It is timely to re-examine how far a bank’s duties extend to its customers.
The Senate Economics References Committee recently published a report – Agribusiness managed investment schemes – examining the Great Southern and Timbercorp collapses. These events had devastating impacts on largely inexperienced or unsophisticated retail investors. In the course of making its recommendations, the report examined the involvement of banks and considered that investment lending was instrumental in facilitating the significant financial losses for retail investors.
Does a bank owe a general duty of care to investor borrowers?
Banking, the provision of financial services and credit are all areas regulated by legislation. The banker-customer relationship is, however, essentially one of contract. The general law does not impose a duty of care on banks.
The National Consumer Credit regime has however imposed statutory obligations onto the banker-consumer borrower relationship since 2010 but not in respect of investment or business loans.
Outside the provisions of the National Consumer Credit regime, business borrowers have occasionally succeeded in establishing that a bank owed more than simply contractual obligations. One example was the 2004 decision of Timms v CBA; CBA v Timms  NSWSC 76. In Timms, the borrowers sought a loan to finance the purchase of a business. The bank investigated the viability of the proposed business and although it was concerned that the business was in a ‘parlous financial state’ proceeded ultimately to approve the loan. The business entered voluntary administration. The borrowers succeeded and made out that the bank represented to them that the business they proposed to purchase was viable when in fact it was not.
Agribusiness and investment lending
The National Consumer Credit regime also does not presently apply to investment loans (other than interest only residential investment loans).
The Bitter Harvest report noted that technically the banks were “legally distant” from the loan arrangements – that is, banks were not directly involved in arranging the loans and therefore no legal duty of care was made out. The committee did say that the banks should be held responsible for allowing borrowers to enter into unsafe loans and “ethically … owed a duty of care to borrowers”. In the case of Great Southern, the Bendigo and Adelaide Bank funded Great Southern Finance which was the lender to investor borrowers and in the case of Timbercorp, ANZ financed Timbercorp Securities.
The Senate report has recommended that investment lending in general be brought under the purview of the National Consumer Credit regime.
The Senate report has also recommended that responsible lending practices be implemented for finance for investment loans advanced to retail investors. The recommendation is that this provision apply both when a bank lends directly to an investor, and where a bank lends to a managed investment scheme such as Timbercorp Securities or Great Southern Finance. The effect of doing so would impose responsible lending obligations on the credit provider in providing or arranging credit for investment purposes.
Investment lending, whether margin loans or loans for investment in other financial products, carries substantial risk and has caused substantial losses. Although changes come too late for Timbercorp and Great Southern investors, for retail investors in future the strengthening of consumer protection around investment lending is a positive development.