The Banking Royal Commission & the powers of ‘Discovery’
"The Hayne Royal Commission needs to focus on the asymmetry (inequality) of power between banks and customers, if it has any chance of getting to the ‘root of the problem’ in the financial sector. On any view, the reality is that there is an undeniable power imbalance in favour of the banks. It has been that way since the 1980s.
Associate Professor Evan Jones, formerly of Sydney University (1973 – 2006) has been investigating banking corruption for 30 years. His recently published 4-part series titled “The Clayton’s Banking Royal Commission” concluded in February 2018 sets out some interesting history surrounding the issues within the banking sector, and deals particularly well with the asymmetry of power issue. Some examples of what is meant by this lack of equality include:
Banks withholding the full completed loan contracts from borrowers;
‘Suspension’ and ‘preservation’ clauses in a loan contract that reduce borrower litigation rights;
Loan contracts repayable at call;
Penalty interest rates and other discretionary fees;
‘Non-monetary’ defaults — where the lender decides arbitrarily that the industry in which the borrower operates is subject to (or likely to be subject to) market deterioration, and defaults the borrower on that account;
Customer asset devaluations — where a lender obtains from a compliant valuer a significant devaluation of customer assets, leading to an unacceptable loan to valuation ratio which, in turn, provides the bank with a ‘legitimate’ cause for defaulting the customer; and
The sale of foreclosed customer assets undervalue.
Documentation is at the heart of the imbalance.
It is important to raise now, the issue of documentation, and the lengths banks apparently go to, to avoid ‘discovery’ – that is, having to produce documents that assist a complainant or plaintiff’s case against the bank. As Dr Jones has pointed out, banks have a reputation of claiming that they have mislaid key documents demanded, or that they have destroyed them because of the lapse of time - “Highly paid grownups argue “the dog ate my homework” ruse”, and “Sometimes, a bank will dribble discovery over a period of time, or occasionally discover key documents at the eleventh hour (Friday night at 5.30 pm for a Monday hearing), strategically putting the victim/s and their legal team in complete disarray”.
This makes the Hayne Royal Commission even more interesting because it has powers to compel the banks to produce documents – unlike the series of inquiries and reviews that have taken place over the last decade, which do not have powers to compel the production of documents.
What will this mean in terms of what the Royal Commission can uncover? A good question. This question becomes more pertinent after reading Commissioner Hayne’s remarks at pages 8 to 10 of the transcript of the initial public hearing on 12 February, where he addressed the provision of information and material to the Commission. Here is a short summary of what Commissioner Hayne has said:
On 15 December 2017, the Commissioner wrote to several entities in the financial services industries seeking a response and documentation in relation to misconduct that has occurred over the past 10 years. A response was requested by 29 January 2018.
Many entities failed to respond in full, with many responses being entirely inadequate.
The Commissioner wrote to these entities again on 2 February asking for more specific information, and limiting the time frame to the past 5 years (rather than the initial 10 years). A response was requested by 13 February.
Many responded saying that they could not comply with a short deadline because of the amount of material that needed to be reviewed and collated.
In response to this Commission Hayne has made the following comment:
“What is to be drawn from the fact of requests for more time to give more specific information about events of misconduct identified over the last five years may have to be considered in light of the chronology to which I have already referred. The initial request for 10 years of information was made on 15 December last year. Initial responses were delivered six weeks later on 29 January. Further requests limited to events of misconduct identified over the last five years, as opposed to departures from community standards and expectations, were made on 2 February.
Answers were sought by 13 February. That a request for details of events of misconduct as defined in the terms of reference identified during the last five years cannot be met within the time sought, even though the initial request for that information was made approximately two months ago, is itself a matter to which further attention may have to be given. Whether it is will be a matter for debate at a later time.” (emphasis added) (page 10 of the transcript).
It seems that Commission Hayne is very much alive to the issue of avoidance of ‘discovery’ by the banks for so many years. It will be fascinating to follow this through the proceedings, and see what behaviour unfolds.”
Tracey Mylecharane - Solicitor
Tracey Mylecharane has more than 12 years’ experience in legal practice and has developed considerable knowledge of business and commercial law issues. She has acted for small and medium businesses across several industries and has been able to assist clients with a vast range of issues from start-up structures and systems, supplier and third-party contracts, to partnership break-ups and dispute resolution (both in and out of court).