Borrowers Step Up Fight Over Cheap Loan Debacle
Sun Herald
Saturday March 31, 1990
THE biggest blunder in Australian banking history began with deregulation of the industry.
In 1984/85, demand for finance was high. Australian interest rates were around 15 per cent, and although farmers, property developers and small businessmen were itching to expand into the boom times, they couldn't afford to service a 15 per cent loan.
Major banks, wrestling with the threat of foreign bank entry and loss of market share, were building up expertise in foreign currency trading.
So when long-time bank customers outlined their funding dilemmas, the local bank managers had the solution. Customers were advised to borrow in Swiss francs, at around 6pc interest, and to go ahead and build their dream.
The advantage, according to the banks, was in the currency swap. Over the previous four years, the Swiss franc exchange rate with the Australian dollar had been steady. Therefore, the Australian dollar value of the loan would be steady.
There was a risk, the banks suggested, of the Australian dollar falling against the Swiss franc. But it was a risk worth taking, considering the 6pc interest rates.
RETRIBUTION
The Australian dollar dropped in 1987. By June it was worth 1.0962 Swiss francs, less than half its 1984 value.
Around $A3 billion worth of Swiss franc loans to Australians were now worth$A6 billion. Interest and principal repayments ballooned. The banks told their customers to pay up or sell out.
This could be just another hard-luck story, if it were not for the efforts of a band of solicitors and borrowers hell-bent on retribution.
Today, the Foreign Currency Borrowers Association is a force for the banks to reckon with. Borrowers have given court evidence of confused advice from bank managers, an unwillingness by the banks to manage the exchange rate prudently, and aggressive marketing of a product despite in-house advice that the product was not sound.
Potentially, say the borrowers, it is a $A6 billion financial scandal. In reality, says banking watchdog, the Australian Bankers' Association, it is just a "user beware" lesson well learned.
"In 1985, people weren't familiar with the effects of a floating currency. And there was big pressure from customers to get in on the act," said ABA chairman, Alan Cullen.
He admitted there could be individual cases of bank negligence but those allegations meant court action, a costly procedure.
While many individual borrowers had to sell up everything they owned to service a $A500,000 loan that had blown out to $A1 million, some Australian corporations have profited by the Swiss franc scheme.
Rodney Adler, executive chairman of FAI Insurances Ltd, took the decision to hedge $A800 million worth of Swiss franc loans in January last year.
The loans had been arranged by his predecessor, father Larry, on an unhedged basis.
"The beauty of the Swiss franc market is that it has a depth of borrowing much greater than Australia. And it's a private market - not controlled by banks - so you know you have much more control over your destiny," Rodney Adler said.
"We looked at the Swiss franc as though it were a commodity."
In 1987, FAI took out the first of four Swiss franc loans. The interest rate was just under 6pc. For FAI, the average Swiss franc exchange rate at which they borrowed was 1.400, and FAI's average loan to maturity period was 12 years.
FAI used in-house research to manage the loan, and in January 1989 Mr Adler took the decision to hedge the loans.
"I was nervous. I didn't want to have to be up at 4am swapping currencies. I knew if the Australian dollar fell even half a per cent, all my work would be undone anyway."
Mr Adler said that foreign currency borrowers needed to be prepared to pay the cost of hedging their bet. But not all borrowers had the facility to interact with the Swiss market directly, as FAI did. In fact, these borrowers were often at the complete mercy of their banks. And there are stories of borrowers asking their banks to hedge their loans and being refused the privilege.
Respected businesses were besieged by armed security guards in early morning raids. With receivers in tow, these guards were demanding sums of more than $600,000 be handed over to their employers, the major banks, within 30 minutes.
Inevitably, these businessmen were told to pack their belongings and were escorted off their own premises.
John McClennan, a consultant to the Foreign Currency Borrowers Association, and a former Westpac bank employee, said banks had a motive beyond their duty to their customers.
Mr McClennan said the Australian banking system had a lack of liquidity, and the solution in 1984 was to move some lending portfolios offshore - an attractive alternative, since any income gains from lending foreign currency to Australians was taxed at a minimal rate (less than 10pc ) provided the income was incurred offshore, usually in a Hong Kong subsidiary.
But Nick Groen, the Australian managing director of the Swiss Banking Corporation, which was never involved in the Swiss franc lending schemes, said rule number one in foreign currency trading was never to buy one currency which was stronger than the currency in which you were paying for it.
"The Swiss franc has been strengthening against the Australian dollar over decades."
He said the experts may find an advantage in currency swaps and benefit from the cross-currency rates but small borrowers would not have a hope.
However, it is all very well to complain about a bank, but how do you prove they were wrong? Since when has anyone ever proved any bank was wrong?
THREATENED
John McClennan found the way. A former bank employee, he knew how to glean evidence from the banks about their Swiss franc lending schemes.
When he began to request certain bank documents relating to product development and lending policy, the banks began to get a little nervous.
He has been threatened with legal suits 12 times - for alleged misuse of in-house information. He says he is not afraid of those threats, and no suit has ever been filed against him.
He has continued to gather support. Documents the banks officially said they did not have or could not find were anonymously dropped on his doorstep. Yes, he says, at times he has relied on old banking friends. But he has no qualms about this. There is, he thinks, only one way to deal with the banks and that is to play them at their own game.
Enter John Torrisi of Elanora Heights, north of Sydney. Mr Torrisi was a fruiterer who had a good relationship with his bank. When he heard about the cheap Swiss franc loans he asked for a $A1.5 million loan. No problem, said the bank.
But as the Australian dollar dropped, Mr Torrisi's loan blew out. The bank was back-peddling furiously and he began taking a tape recorder with him whenever he went to talk to them about his loan.
He gathered enough evidence to force the bank to settle out of court, on the basis that the bank had managed his loan badly and had not advised him properly.
But the bank settled - for around three or four thousand dollars - on the condition he sign a statement pledging never to reveal what had happened to him.
However, publicity was unavoidable and Mr Torrisi received hundreds of calls from people in the same situation. He and 11 other borrowers formed their own support group - the Foreign Currency Borrowers Association. There are now 145 members in the group.
John McClennan said there was a lot that customers did not know at the time they took their loans.
"We exposed a lot of things. Like the banks were swapping US dollars for Swiss francs. The analysis of this was not explained to borrowers. There were wide margins on those exchange rates.
"The banks were also using off-market exchange rates, so there was a loaded secret commission on the exchange."
Mr McClennan believes strongly that the banks put the profit motive before their duty to customers.
INCOMPETENT
"I don't believe the banks deliberately set out to deceive customers. It's just that they were so grossly incompetent."
He also believes the banks ignored Australian financial authority guidelines on borrowing levels by going offshore.
Mr McClennan said that despite warnings of a drastic drop in the Australian dollar, banks continued to market Swiss franc loans.
He said the Government should establish an arbitration process so that lenders did not have to go to court to settle their dispute.
"There's a bloke who hasn't even had his day in court yet, and he has already spent $380,000 on legal costs. You're looking at $150,000 minimum just to get it set up.
"Where do they find this money when the bank has already seized their assets and their available cash?"
Liza Carver, a director of the Consumer Credit Organisation and a member of the Banking Ombudsman's Council recently set up by the Australian Banking Association to cope with customer complaints, said there was no facility to cope with the Swiss franc lenders.
"If we attempted to include claims before 1989, the scheme would just never get off the ground," she said.
That is unfortunate for the 6,000 gnome-loan victims, most of whom are unable to confront the banks. And fortunate for our major banks.
SWISS LOANS BY MAJOR BANKS
WESTPAC CWEALTH ANZ NAB
Borrowers 2,500 2,000 500 500
Amount was $2.6b was $2b was $500m was $500m
now $6b now $4b now $1b now $1b
Settlements 25 6 2 2
Court wins, (borrower) * 2 0 0 0
Court losses (borrower)* 0 1 0 0
Subject to litigation 10 5 1 1
* Subject to appeal
© 1990 Sun Herald
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