An elderly woman who was roped into putting her house on the line for her daughter's failed business has tearfully told the Banking Royal Commission that she "would have signed anything for her".
Appearing via video link on Monday, Carolyn Flanagan – who suffers from a laundry list of health problems including cancer, glaucoma, osteoporosis and pancreatitis – told the Commission how in 2010 she was taken to a bank branch by her daughter.
Ms Flanagan struggles to speak following surgery to remove tumours from her throat and tongue and is legally blind due to her deteriorating vision. She said she "vaguely" remembered going to the Westpac branch.
"A woman and a man was there in a side office," she said. "They had to read it out to me. They pointed to where I had to sign."
Ms Flanagan took her case to Legal Aid NSW in 2013 after her daughter and her daughter's partner – whose identities have been suppressed by the Commission – defaulted on the loan and Westpac notified her of its intention to sell her house.
A dispute was lodged with the Financial Ombudsman, which found in Westpac's favour. The matter was then elevated by Legal Aid team to a member of Westpac's hardship team, who looked into the issue.
Westpac eventually agreed to allow Ms Flanagan to remain in her home until she dies, after which it will sell the property to recover its A$170,000 (NZ$185,000). Westpac alleged the initial document was signed by Ms Flanagan's solicitor, indicating she had received independent legal advice.
At times struggling to hear the questions, Ms Flanagan said she didn't believe she had received legal advice. "I can't even remember," she said.
"Just the woman and the man on the other side of the desk. I would have gone straight to Legal Aid, definitely, if I was told to get legal advice."
But she conceded that it was likely she would have signed the guarantee anyway. "I would have signed anything for her, love," Ms Flanagan said. "In hindsight, I have to be honest about that. If you can't help you children who can you help?"
Ms Flanagan said she thought the loan was only for $50,000. She was cross examined by Westpac's counsel, Matthew Drake SC, who suggested that "your memory of what you knew at the time you entered into the guarantee is very poor, and you don't really remember as you sit there how much the loan was for".
"No, love, I don't," she replied.
Dana Beiglari from Legal Aid NSW, who represented Ms Flanagan, said her clients in these sorts of cases "often have limited recollection of the circumstances of signing up to the guarantee".
"Very often because the child has done most of the logistics and sorted out the paperwork with the bank or broker," she said. "Nearly all of the cases I have seen, the client did not understand the detail of the financial arrangement they have signed up to."
Despite the fact that the seriously ill Ms Flanagan would be rendered homeless should Westpac call in the guarantee, Ms Beiglari said she was initially told by Westpac that staying in her home would "not be a possible resolution" to the dispute.
Alastair Welsh, Westpac's general manager commercial banking, told the Commission Ms Flanagan's testimony was confronting, but said his "review of the file shows we followed the processes that I would have wanted the bank to follow".
"There wasn't a problem with the technical process," he said.
Earlier, the Commission heard that Australians pressured into putting up their own home as security for a younger relative's business venture had been targeted by banks who go "straight" for their assets rather than the borrower's when things go south.
According to the man tasked with reviewing the Code of Banking Practice for the Australian Banking Association, many guarantors were offering up their assets "without understanding the risks".
"At the extreme end, this could be the product of elder abuse, familial abuse," Philip Khoury from governance and accountability firm Cameron Ralph Khoury told the Banking Royal Commission on Monday.
"In fact, even the guidelines the banks have put together for this alert bank staff to the possibility of coercion in obtaining guarantees for someone else's loan, so this was clearly an issue.
"[Even] without crossing over the line into abuse, it was very clear people were wanting to help family members or associates and getting themselves into a highly risky position they were not clear about."
Mr Khoury's review made 99 recommendations, 96 of which were accepted in some form by the ABA in its updated code submitted to the corporate regulator for approval in December.
Under the changes, banks will be required to provide small businesses with a minimum 30 days' notice to change conditions of loans, and three months' notice before terminating a loan facility. Contracts must also be easy to understand and written in "plain English".
"The new draft code goes a fair way towards strengthening protections for guarantors," Mr Khoury said on the first day of the third round of hearings, which will focus on banks' lending practices towards small- and medium-sized businesses.
"[They include] a three-day cooling off period, better information prior to signing up, commitment to providing information to them of any underperformance of the loan during its life, and providing them with assurance that should the loan be called in, that the banks would begin with the borrowers assets rather than going straight to the guarantors' assets."
One of Mr Khoury's recommendations, that guarantors should be absolved of liability if the bank was found not to have followed the process to the letter, was opposed by the banks as "unfair" and did not make it into the updated code.
Mr Khoury said the "argument was there needed to be a very serious consequence for the banks in order for them to adhere to the guarantor provisions religiously", but the banks feared the system could be "gamed".
He said his review heard from many small businesses who were "horrified" at "discovering the extent to which banks could unilaterally vary contract terms" such as raising interest rates or even calling in the loan altogether as a result of a breach of a "non-monetary clause", even when a borrower continues to make their repayments.
"We made a recommendation consistent [with the Small Business Ombudsman] that other than illegality, there should be no grounds for defaulting a loan provided the borrower is continuing to meet their repayments," Mr Khoury said.
He described the language in the relevant section of the ABA's new draft code as "weasel words". "It's a classic example of the way in which the language and framing of the code is small-business unfriendly," he said.
"The array of provisions there on my reading of it, it looks as if there's enormous discretion for the bank to use on or another of those circumstances to justify taking default action."
Earlier in the day, senior counsel assisting Michael Hodge, QC, outlined a number of submissions from the major banks relating to small business financing.
He revealed that CommBank had refunded A$2.7 million (NZ$2.9m) to small business customers for "double-dipping" on overdraft fees, but failed to report the incident to the Australian Securities and Investments Commission as a significant breach.
ASIC has also been notified of CommBank and Bankwest small business customers being charged fees for merchant terminals despite not using or having stopped using them.
The third round of hearings kicked off today and runs for two weeks until June 1. The commission held its first round of public hearings from March 13 to 23, with consumer lending practices under the spotlight. The second round focusing on dodgy financial advice ran from April 16 to 27.
From bank staff accepting bribes in cash-stuffed envelopes and retirees losing their homes due to poor advice, to dead people being charged for services and planners impersonating their own clients, each round of hearings has thrown up shocking new revelations almost by the day.
Last month, the drama hit a fever pitch when one witness collapsed on the stand and had to be removed on a stretcher. Dover Financial Services owner Terry McMaster had been giving evidence for more than two hours when he turned "white as a sheet" and began to breathe heavily.
The latest hearings come amid revelations staff at CommBank fraudulently deposited their own money into children's inactive Dollarmite accounts without the parents' consent in order to accrue bonuses and meet targets.
Meanwhile, former CommBank staffers have described the bank's "ruthless" tactics and toxic workplace environment, telling 60 Minutes on Sunday they were under intense pressure to sell products to customers even if they suspected they couldn't afford them.
The Royal Commission has now received 5540 submissions, 64 per cent relating to the banking industry, 10 per cent to financial advice and 10 per cent to superannuation.