parliamentary joint committee on corporations and financial services_2016_04!04!4336

8/18/2019 Parliamentary Joint Committee on Corporations and Financial Services_2016_04!04!4336

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PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES

Monday, 4 April 2016

Members in attendance: Senators Fawcett, Ketter, O'Neill and Mr Ruddock, Mr Van Manen.

Terms of Reference for the Inquiry:To inquire into and report on:

1.a. practices of banks and other financial institutions using a constructive default (security revaluation) process to impairloans, where constructive default/security revaluation means the engineering or the creation of an event of default whereby afinancial institution deliberately reduces, through valuation, the value of securities held by that institution, thereby raising theloan-to-value ratio resulting in the loan being impaired;

b. role of property valuers in any constructive default (security revaluation) process;c. practices of banks and other financial institutions in Australia using non-monetary conditions of default to impair the loansof their customers, and the use of punitive clauses such as suspension clauses and offset clauses by these institutions;d. role of insolvency practitioners as part of this process;

e. implications of relevant recommendations of the Financial System Inquiry, particularly recommendations 34 and 36 relatingto non-monetary conditions of default and the external administration regime respectively;f. extent to which borrowers are given an opportunity to rectify any genuine default event and the time period typically

provided for them to do so;g. provision of reasonable written notice to a borrower when a loan is required to be repaid;h. appropriateness of the loan to value ratio as a mechanism to default a loan during the period of the loan; andi. conditions and requirements to be met prior to the appointment of an external administrator; and2. in undertaking this inquiry, the Committee will take evidence on:a. the incidence and history of:

i. loan impairments; andii. the forced sale of property;

b. the effect of the forced sale of property in depressed market conditions and drought;c. comparisons between valuations and sale price;d. the adequacy of the legal obligations on lenders and external administrators (including s420A of the Corporations Act 2001 )to obtain fair market value for the forced sale of property; ande. any related matters.On 4 June 2015 the committee resolved that: in conducting the inquiry the committee will not investigate or seek to resolve disputes between customers and banks; and where the experiences of customers may inform the committee about the practices of banks, the committee welcomes

submissions that explicitly address the terms of reference.


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WITNESSES

ARMSTRONG, Mr Tim, Head, Micro and Small Business, South, National Australia Bank ....................... 59

BROWN, Mr Gerard, Group General Manager, Corporate Affairs, ANZ Banking Group Ltd ................... 18

CAREY, Ms Annamaria, Assistant Commissioner, Banking and Finance Strategy, Australian TaxationOffice ..................................................................................................................................................................... 1

COHEN, Mr David, Group Executive for Corporate Affairs, and Group General Counsel,Commonwealth Bank of Australia ................................................................................................................... 37

DE LUCA, Mr Rob, Managing Director, Bankwest ........................................................................................... 37

GREENE, Mr Geoff, Head, Strategic Business Services, Melbourne, National Australia Bank.................... 59

HARDIE, Mr Robert, Manager, Corporate Affairs, Oceania, Royal Institution of CharteredSurveyors .............................................................................................................................................................. 8

HODGES, Mr Graham, Deputy Group Chief Execuive Officer, ANZ Banking Group Ltd .......................... 18

NOLAN, Mr Peter, Oceania Director, Royal Institution of Chartered Surveyors ............................................ 8

PARKER, Professor David, Fellow, Royal Institution of Chartered Surveyors ................................................ 8


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Monday, 4 April 2016 JOINT Page 1

CORPORATIONS AND FINANCIAL SERVICES COMMITTEE

CAREY, Ms Annamaria, Assistant Commissioner, Banking and Finance Strategy, Australian TaxationOffice

Committee met at 09:31CHAIR (Senator Fawcett): I declare open this public hearing of the Parliamentary Joint Committee on

Corporations and Financial Services. Today the committee is taking evidence as part of the inquiry into theimpairment of customer loans. This is a public hearing and a Hansard transcript is being made. The committee

prefers to hear evidence in public. We may agree to take evidence confidentially, if it is relevant. The committeemay publish confidential evidence later but we would seek to ask the witness before doing this. It is important thatwitnesses give the committee notice if they wish to give evidence in private. In addition, if the committee hasreason to believe that certain evidence may reflect badly on a person the committee may direct that that evidence

be heard in private.I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It

is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. Ifthey did, the action may be treated by the Senate as contempt, and it is also a contempt to give false or misleadingevidence to the committee. Witnesses should be aware that if they make adverse comment about anotherindividual or organisation, that individual or organisation will be made aware of the comment and given a

reasonable opportunity to respond.If a witnesses objects to answering a question, the witness should state the grounds of the objection and the

committee will determine whether it will insist on an answer. I remind committee members that the Senate hasresolved that an officer of the department of the Commonwealth or of a state shall not be asked to give opinionson matters of policy and shall be given reasonable opportunity to refer questions to a superior officer or to aminister. This resolution prohibits only questions seeking opinions on matters of policy not questions asking forexplanations of policies or factual questions about when and how policies were adopted. Officers of departmentsare also reminded that any claim that it would be contrary to the public interest to answer a question must bemade by a minister and should be accompanied by a statement setting out the basis for the claim.

The committee welcomes officers from the Australian Taxation Office. Thank you for attending today'shearing. Do you have any comments to make on the capacity in which you appear?

Ms Carey: I am an assistant commissioner in the public groups and international area of the Taxation Office.CHAIR: Would you like to make a short opening statement before the committee proceeds to questions?Ms Carey: No. I am happy just to take questions on whatever issues you wish to ask me.CHAIR: I take it you have read the terms of reference for the inquiry.Ms Carey: Yes, I have.CHAIR: Have you read any of the submissions that have been made to the inquiry?Ms Carey: No, I have not.CHAIR: Are you aware of the basis of claims that people are making about the conduct of banks and the

impairment of loans?Ms Carey: I understand how the principle operates; however, my understanding is that I am here to answer

any tax related questions you may have.CHAIR: Okay. I guess it is my expectation that if people come to provide evidence that they will have a good

understanding of the context, because that would make their answers more directly pertinent to the questioningthe committee may have.

One of the central claims by the banks is that they have no financial incentive to impair customers' loans, andthat they are far better off to help a customer work the loan out. We have had a number of submissions, as well assome documents from the UK, put an alternative view, and that is that various incentives, including tax, providevehicles whereby the bank can minimise losses and maximise short-term revenue, which may go to theremuneration targets for executives or managers within parts of the bank. Can you make any comment regardingthe broad framework upon which banks operate in the area of losses that they provision for and then realiseagainst bad loans?

Ms Carey: Certainly. Naturally, there can be a difference between losses that are written off for accounting purposes versus losses that can be claimed for tax purposes. We have provisions within the Income TaxAssessment Act that specifically allow deductions for losses in relation to what we call 'bad debts' in the


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Page 2 Senate Monday, 4 April 2016


Australian Income Tax Legislation. There is a specific provision, section 25.35, which applies to the writing-offof all bad debts.

Certainly, the income to which the bad debt relates firstly must have been recognised as income by thetaxpayer. There are certain rules around writing-off the debt. It must be more than doubtful; it must actually be a

bad debt. The Australian Taxation Office has certainly released some guidelines, providing information andguidance to taxpayers who wish to write off bad debts — how we would accept a deduction would be claimed — and that is contained in taxation ruling TR 92/18.

In addition, and specifically in relation to banks and financial institutions, there are particular provisions in theIncome Tax Assessment Act — in parlance they are called the 'taxation of financial arrangements provisions'. Theyare contained in division 230. Essentially, they specify for taxpayers who are involved in providing financialarrangements — and, obviously, I am here because of my background in looking after the strategy in relation to

banks within the Taxation Office — the rules under which deductions can be claimed. They are fairly similar tothose in section 25.35 but, I suppose, provide specific guidance to those particular types of taxpayers.

Again, they relate to the calculation of the bad debt. The amounts being claimed as a deduction have to have been included in the assessable income of the taxpayer and the amounts must arise in the course of a business oflending money. Again, they are very specific rules. There are ways of calculating the actual amount but,

essentially, the rules around who is entitled to claim a bad debt are set out in that division. There is probably somescope within division 230 for an amount being recognised as a 'doubtful' debt rather than as a bad debt, and that is because of the way the taxation of financial arrangements provisions interact with the Australian accountingstandards.

Obviously, I am looking at it from the point of view of the taxpayer claiming the deduction. You indicatedcertain incentives being available for banks and, I think I heard you say, their employees to allow for the writing-off of debts and the claiming of losses. I cannot comment on that. Obviously, I am here to cover off on theinterpretation of the law and in what circumstances either debts could be written off as bad or, in some cases, thecalculation may in fact cover off on some element of doubtful debts.

CHAIR: Sure, so the simplest case is where a debt is provisioned for and then becomes a bad debt and thenyou have an actual dollar amount. There is also a transitional state, if you like, where a loan is impaired. The

banks tell us that they have a higher cost of providing finance in that environment. I would be interested to know

whether the rules you have mentioned cover how they can treat that higher cost of providing the finance from atax perspective. Also they then charge consumers default or penalty interest rates — there are various words theyuse for it. I would be interested to know whether the rules specifically cover how that additional finance, thatincome flow coming to the bank, is treated from a tax perspective.

Ms Carey: Certainly penalty interest, default interest or fees that the banks may charge would form part oftheir assessable income under normal income provisions. There is no issue around that. The issue I suppose is ifin fact those payments themselves remain unpaid. Again the same rules would apply to doubtful debts moregenerally because the income should be returned by the bank or the financial institution if income is not receivedor the income is recognised because the taxpayer is on an accruals basis but in fact the payment is never received.Then again there would be a deduction that the bank or financial institution could claim under the previous

provisions that I referred to.CHAIR: So from a tax office perspective penalty interest rates are essentially additional profit for the bank?Ms Carey: Yes, that is correct.CHAIR: If the rules were to change such that, if somebody were in default and penalties were applied, those

funds went to paying down the balance of the loan as opposed to going to the profit sheet of the bank, how wouldthat be treated from a taxation perspective?

Ms Carey: If it is not regarded as part of the assessable income of the bank?CHAIR: Yes.Ms Carey: I would need to take that on notice.CHAIR: If you could do that — Ms Carey: Yes, I think I would need to.CHAIR: At least one submission has raised the issue of property that has been sold by a liquidator and

subsequently the bank has come back some months after the transaction and demanded a payment — in one casearound $36,000 — for GST on that sale. The submission made it very clear that in the original paperwork the salewas not subject to the goods and services tax, according to the paperwork and the boxes that were marked. From


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the tax office's perspective could you give us an opinion? Would it be your expectation that the sale of any property, regardless of whether it was at the hands of a receiver or from normal processes, would be subject toGST and who would be liable to pay that?

Ms Carey: You have me at a slight disadvantage because I am not a GST expert. I am happy to take that particular issue on notice and check with our goods and services tax area. My understanding is that in most casesGST would apply, but there could be particular circumstances and particular rules that would apply in a particularcase. Obviously in that case I am not aware of the background facts, but I am happy to take that on notice andtake that issue up with my GST colleagues.

CHAIR: Sure, and we can provide you with some more information as part of a question on notice.Ms Carey: Okay.Senator KETTER: Ms Carey, you mentioned that it is TR 92/18 that provides us with guidance as to what is

considered a bad debt. Is that the current position of the ATO?Ms Carey: Yes. Even though it is quite an old ruling the principles still apply to the current legislation.Senator KETTER: Just looking at that, and with regard to the terms of reference that we have, it says:A debt may be considered to have become bad in any of the following circumstances —

a number of which do not seem to be relevant to our current terms of reference. But in paragraph 31(d) it sayswhen:… the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt …

And then (e) says:… where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, isalleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered.

How does that line up with the technical defaults that we are looking at, where there has been no actual monetarydefault. We are talking about situations where loan-to-value ratios or other breaches of covenants might haveoccurred that do not really seem to fit there. Can you elaborate on that?

Ms Carey: Certainly. I mentioned division 230, which applies to the taxation of financial arrangements.Under division 230, which, as I said, applies to banks and other financial institutions, taxpayers are actuallyinvolved in providing financial arrangements for their customers and clients and there is the ability there to — it isactually described as the 'fair value method'. It is the methodology for the taxpayer to determine the actual amountof the loss. That provision appears to relate to impairments, including doubtful debts. I would call them doubtfuldebts; you described them as impairments. Essentially, it is comparing the fair value of the financial arrangementsdecreasing from one income year to another. That would be one methodology where a taxpayer, even though thedebt was not bad, by essentially revaluing the loan a deduction will be triggered. But there are certainrequirements that would have to be complied with. The taxpayer has to elect to adopt that methodology, and italso has to reflect what is included in the accounts of the taxpayer. Again, I am not an accounting expert, butaccounting standard AASB 139 basically sets out the conditions under which that revaluation can occur, and thetax law then reflects that accounting treatment.

Senator KETTER: If I heard you correctly, you are saying it is really for the taxpayer to determine theamount of the doubtful debt in that situation?

Ms Carey: It is based on the fair value, however that is determined.Senator KETTER: Does each of the major banks adhere to that standard — I think you said AASB 139.Ms Carey: Yes.Senator KETTER: Is that commonly applied by the major banks?Ms Carey: Again, I would have to take that on notice, but I would certainly hope so. I would assume so.CHAIR: How often does the ATO audit the major banks in terms of their compliance?Ms Carey: How often?CHAIR: Ever?Ms Carey: Yes. Obviously I will not go into individual details, but we have ongoing engagement certainly

with the big four banks — big five if you include one other. I will not name it. I specifically will not nametaxpayers. We certainly have a process of ongoing review of the various transactions that the banks and otherfinancial institutions are involved in.


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Senator KETTER: I imagine, post GFC, this would be an area that the ATO would be looking at. I presumethere would have been a rise of the level of doubtful debts or bad debts at that time — would that be correct?

Ms Carey: Yes. They rise and fall in a cyclical pattern, but certainly, yes, that would be one issue that wewould be looking at as part of our ongoing reviews of the banks, as well as many other aspects — particulartransactions they are involved in, particular types of financing. Certainly bad debts generally would fall into thecategory of the sorts of issues that we would look at as part of a general review of the tax position of the banks.

Mr VAN MANEN: I want to dig down on this a little bit more, because it is a very important issue. I would be interested, even if you take it on notice, for you to be far more forthright with the committee in relation to theactual work the ATO has done in ensuring the banks are complying, during both the GFC period and post-GFC,with these particular provisions in TR 92/18. Because you frequently see, year in year out, the banks regularlyreview their bad and doubtful debt provisions on their financial statements, and it can have a material effect ontheir profitability or otherwise. I would be very interested to know in some detail as to what work the ATO isactually doing. I will accept it if you want to take that on notice, but if you have the capacity to comment now, Iwould be very interested.

Ms Carey: Certainly I do not have the capacity to comment on the details now; I will take that question onnotice.

Mr VAN MANEN: Thank you.Senator KETTER: Just following on from that, the ATO would do some industry level monitoring here to

look at — I recognise the stability of the financial systems and another agencies responsibility, but you would haveyour own areas of concern in this field when it comes to taxpayers paying a fair amount of tax.

Ms Carey: Certainly. Again, and perhaps I should have explained the particular area within public groups andinternational that I manage, but I do manage the banking and finance strategy area within public groups andinternational. We actually have a specific strategy team that manages and monitors what is happening in the

banking and finance sector. Without providing details in relation to these particular deductions, I can certainlyindicate that we are closely monitoring the banking and finance sector. We are certainly very focused on the sortsof transactions that they are involved in. We have a working relationship with the banks as well, so we understandwhat particular issues they are focusing on or are of particular interest to them at a particular period in time. The

period during the global financial crisis, even though I was not actually in this role at that time, certainly we wereconscious and aware of issues like the level of bad debts that the banks were experiencing at that time.

Senator KETTER: So having said that you monitor that and you analyse what is going on, does the ATOhave a view about some of the very high profile cases that have been in the media about the impairment ofloans — perhaps the technical ways in which those loans were impaired? Have you formed a view about that froma tax point of view?

Ms Carey: I would have to take that on notice.Senator KETTER: I would be a bit surprised that you do not have a view that you could share with us today.

This is something that has exercised a lot of the print media, and it is certainly a matter of keen public interest. Iwould be surprised if you were not able to tell us something about the ATO's view on this issue.

Ms Carey: Certainly we would be looking at that in the context of the audit and active compliance work weare doing in relation to the banks. Whether we have reached a view on the extent to which the banks are

complying with the existing law or not, our role is to ensure that they are complying with the existing law.Mr VAN MANEN: To reiterate the chair's opening comments, it is somewhat of a disappointment that the

ATO does not seem to be more across this issue, given the level of publicity and interest it has generated over asignificant period of time. I would be interested to know, more particularly, if the banks do write off a loan andclaim that as a loss and the bank is, subsequently, able to recover some level of funds — whether it be through

payments from guarantors or mortgage insurers or claims against other third parties — how are those proceedstreated? Are they treated as a capital repayment or are they treated as income for tax purposes? If a bank writesoff a significant amount of a loan it reduces their tax payable. I would be interested in knowing how the ATOtreats any recoupment of those losses.

Ms Carey: The recoupment itself would be treated as assessable income of the bank.Mr VAN MANEN: This goes back to my earlier question. How much work is done by the ATO to ensure that

this is properly accounted for?Ms Carey: Again, that would be looked at as part of a review of a particular bank. It is one of many issues

that we would look at as part of any active compliance activity, in relation to a bank or financial institution,


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ensuring that the banks were complying with the income tax law provisions and how we have explained those provisions should operate through our various public rulings.

Mr RUDDOCK: Is 'review' the same as 'audit'? You keep using the word 'review'. I am anxious to knowwhether banks are, effectively, audited, in relation to the full range of matters that we are raising.

Ms Carey: We have a range of products, from audits to specific issue reviews to ongoing active complianceactivities. The banks are subject to a range of those.Mr VAN MANEN: In light of that response and back to my earlier question, what level of work — that you

are aware of in your current role — is being done by the ATO with the banks to ensure that the tax obligations are being met, in relation to these impaired loans?

Ms Carey: I would need to check with our active compliance teams to see to what extent they are focusing onthis as a particular issue. This is one of many issues we are focused on, in relation to the banks. It is a significantone, from the point of view of the committee, but it is one of many issues that we would be looking at, in relationto both the big four banks and the other banks.

Mr VAN MANEN: Wouldn't you be looking at the banking industry as a whole rather than just the big four banks?

Ms Carey: Yes, we would be.Senator O'NEILL: You indicated that the ATO manages and monitors what is going on in the banking and

finance sector and you said there is quite a degree of interest in their transactions. I want to go to the questions ofculture around banking. We saw the Commissioner of Taxation make some significant commentary in hisopening remarks at estimates, recently, about culture in banks. We have a number of them coming before ustoday.

A question of interest in the media is around the ANZ bank and its interactions with the 1MDB and AmBank inMalaysia. Are you aware of the ANZ bank's interaction with that matter?

Ms Carey: Not personally, no. If it is in the press — is it in relation to tax issues, specifically?Senator O'NEILL: It is in relation to the cultural practices of banks and what people seem to get away with.

We hear, by implication, in some of the recent media around this bank that there is a significant movement ofmoney around the globe that is associated with the leadership in Malaysia. There is an ongoing inquiry with TheWall Street Journal . I think it is a matter of $400 million involved. My understanding is that the ANZ bank has a25 per cent share in that and senior members of the board have been involved in that. Is this the sort of matter thatis of interest, to the ATO, in that it creates a culture? Do you interact with APRA around 'fit and proper person'tests and do you interact with the Australian Federal Police? One of the things that concerns me is that there is asignificant resistance to cultural change embedded in banking practice.

Ms Carey: We have, in fact — I probably cannot and I am not in a position to comment on cultural practiceswithin any large industry. Within the ATO, we have established some governance-best-practice documents thatwe have shared with industry and the taxpayers who we have discussed those governance best practices with — and I am aware that some of the banks have been involved in those discussions — have, effectively, signed on tothat. All we can do is influence what we think should be good governance, particularly from the tax point of view,within institutions like the banks — not just the banks but other corporates as well. When we talk to them, whenwe audit them or undertake a review or an ACA type product — and ongoing engagement with the taxpayer — weget a better sense of how their governance processes, more generally, operate.

Senator O'NEILL: One of the concerns that is exercising the minds of Australians right now is the concernabout multinational tax avoidance. The banks have to be part of the process of moving that money around. If aculture of success, in terms of a career, allows for behaviours that fly in the face of what normal bankingAustralians would think was fair, I would have some concerns about the banking sector at large.

Would it concern you, when looking at incentives for particular behaviours that have been part of what wehave exposed in our inquiry so far, that it is not of sufficient interest to the banks? I will not refer to which one,

but this was a response to a question we asked about incentive structures applying, in banks, since 2008 and anyspecial arrangements that might have incentivised people to behave in inappropriate ways. The bank said: 'This

bank does not keep historical records of staff incentive structures and is not in a position to respond to questionsof this scope.' They wanted to have a specific question about a particular incident.

Does it concern you that given the weight of a Senate inquiry one of the major banks in this country cannoteven tell us what their incentive structures are? Doesn't that go to a failure to monitor, carefully, culture andcultural practices and incentives that create that culture?


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Ms Carey: I cannot comment on particular instances like that. However, I do point out, again, that the issuearound good governance — and I think what you are describing is governance processes within a large corporate —

Senator O'NEILL: Does it surprise you that a big corporate cannot provide the Senate with an answer to aquestion about what its incentive programs have been since 2008?

Ms Carey: I would certainly hope, from a good governance process, that any large corporate, such as a bank,had a process in place to enable those sorts of records to be made available. For example, if we — the tax office — were to ask for similar records, I would hope that those records would at least be available. That is part of thegood governance push that we are trying to encourage across corporate Australia — not just the banks butincluding the banks.

Senator O'NEILL: What are your interactions with the Australian Federal Police and APRA with regard tofit and proper persons, cultural practices and questions of uncertainty about whether banks are behaving in waysthat would be exemplary in terms of corporate products?

CHAIR: We can include ASIC in that list of agencies as well.Ms Carey: Certainly, my area does have interactions with APRA; not so much ASIC and the federal police

but the ATO as a whole does. I would need to take on notice the extent to which those interactions relatedspecifically to the banks.

Senator O'NEILL: I will have one more detailed question on notice.CHAIR: As part of that question on notice — noting that the head of ASIC is making a significant pitch around

culture and likewise the ATO, APRA and even to a certain extent other agencies such as ACCC are talking aboutculture, it strikes me that a whole-of-government approach would be appropriate as opposed to having multiplestrands — if you could come back with a detailed answer about your engagement with the other agencies.

Mr RUDDOCK: I have two questions. First, in relation to the way in which banking profitability has changedover time: when those very substantial increases in profitability have occurred has the tax paid by banks reflectedthat growth? What I am interested to know is whether the tax that is in fact payable is being — at a time of veryhigh profitability — manipulated in any way. There are obviously corporations that have been able to manage theiraffairs so that they make large profits but do not pay a lot of tax. Have the banks' payments — without identifying

particular banks but asking the question generally — reflected that increase in profitability?

Ms Carey: Obviously, that is subject to various timing and permanent differences that create those differences between accounting profits and tax payable. Certainly Australia's large corporates' effective tax rates are now published on an annual basis. They were published last December for the first time — I would need to refresh mymemory on what the numbers were for the banks; I will have to take that on notice.

As for whether that has reflected a trend over the years, again, I suppose that would be disclosing particulartaxpayer information around individual taxpayers' effective tax rates. To be honest, I would feel slightlyuncomfortable in providing that information. However, I think you would get from those transparency figures,which now have to be provided and published annually, a better picture of how the tax payable reflects the profitsof the individual banks from an accounting point of view.

Mr RUDDOCK: I would not want to let the opportunity pass without inviting you to consider the frameworkof law in which these issues are being dealt with. Given that we are a body that can recommend change to the law,does the Commissioner of Taxation have in mind particular changes and enhancements which we might be able to

pursue to ensure that it is able to deal adequately with the full range of issues that this inquiry has broughtforward? I am inviting you, if you think there are ways in which we should be legislating to improve the situation,to make those recommendations to us.

Ms Carey: Certainly I can feed that back to the office. This is specifically in relation to impairment?Mr RUDDOCK: This inquiry goes to a range of issues that impact upon not only the banks and their

profitability but also the situations of others and, I imagine, their tax affairs as well. We are concerned aboutwhether or not particular tax implications might lead to different behaviour by the institutions in relation to theway in which they deal with their customers. That is why the questions were asked by my colleague earlier. Iwould be concerned if the way in which the taxation issues and the deductibility issues are dealt with by the bankscould in fact encourage behaviour which might adversely affect these

Ms Carey: I will take that point on notice.

CHAIR: Following on partly from Mr Ruddock's line of questioning, you have indicated that you would bereluctant to look at the tax affairs of any individual taxpayer. We have seen significant media coverage and work by the ATO for the last 12 months looking at multinational corporations and where they make their profit and


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where they pay their tax or they do not as the case may be. Noting that banks are essentially global operations,much of the finance that they lend actually comes from international markets, has the tax office applied a similardegree of inquiry or audit to the affairs of the banking sector to check that there is no transfer of tax liability outof Australia?

Ms Carey: We certainly have. As part of the international focus we have — any entity that has internationaldealings, particularly with related parties overseas, but not restricted to related parties, of course. We are certainlyfocusing on those transactions to determine whether they are operating within the law as it currently stands, and, Isuppose, picking up on Mr Ruddock's comment, whether we are seeing the need for changes to our current laws.

CHAIR: Thank you for appearing today, Ms Carey, and for your evidence. You have agreed to take a numberof questions on notice. If you could provide those answers to the committee by 12 April we would appreciate it.Thank you for attending today.

Ms Carey: Thank you.


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HARDIE, Mr Robert, Manager, Corporate Affairs, Oceania, Royal Institution of Chartered Surveyors

NOLAN, Mr Peter, Oceania Director, Royal Institution of Chartered Surveyors

PARKER, Professor David, Fellow, Royal Institution of Chartered Surveyors

[10:12]CHAIR: I welcome representatives of the Institution of Chartered Surveyors. I invite you to make a short

opening statement before the committee proceeds to questions.Mr Hardie: If I may, last week we distributed a draft copy of your submission. I note for the committee's

benefit that it has not changed, but I would like to make a short statement if that is fine.CHAIR: Sure.Mr Hardie: The Royal Institution of Chartered Surveyors, RICS, is a professional body that accredited

professionals within the land, property and construction sectors worldwide. RICS regulates and promotes the profession, maintains the highest educational and professional standards, protects clients and consumers via astrict code of ethics and provides impartial advice and guidance. We accredit over 118,000 professionalsworldwide, and all individuals and firms registered with the RICS are subject to stringent RICS quality assurancerequirements. All RICS professionals are also required to keep up-to-date with current best practice through a

program of lifelong learning.The key responsibility of the RICS is always to act in the public interest. To that end, the RICS will always put

the public and the profession ahead of our members. As a professional standards accreditation body, we are not ageneral membership or advocacy organisation. Where we can speak out to improve the quality of the professionand the ability of our members to serve the public interest we will do so.

Valuation is a key focus of the work of the RICS. Since 1976, RICS has prepared a professional guide to assistvalues and conduct of their duties. Now in its seventh edition, the RICS Valuation – Professional Standards ,known widely in the industry as the red book, contains mandatory rules, best practice guidance and belatedcommentary from members undertaking asset valuations. All RICS members involved in valuation are required toconduct themselves in accordance with the red book. Globally, we are moving to institute a program of valuerregistration which will require all valuers to be registered with the RICS and using the red book.

The RICS red book has been written to be consistent with international standards developed by theInternational Valuation Standards Council. The red book itself is used in more than 140 countries, including herein Australia. The purpose of the RICS red book is to provide an effective framework within the rules of conductso that the users of valuation services can have confidence that the valuation undertaken by an RICS member isconsistent with internationally recognised standards, generally known as the international valuation standards, orIVS. The red book not only dictates the technical competency requirements of members but also the ethical,objectivity and disclosure requirements of members undertaking written valuations. The key component of anRICS red book valuation is that it must provide a transparent and auditable trail of how and why the figures in avaluation have been arrived at by the valuer.

I turn to disciplinary action. The RICS will consider any complaint received from a member of the profession,a concerned stakeholder or an individual. Complaints are handled at arm's length by an independent conduct andappeals committee. To demonstrate the independence of the committee, it is chaired by a nonmember of the

RICS, and other members are drawn from within and without the organisation and profession. Disciplinary actioncan involve the suspension or termination of RICS membership. It could also involve the levying of a fine or thetemporary suspension of a member or firm from conducting particular activities. This disciplinary action appliesto all members of the RICS, regardless of the nature of the qualification, be they a valuer, land surveyor or a

building manager.I turn now to forced sale. The RICS notes the committee's earlier inquiries about the notion of forced sale end

of manipulated valuation instructions. We understand the committee has before it evidence to suggest thatauthorised deposit-taking institution may act improperly in the drafting of instructions given to valuers so as todeliberately alter the value of property to the benefit of one or another party. Consultation with the RICS

professional group of valuation, a member of six eminent valuers, has found no evidence of this occurring, to theknowledge of the RICS. Were an RICS member to be a party to such an improper practice they would be referredfor disciplinary action as previously mentioned.

We refer members of the committee to RICS global valuation practice statement, VPS1 paragraph 8 of the red book, copies of which are attached to our submission, which states:


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Whenever the valuer or client identifies that a valuation may need to reflect an actual or anticipated marketing constraint,details of that constraint must be agreed and set out in the terms of engagement . The term ‘forced sale value’ must not be used…

VPS3 paragraph 2 states:The report must clearly and accurately set out the conclusions of the valuation in a manner that is not ambiguous or

misleading, and does not create a false impression.

The red book goes on in detail to explain valuation reflecting an actual or anticipated market constraint and forcedvalues.

We look forward to representing the interests of our profession at this hearing today.CHAIR: Thank you. Could I start off by asking you to confirm again for us from your perspective is the

percentage of people who are operating in the area of being a licensed or registered valuer who are members ofRICS. Do you represent 10 per cent of the industry or 90 per cent of the industry?

Mr Hardie: We have 600-odd members of our organisation who are valuers. What proportion that is of theoverall industry I do not believe we are in a position to say. I am happy to take the matter on notice if I can

provide a clearer response than that.CHAIR: That is important, given your last comment that you are not aware of any manipulation or pressure to

change variation because that may only apply to a very small group of people who are working in that sector.Mr Hardie: As I say, one of the important roles of the RICS is the way in which we regulate our members. To

that extent, were we to be aware that a member of our organisation was doing the wrong thing we have the procedures in place to take disciplinary action.

CHAIR: Sure. But my point is that there may be many others in the industry who are not members of RICS.Mr RUDDOCK: It would relevant for me on that same matter to know whether the banks, for instance, would

only use your members for valuation purposes.Mr Hardie: We would dearly like the banks to only use RICS members for the purposes of valuation. We

would also like them to adopt the red book as the principle means by which they determine the way in which property and assets are valued.

Mr RUDDOCK: You would like it, but they clearly do not.Mr Hardie: We are working with the banks to encourage them to adopt the red book as the principle means

by which — Mr RUDDOCK: I hear that you are encouraging them, but they clearly do not.Mr Hardie: The ANZ does.Senator O'NEILL: Is that the only bank that does?Mr Hardie: At this stage, yes.Senator O'NEILL: And how much market share do you have?Mr Hardie: The RICS?Senator O'NEILL: Yes, of the banks' business.Mr Hardie: I could not say.Senator O'NEILL: Is it large or small, Mr Hardie?Mr Hardie: The ANZ, in terms of adopting the RICS red book, gives instructions to its valuers to say that

they can undertake the valuation in accordance with either API guidelines — the Australian Property Instituteguidelines — or the RICS guidelines. I do not believe we would be in a position to tell you what proportion of thework is undertaken by the valuers working on behalf of the ANZ bank using either our red book or the APIguidelines.

CHAIR: How many of the members of your organisation would work for banks as a predominant proportionof their work?

Prof. Parker: The majority would be either for secured lending for banking or financial reporting for balancesheet purposes. Probably, the majority.

CHAIR: How many of them would be, for example, on panels of providers for banks where a significant

proportion of their work came through standard terms and conditions agreed for a period of three or five years — or whatever the panel terms are — with a bank?


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Prof. Parker: In terms of those that may be on panels, I would assume the majority would be on panels. Interms of whether the bank secured lending work forms a majority of their practice, I would be unable to answerthat.

CHAIR: Could you take that on notice? I am aware you may not be able to answer that, even on notice. Butcould you take it on notice to provide the committee with an indication of that?

Mr Hardie: Yes.Mr VAN MANEN: In a previous answer you referred to the API guidelines, and you have your own

guidelines through the red book. I would be interested to understand what the commonalities and differences are between your guidelines in the red book and what you expect your members to undertake as opposed to the APIguidelines.

Prof. Parker: The API, in common with the RICS and most of the other valuation bodies in Commonwealthcountries — Canada, India and the like — all subscribe to the international valuation standards definitions. We alluse those in common. RICS then has the global red book, which is applicable in any part of the world — China,India, Africa, South America, North America, Europe and Oceania. Then, at a national level, the API has furthernational standards and national guidance notes. Oceania is in the process of developing RICS regional guidancenotes. Generally speaking, they have to be completely consistent with IVS standards, so the times at which you

need something in addition to IVS is potentially relatively rare and only comes up when there is a particularnational issue. The usual one in the context here is something like native title that requires particular guidancenote or technical information paper to address issues that are specific at a national level.

Mr VAN MANEN: In this context, obviously we have had a range of submissions from a variety of peoplequestioning the methodology. A more recent case that I am aware of in my area is: in the space of three months, a

property went from being valued at $2½ million to $900,000 with a $700,000 bond held with Brisbane CityCouncil for infrastructure charges. I find that extraordinary, even though the valuations were done by twodifferent companies. If everybody is supposed to be using the same methodology, the same guidelines and theInternational Valuation Standards et cetera, how do you finish up, in the space of three months, with a property

being valued at $1½ million less than what it was valued at three months ago? We have had plenty of testimoniesand submissions to this committee in respect of this inquiry with similar stories.

What is going wrong in the valuation industry or what is being missed in the valuation industry that these largediscrepancies are occurring? If everyone is using the same rules, regulations and standards this should not beoccurring.

Prof. Parker: Whilst I cannot comment on that particular case, it is not uncommon to have large differencesin valuations. In my role as an acting commissioner on the New South Wales Land and Environment Court, wecan have differences between $40 million and zero. It is entirely dependent on the basis of value and the nature ofinstructions. I would agree that if the basis of value and the nature of instructions are the same in both cases then,unless there has been a very significant movement in the market, it would be surprising to see a significant changein value.

This does vary by property type. For example, CBD office buildings are less volatile. They tend to move less invalue as markets go up and down. Development land is particularly volatile. Broadacre residential subdivisionscan go way up as a market improves and very quickly go way down, as we saw during the global financial crisis.

In the work that we do around the forensic valuation analysis, it is very usual to start with the nature of theinstructions — exactly what the valuer has been asked to do — in order to understand the number the valuer cameup with. Unless it is an apples with apples comparison, we cannot necessarily equate two valuers' opinions unlessthey are on the same basis.

Mr VAN MANEN: So that goes to the heart of many of the concerns that have been raised by submitters tothis inquiry as to the nature of the instructions from the banks. If the original set of instructions when the loan wasoriginally funded and the property was valued — say in 2008 or earlier, and subsequently in 2011, or 2012 or2013, whenever the date was — say, in 2011 or 2012, were materially different from those in an earlier periodwhen the loan was originally funded, you are potentially going to get a substantially different outcome invaluation. The consequence of that is that the borrower could, potentially — as in a number of cases that have beentestified to this inquiry — become in breach of their lending covenants as a result of the different set of instructionswith regard to a valuation from the bank involved.

Prof. Parker: It could be.CHAIR: So what are the implications then, Professor Parker, if the rules of engagement between banks and

valuers and consumers were changed such that there were consistent guidelines at the point of issuing a loan and


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at the point of the bank assessing whether or not a loan has become a doubtful loan? It strikes the committee thatit appears that two standards are applied. We seem to get very optimistic valuations when people are trying towrite business and very pessimistic valuations when people are trying to secure their risk. Would there beunintended consequences for your industry or for the consumer if there were to be a narrowing of that window ofinstructions?

Prof. Parker: The instructions should be to a large degree relatively common. If they follow the red book andwhat we call VPS 1, valuation practice standard 1, there are a dozen things that are to be included in the letter ofinstruction. Those dozen things are to be considered in the valuation process and those dozen things are to bereported in the valuation report. So, if they were exactly the same, that is one scenario. If the instructing partyincludes further assumptions, then that can materially change things. And the most common assumption, as MrHardie referred to, will be some form of limited marketing period. So, if the property market has collapsed, the

borrower is on the verge of collapse or default and the bank attaches further assumptions of, say, a three-monthmarketing period, then that could significantly change the assessment of value.

CHAIR: And that is the heart of what I am getting at. If you look at the accrued interest payments, perhapsretaining the property on the market for 12 months, it strikes me that that is significantly a smaller cost to pay thanthe dramatic discount which is often realised in the fire sale or the distressed sale situation. So my question is: ifthere was a constraint that the valuation upon which the business was written had to match the valuation method,the instructions, upon which any risk measures were taken, would that unduly constrain your business ordisadvantage the consumer, in your opinion?

Prof. Parker: If we set methodology aside — because that is a slightly different thing — in terms of process, ifthe instructions were the same the first time around and the second time around, then you would receive avaluation that was consistent with the instructions. If, the first time around, the instructions were to assume areasonable marketing period, then the value if it was a buoyant market might assume a three- or six-monthmarketing period. If it was a depressed market, the marketing period may be assumed to be considerably longer.

Senator KETTER: Chair, I want to follow up on that. Professor Parker, I am just looking at your red book, at4.8. I know you do not like to use the term 'forced sale', but you talk about the circumstances there at 4.7 and 4.8,and at the end of 4.8 you refer to the fact that, 'the term is a description of the situation under which the sale takes

place and so it must not be used as a basis of value'. So am I correct in assuming that should mean it does not have

an effect on the actual valuation that you provide?Prof. Parker: No, the basis of value is either market value or investment value. There are only two bases of

value.Senator KETTER: I see.Prof. Parker: Within each basis you can have a variety of different forms of value, depending on the

assumptions that are adopted. The valuation practice standards are written to be globally applicable, so theyshould work as effectively in China as in South America. But they should also allow scope for assumptions withineach country to deal with particular conditions or particular circumstances within those countries.

Senator KETTER: There was market value and what was the other — Prof. Parker: Investment value.Senator KETTER: And depending on the marketing conditions, there could be quite a substantial difference

between the two?Prof. Parker: There could. Market value is generally defined as the value to a hypothetical purchaser,

hypothetical vendor, reasonable marketing period, arm's length transaction, consistent with the Spencer decisionin 1906, I think. Investment value, otherwise known as worth, is the worth to a particular party. So certain

buildings may be worth more to particular parties than to hypothetical vendors and hypothetical purchasers because they particularly suit that party. So most of the world works on market value, but there is the basis ofinvestment value, which may come up, for example, when an institution is buying a major office building becauseits target rate of return may mean that it can pay a number higher than another institution that is working on adifferent target rate of return.

Senator KETTER: I see.CHAIR: Can I go to where you said 'there were a number of assumptions' as part of a valuation. We have had

some submissions that have talked about a valuation that was obtained and then, in the actual forced sale, ratherthan the property being put in the hands of a commercial estate agent it was put into the hands of a residentialestate agent. The form of advertising, according to the submission, was grossly inadequate, to the extent that an


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auction was held on a day after a public holiday and only the owners turned up and a couple of casual passers-by.In your 'assumptions', do you state that your valuation is based on the appropriate agent being appointed for thesale of the property, or is the bank free to take your valuation but then give the sale process to whomever theywish, to the receiver in this case.

Prof. Parker: There are two things going on there. There is the valuation process, which assumes 'prudent parties acting reasonably'; and there is then whatever the bank chooses to do as part of its operations. So thevaluer can only provide the bank with his or her opinion of value. That is one input, usually into a bank's lendingdecision or foreclosure decision. The banks generally have another range of inputs they put into that decision, andthen how they choose to effect that decision really is up to the bank.

CHAIR: Sure. What we are looking at here, though, is trying to protect the rights of the consumer, in this casesmall business. If the valuation says that fair market value for this property in the current climate in terms of realestate prices is X, on the basis of it being marketed for a suitable period by a suitable agent, then the best interestof the consumer is if the bank then engages a suitable agent for a suitable period, whether directly or through thereceiver or however. My question goes to: what are the unintended consequences for your industry, in terms of

professional indemnity and all the other things that flow, if we were to constrain the banks to act in accordancewith the assumptions that underpin your valuation?

Prof. Parker: It is always open to the valuer and the bank to extend the assumptions to include things likeusing a commercial real estate agent rather than a residential real estate agent, taking the property to auction ortaking it to private treaty or taking it to tender, depending on which one is more suitable. There is no limit to thenumber of assumptions that can be built in. But the overarching assumption of prudence and reasonableness — aswe see in matters that come before me in court quite regularly; parties sometimes do not act prudently andreasonably — if that works its way through to a professional negligence action against the valuer, then one wouldthink the valuer claiming an assumption the parties were acting prudently and reasonably would say, to use yourexample, using a residential agent to sell a commercial property a day after a public holiday, was neitherreasonable nor prudent.

CHAIR: What you describe, though, is a situation where the consumer is not necessarily protected by yourindustry — because you just operate in accordance with an assumption — but at the moment they are not protected

by anybody else, it would appear, in terms of holding the ADI or the receiver to account for being prudent and

reasonable. Do you have any suggestion as to how that gap could be closed?Prof. Parker: Only in strengthening the law around foreclosure and the regulation around foreclosure.

Generally, following most property collapses we have had over the last 30 years we have strengthened theregulation around unlisted trusts, listed trusts, property syndicates. As government strengthens the legislation andstrengthens the regulation, some operators will find further ways around it.

CHAIR: Last question before I go to Senator O'Neill: we have had some submissions that have highlighted procedures within banks when they are assessing the equity of a consumer. Notes in the files have indicated this particular applicant for a loan has this cash position or cash flow and this amount of securitisation, and they tendto nominate it as either 'sensitive' or 'non-sensitive'. Without seeing a definition, I assume sensitive might be their

private residence; non-sensitive might be an investment property or something that is not particularly damaging. Ihave not seen a definition for that. I have two questions. Firstly, is the valuation industry aware of a definition ofsensitive and non-sensitive?

Secondly, in placing a value on a property, do you ever make reference to or highlight the fact that what you arevaluing is purely a commercial or an investment grade security or is something that is patently and obviously asensitive asset to the individual involved?

Prof. Parker: In terms of familiarity with these terms, no, I have not come across them before. In terms ofhow one goes about valuing things, for example, if it were a small warehouse with a single tenant, then theinstructions in the report would probably talk about the likely market, the likely marketing period. If it were theresidence of a party that, for example, was a particularly large or palatial residence on a very large area of land ina part of Sydney where you might not normally expect such residences to be, that would probably get quite a bitof attention in the report, because it would significantly affect the marketing period and the likely buyers for the

property.Senator O'NEILL: Thank you very much, Professor Parker, for your evidence this morning. I am thinking of

so many small businesses and businesses of the scale that we have had present their situations to us. The commonunderstanding is a valuation is a valuation is a valuation. It is only in the course of this inquiry that we havestarted to find out a lot more detail. Today is the first day that I have heard this difference between market value


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and investment value in terms of worth. If we are to create some practical outcome from this inquiry, it wouldseem to me that the report that you produce — you have talked about the valuation reports, and it starts off withgeneral principles — states that there must be clearly and accurately set out the conclusions of the valuation. But itis becoming more apparent to me that it is not the conclusions of the valuation that people need to be informed of.It is the assumptions, the directions that are given, the basis of value and the nature of instruction that seem tohave a very significant impact on the type of valuation that is achieved. While there are some directions that theseneed to be read together, we heard evidence early in the inquiry that the valuation, although paid for by the clientof the bank, is owned by the bank. We have had a little bit of movement saying, 'No, if the client is paying for it,

perhaps they should have access to it as well. But my understanding is that that is not common. People have tofight and ask to get the valuation. If they get the valuation, they will not necessarily get the nature of theinstruction or understand the complexity of the nature of the instruction. Am I describing the reality in a fair andaccurate way and, if so, what redress is required to make this a lot more transparent?

Prof. Parker: It may vary potentially quite a bit between individual circumstances, so I cannot comment onthose. But, if a valuer were to be working on the red book then the ninth of 12 things that he is required to state inhis instructions that he agrees with his client are in the assumptions and the special assumptions. The red bookthen says, 'Well, if that is in the instructions, that should be mirrored in your valuation process in the methodologyyou adopt and it should be very clearly stated in your valuation report. The 12 things that are flagged in theinstructions should be reflected in the valuation and stated in the valuation report. So there should be a flow-through effect, where you should be able to read, from the opening of the report, the preamble and theinstructions, and see those instructions being put into practice, see the effect on value and the commentary in thereport at the end.

Senator O'NEILL: Could you provide a sample of a valuation and indicate for us clearly where it is easy forsomebody to see what the instructions are?

Prof. Parker: I do not personally have one.Senator O'NEILL: On notice would be fine. I am sure you would be able to access one at some point in time.Prof. Parker: Yes. Given that they are often proprietorial documents between clients — Mr Hardie: We will engage with our professionals group and find something that is suitably de-identified that

we can provide to the committee.Senator O'NEILL: Thank you. That still does not give me great confidence that this is going to be an easy

document for people with small business loans who are engaging in commerce to be able to read without toomuch translation by a professional. I also want to frame your answer in an understanding of how much of themarket you have and how much of the red book that you just referred to was actually applied, which was theanswer we did not get at the beginning to the chair's question of how much of the market you guys cover.

Mr Hardie: We are prepared to take that question on notice. I suppose one of the things that I gleaned fromProfessor Parker's evidence this morning is that this is detailed work and it is something that requires someexperience and understanding of to understand properly. The end user, at the end of the day, needs to be in a

position to ask a question if they are unsure about what something does or does not mean. But these are technicalvaluations undertaken for a particular purpose. If what the committee is seeking is greater transparency or perhapsmore easily defined terms in the way in which a document is framed, the committee can of course recommendthat. But I am not certain that that is something — we believe the red book, obviously, goes so far as to explainwhat those assumptions need to be that are built in.

Senator O'NEILL: We are familiar with the concept of plain English and reconstructing some documentsover recent years to make them more accessible for people with a general reading capacity to read, so obviouslythat is something we could talk about. But could I go to the issue of who owns the valuation and who is the client.In point 4 of VPS3 — and this was a situation that came up quite frequently — it says:Where multiple reports are to be made to a single client over a period of time, with identical terms of engagement , it must bemade clear to the client and to any others who may rely on the valuation advice provided, that the terms of engagement andform of report must always be read together.

What we have been discussing, though, is the fact that, in many instances, banks appear to have been a singleclient who asked for a very different kind of valuation. Let me be more practical. One property is being sold and,at one point in time, as the chair indicated, it has a particular value and a particular form, and the bank — let us sayit is CommBank for the purposes of this argument — changes the nature of the valuation that it wants. Is thatconsidered a new job? Is there any requirement for you as a valuer to indicate: 'This report was delivered six


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months ago. These were the assumptions in it. Now I am doing a completely new job. I have changed my set ofassumptions'? How do those sorts of documents talk to one another in the process that you manage?

Prof. Parker: I think the clause you went to in VPS3 deals with institutions revaluing their office shoppingcentre portfolios on a three-, six-, nine- and 12-monthly basis. Somebody like Westfield will value a portion oftheir shopping centre portfolio every three months on an ongoing basis over the year. The second scenario thatyou looked at, where the assumptions change — yes, that is a new job; that is a different job. In terms of yourquestion as to who the valuation is for, the second of the 12 things that should be identified in the instructions,according to the red book, is the identification of the client and any other intended users. Within the valuationlitigation law, there is a vast body of law on who can and cannot rely on valuations, and scenarios where bankshave commissioned them but borrowers have paid for them. It is a particularly vexed area. The red book is veryclear to say, 'Who is your client?' and 'Who are you, as the valuer and the client, assuming is going to rely on thisreport?'

Mr RUDDOCK: That goes to the very question: is the bank required to give its instructions to its client so heknows the way in which the bank is instructing the valuer? And does the valuer have to inform the client of the

bank as to the valuation that has been made? They challenge the valuation. Your instructions do not make it clearthat they are entitled to that.

Prof. Parker: No. On the first point, it is entirely up to the bank, when it drafts the letter of instruction, as towhom it is prepared to make the valuation available to.Mr RUDDOCK: It is entirely up to the bank?Prof. Parker: Yes.Mr RUDDOCK: That is probably the answer that — Prof. Parker: Sorry; if the bank is the instructing party.Mr RUDDOCK: Even if somebody else is paying?Prof. Parker: Yes.Senator O'NEILL: It is very interesting to get some clarification around that.Prof. Parker: It tends to be a feature of the banking industry and where the banking industry perceives the

risk may lie.Senator O'NEILL: Professor Parker, you sound like you have been in this field for a long period of time.Prof. Parker: A little while.Senator O'NEILL: You have probably seen people come through your working life — in the way that we have

seen before this committee — in a very distressed situation that may, in some part, be due to failure of managementof their business, or perhaps not. Can you provide any recommendations about the nature of ownership of thevaluation that needs to change? This is a transaction that affects parties at either end — both the bank and the

business owner. Are there any proposals from your industry to provide a less power-differentiated relationshipwith the valuation of a property that is clearly of great importance to both the bank and the business owner?

Prof. Parker: One would assume that it would be within the powers of the bank to agree to provide a copy ofthe valuation to the borrower, so at least the borrower sees the valuation.

Senator O'NEILL: That is an assumption that we definitely would have to say is not the case. At the beginning of conversations that have been reported: 'Yes, it does seem fair that if you are paying for it, maybe youshould have a look at it.' It still does not go to where we need to go, which is to actually have a deepunderstanding of the set of assumptions that are embedded in this valuation, and whether, indeed, it is a market-value valuation or an investment-value valuation, or what assumptions have been embedded in it.

Prof. Parker: As Mr Hardie said — at the risk of pushing our own barrow — if the requirement on the bankswas to follow the red book, with a secondary requirement that came out of this committee that the copy of thereport should be provided to the borrower, then that would appear to address some of the issues you raise.

Mr Hardie: If it would assist the committee, we would be happy to take that on notice and raise that with our professionals valuation group to determine whether they — as the eminent group of valuers in the profession thatthey are — believe that there are some things that could be done to encourage greater interoperability, I suppose, ofthat valuation advice once it has been provided, based on who the client is, who has paid for it and that kind ofthing. You might like to put some more matters on notice that we can take away and discuss with them, or we will

just take this matter at face value and discuss it with them and come back to the committee with a response, if thatwould assist.


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Senator O'NEILL: That would be helpful. Chair, this time I would like to ask about desktop valuations, butwe might run out of time.

Mr RUDDOCK: I want to understand the industry. You represent 600 in Australia. I imagine there are tens ofthousands of people who hold themselves out to be valuers.

Mr Hardie: We do not believe there are more than 10,000. We have 600 members — Mr RUDDOCK: Okay; 10,000. You have less than one in 10. I just want to get it into perspective. You want

to recruit — I assume you do. You want to cover the field — I assume you do. Who regulates the other 9,000?Prof. Parker: I think the API submission nominated that 4,000 of their membership were actively undertaking

valuations. In those states that still have registration, the state government registration body would have aregulating role. If they are a member of the API, the API would have a regulating role. If they are a member ofRICS, RICS would have a regulating role.

Just to address your earlier comment, that you assume we try to cover the whole market: I am not sure that wedo. The question on notice may provide greater illumination, but my general understanding is that RICS memberswill be dealing with larger properties rather than smaller properties. The general valuation profession may do lotsand lots of houses for mortgage purposes all over the suburbs of Sydney, Melbourne and Adelaide. RICSmembers might be more likely to be valuing business premises, office buildings and shopping centres, perhaps,rather than houses.

Mr RUDDOCK: When I read the first dozen paragraphs about your organisation it says that you are a professional body that accredits professionals and they are of the highest educational and professional standards — then it says nothing further about education. What are the educational standards?

Prof. Parker: We have a program of partnering with several hundred universities around the world in thedelivery of property education. RICS deliverers property education in land, building and construction, so weaccredit or partner with universities offering land surveying programs, quantity surveying programs and propertyvaluation programs. In countries where there is no infrastructure for education, such as India, we established ourown university in order to offer the courses. We were certainly offering courses by correspondence during theSecond World War to prisoners in Changi jail. We generally developed the curriculum for property courses thatformed the backbone of most courses offered around the world today. We have an annual review process wherethe RICS and the university get together to see if anything has happened to the course. We have a five-yearlyformal partnership review meeting system, and our education accreditation system is based on competency. Whatwe are wanting to check is that the students going in are reasonably smart students, the quality of teaching is of anappropriate level, the quality of research being undertaken by the institution is at an appropriate level and theemployability of graduates when they come out is at an appropriate level, because usually the best test of theuniversity's programs is whether or not their graduates can get jobs.

Mr RUDDOCK: In terms of your supervisory role, how many people did you expel this year?Mr Hardie: We could take that on notice. We publish in our monthly magazine all of those members who

have been confronted for disciplinary action. You will note from our submission we removed or expelled a fellowof the institution who was the former Surveyor General here in New South Wales, and that was published. Thatgentleman lived on the Central Coast, and I believe the Central Coast Express Advocate at the time published anarticle suggesting that he had been expelled from the organisation. I can take on notice to find the number that we

have expelled. But I believe, anecdotally — we were kicking this around in the office the other day — the number isvery small, which can be read one of two ways.Mr RUDDOCK: It does happen; that is all I am interested in. In terms of the other 5,000 or 9,000

organisations, how do you see the other supervisory bodies? Or are there people out there practising as valuerswho have membership of no supervisory body?

Mr Hardie: I do not believe we would be in a position to professionally or otherwise critique the work thatother organisations do. All we can do is speak about the work we do to regulate our members, and we believe wehave the best regulatory system when it comes to ensuring the highest standards of professionalism within the

profession by our members.Prof. Parker: Just to pick up on Mr Hardie's earlier point, expulsion is only one form of redress. We fine

members, we send them to do further education, we put them on periods of probation, and I think we are the only professional body that publishes those that have been thrown out of the institution.

Mr RUDDOCK: Regarding the shortcomings that we are concerned about in relation to valuation practice,we might assume that, given your red book and all your requirements and the prospect that people might be


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expelled, all your people are perfect. But there are another 5,000 or 9,000. We do not know — and you cannot eventell me — whether or not any supervisory arrangements are likely to be adequate or not, because you are not

prepared to compare what they are offering with what you are offering. I have got no idea.Mr Hardie: What I will say is that our organisation — I have made this comparison before — is not like the

RSL where you pay your dues and you get in and you go to a meeting every couple of months. We require ourmembers, if they wish to be members, to go through a rigorous process of accreditation, which means that, asProfessor Parker was saying, in order to get in the door in the first instance you have to have achieved the highestlevels of academic qualification and to have proven yourself to be worthy of membership of the organisation.That, we would like to hope, would be sufficient, if you will pardon this expression, to weed out those who

perhaps are not capable of operating to the high standards which we would require. It may well be that there aremembers of other organisations who could not be members of our organisation.

Senator O'NEILL: They might be more attractive if you are trying to get advice.Senator KETTER: Given the time, I will try to compress my issues into one question. I note that in your

submission you say you are working hard to engage banks and other firms to see the adoption of the red bookthroughout Australia. You have indicated that ANZ is one such institution. Are you surprised that the red book isnot used as much in Australia as it is in other, comparable countries; and does the fact that institutions do not

apply the red book restrict your members' ability to work for those financial institutions?Mr Hardie: Yes and no is the answer to the second question, and I will answer both this way. Whilst the

RICS is almost 150 years old, we have only had a professional presence, in terms of a staffed office, in Australiafor the last 10 to 15 years. Over that time, we have been working with the banks and universities and in the

broader external stakeholder environment to improve recognition of RICS and our members in the work that theydo. This is a work in progress. We would of course like to see the red book adopted by all the banks, and we areworking with them towards that goal. This is just a matter of time. So, yes, we are working towards that.

In terms of the impact that it has on our members, where we become aware that a member is restricted fromoperating by virtue of being an RICS member — because as a result of being an RICS member they are notrecognised for doing particular types of work — we seek to engage with that organisation. One example is thatsome local government areas, when they are conducting a valuation, require that valuation to be undertaken by a

person with professional qualifications recognised by another organisation. We would seek to engage one-on-one,

where we can, with that organisation to say our members are equally well qualified as the members of the otherorganisation. It would be great if we had a level playing field such that our members could participate in thatwork as well.

CHAIR: Mr van Manen.Mr VAN MANEN: I have first a brief statement and then a question. I am interested in the discussion about

education, and I would say there is a vast difference between education and applying that through experience. Ithink experience is actually far more important than the basic education, and we have seen that in other areas.

I am interested in your view on the marketing practices for properties that are being sold — specifically, as yousee quite commonly as part of the marketing campaign by a bank or the agent appointed by a bank, where the saleis a mortgagee-in-possession sale. What is the consequent effect of that style of marketing campaign on therealisation value of the property; is there actually value in not allowing properties to be marketed on the basis thatthe sale results from mortgagee in possession; and, in doing that, is there the potential for a higher realisationvalue of the property on sale?

Prof. Parker: To deal with the first issue, I concur that experience is important, and so, when a studentgraduates from an RICS accredited university, they are required to do at least two years professional experience

before they can apply for professional membership — before they are allowed to do anything, essentially, on theirown. The ability of graduates to get through their two-year assessment the first time seems to vary quite a bit eachyear, so quite a few have not gained enough experience and they have to come back and do it again.

In terms of whether 'mortgagee in possession' is a prudent thing to place in advertising material, it may or maynot be. Generally, what we might call mortgagee-in-possession or forced sales would be disregarded from the

point of view of the Spencer test as not being evidence of an arms-length transaction or a transaction that had areasonable marketing period. One can see that, for the bank, selling the property promptly is better than having itsit there for a very long period of time. If the borrower is paying some form of penalty interest, selling the

property promptly is probably beneficial, rather than having it sit there for a long time. Very often we notice that,in localised markets, the most likely buyers know the vendor is in financial difficulty; they probably know the


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bank is going to sell or sell them up. So it is knowledge in the market that is effectively confirmed by the 'for sale'sign. I am not aware of any research or control tests as to whether it does or does not make a difference.

CHAIR: Thank you for attending today's hearing and for your submission and evidence. You have agreed totake a number of questions on notice. I would ask you to return those to the committee secretariat by 12 April.


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BROWN, Mr Gerard, Group General Manager, Corporate Affairs, ANZ Banking Group Ltd

HODGES, Mr Graham, Deputy Group Chief Execuive Officer, ANZ Banking Group Ltd

[11:11]CHAIR: The committee will resume. We are today taking evidence from representatives from the ANZ bank.

Thank you for attending today's hearing. The committee has received your submission, No. 49, andsupplementary submission. Would you like to make an opening statement before the committee proceeds toquestions?

Mr Hodges: Yes, we will make just a short statement. We welcome the opportunity to appear again before thecommittee. As you mentioned, we made a supplementary written submission to the inquiry addressing evidencegiven to the committee hearing in Sydney on Tuesday 16 February. We have also provided the committee with aconfidential response to customer issues raised in that hearing and in public submissions made by ANZ customersto the inquiry.

I would like to just take a few minutes, if I could, to address a couple of these claims. On the first one, the purchase of Landmark Financial Services, ANZ did not purchase Landmark for 16 per cent of the value of theLandmark Financial Services loan book. ANZ acquired the loan book for approximately $2.2 billion. That was

the total of the loans outstanding by the customers, which is a principal and small amount of accrued interest, less provisions for those losses. The sale price of the Landmark deposit book was also the book value, which wasapproximately $300 million dollars.

On the Landmark to ANZ transition, concerning the transition of customers from Landmark to ANZ, let merepeat what I said at the committee back in November: there have been examples where ANZ could have done a

better job, in the transition to ANZ management, in the way in which some customers were treated. Having saidthat, it is incorrect to suggest that customers transitioning from Landmark to ANZ had long-term loans truncatedto periods of two to six months. Customers in default are given time to sell down their assets and get back ontrack. It would appear that a six-month deadline given to sell an asset may have been mistakenly construed as atruncated loan period.

The third area is proceeds from sale. It was also suggested in the hearing on 16 February that the bank hasretained the surplus from the forced sale of properties after the loan interest and bank costs have been repaid.

ANZ rejects this. We know of no situation where this would happen and will happily review any case brought tous where it is alleged that this occurred.In the area of ANZ's approach to customers in difficulty, there have also been allegations that ANZ enforced

action has been taken at short notice. We are unaware of any case where this is correct. We reiterate that ANZaims to work with commercial customers in default to help them get back on track. Less than 0.1 per cent of allcommercial customers are subject to ANZ enforced insolvency action. As I said to the committee in November,we estimate that, on average, the time between ANZ first issuing a default notice and actual enforcement is about1½ years for non-agricultural customers and over 2½ years for agribusi

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