Category: Banking

Golden advice from Lord Hamblen SCJ

On By Geoff GreenIn Banking, Expert Witness, Experts in Singapore, SME lendingLeave a comment

A keynote paper presented to the Expert Witness Institute Online Conference in May 2022 by Lord Hamblen of the Supreme Court of the United Kingdom is now available online, here.

For those of us who do expert work, “The modern expert: personal insights and current issues” is well worth reading in its entirety, but in my opinion the best advice is:

[17] …do what you can to make it easy for the judge to understand your expertise and your expert views. This involves explanation. Do not assume prior knowledge and understanding. In simple and clear language try and make it easy for a judge to assimilate and to understand.

Make clear what your underlying assumptions are and set out all the building blocks which lead to the conclusions that you reach.

That may involve covering what seems like basic ground for you, and possibly for the judge, but it is far better to err on the side of cautious simplicity than diving straight in to the key disputed issues.

[18] …Make a conscious effort to simplify and to clarify.

[20]…All the opinions you express and the conclusions you draw must be supported by reasoning. Those reasons must be clearly set out and explained.

Make sure, however, that the supporting reasons are cumulative rather than individually critical. You want to avoid the risk of your expert opinion being undermined if one building block is taken down.

Try and build as effective defences as you can for any opinion you express. This means careful and convincing reasoning.

[21] …do what you can to try and gain the judge’s trust and confidence. This means demonstrating objectivity and an awareness of your duty to the court, not just your client.

Be prepared to make concessions even if that appears to be against your client’s interest in winning the case. Acknowledge errors or omissions, if made.

[28]…the clearer your oral evidence is, the better it will be understood and the greater its likely impact. Clarity in the giving of oral evidence involves keeping to the point and making your points in shortly expressed but plain language. Avoid speeches.

[29]…Show that you have been even handed and are concerned to arrive at the right answer rather than simply the answer that may suit your client. As it is put in one of the cases to which I shall be referring [my note: this one], give the impression that your evidence would have been exactly the same if you had been instructed by the other side.

[33] There is nothing more fatal to the acceptability of an expert’s evidence than concerns about their independence and impartiality.

[34] …avoid being an advocate. It is counsel’s job to argue the case. That is not the role of the expert. If you give your evidence in an argumentative manner that will inevitably undermine that evidence and risk allegations of partiality. Counsel may try to provoke you and to get a rise from you, but you must retain your clear-headed objectivity.

Make points, explain points, but do not argue them. Never get into an argument with counsel, however provoked you may be. If you are not being treated fairly in cross examination then your counsel or the judge will usually intervene. Do not, however, take matters into your own hands.

[35] …know the limits of your expertise…do not stray into areas of non-expertise. You are being asked to give expert opinion evidence. That opinion evidence is only admissible because it is expert evidence. But keep to your expert opinions.

Do not stray into judgments as to the facts. Ensure that the evidence you give is and remains the expression of your expertise and nothing else.”

The High Court: Stubbings v Jams 2 Pty Ltd

On By Geoff GreenIn Banking, Non-bank lendingLeave a comment

This week the High Court delivered judgement in Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the final instalment of litigation which addressed whether asset-lending – loans made based on the value of security rather than the capacity of the borrower to repay by instalments – was inherently unconscionable, and the extent to which lenders might rely on certificates of advice.

The answers to those questions are: “no” and “it depends,” turning on quite specific facts.

The Plan

An unemployed man (the Guarantor) wanted to buy a new home to live in, after falling out with his landlord – but he was unable to arrange bank finance.  Supposedly guided by a consultant, he used a shelf company to borrow the whole of the purchase price from a private lender, secured by mortgages over two other properties that he owned in Narre Warren.

The Guarantor’s stated plan was to renovate the two Narre Warren properties and sell them, and then refinance through a bank after two or three months.  The Court found that this plan “was never going to work” – he did not have the money to renovate the properties or pay interest while any renovation was underway, and he did not have a realistic chance of later arranging bank finance either.

The Guarantor’s disadvantage

The Guarantor was described as “completely lost, totally unsophisticated, incompetent and vulnerable…incapable of understanding the risks involved in the transaction” and “precisely the sort of person who needed protection and was vulnerable to being exploited.”

The Lender’s system

The lender was represented by a lawyer who “deliberately avoided knowledge of borrowers’ and guarantors’ personal and financial circumstances.”  Through a system of conduct that was almost the opposite of bank lenders, he:

  • Did not require application forms from borrowers.
  • Did not seek any information about the income of borrower or guarantor.
  • Did not run credit checks.
  • Treated the asset position of the nominal borrower company as irrelevant.
  • Refused to communicate, meet, or negotiate with proposed borrowers.

The Court found that “if enquiries had been made, they would have led to [the lawyer] discovering… that the transactions from the perspective of the [Guarantor] were not merely risky and dangerous but entirely uncommercial and could not in any way have advanced his interests…that the appellant had fundamentally misunderstood the transaction…and that it was possible that [the Accountant] had given [the borrower] and [the Guarantor] no financial advice at all.

Pro forma certificates of independent legal and financial advice

The lawyer prepared pro forma certificates of independent legal and financial advice, and the lender’s claimed reliance on them to the exclusion of any other information except valuations was crucial – but there were three problems with that claimed reliance:

  1. The certificate of legal advice addressed the consequences of default for the guarantor – but did not address the likelihood of default.
  2. The certificate of financial advice which would potentially address the likelihood of default was completed in respect of the borrower shelf company, not the Guarantor.
  3. The certificates could not displace the lawyer’s actual knowledge that “the loans were a dangerous transaction” for the Guarantor who, the Court found, the lawyer knew to be under a disadvantage.

Conclusion

The High Court clearly accepted that there was nothing inherently unconscionable about asset‑based lending.  However, in the circumstances here, the lawyer’s conduct amounted to the unconscientious exploitation of the Guarantor’s special disadvantage, and the Court held that it would be unconscionable to allow the lender to be able to enforce its rights under the mortgages.

The Review of the Australian Banking Code of Practice

On By Geoff GreenIn Banking, SME lendingLeave a comment

Background

The Banking Code of Practice (the Code) issued by the Australian Banking Association (the ABA) is independently reviewed every three years.  The 174 page review conducted by Mike Callaghan AM PSM – an economic consultant and 38 year veteran Treasury official – released on 3 December 2021, and available here, is the first review since the Hayne Royal Commission.

The Code applies to consumers and small businesses, the latter specifically defined as those with annual turnover of less than $10 million and fewer than 100 FTE employees, and less than $3 million total debt to all credit providers (whether fully drawn or not).

Recommendations impacting lending to small business

I have set out below the recommendations which relate to small business lending, together with my comments, in italics:

(60) Part 6 should be extended from referring to ‘lending to small business’ to cover ‘providing banking services to small business.’ The first commitment in this part should be for banks to assist small businesses with their banking services that are suitable to their circumstances.

BNPL products are blurring the line as to what is “lending” and what is not. The proposed recommendation will also make it clear that merchant (i.e., credit card clearing) and foreign exchange hedging arrangements are caught, which seems sensible and uncontroversial.

(61) While it will take time to incorporate the Pottinger Review recommended changes to the definition of small business in a revised Code following the triennial review, ABA banks should commit to introduce the changes as soon as possible.

The change referred to here is to increase the total debt threshold from $3m to $5m, so that larger small businesses are protected by the Code.

Significantly, this would further limit the ability of banks to enforce “non-monetary defaults” (i.e., defaults other than non-payment of principal and or interest).  Currently banks use non-monetary triggers such as financial covenants to monitor the health of businesses with multi-year loans.  If the use of non-monetary triggers is further limited, banks are likely to reduce loan tenor to a standard 12 months, at least for riskier customers.

(62) To help clarify what parts of the Code apply to small business, and to recognise there is a difference in the requirements for lending to small business and lending to individuals, the references to small business lending in Part 5 should be shifted to Part 6 of the Code.

A minor and sensible change

(63) The Code should specify that future earning capacity is taken into account when assessing a small business’s capacity to repay a loan.

Banks will be happy to explain to their customers that they take future earning capacity into account when assessing a loan, and in my experience, this is already well-understood, so this will not be a significant change.

(64) The Code should clarify that a bank’s approval of a small business loan will not be dependent on a third party (such as the small business’s accountant) certifying the capacity of the small business to repay the capacity of the small business to repay the loan.

Some banks ask their customer’s accountant to certify the capacity of a business to repay a proposed loan.


This creates problems where the customer is unwilling or unable to pay the accountant’s fees for doing so, or where the accountant forms the view that the business does not in fact have capacity to repay the loan.  The solution as proposed, however, may convert conditional approvals into unconditional refusals.

(65) Banks should advise a small business if there is likely to be a delay in the initial indication of how long it would take for a decision, the reason for the delay, and give a revised estimate when a decision is likely.

Unexpected delays can sometimes be an important “soft signal” that a customer is not regarded as being as credit-worthy as they (or perhaps the front-line banker) believe.  In practice this proposal is more likely to see lenders formally estimate the longest possible period, to simplify later management of turnaround times.

(66) Banks should commit that if they require additional information when considering a loan application, they will endeavour to ensure that this does not delay the time it will take for the bank to make a decision.

In my opinion rules that would hold lenders to fixed decision periods should be approached with caution! It is always quicker to decline a loan than to approve it, and this proposal risks a default “no” the day before the deadline, to ensure that the target is met.

(67) Banks should commit to tell small business the reason, if appropriate, as to why a loan was declined, along with what would be needed for the application to be reconsidered.

This proposal was pressed by the Australian Small Business and Family Enterprise Ombudsman. It is hard to see how it will result in anything other than generic broad-brush statements, with most businesses being told that “the bank could not be satisfied that the borrower could service the loan.”

Overall

The most significant recommendation is the proposal to extend the small business lending protections from $3m to $5m, and the larger small business borrowers affected by this may be frustrated if it makes it harder to secure longer term loans.

Other recommendations will result in loans being more speedily declined for less creditworthy customers, but it is hard to see them as major, or significant.

Lending to small business would remain conservative: reference to the decision of a prudent banker remains unchanged, and there is no sign of a specific invitation for lenders to “look through” (i.e., make allowance for) external shocks such as drought or flood, or most recently, Covid, which seems a missed opportunity.