Bank of Melbourne used customer's $100k as 'bargaining chip'

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Bank of Melbourne used customer's $100k as 'bargaining chip'

By Clancy Yeates

The Bank of Melbourne tried to deal with a mistake by one of its bankers by locking up $100,000 of a customer's money in a term deposit that could not be withdrawn, the royal commission has heard.

The bank's decision, made without any consideration of whether it was legally entitled to do so, was an "abuse of the bank's power", senior counsel assisting Rowena Orr said on Friday.

As it continues to probe small business lending, the royal commission heard former policeman and Westfield executive Brad Wallis borrowed $516,000 from Westpac-owned Bank of Melbourne to buy a restaurant and five-star bed and breakfast in 2016.

The banker was keen for the loan to be classified as a residential property, despite the valuer advising it was a commercial property, and Ms Orr suggested this was because the bank would lend more money against residential properties. The banker was under pressure because the National Australia Bank was close to winning the business.

"The NAB has offered the client as attached, and conditioned it, whilst we try to dot our Is and cross our Ts before we even know if the deal will be approved," the banker wrote to his regional manager in trying to get the loan approved.

After the valuer said the property was commercial, the banker went against internal policies to value the property by using the contract of sale. It was classified as a residential loan.

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Westpac's general manager of small business banking, Alastair Welsh, acknowledged this was "the wrong call".

“This was a commercial property and this should have been valued as a commercial property,” Mr Welsh told the hearing on Friday.

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By mid 2017, the business had not worked out and Mr Wallis sought a valuation on the property. He was considering accessing any accrued equity in the property, and a separate investment property he owned in Port Macquarie.

But at this point, the bank's credit officers became concerned about the property being classified as a residential loan when it was in fact a commercial property, which are seen as riskier by banks.

An internal note within the bank said the loan-to-valuation ratio on the property was outside the bank's range, and the client needed to sell the property or reduce its loan-to-valuation ratio to 65 per cent.

Westpac's general manager of small business banking, Alastair Welsh, acknowledged the banker had made "the wrong call"

Westpac's general manager of small business banking, Alastair Welsh, acknowledged the banker had made "the wrong call"Credit: AAP

Mr Wallis sold his separate investment property for $760,000, which was more than the bank needed to pay off the loan against that property. But its credit team decided it wanted to hang on to $100,000 in a "hard-hold" term deposit - one he was not able to withdraw money from.

An internal note within the bank at the time said the problems were not the customer's fault, "we just want to do what we can to make the best of a bad situation”.

Ms Orr said the bank was using the $100,000 as a "bargaining chip'' to get Mr Wallis to restructure the loan in the way it wanted.

She put it to Mr Welsh: "The bank's decision to require the term deposit to be created to hold the $100,000 from the proceeds of sale from the Port Macquarie property was taken to try and bring about a solution to a problem caused by the bank's own conduct, and not by any fault on the part of Mr Wallis."

"Yes, that's correct," Mr Welsh replied.

Ms Orr also put it to Mr Welsh the bank's behaviour was an "abuse of the bank's power" in the relationship with the customer, to which Mr Welsh agreed the customers had no options but to accept the bank's demand.

Mr Wallis complained to the Financial Ombudsman Service, which found the bank's conduct in holding the $100,000 was “unfair” but it was entitled to do so under the law. However, Ms Orr said there was no evidence the bank had determined the action was legal when it put the $100,00 in a term deposit.

Mr Welsh agreed it was unfair. He was not aware of any evidence of disciplinary action against the staff who withheld the $100,000. The bank released the $100,000 to Mr Wallis in February when the bed and breakfast property was sold.

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