so so that we can take it into account. So it becomes, in effect, the bank’s document. MS CARNELL: Why doesn’t the bank pay for it, then? MR HODGES: Well, in some cases they do, but it’s the – it – the valuations are, you know, sort of – so there are some paid by the bank, because the bank initiates that valuation. MS CARNELL: No, I understand that, but mostly they don’t.

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MR HODGES: But it’s largely because it’s initiated by the customer and we are looking to MS CARNELL: No, no. So the customer MR HODGES: No, no. MS CARNELL: hasn’t initiated it. MR HODGES: The borrowing request is initiated by the customer or circumstances have changed and we would then – that’s part of the support for the loan documentation. We would expect the customer to pay for that. MS CARNELL: I understand, but if the customer pays – again, the court of public opinion would perceive that if you pay for something then it’s yours. MR HODGES: It’s a question of how it’s legally – so this is a question of its – the bank’s ability to legally rely on it, I think, and so MS CARNELL: I understand that. MR HODGES: it’s more that question as opposed to is it valuation for the client – for the customer, absolutely, and should the customer have an issue and would they be able to debate that, we would expect they would, and so, from a bank point of view MS CARNELL: Well, see, at the moment they can’t, because the valuer says they work for the bank. MS SCOTT: And the bank says MR HODGES: The bank MS CARNELL: Says it’s the valuer’s issue. MS J. McKINSTRAY: Sorry, could I MR HODGES: Yes, sure. MS McKINSTRAY: Thanks. Hi. I have seen a couple of complains that we have dealt with in the past in relation to valuations. I mean, our practice is not to send them back to the valuer, so I’m not sure if in your case reviews you have seen that MS SCOTT: Yes, we have. MS McKINSTRAY: in an ANZ context. MS SCOTT: Yes.

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MS McKINSTRAY: Our practice is not that I have seen to do that, and we will work with our panel of valuers. I have seen revaluations done by an alternate valuer in the past where there has been a dispute. That’s not always the case; it would depend on the situation. MS CARNELL: So could we comfortably say, then, in our report that reviews of valuations could be directed to the advocate? I mean, I’m just trying to work out what we do when a consumer is saying that valuation is rubbish and this is the reason why it is rubbish and they’ve got nowhere to go, not a thing they can do about it. So what can they do? What’s the MS McKINSTRAY: So MS CARNELL: The recommendation? MS McKINSTRAY: So I imagine, yes, there’s a lot of – there are formal and informal ways that complaints are raised with the bank. Many of these customers will have relationship managers or branch contacts, and that would be the first point to inquire, because MS CARNELL: They say it’s a matter for the valuers. They – we’ve gone down that path. They say that – you know, they go to the bank and say this is rubbish, they’ve said it was a matter for the valuers, they go to the valuers, the valuer says it’s a matter for the bank. MS McKINSTRAY: Then perhaps that’s a matter for us internally for awareness, because that is something that we do look at internally. I know that our complaints team look at it, and I’ve seen some that have come to me, as well. MS CARNELL: Okay. MR HODGES: So, Kate, I guess the underlying issue here, of course, is – and I would be – it would be true of me, too, that I often think my asset might be worth more than what it’s worth MS CARNELL: Absolutely. MS SCOTT: Yes. MR HODGES: as an independent. So to the extent that you have a big difference, I think obviously that’s where, you know, people like Jo or others would want to review that. But I would have thought that’s – it’s sort of – the valuers are there as professionals to put the market value on that. Now, we might not agree with it and the bank may not agree with that value, as well. The customer and the bank, neither of us may actually agree with a number that they come up with, but that’s why we employ valuers. Because they’re the best people to provide MS CARNELL: Yes. MR HODGES: current market value for those assets, and I know we saw some circumstances back in the Gold Coast

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MS CARNELL: Yes. MR HODGES: a number of years ago where we felt the bank – the valuations that were coming in were too low relative to what we felt they were worth, and, you know, the bank had to sort of go to these valuers and say, look, actually, we actually think these are worth more than this and have a conversation with valuers, just as customers can do that with their valuers, as well. So there will be some differences of view on either side. MS CARNELL: We agree. MR HODGES: I think it’s interesting you say there’s no resolution to that. I mean, I think the resolution, as I would see it, would be the customer, the valuer and the bank would sit down together and say why have we got a difference here and presumably have a dialogue around why they’ve come up with their value and why it might differ from the customer’s view. Ultimately we have a document which is done by a professional which we have to rely on which we will rely on, and I guess, from our perspective, maybe we need to reflect inside the bank as to how we would deal with those sort of disputes MS CARNELL: Look MR HODGES: you know, more obviously than maybe we do at the moment. MS CARNELL: As you talked about the Gold Coast scenario we’ve got a couple of cases in this case where valuers did come up with valuations and I give you they’re professionals but, like all professionals, sometimes you make a blue, sometimes you don’t get it right. In these cases – in a case I could think of there was really quite a significant difference between a previous valuation and it was a downward valuation at a time when it was incredibly hard to see that the market had done anything like that so the customer is in this position and the problem comes is the impact of that low valuation is significant to the customer. MR HODGES: Well, sure, if they’re in a property business I can understand that would be MS CARNELL: No. There was the LVR issue for them. MR HODGES: Well, okay, and so I think Jo’s view that you would then say it’s – we would actually want a second opinion around that MS CARNELL: Thank you. MR HODGES: which is an alternative opinion, if you like, and I guess that’s probably the next best way of trying to deal with that such that MS CARNELL: ..... MR HODGES: they don’t think that someone has made a particular blunder without giving – obviously showing that current valuation to the new person to get sort of an independent view on how that would look and I would have thought that would be something – if I was in the bank and I

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was sort of responsible for that issue I would say actually that’s something we ought to do and then you would look at how you would make that affordable from a customer perspective, yes. MS CARNELL: I agree and, you know, a reasonable person would do that. Unfortunately, sometimes that’s not what happens – that we’ve got a valuation, that’s what it is, that’s what we’re going with. MR HODGES: Yes. It would be very rare that something like that would happen so in a sense I think in the vast majority of cases I know there will be differences of view and obviously, you know, as a customer I probably have that in terms of what my house is valued at too but I think it probably isn’t material from a business perspective or a borrowing perspective – it’s in those small number of circumstances MS CARNELL: Yes. MR HODGES: where it would be material and I think, you know, a recommendation about having an alternative independent view or something might be something that would make sense. MS CARNELL: Yes. Look, it is a small number of cases where it is material. MR HODGES: Yes. Yes. MS CARNELL: Unfortunately where it’s material, it’s really material MR HODGES: Yes. I get that. MS CARNELL: and not just in a property business but in a, you know, capacity to MR HODGES: Yes. MS CARNELL: the capacity to roll over a loan, the – I mean all sorts of issues. MR HODGES: Well, it’s important for both the bank and the customer to have a realistic view of valuation because it’s only on that basis can you take the next steps. MS SCOTT: Yes. Yes, that’s right. MS CARNELL: Okay. Thank you. MS SCOTT: So ..... MS CARNELL: Okay. Look, to another issue and this is the issue I spoke about earlier about communication and transparency. What we found in a range of the cases we’ve looked at is that the problem for the customer – the client, whatever, or, for us, the person – the complainant in lots of cases – is that what they’re been told by one bit of the bank – often their customer manager – and what they’re being told by another bit of the bank are absolutely at odds. So I will give you an example.

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You know, somebody has been in, you know, in business for a long time so has dealt with the bank and even this bank – you know, the bank that they’re dealing with for, you know, 20 years, whatever it might be. Everything is hunky dory; they have a good relationship with their customer manager; their customer manager or their manager is telling them everything is fine – “We’re really comfortable with the direction the business is taking.” Certain circumstances that I could think of – there has even been quite recent, you know, new loans or additions to the loan put in place so everything looks fine; there is no reason that the consumer could believe there’s a problem. In one case I can think of the bank even provides a document indicating that the facility they’ve currently got will be not rolled over but a new facility will be provided in a number of weeks when a loan, you know, expires for a 12 month period and within days another piece of the bank is indicating to that particular customer, “Sorry. We now need you to dramatically reduce your exposure to us.” You’ve got, you know, one part of the bank telling you one thing, one part of the bank telling you something absolutely at odds. In some cases it’s some parts of the bank, you know, selling you a product, you know – like, you know, “You’re a really great customer. You need to buy some more of this,” you know, “one of these sorts of issues” so you think you’ve got an ongoing relationship with the bank and then something – and then another bit of the bank tells you something absolutely at odds and the timelines often for the change are, you know, sort of days or weeks, not time – not reasonable at all. From a consumer’s perspective there is only one bank, there’s only one ANZ. There’s not the consumer bit, the customer advocate bit, the legal bit, the bad bank bit; you know, there’s one bit. So how do you solve the issue MR HODGES: Are you saying that this is an ANZ customer who said that? MS CARNELL: No. MR HODGES: No. No. MS CARNELL: I’m not. I’m MR HODGES: Because I would find that MS CARNELL: Yes, I can talk about one ANZ customer who MR HODGES: Who had that experience? MS CARNELL: Who had that experience, yes. MR HODGES: Well, I’m most surprised. MS CARNELL: Who had an experience at their local bank then MR HODGES: Most surprised. MS CARNELL: Okay.

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MR HODGES: And I would have thought that was a highly – a very unlikely event because we have – you know, I mean, first of all if a customer – and we’re talking about a customer who has gone into issues here – is that what you’re saying – and it has gone from one part of a bank to another part of a bank or are you talking about MS CARNELL: No, not even somebody – I’m talking about at the end – a loan is going to fall due at a particular date. MR HODGES: Yes. MS CARNELL: That every input they’ve had from the bank MR HODGES: Yes. MS CARNELL: was that that facility would be rolled over, a new facility would be given. MR HODGES: Yes. MS CARNELL: You know, there’s stuff in writing on this. MR HODGES: Yes. MS CARNELL: Positive, positive, positive, positive MR HODGES: So I’m MS CARNELL: not positive. MR HODGES: Number 1, I would like to talk to you afterwards, maybe in private, to find the name of the ANZ customer who you felt that happened to so that would be – that would be good. MS CARNELL: That’s all right. No, that’s okay. MR HODGES: But MS CARNELL: I think it’s one ANZ – if I’m thinking of the one but that’s okay; that’s good. We’ve got a number of them. MR HODGES: But my – my immediate reaction to that is that that wouldn’t be acceptable from us and it wouldn’t happen. Through handover processes and, frankly, if it did happen I would be – you know, that would be something that I would – the customer has every right to contact more senior people and have a clear conversation with them so it would be either Kate or it would be myself or the CEO and we would actually intervene in that. I think that’s an unreasonable circumstance for a customer to find themselves in so MS CARNELL: Okay. Okay. Remember that our definition of small business isn’t the same as yours so we’re not talking about under a million bucks

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MR HODGES: I mean, I don’t MS CARNELL: we’re talking about decent MR HODGES: I don’t care what size business MS CARNELL: Yes. That’s it. Good. MR HODGES: that’s not reasonable for any customer to face in a circumstance where within a – you know, a matter of days or weeks or whatever which you’ve just described MS CARNELL: Yes. MR HODGES: where a bank would take – you know, would be expressing one view one way and then expressing an alternative dramatically different view the next day. I just think that – excuse me – I don’t think – that’s unacceptable so if you’ve got an ANZ customer where we’ve dealt with that MS CARNELL: Yes. MR HODGES: I would rather deal with it privately but I actually don’t think that’s right and I think their access to senior people in the bank to deal with a circumstance like that would be rapid and we would review those issues and I imagine they would find their way to Jo. I mean, Jo might want to talk about it – I will give you a chance. MS CARNELL: Look, go for it, Jo. MS McKINSTRAY: Right. Yes. I think that’s very – would be a very very unusual situation, particularly if it was a customer who was moving into a hardship situation where there’s very clear relationship onus as to who manages that customer and handles between – whether it’s in the normal part of the business or in a more specialised lending services area so it’s, you know, it would be – I would be surprised. It’s not something that – it would be an exception absolutely. MS CARNELL: You go. MS SCOTT: So this has been quite overwhelming in the cases that we’ve reviewed in that the relationship managers doing sort of the day-to-day type activity with the borrower either isn’t aware or doesn’t communicate that there are early warning signs about a facility. So there’s something about that communication in that close day-to-day relationship which is not indicating the early warning signs and then the situation which is – this is not ANZ bank but a situation where a relationship manager was working with the borrowing having every understanding that the loan facility would be extended and, you know, there’s very good reasons why the loan facility had to be extended, there was a good strategy in place. Every indication was given to that business that that would happen. A valuation occurred, the financials came in. The new facility wasn’t put in place by the expiry date of the loan – nothing to

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do with the customer – and then the bank applied penalty interest rates of 16 per cent because that loan had defaulted before the new facility was in place. MS McKINSTRAY: It’s difficult to talk to that. I just think, Kate, I reflect on – you spoke to us recently about some extra training that has gone out to your frontline staff about identifying hardship triggers, for example, and that would inform the conversations that are happening. MR HODGES: Yes. So MS McKINSTRAY: Although, I think MR HODGES: Go on. MS McKINSTRAY: I think from – and again, obviously we don’t have the details of the case and you’ve indicated it’s not an ANZ customer; however, it sounds to me, in listening to you describe that, Anne, that there was a process failure and that the timeframes for getting a new facility in place, you know, didn’t follow the expected timeframes. You know, if that scenario was to occur in ANZ – to Graham’s point – we would expect that we would make that right. That wouldn’t seem appropriate. If the bank has made an error and our processes have not followed the expected timeframes due to errors on our part, then we would make that right. MS CARNELL: One of the things ..... MR HODGES: And – sorry – just let me add a thought to that, because, I mean, for me, that would be an unacceptable outcome from the way the bank would behave. I think it goes to the very point about why having trigger events, if you like, force the bank to have an early conversation with a customer so that, if there are issues emerging in that business, they’re aware of it. I mean, they need to be aware of these issues. And if it was a handover where you were saying something one day and something else another day, I think that’s – as Kate said, it’s a process failure, but it’s an unacceptable outcome for a client, and I would have expected something like that – if it did happen, that customer would have redress to a more senior person who would understand quite quickly that that’s inappropriate. And, you know, charging higher fees for something where the bank has dragged its outcomes, again, doesn’t seem reasonable to me, so it doesn’t pass the reasonableness test, I would have thought. MS CARNELL: We agree. MS SCOTT: We agree. MR HODGES: And if that was one of our customers, we would actually be appalled if we behaved that way and make sure that that customer was, sort of, redressed in a sense of if they were charged extra, so I would have thought that would be something that a senior person would deal with.

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MS CARNELL: You’ve, I think, already proposed something that we agree with a lot – that a requirement to provide a reminder six months before a loan facility finishes that a loan facility is finishing MR HODGES: Yes. MS CARNELL: and to ensure that the client knows, if this is the truth, that a rollover facility won’t necessarily be provided, and then, most importantly, a three months notice where there is no intention to rollover. Now, I think that’s a really good set of commitments that you guys have given. I would like to add just one and say: so what happens when the bank doesn’t give three months notice? Could we add to that that, if three months notice isn’t given, then an automatic 12-month extension will be provided, because there has got to be something that happens if the bank doesn’t do it, other than, “Well, we will give you another four weeks”, or something, which, you know, won’t be any good. MR HODGES: Well, I would have thought that, if the bank failed to give the three months, then, from the date at which the customer said, “Hold on. You didn’t give me notice”, you would actually have an extra three months from there. I mean, you essentially say, “If you were put on notice that you should have given three months notice – you didn’t do it – then you should give three months notice from when that customer tells you”. So, essentially, it’s up to the bank to give that notice and, if the bank doesn’t give it in time, it’s the bank who wears that sort of responsibility. MS CARNELL: I think it should be longer, because now – “You didn’t give me three months and that meant I thought that you were going to roll it over, so I planned around that because I knew that you had to give me three months”. MR HODGES: Well, if you were getting three months, getting three months is still getting three months, I would have thought, so I think it seems to be a reasonable response rather than an extension of 12 months, particularly, I might say, if the bank is saying, “We actually don’t want you, as a customer, to have you there for 12 months” – may not necessarily be in the customer’s best interests. So the earlier the customer acts on that MS CARNELL: The customer can go any time. MR HODGES: No. I know, but all I’m saying is that, you know – and just because the three months is up doesn’t mean, suddenly, the bank is going to do something, you know, precipitous around the client. The bank has made a call and said, “For whatever reason”, there might be different reasons, “we actually don’t want to see you as a customer any more”. It’s in the bank’s interests and the customer’s interests for that customer to find alternative arrangements, and I think that’s where, you know – I mean, I think you’ve – we’re reasonable institutions. We behave well, and I think it’s MS CARNELL: Sometimes. MR HODGES: No. I think in the vast majority of times, and I think that’s one of the things that I just want to reinforce. We have many, many, many very happy and well-serviced clients. We do make mistakes and, when we do, we deal with them and address them properly, but, you know, we

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won’t – we’re not silly around doing these things. And, you know – and I think – and I wouldn’t expect any of our staff to be. So it’s a principle. MS CARNELL: No. And I agree with that. And, you know, I actually, you know, believe that your commitment to six months and three months – in fact, you know, if that had occurred in a range of the cases that we have, the outcome could have been quite significantly different than it was. MR HODGES: Yes. MS CARNELL: So just back to communication and transparency generally, where – so what would be the penalty, shall we say, where – or what penalty should we recommend – Kate indicated you guys don’t do this – where it can be shown that a customer did get a very different view from their customer manager or their bank manager – whatever – the person they deal with – that would – it could have indicated to any reasonable person that their loan was going to be rolled over and then it not to be rolled over, because this is catastrophic for the person involved. At the moment, what happens? Nothing. You just go broke or, you know, you have to pay back the loan. I mean, there’s nowhere for a consumer to go. On the basis that you guys don’t do it, then what can we – and, fairly obviously, some banks do do it – so how do we ensure that other people behave the way you guys do? MR HODGES: I mean, I would have thought that the issue facing a customer in those circumstances is that they would want to get themselves repositioned with an alternative finance provider within a reasonable timeframe. And so what is that reasonable timeframe? I don’t know. I mean, if you’ve said on the one hand, “Everything is going well”, and then someone on the other hand, “Everything is not well”, you need to give people time to get their personal circumstances changed. MS CARNELL: Okay. MR HODGES: So what is that timeframe? I mean MS CARNELL: Well, it’s not 24 of 48 hours. MR HODGES: No, it’s not. No. It’s, sort of – I guess three months is sort of – 90 days is a pretty reasonable time, with a view to – that, you know, you would review it again in 90 days. But, I mean, it seems to me, again, it’s in the – where a decision like that is being made, it’s in the interests of the customer to make a move quickly, and I think it’s incumbent on the bank to give the customer time to be able to seek alternative financial arrangements, to be honest. MS CARNELL: Look, I absolutely agree. So when we MR HODGES: And so how long is that? You know, I mean, I think we’ve, sort of, talked earlier in those normal circumstances – 90 days is, sort of, generally sufficient, but it may be in those more special circumstances you might extend that. MS CARNELL: A rural property, it wouldn’t be.

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MR HODGES: No. I think, in the rural side, that could be a longer period. Look, it just depends on the environment that you find yourself in when those circumstances arise. So whether it’s a six-month period – I don’t know. I mean, I think the issue – the real issue with that is how do you validate that outcome that you’ve, on the one hand, had an indication on the side – if it’s verbal, for example – and then an indication on the other side where it’s written, and it’s the customer says this, the banker says something else. I think they’re your more fraud issues, but – so, therefore, maybe sticking with the, sort of, broader timeframes where it’s a – you know, 90 days, which is sort of what we were saying before, but where there’s an issue around that, I mean, partly that’s what you’re there for. You would actually have a right to accelerate – you know, sort of, raise that issue with either an EDR or an internal bank – people like the advocates. Now, as you would be aware from – when the ABA made their decision earlier in the year to require all banks to have an advocate, I think that’s a really good step. I mean, Jo, as our advocate, deals with those more difficult issues. And, you know, ANZ has had an advocate for 10 years or more – 15 years – and we’ve found that a very useful way of dealing with issues which are a little bit more out of the box – different – where the bank and Jo has absolute right – whatever her decision is, the bank abides by it, and she can, sort of, look at that from an issue of fairness to decide what the outcome would be. I would have thought those sort of circumstances would raise the issue, “Is that fair on a customer?”, and you would say, on the surface of it, “It’s not fair”, but she would investigate what has gone on and then look to resolve that in a way which works the bank and the customer. That’s how we would generally do that. MS CARNELL: What’s your security of tenure, Jo? Sorry. It’s all right. Look, I see that MR HODGES: Did you want to add anything to that? No. MS CARNELL: One of the things that’s interesting is regularly when these things go a bit belly up, the customer isn’t told at all what their options are – like, that the advocate exists – like, FOS exists – like, anything exists – so they’re in this MR HODGES: I find that really difficult to comprehend, Kate. I mean, I think – again, the way I would see it is, if there’s an issue sitting there it’s in both the customer’s and the bank’s interest to resolve it in the best way possible. If the customer is unaware of their redress – I mean, I would have thought the ombudsman scheme is well-known and I think largely very effective. MS CARNELL: For consumers it is. MR HODGES: And we’ve agreed to – that we should increase the limit to three million. We think that sort of makes sense in the context of, you know, what you were talking about at the opening of this. The advocate is well-publicised on our ANZ website as is our hardship. It’s on our front page. And, again, go back three years in the Australian Banking Association, we agreed to put access to hardship or people experiencing difficulties a button on, or a link on the front page of every bank’s website to encourage people to go into that so it’s not buried, if you like, within the websites of the banks. And I think, again, in the conversations with both consumer and other sort of advocates, they found that to be very helpful. So, I mean, I might ask Jo to just add a thought or two to that.

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MS CARNELL: Okay. MS McKINSTRAY: And I suppose what I say applies to retail customers as well – customers as well, not just small business customers. But we do go to quite long lengths to make sure that people are aware of the processes that they can raise their complaints with us. There are number of pathways. So all of our branches have complaints brochures available. If you Google “complaints ANZ” that will take you through to ANZ.com and that will – you will pick up the process. It actually sets out what the process is. It explains the internal dispute resolution process. It explains my office and my role. And it also notes, whether it be FOS or the SET or whatever the relevant external dispute resolution scheme is, when a customer is unable to resolve their matter through the internal dispute resolution process, they are reminded that they can go to FOS and they’re provided with the contact details. They are also offered an opportunity to opt in to my office for an impartial review. That doesn’t stop them going to FOS, so only binding on the bank. The customer can still go to FOS after that. At the end of my process I also reiterate that there’s an EDR process and provide those details again. So we’re quite, you know, forward in promoting those MS CARNELL: Can I ask you a detailed question, slightly off that line. MS McKINSTRAY: Yes. MS CARNELL: Currently if that is what happened, they went to FOS. They would be referred straight back to you – back to the internal dispute resolution. MS McKINSTRAY: No, it’s a separate process. So there’s – I actually sit separately to the complaints team. MR ..........: Can you speak louder. MS McKINSTRAY: Sorry. So there’s an internal dispute resolution team. MS CARNELL: That’s right. MS McKINSTRAY: And the escalation point can be to me MS CARNELL: It’s just FOS tells us the first thing they do is send back – is send people who come to them back to the bank’s internal dispute resolution. MS McKINSTRAY: Absolutely. MS CARNELL: Which I have a problem with, I tell you. MS McKINSTRAY: No, no. Sorry, just to correct you there. It’s actually to the external dispute resolution team. So it’s a specialised separate team at ANZ, and I think that that’s the case for most banks. And absolutely that’s what FOS does initially. It’s for their registration process,

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because they recognise that most complaints can actually be resolved directly with the bank. And there are many customers that go directly to FOS without coming to the bank first, and everybody is referred 1 MS CARNELL: What about when they’ve already been to the bank? MS McKINSTRAY: Yes, yes. MS CARNELL: They’ve already been to you. MS McKINSTRAY: Then there’s a much shorter period in which the bank has an opportunity to again try to resolve it. And around half MS CARNELL: So they still come back to you again. MS McKINSTRAY: And around half of them are resolved during that process, rather than going through a lengthy detailed FOS process. MS CARNELL: Have you got any data on how they’re resolved and what the outcomes are in the bank’s internal system? MS McKINSTRAY: Yes. Yes, absolutely. MS CARNELL: I would be really interested in having a look. MS McKINSTRAY: Yes. No, certainly. But I can tell you MS CARNELL: Particularly not – not just the numbers, but the outcomes. MS McKINSTRAY: Yes. I can MS CARNELL: That’s the bit I’m concerned MS McKINSTRAY: Yes, I can – specifically for small business customers, 93 per cent of those complaints are resolved at the first instance in the internal dispute resolution on my team. MS CARNELL: Yes, okay. That bit I know because that’s in the – I’m interested in actually what happens. MS McKINSTRAY: Yes. MS CARNELL: Because the feedback we get is, people agree because they’ve got no other choice. But fundamentally at the end of the day, you know, the bank puts something on the table and they go, you know, I’ve just – I’ve had it by now and, you know, you can take – and what choice do they have. So they feel – they tell us they agreed under duress. MS McKINSTRAY: Yes, but that’s not the experience that I hear from customers that escalate to me. And that may be because they do accept something at an earlier stage in the process.

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MS CARNELL: Yes. MS McKINSTRAY: Yes. But we can certainly provide you with statistics on the findings. We publish from my office each year in our corporate sustainability report the split of findings for customers or for ANZ. MS CARNELL: Okay. And the sort of – the sort of findings like compensation, not compensation MS McKINSTRAY: Yes. So there’s a range of things. It depends on MS CARNELL: That’s good. No, that’s the stuff MS McKINSTRAY: Yes. No, absolutely. MS CARNELL: I mean, I know about the actual numbers and the – you know, and those sort of things. I was just interested in what the outcomes were. And I don’t expect names and dollars. MS McKINSTRAY: No. MS CARNELL: But I am interested in just what those settlements are. MS McKINSTRAY: Yes. I can certainly provide information, yes. MS CARNELL: That’s good. Thank you for that. MR HODGES: Do you want to just talk to – just briefly what sort of outcomes you might get, just in terms of – just something to help Kate and the others. MS McKINSTRAY: Outcomes, yes. So it depends on the scenario. And the reality is that the majority of things that are resolved internally are probably at the smaller scale compared to the matters that you’ve looked at more recently. So we have complaints around declined lending, for example. Now, we won’t override credit policy but we will make sure that the most current information is being provided and that nothing has been overlooked. And we can ask for things to be reassessed. So that’s important. We have complaints around disputed transactions, for example. Now, sometimes that’s a matter of working with the customer so that they better understand what has occurred but it can also mean assisting them to help with other funds that have been mistakenly paid away that’s still available. Or if the bank has done something wrong, to actually put it right. If there has been a delay in the settlement, for example – you know, someone is looking at a penalty interest, then that’s something the bank will put right. Yes. MS SCOTT: Sure. That’s good. So thanks, Jo. We are coming up on to the Ombudsman later, Financial Ombudsman Service. But can we just ask, do you advise clients what the limits are on the Financial Ombudsman Service?

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MS McKINSTRAY: No, we – not generally. Sometimes – so we do talk occasionally in terms of non-financial loss. So a customer might come to us and say, I’m very stressed about something, I want $100,000. And we will actually talk to them in terms of what actually FOS, you know, has a cap of $3000 on non-financial loss. We tend to work within that. We’re guided by what we think FOS would do. We don’t talk about FOSs limits. My understanding is it’s FOSs preference that they provide that information to the customer and – but that that’s a matter for FOS because it’s not for us to determine if something is outside their terms of reference or not. MS SCOTT: Yes, but clearly we wouldn’t want to be wasting people’s time sending them to something that they’re not going to get any – they’re not going to have any access to so MS McKINSTRAY: No. MS SCOTT: Okay. So, thank you, that’s an issue. So can I just come back to – on the communication and transparency. So the other area we’ve identified is how you handle when a case – a customer’s file has been moved from the local branch or relationship manager that they’ve been dealing with into the credit risk or restructuring area, and often they are not aware that that has occurred other than somebody else from maybe Melbourne or Sydney has suddenly started to talk to them about their loan. Is there a structured communication process around advising a borrower of where they’re about to go to in terms of their farm MS McKINSTRAY: Absolutely. MS SCOTT: and why and what will happen? MR HODGES: I mean, I would like – and this is a really important question and maybe it’s best for me to take that one on notice and just tell you exactly what that process is in the various areas. MS CARNELL: Good. That’s all right. MR HODGES: I would have – I think as we sort of said earlier, there would be as structured conversation to say, are you’re changing effectively the person you’re dealing with day-to-day, if that was the case, there would be a conversation with the customer and an explanation as to why they were, who the new person was. And when the new person spoke with those individuals, they would explain what their role was and what they were doing. So, yes, the answer to that is yes. But I think what you’re looking for is the specific way that happens. And I think I need to probably give you something written on that so that you’ve got more detail on that. MS CARNELL: Okay. That’s fine. MS SCOTT: And, again, in the communication to customers about those processes within the bank is put in very plain terms somewhere so they realise what that means. MR HODGES: Yes. I mean, I think – I mean, inevitably that would be a conversation, and likely to be writing to the customer as well. Certainly in the new area they would go into, the contacts there and what they were doing and why would be explained to the customer. Otherwise if you’re not working with the customer around that, you’re not going to achieve any outcomes that you want to. So, yes, but

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we will come back with the – how we do it and what’s the process and what’s the language, and how we MS CARNELL: Yes. And how you make sure that the customer understands what’s happening. MR HODGES: Yes. And I think there will be – you know, I mean, it’s clearly the case more so in the – in the medium and larger clients – it’s, you know, obviously, very, very clear and obvious. I know in Kate’s space – maybe she can just talk a little bit to hers as well. MS GIBSON: Yes, I think it is absolutely a good idea that we come back with it in detail, but, again, given that for the smaller customers we’re only going to do that transfer if there’s been a monetary default, there’s going to have been, you know, at least 90 days of contact with the customer about the fact that the accounts are in arrears prior to any transfer to another part of the bank occurring. So that conversation is absolutely happening, but we will come back with the details for you. MS CARNELL: That would be – that would be great, because, you know, there’s a consistent theme around the cases we’ve looked – we’ve looked at where the transparency of that mood and probably even, more importantly, the transparency of what happens around the appointment of investigative accountants occurs. MR HODGES: So, Kate, on that – I mean, you’re talking about larger businesses in those cases. MS CARNELL: Well, you know, we don’t have the same view of small business. MR HODGES: So in Kate’s – yes – no, I agree with you, but in Kate’s area the process would be more that someone from our collections area would ring up and remind someone that they’re behind in terms of their payments. So that would sort of happen. And, you know, are they planning to make their payment so that, effectively, they’re in monetary default. MS CARNELL: Yes. MR HODGES: And, as Kate said, if they’re not in monetary default, then that won’t happen. So MS SCOTT: So somebody making all their payments couldn’t go to the credit area? MR HODGES: No. Not in MS GIBSON: Certainly not in my business or my part of the business. I think we need to come back to you in terms of the specifics. MS CARNELL: They certainly – certainly can if they’re bigger. MR HODGES: If they were in the larger business they – a deteriorating sort of position in that business would lead, you know, a review, because of the covenants where we’re seeing that business has deteriorated. We would move at some stage into a – what we call our lending services area or our area where there’s more intensive management. The reason around that is really that those people are much more skilled in dealing with people who have got business

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issues and we have less clients that they’re looking after, so that they’ve got more time to spend with those clients. So it’s actually a process which means that we can work more closely with those clients around what’s happening in the business and actually we’ve got people who are more skilled at dealing with clients who have got those issues and where they work. And absolutely those people would know that has happened and why that has happened. Because that’s part of the conversation that would have gone on that the business isn’t performing well. And it wouldn’t be in the initial stage. We tend to – at – you know, again, above Kate’s area, but we tend to then – what we would first do is flag that a business has got some challenges. The relationship teams would stay with those businesses and manage them. But it might be shadowed behind the scenes by someone who is saying, “Look, if this is happening you might want to do this”, so they provide some advice to the managers there first. It’s only if things aren’t corrected that ultimately you would transfer it. We would prefer not to transfer, but it’s only where we see there’s a more prolonged issue or something which is going to require more specialised sort of work that you would end up transferring the day-to-day management of that account to that lending services area. MS CARNELL: When – how does the bank select an investigative accountant to conduct a review? How do you decide who to use? Taking into account the customer MR HODGES: Again, we would have – we would have a panel of accountants who would be accredited as being, you know, capable. And, I guess, part of it might depend on their capabilities around an industry or around a geography. So some customers are multi-geography, so they operate in all states, in which case you want someone who has got a bit more of a national capability to look at businesses and what’s going on. In other areas they might have some industry specialisation which is sort of important. But, typically, at the sort of the smaller/medium business end of it, it would be a reputable accounting firm who does that sort of – I mean, many accounting firms do it, but one who is a sort of a – has been accredited by the bank to be capable of doing that sort of work. MS CARNELL: And so what’s their job? What’s MR HODGES: Their job is to sit with the business, understand what’s happening in the business, to go through developments and to write a report for the bank about what is creating the issues that are happening in that business and what might be the ways that that business might be able to remedy its issues in the business. MS CARNELL: So why does the borrower pay if it’s a piece of work done for the bank? MR HODGES: Well, it’s done for the borrower: to encourage the borrower and to help the borrower get their business on track. MS CARNELL: Can the borrower say “no” then? “I don’t want one”. MR HODGES: Borrowers can and probably do say in cases “no”, but the bank, I think, has a right to say, “We want that”. If they choose not to, then, I guess, that would be something where the bank and the borrower would say at some stage, “If you’re not prepared to have, you know, sort of

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further investigation in that business – independent investigation in that business, we would question whether you’ve got an ability or a willingness to correct what’s going on in that business”. So, I think, Kate – I mean, that conversation is one which, if it’s occurring, can be made a little bit difficult, because people often would say this is an imposition on them. But the reality is here that there’s a business which is not performing. The reason why it’s happening is that there’s a business not performing well and management don’t seem to have been able to manage that business effectively and, therefore, getting an independent view of what’s going on in that business is seen to be the right way and has proven over time to be the right way of, at least, getting a focus around what can be done in that business to make that work. MS CARNELL: Can I come back to my previous comment, that if I pay for something I think I own it, or I think I have rights to it, if not own it. MR HODGES: Yes. MS CARNELL: So MR HODGES: We would give the report to the customer and the customer actually – you would want the customer to be actively involved in shaping that report. And so, you know, in the end it’s a report for the customer and the bank and it’s there to try to find solutions as to why that business is performing as it is and what the business might do about fixing that. MS SCOTT: So, Graham, we’ve got instances in cases where there’s one report that’s prepared and presented to the borrower and then a more fulsome report. So the borrower gets an edited version. MR HODGES: I think there will be sections of that report which might be just for the bank around security positions and things like this, so there will be some sections of that report which may not be shared with the borrower. But that would be because of the – it’s more for the bank to understand that and that’s MS CARNELL: I will come back to, so why do I pay as the customer if it’s for the bank? MR HODGES: Because it’s for you as the customer as well. MS CARNELL: So does that mean I can – can I have some input into what the instructions are to the investigative accountant and who does the role – who does it? MR HODGES: Well, I think that’s MS CARNELL: Because if I have no control MR HODGES: That’s generally – that would generally be a conversation that would happen with a client. MS CARNELL: Okay.

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MR HODGES: I mean, I think in most instances that probably would be a reasonable conversation to say, “Look, I would rather choose this person, or this person, or these are the three people we could choose from – one”. And, you know, so I think, you know, that would be what I would call a reasonable approach. In some cases that won’t happen. It will be, “We want these people because we think they’ve got the expertise” and actually – so MS CARNELL: Yes. MR HODGES: look, I think, there will be a range of outcomes there, to be honest. MS CARNELL: Look, I accept that. But the people who end up with investigative accountants are under pressure. Okay. MR HODGES: Sure. MS CARNELL: So it wouldn’t happen if they weren’t. All of a sudden they get an investigative accountant that’s in their business that they haven’t chosen that’s costing them money and there’s no – there’s no constraints around – or from the perspective of the client – what these people can charge. And looking at some of the charges they’re pretty exciting at a time when you’re already stretched. So it just doesn’t seem quite fair that the consumer has no capacity – or there’s no pressure on anyone for the investigative accountant to be cost-effective. MR HODGES: Well, I disagree with that. I mean, I think, you know, in choosing – in selecting a – sort of a panel of potential accountants, the bank would expect these people to have a view about what is a reasonable rate to charge the people. And we would expect these people to, you know, be reasonable in their pricing. Now, some businesses will be more expensive for that because of the complexity and the issues. Others will be, you know, more straightforward and therefore cheaper. But, you know, the reality, I guess, is in most instances this is money well spent in a sense of better understanding and diagnosing the issues with someone who is, you know, very skilled. Now, it may be that it’s a relatively straightforward process because the business’ own accountants are, you know, knowledgeable, they – when they go to meet with the business manager, the owner and their accountants they can get to the issue quite quickly and sort of prepare a relatively brief, you know, summary report, which will be cheaper. There will be other instances where the account management has been – the business management has been relatively inadequate and that’s part of the reason why they’ve got it, which requires more investigation as to, you know, what’s happening around stock, I mean – you know, where are the creditors and what’s going on with all of those sort of issues – and the debtors, and how is it all being collected, what are their accounting systems, why are they different for their management systems MS CARNELL: I understand that. MR HODGES: etcetera, etcetera. MS CARNELL: So wouldn’t it be reasonable MR HODGES: So they will be more expensive.

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MS CARNELL: Yes, I accept that. Wouldn’t it be reasonable for the business owner to be able to choose from a panel with a quote for how much it’s going to cost, at least saying subject to the fact it doesn’t take longer or we get proper – you know, we get proper cooperation or something. Because MR HODGES: Well, if I was an MS CARNELL: as it is, there’s no reason why they shouldn’t just take as long as they like. MR HODGES: Well, I don’t think that’s the case, and I think if you MS CARNELL: Well, we’ve seen – I’ve seen a few that are pretty ordinary. MR HODGES: Well, you might have seen a few that are ordinary, but you will – there’s a – there will be a whole range MS CARNELL: I agree with that. MR HODGES: which have done a very good job. So we’ve got to be careful we don’t tar everything with the ones that you might have seen which would be ordinary. But if I MS CARNELL: Yes. MR HODGES: was one of those accountants and I was being asked to give a fixed price, effectively, for this, I’m likely to make that price higher than what it otherwise might be. So the vast majority of people might end up paying more with a scenario like that, because you’re not going to want to underquote for work that you still don’t – you don’t understand what’s involved in it. So I’m MS CARNELL: Graham, you don’t – you obviously don’t agree with markets. MR HODGES: I’m just giving you my perspective on this, is that if you are – if you’re committing resources to these things and you don’t understand what you’re getting into, the likelihood that you are going to underquote is less likely than the fact that you will actually, you know, push up your MS CARNELL: Look MR HODGES: price. I mean MS CARNELL: I MR HODGES: I think that’s the way MS CARNELL: Yes. MR HODGES: the business would work.

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MS CARNELL: I’m saying like when you get, you know, a lawyer to do some work, they will say, well, here is the amount it’s going to cost you, subject to it not taking more than X number of hours and, you know, whatever. MR HODGES: Well, I presume they were – and I haven’t seen any recently, but it’s about the number of hours and the type of people who work on that is how they quote anyway. MS CARNELL: Yes. MR HODGES: So they will typically quote by, you know, if I’ve got an associate or a junior accountant working on it versus a partner working on it, this is how much it will cost. So I suspect that’s not going to help the business owner very much. They will just quote an hourly rate and say per hour we’re going to spend this. We can’t tell how many hours they will be, so MS CARNELL: Is it reasonable for the customer to see the instructions to the investigative accountant? MR HODGES: Yes, I would have thought so. Absolutely. MS CARNELL: Yes, I agree. MR HODGES: And, you know, on the price – I’m not trying to be difficult around that price. I think it’s quite reasonable for them to say, you know, for these people this is the – sort of the – they should know upfront what they’re charging for a junior person and a senior person per hour in the work there, and it’s in everyone’s interests to have that work happen as quickly as possible. So I’m not disagreeing that there should be price contestability in there and there should be reasonable quoting. I’m just sort of being cautious about if you just had a panel MS CARNELL: No, I get that. MR HODGES: and a customer chooses – they won’t have any understanding of the expertise of the various people, who the partners are, are they good at this or not, and that’s, I think, something the banks – the people who are involved in this will have a much clearer idea of who can complete that work more quickly and more effectively. MS CARNELL: I have no problems with all of that, as long as the bank is paying. It’s just once the customer pays then I think they have some rights in this, but we will go MR HODGES: The bank is helping the customer select the right person to do that, so I think that’s the way I would have seen it. MS CARNELL: That’s fine. In a number of cases, the investigative accountant has subsequently been appointed as the receiver to the business. MR HODGES: Yes. MS CARNELL: Isn’t this a conflict of interest?

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MR HODGES: Look, I would say no, but, you know, sort of within a range of issues here. Why would you do that? I suspect the reason why that might happen would be that that individual, having done the investigation, is already very much up to speed around the business and therefore is shortcutting the way that they would manage that. So it’s sort of better from a speed issue, it’s better from a cost issue, and an effectiveness issue. So I can sort of see why that would be the case, but I would also have a – I recognise that you don’t want people to go in there as an investigative accountant and say the business is toast, appoint me as a receiver. And so I think those are sort of examples where you would want to be really clear as to whether there was a potential conflict in there in terms of the way they work, and, again, that comes back to clarity in the industry about what sort of quality report is being done and then how people operate in the receivership. I would say more typically the receiverships would reflect who is really skilled at that, which may not necessarily be the investigative accounting firms. Now, if you looked at that at the higher end of the market, they’re quite bifurcated, in a sense. They can be linked, or they could be quite separate. At the lower end of the market, I think they try to do a full service, in which case, you know, it’s probably more common at the lower end of the market – the smaller end of the market where they would be one and the same, and the question then is what is the integrity around how they’ve done that, and I think that’s a fair question to ask. MS CARNELL: It’s certainly – you know, conflict of interest is in many cases perceived conflict. MR HODGES: Sure. And that’s something we have to deal with all the time as part of our business, and we’re quite mindful of. I can understand if a customer has had a report and then suddenly they find the firm that was asked to do the investigative report is ultimately appointed a receiver, then you could say they feather bedded themselves. Typically what we would find is the time between a report being done and ultimately a receiver being appointed is quite a long time. Quite a long time. So, again, I quoted some numbers last year at the inquiry MS CARNELL: Yes. MR HODGES: where for a non-rural business that was around – if I recall, around one and a half years between an event of default and putting a business into receivership. One and a half years, as an average time. For a farmer, it was more like two and a half years, largely because you’re waiting for seasonable conditions and seeing where things go. So those lengths of time are generally quite long, and I think that’s something where, you know, I think we would have to be – we are and we would have to be very mindful around that sort of potential conflict of interests that you’re talking about. MS CARNELL: And because the longer the timelines, the less reason to use the same company, because obviously the – you know, their MR HODGES: Well, it MS CARNELL: knowledge of the case and so on obviously becomes blurrier the longer

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MR HODGES: I would say that may be the case. It may not be. It may be that the investigative accountant is still working MS CARNELL: Yes. MR HODGES: with the business to try to correct that business and they are the ones who sort of carried through work following that initial report to see where things are going. So it could work either way, to be honest, but I sort of take your point that that might be the case. MS CARNELL: Because court-appointed receivers end up having to just go in and do the job and they don’t have the – they’re not – they haven’t been IAs, they manage to do the role. I mean, just there is a perception, and an understandable one, that where the IA becomes the receiver MR HODGES: Yes. MS CARNELL: there was a reason or could have been seen a perceived conflict, and I think it’s MR HODGES: Sure. I can see that, and it would be really interesting to understand from the accountants how they sort of – in their minds sort of manage that sort of potential conflict, as well, because it’s in their – because they’re different parts of their practices, but, you know – but they are linked. MS SCOTT: Well, it’s ..... MR HODGES: And that’s – we want the link, in a sense, because what you’re saying is you’ve got expertise you built up here and these people carry on to the next step. MS SCOTT: It’s interesting. When you talk to people that are actually involved in it now, they say there’s very strict demarcation, as you described MR HODGES: Yes. MS SCOTT: when you talk to people that have left the industry, they say, yes, that’s a perceived conflict of interests, and it’s MR HODGES: Yes. MS SCOTT: If it’s perceived, it is. So there’s just a different viewpoint depending on whether you’re working in the industry or not, but that’s just what we’ve MR HODGES: Yes. I mean, I could see – recognise how that could be a perception, absolutely, in the customer’s eyes, particularly. MS CARNELL: Okay. Some of the dilemmas here – okay, the receivers have been put in place and a lot of our cases are around the conduct of the receiver.

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MR HODGES: Yes. MS CARNELL: You know, how they sold the property, did they get the best values, you know, all of those sorts of things. Did they sell – why didn’t they sell it as going concerns or why did they split? You know, there’s a million reasons. Now, when the consumer has a problem with a receiver who do they – and the banks put the receiver in, but – and if the complaint is to the bank, the bank – this is – we’re back to the valuer problem here. You complained to the bank that the receiver is not doing a good job. The bank says, “That’s nothing to do with us. It’s the receiver’s role”. If you go to FOS, FOS says, “We don’t do receivers. So that’s not what we do”. Help me what somebody who is going through the traumatic – traumatic experience of having a receiver and does when they believe the receiver is not – is not doing the right thing, because the bank won’t talk to them. MR HODGES: Yes. MS SCOTT: And the receiver won’t talk to them. MS CARNELL: And the receiver won’t talk to them, because the receiver says they work for the bank, not for them. MR HODGES: Yes. And the receivers have their own obligations in terms of the way they have to work as well, in terms of what they’re doing. They do work for the bank, but they do have obligations: different to an administrator, for example, who has more statutory obligations to the court. MS SCOTT: There’s industry – there’s industry practice that’s done, but it still doesn’t allow the business to actually go and see anybody. MR HODGES: No. MS SCOTT: So the fact is there’s a door closed wherever they go. MR HODGES: And, I guess, in our – in our experience there would only be two sort of broad ways of doing that. One would be to call sort of a meeting, if you like, with the bank, the receiver and the client to sort of try to draw out what the issues were and why there was a significant difference. And we could request the receiver to come and meet with us, but not compel them, I think, would be the way I would see that. And that might be – you know, in a circumstance that might be the case. And the other address really is probably only through the receivers sort of – EDR or sort of – or regulatory body. MS SCOTT: There isn’t one. There isn’t one. MR HODGES: There’s ARTA or whatever it’s called, isn’t it? MS SCOTT: They don’t – they don’t MS GIBSON: I think we

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MS SCOTT: They don’t respond to the borrower that they work MS CARNELL: And they say that, so MS GIBSON: I think we would acknowledge that there is a gap there: that they can’t go – it’s not in the jurisdiction of FOS and, you know, from our point of view, as you’re looking at external dispute resolution, this would appear to be an area where there is a gap. MR HODGES: Yes. MS GIBSON: And that’s something that should be looked at. MS SCOTT: Thank you. MS CARNELL: Thank you. And, look, that’s a – it’s, obviously, a gap, but, gee whiz, it happens – it happens – there’s always going to be difficulty in this space on how assets are sold. Are they sold appropriately? And there’s a gap. MR HODGES: So have the receivers – have you – you’ve had a conversation with them. I mean, do they expect that they should have an EDR body for complaints on this sort of stuff? MS CARNELL: No. MR HODGES: They don’t. MS SCOTT: No. Well, no, because they work for the bank. MS CARNELL: They said that. MS GIBSON: Well, they don’t – they don’t – but they don’t always work for the bank. MR HODGES: No. MS GIBSON: So I think from our perspective it would be appropriate that there is an EDR process for receivers. MS SCOTT: So where the bank has given the instructions to the receiver they say they work for the bank and, therefore, they will not accept any issue from the borrower. MR HODGES: Well, they’re professionals and I would have thought as professionals they should be held to a certain standard and MS SCOTT: Well, still there is nowhere for somebody to go if they’ve got an issue. MR HODGES: No. Well, I would have thought that would be something that you might want to look at. And, sorry, Jo wants to say something.

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MS McKINSTRAY: Yes. I agree, it is a problematic area. It’s clearly in everybody’s interest, if there’s an issue, to resolve that, so that, you know, everybody needs to get the best outcome they can out of that really difficult, unpleasant process. I’m aware of at least one instance where we have received a complaint and we have been involved with a meeting with a client and ..... but, again, we can’t compel that, but we’ve illustrated that. MS CARNELL: Yes. I think that runs into, probably, almost our last, you know – well, there’s two more issues – and that’s access to justice generally for small businesses. Now, we perceive that FOS does a good job dealing with consumers. The cap, the compensation, the expertise is not there for small businesses except for very little small businesses. We believe that – I would be interested in how you guys think the small businesses – not just under $1 million – small businesses more broadly – shall we say small businesses up to 10 million or five million – you know, where a lot of them are – you know, where is their access to justice? They obviously can’t afford the court system, particularly when they’re at the point they are – when they need access to justice. MS McKINSTRAY: So our internal dispute resolution function and my office don’t have dollar limits, so, while FOS might have a dollar limit for a client size or a compensation amount, we don’t have those things in place. So, you know, I accept that that means that they are dealing with the house, effectively, even though ..... acting partially, but there certainly are avenues for those complaints to be reviewed and investigated internally, and we do support increasing FOSs jurisdiction. MR HODGES: Yes. To three million, not to five or 10. I mean, anyone borrowing 10 million is not a small business. They’re MS CARNELL: What about farmers – to buy, you know, properties? MR HODGES: Well, farmers – yes. So farmers – even farmers MS SCOTT: Prawn farm. MR HODGES: Sorry? MS SCOTT: A prawn farm. MR HODGES: Well, a prawn farm is unlikely to be what I would call a real small business. MS SCOTT: Well ..... MR HODGES: I mean, it’s a medium-size business. Absolutely. And, you know, I mean, I think, you know, in the case of farmers, you know, one of the issues that we’ve said at previous inquiries was, you know, mediation is often something which should and does happen, so we’ve – we committed to take all farmers through mediation. As you may be aware, I mean, from a farm perspective, because, you know, to be honest, a farm is where people live as well as where they work – we’ve said – we’ve put on – and it can often be seasonal issues that affect farms and,

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sometimes, for many seasons – we’ve put on moratoriums around, you know, debt repayments where there were specific areas of difficulty. We’ve actually still got one going on until the end of this year. Luckily, now it looks like a better season coming up. And we’ve suggested – and it hasn’t happened yet – that there be mandatory mediation around that sector. But, at the moment, that’s not consistent with state jurisdiction around the country, and we believe that that would be a good move to require mediation around those. But, you know, when you’re talking about clients of that size – of the larger size – mediation is obviously a useful step to go through well and truly before you, you know, get into serious court action, because that, sort of, in the end, is expensive – it’s inaccessible in some ways to some people. And we’ve had an approach where, in protracted negotiations like – or issues with customers – that we’ve, you know, offered to pay for them to have legal support around mediation to help, you know, solve issues at the earliest possible way, and I think that’s the case for many of our customers, where there’s a protracted issue where the advocate is unable to solve it and it’s outside the FOS, sort of, limit, but where we sort of don’t see – we see it as being important to try to get a resolution around it rather than have it continue to be a protracted issue or go through the courts. MS CARNELL: What about building developers? I mean, they will end up with debts at certain times in a project that are significantly higher than that. MR HODGES: Yes, so different business are – you know, have different structures and, you know, the construction industry is one where, you know, often the borrowing limit might be a little bit higher than, sort of, what you might – because of the nature of that business MS CARNELL: I agree. MR HODGES: rather than what you might call just a normal going concern business. Well, you know, I think the way that gets set up as a sector and the structure of the borrowings around that, you know, you need to be more conservative in setting it up. I mean, we do have, and we will continue to see, cycles around the construction sector, but still in those cases of larger amounts, it’s generally sensible to have a mediation. I don’t have a problem that they’re outside the FOS when they’re – when you’re talking about the numbers of, you know, the five to 10 million that you’re talking about, even above three, that’s a substantial borrowing and these people do have access to lawyers. They are putting contracts in place. They are working on things. They, you know – and I would have thought it’s their responsibility as a business to have that profession support. Just as we say, when you take out a loan, you ought to get financial and legal, you know, advice around those loans. MS CARNELL: I think – look, we absolutely agree. MR HODGES: Yes.

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MS CARNELL: Absolutely agree. That’s not what we’re talking about. We’re talking about access to justice not access to legal representation. To take on the banks in the court requires you to be a little bigger than that really, let’s be fair. The costs of a court case, that can take a very long time MR HODGES: Sure. MS CARNELL: is way outside the capacity of somebody, you know, with a loan of five million bucks MR HODGES: Well, that might MS CARNELL: or 10 million bucks. MR HODGES: That MS CARNELL: So what happens to those people? MR HODGES: That may or may not be the case, but that’s why we favour the mediation and we think that’s sort of a sensible approach. And that’s again, as Jo has said, the bank doesn’t limit Jo at any number where she can review those issues. So, you know, we actually would rather solve those issues if there’s one with a client. MS CARNELL: So what do you – what’s your view on a body that specialises in small business loans generally? You know? Whether that sits under FOS, next to, wherever it might sit, but having a body that does small business loans up to MR HODGES: Well, I think that’s one of the things that’s going to obviously be reviewed as part of the Ramsey review MS CARNELL: That’s true. MR HODGES: so I guess it seems to me what would make sense, at this stage, is to await the Ramsay recommendations, which are going to land, I guess, shortly, and then have a conversation around that. MS SCOTT: March. MS CARNELL: March. MS SCOTT: March. MS CARNELL: March. There’s MR HODGES: Yes, I mean MS CARNELL: an interim report, but they’re not going to address this, I understand, in the interim report.

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MR HODGES: Well, I don’t know. I haven’t been privy to that or understand it. MS CARNELL: Yes. MR HODGES: But I would have thought that was a sensible part of addressing that within the context of what he is recommending around that. MS CARNELL: Yes. I suppose what we’re saying is there is obviously a gap. You know, small businesses can’t go to court and they can’t go to FOS. MR HODGES: So Kate, I just disagree that a borrower of five to 10 million is a small – is a “small business”. I mean, they’re reasonable – reasonably sizeable businesses and, you know, I think I think it’s, in those cases, you know, the court is an option, absolutely probably a last resort. FOS, we don’t believe is the right, you know, sort of, beyond the three million. We don’t think that threshold is right. That’s – that’s the mediation route, we would say and that’s MS CARNELL: Yes. MR HODGES: Well, you know, ANZ has always been prepared to look at the mediation route. MS CARNELL: Okay. MS GIBSON: Kate, I just want to say, one of the things with regard to FOS – I mean, we would – I know we’re talking that there are many customers who have large amendments, but, as you acknowledge, there’s a lot of customers who have much smaller loan sizes and, in our view, we believe the FOS is working reasonably effectively. MS CARNELL: For consumers, we agree. MS GIBSON: And – and for small businesses. MR HODGES: Yes. MS GIBSON: I think that they have done a lot of work in building the capability around that. MS CARNELL: Better than they were. MS GIBSON: I think one of the challenges, if you think about having a separate, you know, body that looks after small businesses exclusively, while there are clearly some pros there in that you can make sure that people fully understand small businesses, you do run the risk – and you would need to manage that risk – that you get a divergence in the approach for consumers and for small businesses and, for a lot of small businesses, they don’t actually separate their personal finances and their small business finances in a very black and white way. So, yes, we would be keen that you didn’t get a divergence in the way that people were being treated if they have a consumer hat on verses their small business owner hat on.

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MS CARNELL: And we would be concerned if all small businesses were seen as the same as consumers, because they’re not. MS GIBSON: Absolutely. No, I absolutely agree. MS CARNELL: So it’s the MR HODGES: We agree. But I think – I think what we’re saying is that the vast majority of small businesses fit under that $3 million camp, the vast majority. MS CARNELL: We actually accept that in number terms because there’s a million small businesses that don’t employ anyone. So in terms of numbers, you’re always going to get large numbers that fit into that space. The issues are, though, that those small businesses that are growing quickly, that are the engine room, are not the ones that don’t employ anybody. They’re ones that have got, you know, 20 employees and are growing quickly. New South Wales recently did a really good bit of work on where growth was happening in the small business space, you know, and it was in that – well, I think they called them “gazelles” or something – this group of businesses which were in the six to 10 per cent of small businesses. But where they fitted was in that 20 to 50 employee space and they were growing quickly. But they’re still small businesses. But, anyway, I’m just saying you’re right if you go for numbers, but that’s because a million small businesses employ no one and they’re little, there’s no doubt. They’re carpenters and plumbers and people who work from home and so on. But it’s wrong to suggest that that’s what small business looks like in Australia because it doesn’t. MR HODGES: Well, as I said earlier, I mean, I think we’re happy to be informed by Mr Ramsay’s sort of views around how that might best work. But, you know, I think we’re happy to work with proposals that might, you know, sort of try to find some resolution around that. MS CARNELL: Okay. Last issue is the bank – the Code of Banking Practice and the implementation. Now, right at the moment the code is a heap of fluff, so there’s lots of fluffy words and it doesn’t – and it’s not enforceable. So there’s a review of the code. A chunk of the issues we’ve spoken about we would hope ended up in the code. How do you see the code going forward and what enforceability might look like? I mean, there’s not much point in having a code if it’s not enforceable. MR HODGES: I mean, I don’t think it’s a heap of fluff. I mean, I think – you know, this is MS CARNELL: Show me the bit MR HODGES: This was set up in 1993. It’s – as you know, it has been self-regulated. I think it has got really important principles in it. We – a review of the code is going ahead right now and I think, from my understanding, that there is some good adjustments to that code being put in there. I mentioned some in my opening statement. I think it still stands as a very important statement about what the banks stand for and the banks see that as such and treat it seriously. So the issue around how that’s going forward, I mean, I understand that, you know, some have called for ASIC to supervise that.

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MS CARNELL: Yes. Yes, we have. MR HODGES: Yes. And I guess in the end if that’s the direction it goes, then I can’t say we would object to that. I think the issue then would be how it works functionally if ASIC is supervising it and where the issues of redress sit and how is it going to manage. MS CARNELL: Great. MR HODGES: I think what we wouldn’t want to see is a sort of an overlap which causes both confusion and extra sort of administration and costs around it. And so I think there is absolutely, I think, a place for the Code of Banking Practice to – and I think it has been upgraded maybe four times since it was originally – it was upgraded in early 2000. It was upgraded again in 2010, 2013. It’s being upgraded again now. So modernising it for standards and practices of today I think is a good thing. MS CARNELL: But, Graham, how many banks have been found guilty of contravening the code? MR HODGES: I couldn’t tell you, Kate. MS CARNELL: None. MR HODGES: Well, I don’t know. I mean, if you look at the code conduct monitoring committee, I mean, they’re the ones who sit there and review what issues emerge in that. And, you know, my understanding is that their requirement is to review where there are, you know, breaches of the code or wilful neglect of that. MS CARNELL: They have no power to do anything. They have no power to fine or MS SCOTT: And they’re funded by the bank. MS CARNELL: And they’re funded by the bank, yes. MR HODGES: Well, I’m very happy for the Government to fund it, you know, so let’s hand that – we would be happy to send the costs going back the other way for a change. MS CARNELL: No. Look, and I understand that and it is an issue of, you know, this MR HODGES: Just because it’s funded by the bank does not mean that it’s independent. I mean, I think that’s a cheap shot, to be honest, I mean MS SCOTT: Well, it just doesn’t have the impression of showing anything. MR HODGES: I agree. I mean, I’m not disagreeing with you but the comment that it’s funded by the bank, therefore it’s wrong, is MS SCOTT: No, no.

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MR HODGES: I just think that’s a wrong comment and I think it’s sort of disrespectful to the industry which actually believes in the code and actually working on the code. So put that aside. Yes, you’re right, it hasn’t got teeth. But the idea of it is it was there to refer issues back to the banks to say, that’s not being done right, fix it, sort of thing. MS CARNELL: Yes. MR HODGES: Now, I think the banks have done that okay in some areas, and probably not well enough in others. So, you know, I would be the first to say, this code has needed an upgrade and I think is being strengthened. Whether it now morphs into ASIC supervising it, we are actually comfortable with that. And I think the issue that we’re saying is, let’s make sure it’s clear what the roles and responsibilities are around the various parties in that. That’s what we would ask for. MS CARNELL: I think that, you know, solving the issue of the – that perception issue again, you know, having it registered with ASIC and having it enforceable would create a scenario where the code, you know, looked like it had a level of independence. And I think that’s really important. MR HODGES: Yes. So the – yes, you can – go on. MS McKINSTRAY: I was just going to say it really is taken really seriously internally in the bank because I know that, you know, it’s certainly it’s a bit of a yardstick when products are being designed. It’s a set of guidelines that we test ourselves around. Certainly when I look at matters in my team, that’s a factor we look at if there has been a breach. And that will help to determine an outcome or a resolution. MS CARNELL: One of the things we would like to see is an area in the code that is specifically looking at small business. Because at the moment the small business bits are all over the code so to try to work out, you know, what the code of banking practice looks like for small business is a bit of challenge, really. MR HODGES: Yes. MS McKINSTRAY: I completely agree with you, Kate, and I have to say, you know, when I read the code, you know, trying to take the lens of my customers, I completely agree. It is not transparent exactly which aspect of the code are referring to consumers and which to small businesses. And we fully support that, and we would expect that the review that’s undergoing now will address that with some better plain language and all that. MS CARNELL: Okay. MR HODGES: Yes. MS CARNELL: Have any of my colleagues got any questions? Have you guys got anything else you would like MS J. LAWRENCE: Sorry, yes.

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MS CARNELL: Yes. MS LAWRENCE: Can I just ask one? MS CARNELL: Yes, sure. MS LAWRENCE: In regard to the code, how do you ensure that ..... staff are aware of it and how you ..... on a day-to-day basis. For example, most financial ..... go to 20 hours ..... MS McKINSTRAY: Yes. MS LAWRENCE: Do you include in that a ..... by the staff an hour of that is refreshing themselves about the code? MS McKINSTRAY: Certainly, yes, I know my staff do need to do that, continuing professional development a number of hours every year. Part of that training is making sure that they do the mandatory training that we expect of the bankers which does include reference to the code. I can’t answer the question about the specific amount of time but I could certainly go away and get that information for you. MS LAWRENCE: So the code covers all types of staff, as I understand it, not just those in your area. MS McKINSTRAY: And I would have to – so the mandatory training that we get our staff to do each year, there are some aspects of that mandatory training that are specific to staff who work with customers as opposed to people who are working in a head office environment and are not dealing with customers. So there are some aspects of the mandatory training that will vary, based on the nature of the role that you have. But there’s not a huge variation there. I could certainly come back to you with detail about how the code of banking practice is covered in that and who does that training. MS CARNELL: Okay. Can I – do you want to say something further? MR HODGES: No, I will just say – I mean, I presume you – we’ve agreed to come back with a couple of things. Did someone make a note of what they were? MS CARNELL: Yes. We will tell you what they are. Yes. MR HODGES: I mean, I didn’t make a note as I went so just MS CARNELL: Nor did I but I’m sure someone did though. MR HODGES: Okay. All right. Excellent. Okay. All right. MS CARNELL: Yes. Can I thank you for your cooperation, not just now but throughout our inquiry. We will be reporting in the next few weeks so it’s

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MR HODGES: Yes. We’re happy to work – and I think, you know, I think this is a useful process so MS CARNELL: I’m really hopeful that – you have already agreed to a range of things. We would like to push you a bit harder on others. But, you know, I think we have a capacity to get a better outcome for small businesses going forward. MR HODGES: Okay. MS CARNELL: Okay. Thanks for that. Thank you, guys. For everybody else here, we will reconvene at two? One? MS SCOTT: One o’clock. MS CARNELL: One o’clock. Okay. With the National – with NAB. SESSION CONCLUDED