First day of hearings in Melbourne told an everyday story of unmanageable debt made worse and worse

The first witness at the royal commission into misconduct in the banking, superannuation and finance industry is building a tower of debt.

Imagine you have a credit card with a $5,000 limit, says Karen Cox from the Financial Rights Legal Centre. You have not paid it off in a while but you are meeting the monthly minimum repayments, so the bank offers to raise the limit.

You accept the offer but now the debt is $8,000, and you cannot pay it off. You accept a credit transfer from another financial institution on the promise of 18 months interest-free, thinking to use that time to pay down the debt. You never get around to cancelling the original card but keep it “for emergencies”.

An emergency happens, and you reach for the original credit card. Now you have two credit card debts, and you can’t pay off either one.

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“What was meant to be a refinance to get them out of trouble just gets them deeper and deeper into trouble,” she says.

It gets worse. In an effort to gain control, you consolidate your credit card debt into your home loan. The interest rates are lower, but it takes much longer to repay. In some cases, Cox says, the size of the consolidated debt makes mortgage repayments unmanageable.

“We spoke to a father in the last month who had refinanced $100,000 in credit card debt into his home loan,” she says.

The new loan balance pushed repayments up by almost $1,000 a month. “The family is very likely to lose their home, because they can’t afford it,” she says.

Credit card debt is the impetus behind the overwhelming majority of calls to the legal centre, which manages the New South Wales branch of the national debt hotline.

It’s also one of the focus areas for the first hearing of the royal commission, which began in Melbourne on Tuesday.

Decades of debt

The amount of credit card debt is staggering, Cox says. Assessments about whether a person can afford a particular credit card are based on their ability to meet the minimum monthly repayments, not pay the total within a reasonable timeframe. It is unsustainable.

“We spoke to an elderly woman who said she had been paying off the same $1,000 since the 1990s,” she says.

“If I go to purchase a pair of jeans after this hearing, I don’t want to be carrying that debt for 10 years or more. And yet we are seeing people who are carrying debt for more than 10 years.”

The royal commission in the next two weeks will focus on consumer credit lending products: home loans, car loans, credit cards, credit offers such as pre-approved overdrafts, and add-ons such as loan insurance.

Twelve case studies have been pulled out of the 1,894 submissions the commission has received so far for in-depth analysis.

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Almost nine in 10 of the submissions “described conduct that is alleged to be misconduct or conduct falling below community standards or expectations”, says Rowena Orr QC, senior council assisting commissioner Kenneth Hayne QC.

The case studies will focus on examples of alleged misconduct, or conduct falling below community standards and expectations, from six financial institutions: ANZ, Aussie Home Loans (a wholly-owned subsidiary of the Commonwealth Bank), Citibank, Commonwealth Bank, National Australia Bank and Westpac.

All six institutions received letters from Hayne requesting they detail events where their institution may have committed such conduct.

The level of detail in their responses “differed”, Orr says, but all agreed to certain events of misconduct or conduct falling below community standards.

The response from Aussie Home Loans, a mortgage broker that is alleged to have had some fraudulent broker arrangements, was eight paragraphs long, contained within a submission from parent company Commonwealth Bank.

The Commonwealth Bank’s submission, Orr says, adopted a “high-level and general approach” that “did not disclose the totality” of its conduct. Its second submission contained an abundance of spreadsheets, presenting information that was “not in a form which made it possible to understand the type and scale of [the bank’s] misconduct events”.

Orr’s comments, delivered in a flat tone that underlined the commission’s displeasure at receiving such a response, drew angry mutters in the overflow courtroom, where most of the media and many members of the public had come to watch.

It is a level of obfuscation expected by those in the public gallery, many of whom have made their own submissions to have their case heard by the royal commission.

Some are not convinced that the rows of lawyers and lever-arch files in the principle courtroom are capable – or even interested – in bringing the banks into line.

In the long, snaking queue to get into the courtroom before the hearing, a failed Melbourne property developer, who requested anonymity of both Guardian Australia and the commission to which he made a submission about a multimillion loss when MFS Investment Management went into administration in 2007, said he believed the commission would be a “whitewash”.

“It’s not going to change the banks. It can’t,” he said. “They’ll just ignore the recommendations.”

The Melbourne hearings will run until 23 March.