Senate committee calls for comprehensive banking sector inquiry, code of conduct between banks and SMEs and abolition of withholding tax

The Senate Committee report into the post-GFC banking sector has called for an independent "root and branch" inquiry into the Australian financial system.

“While Australia avoided the worst of the crisis, this should not be allowed to result in complacency about the structure and performance of our financial system.

“There is now an opportunity to conduct a comprehensive examination of the banking sector and to debate what the post-crisis sector should look like and whether it is delivering what Australians want from it,” says the report.

The report follows more than 150 submissions from banks, mortgage brokers, borrowers, the RBA, non-banks and other industry participants as well as public hearings.

The inquiry was triggered over concern surrounding the handling by Bankwest of its loan book and a major focus of submissions related to the bank’s treatment of small business borrowers.

“Most of the evidence received by the committee was from aggrieved borrowers of Bankwest who alleged mistreatment by the bank after Bankwest was acquired by the Commonwealth Bank of Australia in 2008 at the height of the global financial crisis,” says the Senate committee report.

While noting the “many sad and distressing stories” that are now a matter of public record, the committee said the more challenging times presented by the GFC “placed extra stress on less robust and more speculative projects.

“In many cases, loans were sought for ventures that were a considerable risk even during the more stable economic environment that existed prior to the GFC."

 But the committee said this explanation did not apply to every case, “nor does it excuse Bankwest”.

“Under its previous owners Bankwest was willing to enter into these loans.

 “When its small business borrowers are experiencing difficulties, Bankwest has a duty to make genuine attempts to work with the borrower, to clearly explain what is happening and why, and to treat them with courtesy.”

As a consequence, the report calls on the Australian Bankers' Association (ABA) to meet with small business representatives to “develop a code of practice specifically relating to lending to small businesses” which provides greater transparency in lending contracts” and give SMEs access to valuation reports.

The report also acknowledges the “multiple upward pressures on the cost of funds since the crisis and it is likely that costs will remain elevated”.

“Banks continue to adjust to higher post-crisis funding costs as they compete for available deposits and rollover longer-dated wholesale funds obtained at lower pre-crisis prices,” says the committee’s report.

It calls for further steps to support the recovery of the securitisation market, which has “helped enable stronger competition in the sector” and recommends the abolition of the foreign investors’ withholding tax, recently doubled by the government, if it can be accommodated in the budget.

The tax is charged on income paid to foreign investors who invest in managed schemes, many of which fund large infrastructure and property projects in Australia.

The committee says the tax “distorts funding decisions and is an impediment to foreign banks competing in the Australian banking sector”.

“The tax burden may also be simply passed on to borrowers.”