During the agricultural round of hearings, and in his Interim Report, the Commissioner asked if there should be special rules for farmers to address the particular challenges of the sector, and if so, who should bear the added cost? The Commissioner weighed various proposals, some of which had the potential to significantly affect the sector. For example, Counsel Assisting asked whether there should be a moratorium on banks taking enforcement action when a property is affected by natural disaster.
In his Final Report, the Commissioner has not, for the most part, recommended special rules for farmers. Rather, he takes a measured approach addressing particular concerns. The Commissioner makes four recommendations relating to the valuation of farming assets, charging of default interest, and enforcement of loans.
In relation to the enforcement of loans, the Commissioner recommends that banks adopt various procedural measures. It is unclear how this recommendation is to be enacted. No changes to the law (or Banking Code) are recommended, and the Government has only indicated that it supports banks acting on the recommendation. However, even if no formal obligations are imposed, this recommendation may ultimately inform the standard of conduct expected of banks under other obligations.
In relation to agricultural lending, the Commissioner recommends that:
- APRA update its prudential standard (APS 220) to:
- require that internal appraisals be independent of loan origination, processing and decision processing; and
- provide for valuations of agricultural land that recognise, to the extent possible, the likelihood of external events affecting its realisable value and the time that may be taken to realise the land at a reasonable price.
- the ABA should amend the Banking Code to provide that banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster;
- a national scheme of farm debt mediation should be enacted;
- when dealing with distressed agricultural loans, banks should:
- ensure loans are managed by experienced agricultural bankers;
- offer farm debt mediation as soon as a loan is classified as distressed;
- manage loans on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
- recognise that appointing receivers or administrators is a remedy of last resort; and
- cease charging default interest when there is no realistic prospect of recovering the amount charged.
In his Interim Report, the Commissioner observed that there is a conflict of interest where an employee engaged in loan origination is also responsible for conducting an appraisal of the property offered as security, and urged the prompt implementation of a suggestion by APRA that valuations should be made independently of staff engaged in loan origination. The Commissioner formally recommends that change in the Final Report. This is despite concerns raised during the hearings that in rural areas, often the local banker responsible for loan origination will also be best-placed to conduct an appraisal, because they are familiar with the area.
The Commissioner has also recommended that APRA amend its prudential standard to provide for valuations that recognise the likelihood of external events (including fire, drought and flood) affecting an agricultural property's realisable value and the time that may be taken to realise the land at a reasonable price.
This recommendation appears to respond to the Commissioner's earlier question as to whether banks should be required to take account of the fact that in seasonal downturns there may be no market for land, or that even if there is a market, a better value would be achieved when the good times return. The Commissioner does not provide any detail in the Final Report as to how APRA should provide for valuations that recognise this likelihood.
The Government has indicated its support of these recommendations.
Two of the Commissioner's recommendations relating to agricultural finance address the charging of default interest.
First, the Commissioner recommends that the ABA amend the Banking Code to provide that banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster. Many banks have already implemented such a policy in relation to declarations of drought. Questions may arise as to the manner and extent of declarations applicable to other forms of natural disaster.
Second, the Commissioner has recommended that banks cease charging default interest when there is no realistic prospect of recovering the amount charged, though no change to the law (or Banking Code) is proposed. In this regard, the Commissioner observes that '[p]roviding for the payment of default interest is, and should remain, a matter for any lender to proffer […] as a term of the loan contract', '[b]ut there comes a time […] when charging default interest serves no larger commercial purpose than providing a bargaining chip'. While the sentiment appears reasonable, we query how banks will practically determine when there is 'no realistic prospect' of recovery.
The Government has indicated its support of these recommendations.
National farm debt mediation scheme
The Commissioner observes that, properly used, farm debt mediation may allow the lender and the borrower to agree upon practical measures that will, or may, lead to the borrower working out of the financial difficulties that have caused the lender to treat the loan as distressed.
The Commissioner recommends that banks should offer farm debt mediation as soon as a loan is classified as distressed, though again no change to the law (or Banking Code) is proposed, so it is unclear how this recommendation is intended to be enacted. It seems to us that it may not always be practical for banks to mediate as soon as a loan is classified as distressed. This may be when the loan is only 90 days in arrears, in an industry where seasonal factors often cause lengthy delays.
Noting that there was little or no disagreement in submissions to the Royal Commission as to the instigation of a single national legislated farm debt mediation scheme, the Commissioner has recommended that one be enacted.
Enforcement of loans
The Commissioner's final recommendation relating to agricultural lending is that banks should ensure loans are managed by experienced agricultural bankers, and adopt various procedural measures when taking steps to enforce the loan, including referring a matter for farm debt mediation as soon as it is classified as distressed, managing loans on the footing that working out will be the best for both bank and borrower.
As stated above, it is unclear how this recommendation is to be enacted, as no changes to the law (or Banking Code) are recommended. The Government has indicated only that it supports banks acting on the recommendation. However even if no formal obligations are imposed, this recommendation may ultimately inform the standard of conduct expected of banks under other obligations: for example, clause 10 of the Banking Code, which provides that banks will engage with customers in a fair, reasonable and ethical manner.
The Final Report makes various recommendations relating to the access of financial services by Aboriginal and Torres Strait Islander customers in remote communities, including recommending that the Banking Code be amended to provide that:
- banks will work with customers who live in remote areas, or who are not adept in using English, to identify a suitable way for those customers to access and undertake their banking;
- banks will not allow informal overdrafts on basic accounts without prior express agreement with the customer;
- banks will not charge dishonour fees on basic accounts; and
- if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow Australian Transaction Reports and Analysis Centre’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage.
The case studies in the fourth round of hearings also considered issues arising out of the conduct by funeral insurance providers. In the Final Report, the Commissioner recommends that the law should be amended to prohibit the hawking of insurance products, to remove the exclusion of funeral expenses policies from the definition of ‘financial product’ and put beyond doubt that the consumer protection provisions of the ASIC Act apply to funeral expenses policies.