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Review of the Code of Banking Practice, Final Report, December 2008

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Review of

The Code of Banking Practice

Final Report

December 2008

Jan McClelland and Associates Pty Limited


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TABLE OF CONTENTS

TABLE OF CONTENTS ......................................................................................................... 2

ABBREVIATIONS AND DEFINITIONS .............................................................................. 10

SUMMARY OF RECOMMENDATIONS ............................................................................. 12

RESPONSIBLE LENDING ............................................................................................... 12

General Principle of Responsible Lending - Clause 2 .......................................................... 12

Provision of Credit – Clause 25.1 ....................................................................................... 12

FINANCIAL HARDSHIP – Clause 25.2 ............................................................................ 13

DEBT COLLECTION - Clause 29 ..................................................................................... 14

GUARANTEES - Clause 28 ............................................................................................... 15

JOINT DEBTORS - Clause 26 ........................................................................................... 15

CODE COMPLIANCE MONITORING COMMITTEE AND THE FINANCIAL

OMBUDSMAN SERVICE - Clause 34 .............................................................................. 15

FEES AND CHARGES – New Provision ........................................................................... 17

REVERSE MORTGAGES – New Provision ...................................................................... 17

DIRECT DEBITS - Clause 29 ............................................................................................ 17

ACCOUNT SWITCHING – New Provision ....................................................................... 18

ELECTRONIC BANKING - Clause 33 .............................................................................. 18

COMMUNICATION – New Provision............................................................................... 19

ACCOUNT SUITABILITY - Clause 14 ............................................................................. 19

DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13 ................................ 20

COMPLIANCE WITH LAWS - Clause 3........................................................................... 21

KEY COMMITMENTS – Clause 2 .................................................................................... 21

COPIES OF DOCUMENTS - Clause 11 ............................................................................ 21

OPENING OF ACCOUNTS - Clause 16 ............................................................................ 21

CHANGES TO TERMS AND CONDITIONS - Clause 18 ................................................. 21

CHARGEBACKS - Clause 20 and Clause 10 ..................................................................... 22

PRIVACY AND CONFIDENTIALITY - Clause 22 ........................................................... 22

STATEMENT OF ACCOUNTS - Clause 24 ...................................................................... 22

ADVERTISING - Clause 30 ............................................................................................... 22

INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35, 36 and 37 .......... 22


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APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39 ................................. 23

CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New Provision .............. 23

LANGUAGE AND STRUCTURE OF THE CODE ........................................................... 24

STAFF TRAINING AND COMPETENCY - Clause 7 ....................................................... 24

UNFAIR CONTRACT TERMS ......................................................................................... 24

ACCOUNT COMBINATION- Clause 17........................................................................... 24

USE OF FINANCE AND MORTGAGE BROKERS ......................................................... 24

PROMOTION OF THE CODE – Clause 9 ......................................................................... 25

CHAPTER 1 - INTRODUCTION .......................................................................................... 26

1.1 Appointment of the Review .............................................................................................. 26

1.2 The Code of Banking Practice .......................................................................................... 26

1.3 Terms of Reference .......................................................................................................... 26

1.4 Approach .......................................................................................................................... 26

1.4.1 Preparation for the Review ......................................................................................... 26

1.4.2 Announcement of the Review .................................................................................... 27

1.4.3 Consultations ............................................................................................................. 27

1.4.4 Initial Submissions ..................................................................................................... 27

1.4.4 Review of Documentation .......................................................................................... 27

1.4.5 Attendance at Forums ................................................................................................ 28

1.4.6 Issues Paper ............................................................................................................... 28

1.4.7 Final Report ............................................................................................................... 28

1.5 Structure of the Report ...................................................................................................... 28

1.6 Acknowledgements .......................................................................................................... 29

CHAPTER 2 - CONTEXT ..................................................................................................... 30

2.1 Economic and Regulatory Changes ................................................................................... 30

2.2 Status and Standing of the Code........................................................................................ 31

CHAPTER 3 - RESPONSIBLE LENDING ............................................................................ 33

3.1 Credit Assessment - Clause 25.1 ....................................................................................... 33

3.1.1 Issues Paper ............................................................................................................... 33

3.1.2 Responses to the Issues Paper .................................................................................... 34

3.2 Unsolicited Offers of Credit Card Limit Increases – Clause 25.1....................................... 36

3.3 Developments since the Last Code Review ....................................................................... 37


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3.3.1 Subscribing Banks‟ Policies on Responsible Lending................................................. 37

3.3.2 National Regulation of Consumer Credit .................................................................... 37

3.3.3 Ministerial Council on Consumer Affairs Regulatory Impact Statement on Responsible

Lending Practices in relation to Consumer Credit Cards ..................................................... 38

3.3.4 Australian Law Reform Commission Review of Privacy Legislation ......................... 38

3.3.5 Financial Ombudsman Service ................................................................................... 38

3.4 The Way Forward ............................................................................................................. 39

3.4.1 Credit Assessment...................................................................................................... 39

3.4.2 Unsolicited Offers of Credit Limit Increases .............................................................. 40

Recommendations .............................................................................................................. 41

General Principle of Responsible Lending ...................................................................... 41

Provision of Credit ......................................................................................................... 41

CHAPTER 4 - FINANCIAL HARDSHIP .............................................................................. 43

4.1 Financial Hardship - Clause 25.2 ...................................................................................... 43

4.1.1 Issues Paper ............................................................................................................... 43

4.1.2 Response to the Issues Paper ...................................................................................... 43

4.1.3 The Way Forward ...................................................................................................... 45


CHAPTER 5 - DEBT COLLECTION .................................................................................... 48

5.1 Debt Collection - Clause 29 .............................................................................................. 48

5.1.1 Issues Paper ............................................................................................................... 48


5.1 3 The Way Forward ...................................................................................................... 49


CHAPTER 6 - GUARANTEES.............................................................................................. 51

6.1 Guarantees - Clause 28 ..................................................................................................... 51

6.1.1 Issues Paper ............................................................................................................... 51

6.1.1 1 Commercial Asset Financing Guarantors ............................................................. 51

6.1 1 2 Cooling off Period ............................................................................................... 51

6.1.1.3 Undisclosed Principle and Agent Arrangements .................................................. 51

6.1.1.4 Compliance with Privacy Principles .................................................................... 52


6.1.2.1 General Comments on the Guarantee Provisions of the Code .............................. 52


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6.2.1.2 Commercial Asset Financing Guarantors ............................................................. 53

6.2.1.3 Cooling Off Period .............................................................................................. 54

6.2.1.4 Principal and Agent Arrangements ...................................................................... 54

6.2.1.5 Privacy Principles ............................................................................................... 55

6.2.1.6 Enforcement ........................................................................................................ 55

6.1.3 The Way Forward ...................................................................................................... 55

6.1.3.1 Commercial Asset Financing Guarantees ............................................................ 55

6.1.3.2 Cooling Off Period .............................................................................................. 56

6.1.3.3 Principal and Agent Arrangements ...................................................................... 56

6.1.3.4 Privacy Principles ............................................................................................... 57

6.1.3.5 Enforcement ........................................................................................................ 57


CHAPTER 7 - JOINT DEBTORS .......................................................................................... 59

7.1 Joint Debtors - Clause 26 .................................................................................................. 59

7.1.1 The Issues Paper ........................................................................................................ 59


7.1.3 The Way Forward ...................................................................................................... 60


CHAPTER 8 - CODE COMPLIANCE MONITORING COMMITTEE AND THE

FINANCIAL OMBUDSMAN SERVICE ............................................................................... 61

8.1 Code Compliance Monitoring Committee - Clause 34 ...................................................... 61

8.1.1 Issues Paper ............................................................................................................... 61


8.1.3 The Way Forward ...................................................................................................... 65


CHAPTER 9 - FEES AND CHARGES .................................................................................. 69

9.1 Exception Fees – New Provision ....................................................................................... 69

9.1.1 Issues Paper ............................................................................................................... 69



CHAPTER 10 – OTHER ISSUES .......................................................................................... 74

10.1 REVERSE MORTGAGES – New Provision .................................................................. 74

10.1 1 Issues Paper ............................................................................................................. 74


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10.1.2 Responses to the Issues Paper .................................................................................. 74


10.2 DIRECT DEBITS - Clause 29 ........................................................................................ 74

10.2.1 Issues Paper ............................................................................................................. 74



10.3 ACCOUNT SWITCHING – New Provision ................................................................... 76

10.3.1 Issues Paper ............................................................................................................. 76



10.4 ELECTRONIC BANKING - Clause 33 .......................................................................... 77

10.4.1 Issues Paper ............................................................................................................. 77



10.5 COMMUNICATION – New Provision ........................................................................... 79

10.5.1 Issues Paper ............................................................................................................. 79


Recommendation ................................................................................................................ 79

10.6 ACCOUNT SUITABILITY - Clause 14 ......................................................................... 80

10.6.1 Issues Paper ............................................................................................................. 80



10.7 DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13 ............................ 81

10.7.1 Issues Paper ............................................................................................................. 81



10.8 COMPLIANCE WITH LAWS - Clause 3 ....................................................................... 82

10.8.1 Issues Paper ............................................................................................................. 82



10.9 KEY COMMITMENTS ................................................................................................. 83

10.9.1 Issues Paper ............................................................................................................. 83


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10.9.3 The Way Forward .................................................................................................... 83


10.10 COPIES OF DOCUMENTS - Clause 11 ....................................................................... 84

10.10.1 Issues Paper ........................................................................................................... 84

10.10.2 Responses to the Issues Paper ................................................................................ 84


10.11 OPENING OF ACCOUNTS - Clause 16 ...................................................................... 85

10.11.1 Issues Paper ........................................................................................................... 85



10.12 CHANGES TO TERMS AND CONDITIONS - Clause 18 ........................................... 85

10.12.1 Issues Paper ........................................................................................................... 85



10.13 CHARGEBACKS - Clause 20 and Clause 10 ............................................................... 86

10.13.1 The Issues Paper .................................................................................................... 86



10.14 PRIVACY AND CONFIDENTIALITY - Clause 22 ..................................................... 87

10.14.1 Issues Paper ........................................................................................................... 87



10.15 STATEMENT OF ACCOUNTS - Clause 24 ................................................................ 88

10.15.1 Issues Paper ........................................................................................................... 88



10.16 ADVERTISING - Clause 30 ......................................................................................... 88

10.16.1 Issues Paper ........................................................................................................... 88



10.17 INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35, 36 and 37 .... 89


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10.17.1 Issues Paper ........................................................................................................... 89

10.17 2 Responses to the Issues Paper ................................................................................ 89


10.18 APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39 ........................... 91

10.18 1 Issues Paper ........................................................................................................... 91



10.19 CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New Provision ......... 91

10.19.2 Issues Paper ........................................................................................................... 91



10.20 LANGUAGE AND STRUCTURE OF THE CODE ..................................................... 93

10.20.1 Issues Paper ........................................................................................................... 93



CHAPTER 11 – OTHER MATTERS RAISED IN SUBMISSIONS TO THE ISSUES PAPER

............................................................................................................................................... 94

11.1 STAFF TRAINING AND COMPETENCY - Clause 7 ................................................... 94

11.1.1 Issues Paper ............................................................................................................. 94

11.2 Response to the Issues Paper ....................................................................................... 94


11.2 UNFAIR CONTRACT TERMS ..................................................................................... 94

11.2.1 Issues Paper ............................................................................................................. 94

11.2.2 Response to the Issues Paper .................................................................................... 94

Recommendation ................................................................................................................ 95

11.3 ACCOUNT COMBINATION- Clause 17 ....................................................................... 95

11.3.1 Issues Paper ............................................................................................................. 95



11.4 USE OF FINANCE AND MORTGAGE BROKERS...................................................... 96

11.4.1 Issues Paper ............................................................................................................. 96


Recommendation ................................................................................................................ 97


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11.5 PROMOTION OF THE CODE – Clause 9 ..................................................................... 97

11.5.1 Issues Paper ............................................................................................................. 97


Recommendation ................................................................................................................ 97

CONTRIBUTIONS TO THE REVIEW BY SUBMISSIONS, CONSULTATIONS AND

CORRESPONDENCE ........................................................................................................... 98


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ABBREVIATIONS AND DEFINITIONS

ABA Australian Bankers‟ Association

Abacus Association of Building Societies and Credit Unions

ACCC Australian Competition and Consumer Commission

AML/CTF legislation Anti Money Laundering and Counter Terrorism Financing Act

ASIC Australian Securities and Investments Commission

ALRC Australian Law Reform Commission

BFSO Banking and Financial Services Ombudsman

CCMC Code Compliance Monitoring Committee

Consultative Forum ABA‟s Community and Consumer Consultative Forum

Consumer Advocates Joint Consumer Submission contributors

COSBOA Council of Small Business Organisations of Australia

COSL Credit Ombudsman Service Limited

COTA Over 50’s Ltd Council on the Ageing

EFT Code Electronic Funds Transfer Code of Conduct

EDR External Dispute Resolution

FOS Financial Ombudsman Service

FSR Financial Services Reform Act 2001

IDR Internal Dispute Resolution

IP Review of Code of Banking Practice Issues Paper May 2008

JCS Joint Consumer Submission

Australian Financial Counselling and Credit Reform

Association

Care Financial Counselling Service and Consumer Law

Centre ACT

CHOICE

Consumer Action Law Centre

Consumer Credit Legal Centre NSW

Consumer Credit Legal Service WA

Consumers‟ Federation of Australia

Financial Counsellors Association of Queensland

MCCA Ministerial Council on Consumer Affairs


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MFAA Mortgage and Finance Association of Australia

NSW OFT New South Wales Office of Fair Trading

SEQUAL Senior Australian Equity Release Association of Lenders

The Code Code of Banking Practice

The reviewer Jan McClelland & Associates Pty Limited

UCCC Uniform Consumer Credit Code

USA United States of Australia

UK United Kingdom


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SUMMARY OF RECOMMENDATIONS

RESPONSIBLE LENDING

General Principle of Responsible Lending - Clause 2

1. That a key commitment to responsible lending be included in the current Clause 2 of the

Code, Our key commitments to you, along the following lines:

We will be responsible lenders in approving credit, offering credit limit increases,

supporting customers facing financial difficulty; and promoting responsible use of credit.

Provision of Credit – Clause 25.1

2. That a separate clause on provision of credit be included in the Code, building on Clause

25.1 but expanded to include two parts, one relating to approval of an application for a

credit facility and another relating to unsolicited or other offers of credit card limit

increases, which covers the following:

A. Approval of an Application for a Credit Facility

1) Before we approve your application for a credit facility or for an increase in your

existing credit facility, we will exercise the care and skill of a diligent and prudent

banker in selecting and applying appropriate assessment methods to your

circumstances and financial position and in forming our opinion about your ability

to repay the credit facility.

2) Our credit assessment methods will vary depending on a range of factors including

the credit facility product, whether you are a new customer or have an existing

banking relationship with us, the information you have provided to us and the

information available to us from other sources. Our credit assessment methodologies

will include, as appropriate to your circumstances, consideration of at least two of the

following factors:

a) Information you have provided on your income and financial commitments;

b) How you have handled your finances in the past;

c) Our internal credit scoring techniques;

d) Information from credit reference agencies.


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B. Unsolicited or Other Credit Limit Increase Offers

1) If we decide to make you an offer of an increase in the credit limit of your credit

facility, we will take into account the following criteria:

a) Your recent credit facility repayments history, including whether you have been

able to meet repayments or whether you have a history of missed or late payment;

b) Your income, if in the course of our dealing personally with you, we become

aware that you are in receipt of a welfare payment that is your sole source of

income;

c) Your recent credit facility history, including whether you have a history of

consistently reaching or exceeding the credit limit while making only the

minimum monthly repayments, and/or whether we are aware of other information

that suggests you may be likely to be experiencing financial stress;

d) Your banking relationship with us, including whether you are a new customer

and/or whether you have acquired any other products from us; and

e) Your request not to receive unsolicited offers of credit limit increases, if you have

made such a request.

2) If we decide to make you an offer to increase your credit limit on an existing credit

facility, we will provide information on:

a) The new minimum monthly payment and repayment period if you accept the offer

and the credit facility is fully drawn on;

b) How to request a lower credit facility limit than the one we have offered;

c) How and when to reject the offer, for example, if you are having difficulties

meeting your current repayments, or if your financial circumstances have

changed or are likely to change such that you cannot afford to meet increased

repayments; and

d) Easy and efficient ways to reduce your credit facility limit and how long it will

take to process your request for a reduction in your credit facility limit.

FINANCIAL HARDSHIP – Clause 25.2

3. That a separate clause on financial hardship be included in the Code, building on Clause

25.2 but expanded to cover the following:

1) With your agreement, we will try to help you overcome your financial difficulties with

any credit facility you have with us. We will deal with you or, at your request, with

your financial counsellor or representative.

2) If, in the course of our personal dealings with you, we identify that you might be

experiencing difficulties in meeting your repayments we may contact you and invite

you to discuss your situation with us and the options available to assist you in

meeting your obligations in these circumstances.

3) If at any time you feel you are experiencing difficulties in meeting your repayments,

you should make contact with us as soon as possible to discuss your situation with us


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and the options available to assist you in meeting your obligations in these

circumstances.

4) If, at the time, the hardship variation provisions of the Uniform Consumer Credit

Code could apply to your circumstances, we will inform you about them.

5) We will provide you with information about our processes for dealing with customers

in financial difficulty, including relevant contact numbers, at your request and when

we send you a default notice.

6) We will respond promptly and courteously to any requests for assistance from you.

7) We will take into account the information available to us, including the information

you provide to us, about your financial situation and determine whether or not we are

able to provide assistance and the nature and extent of such assistance.

8) We will inform you in writing of our decision whether or not to provide you with

assistance and the reasons for our decision. If we agree to provide you with

assistance we will confirm in writing the agreed arrangements.

9) While we are considering your application for assistance where you are experiencing

financial difficulty in relation to a credit facility with us, we will not commence any

enforcement action in relation to the debt or assign the debt. If we reject your

application for assistance, we will allow you a reasonable period of time to obtain

advice, before we commence enforcement action in relation to the debt or assign the

debt. If we have commenced enforcement action before you made the request, we will

not proceed to judgement whilst we are considering your situation.

10) We will not require you to access your Superannuation Fund to repay your credit

facility with us.

11) We will have information about our processes for dealing with customers in financial

difficulty available on our website.

12) We will ensure that relevant staff are trained in the financial hardship provisions of

the Code, and applicable consumer credit legislation.

DEBT COLLECTION - Clause 29

4. That Clause 29 of the Code is amended to include reference to ACCC and ASIC debt

collection guidelines as amended or replaced from time to time.

5. That the debt collection clause follow the proposed revised clause on Financial Hardship

and include the following:

a) We will comply with the Australian Competition and Consumer Commission and

Australian Securities and Investments Commission guideline “Debt Collection

Guideline for Collectors and Creditors, October 2005,” as amended or replaced from

time to time, when collecting amounts due to us. We will ensure that our debt

collection agents do likewise.

b) If we sell a debt to a third party we will choose firms that agree to observe the ACCC

and ASIC debt collection guidelines referred to in (1) and that are members of an

ASIC approved external dispute resolution scheme.


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GUARANTEES - Clause 28

6. That the definition of commercial asset financing guarantor in Clause 40 of the Code be

amended to broaden the class of guarantors to include directors, owners or managers of

the business that is managed by or under the direction of the director, owner or manager.

7. That Clause 28.14 of the Code be expanded to provide that enforcement of a judgement

against the guarantor or any security provided by the guarantor will only be taken after

attempts have been made to enforce the judgement against the debtor and/or enforce any

security against the debtor.

JOINT DEBTORS - Clause 26

8. That Clause 26.1 of the Code be amended to provide:

We will not accept you as a co-debtor under a credit facility where it is clear, on the facts

known to us, that you will not receive a benefit under the facility.

CODE COMPLIANCE MONITORING COMMITTEE AND THE

FINANCIAL OMBUDSMAN SERVICE - Clause 34

9. That the CCMC be established as a separate independent unit within the FOS reporting

directly to and accountable to the FOS Board for the performance of its prescribed

functions under the Code.

10. That separate terms of reference of the CCMC be developed by the CCMC in

consultation with the ABA, the FOS ASIC and consumer interests. The terms of

reference for the CCMC should be consistent with the compliance monitoring,

investigation and reporting functions of the CCMC under the Code and be published on

the CCMC, FOS and ABA websites.

11. That the terms of reference of the CCMC make it clear that the CCMC and the FOS

have different functions of Code compliance monitoring and dispute resolution

respectively and guarantee the independence of one from the other in the performance of

those functions respectively as well as independence from banks.

12. That the charter, constitution, terms of reference and operating protocols of the FOS

Board and of the CCMC and the Code make it clear that individuals and organisations

have the right to make complaints about Code breaches directly to the CCMC.

13. That the Code make it clear that the CCMC retains its powers under the Code to conduct

investigations in response to complaints of Code breaches from any person or

organisation, and also to initiate investigations and reviews on its own initiative, and to

make determinations in relation to those investigations.

14. That the Code also spell out functions of the CCMC as including to:

a) conduct its own enquiries into banks‟ compliance with the Code;

b) prepare an annual report on compliance with the Code;

c) contribute to joint publications between the CCMC and FOS on Code interpretation

and compliance issues; and

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#director


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d) promote awareness of the Code with banks through the provision of feedback on

Code issues.

15. That the charter, constitution, terms of reference and operating protocols of the FOS and

of the CCMC make it clear that the following arrangements apply in matters that are

referred to the FOS or the CCMC.

a) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issue and finds that there has been a Code breach, that

determination is a final determination as to whether a Code breach has been

established. FOS must report its determination to the CCMC for further monitoring

as appropriate and provide access to its case file on the matter if required by the

CCMC.

b) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issues and finds that there has been no Code breach, the

determination of FOS is final and the CCMC cannot investigate the matter. FOS

must inform the CCMC of its decision and provide access to its case file if required by

the CCMC.

c) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issue, but does not make a determination on this aspect of the

dispute, the FOS must refer the issue to the CCMC and provide access to its case file

if required by the CCMC.

d) Except where the FOS, in performance of its prescribed function of dispute

resolution, identifies a Code issue and determines whether there has been a Code

breach, in all other cases the CCMC shall have sole responsibility to make a

determination whether a breach of the Code has occurred.

e) If a customer seeks to refer a dispute to the FOS alleging a breach of the Code but

there is no financial loss, the FOS must advise the customer of the right to take the

matter to the CCMC.

f) Where the CCMC, in accordance with its prescribed function of Code compliance

monitoring, determines whether a breach of the Code has occurred, that

determination is a final determination as between the CCMC and the FOS as to

whether a Code breach has been established.

g) There will be free flow of information between the FOS and the CCMC to enable the

FOS and the CCMC to perform and discharge their respective functions properly.

16. That the FOS and the CCMC ensure that the community is aware of the CCMC‟s

existence, role and separate function in relation to compliance monitoring and establish

a Memorandum of Understanding that sets out their respective roles, agreed protocols

for handling Code matters, and protocols for the sharing of information.

17. That staff at FOS and the CCMC be jointly trained on the distinction between the dispute

resolution function of the FOS and the compliance monitoring function of the CCMC

and the protocols for handling matters including the referral of matters from the FOS to

the CCMC and the sharing of information in accordance with the MOU between the

FOS and CCMC.


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18. That the description in clause 34(a) (i) of the Code of the bank appointed member of the

CCMC be amended to make it clear that the appointee is a representative of Code

subscribing banks.

FEES AND CHARGES – New Provision

19. That a new clause on „exception fees‟ be included in the Code that commits banks to:

a) Disclosure of exception fees in relation to the products to which such fees apply;

b) Publication of facts sheet on exception fees on the ABA‟s website;

c) Provision of information on how customers can avoid „exception fees‟;

d) Provision of information on accounts or facilities which have minimal or no

exception fees;

20. That reference to „standard fees and charges‟ in the Code be replaced by „fees and

charges‟.

21. That Clause 40 be amended to replace the reference to „standard fees and charges‟ with

„fees and charges‟.

22. That the definition of „fees and charges‟ in clause 40 includes „standard fees and

charges‟ and „exception fees‟ disclosed in accordance with legislative requirements.

23. That the definition of „standard fees and charges‟ in clause 40 be retained.

24. That the definition of „exception fees‟ in Clause 40 include overdrawn fees, over-limit

fees on overdrafts and credit cards, credit card late payment fees, dishonoured cheques,

direct debit items and ATM failed transaction costs.

REVERSE MORTGAGES – New Provision

25. That a new clause be introduced in the Code to govern equity release products, also

commonly referred to as reverse mortgages. This clause should commit subscribing

banks and their agents to compliance with the SEQUAL Code.

DIRECT DEBITS - Clause 29

26. That clause 19 of the Code be expanded to include reference to a variation of direct debit

arrangement as distinct from cancellation of direct debit payments along the following

lines:

a) We will take, by telephone or in writing, and promptly process your:

instruction to cancel a direct debit request relevant to a banking service we provide to

you; and

complaint that a direct debit was unauthorised or otherwise irregular,

b) We will not direct or suggest that you should first raise any such request or complaint

directly with the debit user (but we may suggest that you also contact the debit user).

c) Where you wish to change the terms of a direct debit arrangement with a merchant,

as distinct from seeking to cancel a direct debit facility, you will need to contact the

merchant directly to make the change.


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27. That staff are trained in the provisions of Clause 19 including:

a) the distinction between cancellation of direct debits and changes to the terms of direct

debit arrangements; and

b) the need to process cancellation requests and complaints promptly in order to avoid

the possibility of the customer‟s banking facility becoming overdrawn and incurring

exception fees due to the continuing payment of the direct debit facility.

ACCOUNT SWITCHING – New Provision

28. That the Code include a new provision on switching accounts for personal customers.

29. That the new Code provision on switching accounts reflect the four key principles

announced by the ABA on 9 February 2008 and available on the ABA website with a

focus on:

a) Obligations of the old financial institution to provide a list of the customer‟s direct

debit and credit arrangements over the past 13 months to the customer in order to

facilitate the establishment of the arrangements for the new account;

b) Obligations of the new financial institution to provide the customer with information

and support to help the customer make the switch. If requested by the consumer, the

new financial institution will assist in notifying the Direct Entry users of the new

direct debit and direct credit arrangements and assist with closing the customer‟s old

bank account;

c) Obligations in regards to timeliness, the provision of information to customers on

how to avoid exception fees, and dealing fairly with customers throughout the

account switching process;

d) Provision of quarterly progress reports to the Government.

30. That the Code include a provision that banks will publish their account switching

arrangements on the ABA website and on their individual websites.

ELECTRONIC BANKING - Clause 33

31. That Clause 33 be simplified, taking into account the proposed revisions to the Electronic

Funds Transfer Code by ASIC, with a focus on:

a) Providing customers with the option of receiving material electronically if it is

available;

b) Notifying customers by electronic communication when and how information can be

retrieved electronically;

c) Incorporating electronic communication as a product feature and including this in

any product disclosures

d) Providing information electronically in a form that allows the customer to retain it;

and

e) Protecting customers from ‟phishing‟ by including a commitment that customers will

not be sent an email or SMS message requesting them to reply via the same electronic


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communication channel or to click on a hyperlink and provide information on their

account details, financial details, login or other security password details

32. That the relationship between the Code of Banking Practice, EFT Code and electronic

communication provisions in the Corporations Act and UCCC be clarified and reflected

in the Code based on the following:

a) The EFT Code electronic communication provisions will apply to all transactions

covered by that code;

b) The Code of Banking Practice electronic communications provisions will not apply to

those transactions covered by the EFT Code electronic communications provisions;

c) The Code of Banking Practice will apply to all other electronic communications with

the customer except where the law specifically provides for these circumstances, such

as the UCCC and the Corporations Act.

33. That Clause 39.2 of the Code be relocated to Clause 33 of the Code and amended along

as follows:

To the extent of any inconsistency, this Code is to be read subject to the Electronic Funds

Transfer Code of Conduct and the electronic communications provisions in the

Corporations Act 2001 and UCCC.

COMMUNICATION – New Provision

34. That a key commitment to communicate with customers and their representatives in a

timely and courteous manner be included in the current Clause 2 of the Code, Our key

commitments to you, along the following lines:

We will communicate with you and/or your representatives in a timely and courteous

manner, whether by telephone or in written communications including electronic

communications.

ACCOUNT SUITABILITY - Clause 14

35. That clause 14 of the Code be amended along the following lines:

a) If you tell us that you are a low income earner or a disadvantaged person (regardless

of whether you are an existing or prospective customer but not if you are a small

business), we will provide you with details of accounts which may be suitable to your

needs. Depending on your needs this information may include details of accounts

which attract no or low fees and charges and how you can avoid incurring exception

fees.

b) If you ask for this information or if, in the course of dealing with you, we become

aware that you are in receipt of Centrelink or like benefits, or assess that your needs

are suited to an account which attracts no or low fees and charges, we will provide

you with factual information about these accounts.

c) We will publish information about accounts which attract low or no fees or charges

on our website or through other means.


20

36. That a definition of „low income earner‟ be included in the definitions in clause 40 of the

Code to include persons receiving Centrelink or like benefits and persons meeting the

Australian Bureau of Statistics definition of „low income earner‟.

37. That account suitability provisions for Indigenous customers be included in a general

commitment in the Code in relation to the provision of appropriate banking services to

Indigenous communities, particularly those in remote locations.

DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13

38. That clause 10 be simplified to clarify and eliminate any overlap or duplication with

other Code provisions.

39. That the review of Clause 10 be informed by the work of the Australian Government

Financial Services Working Group looking at the length, complexity and readability of

disclosure documentation in financial services.

40. That clause 10.2(e) of the Code be amended to incorporate all of the provisions of clause

13 of the Code, thus removing overlap and duplication as follows:

(e) inform you that, at your request, we will provide you with general descriptive

information about our banking services, including where appropriate:

- our account opening procedures;

- our obligations regarding the confidentiality of your information;

- complaint handling procedures;

- bank cheques;

- informing us promptly when you are in financial difficulty;

- your taking care to read the terms and conditions of your banking service(s); and

- cheques, if your account provides cheque access, including:

- cheque clearance times;

- the effect of crossing a cheque; explaining what “not negotiable” and “account payee

only” mean and the effect of deleting “or bearer” on a cheque where these words

appear on a cheque;

- stopping payment on cheques;

- reducing the risk of unauthorised alteration of a cheque you write;

- cheque dishonour;

- post dated cheques; and

- stale cheques.

41. That clause 13 of the Code be deleted.


21

COMPLIANCE WITH LAWS - Clause 3

42. That clause 3.1 of the Code in relation to compliance with laws be retained.

43. That clause 34 of the Code be amended to make it clear that the functions of the CCMC

do not extend to compliance monitoring, investigation of allegations of a breach and

reporting of clause 3.1 unless they are also breaches of other provisions in the Code.

KEY COMMITMENTS – Clause 2

44. That the Code make it clear that the provisions of clause 2 of the Code, Our Key

commitments to you are general guiding principles and should be interpreted by

reference to the relevant more detailed code provisions.

45. That Clause 34 of the Code be amended to make it clear that the functions of the CCMC


reporting in relation to clause 2 of the Code unless they are also breaches of other

provisions in the Code.

COPIES OF DOCUMENTS - Clause 11

46. That clause 11.2 be amended to include reference to legislative requirements as follows:

At your request, we will give you documents we have in accordance with legislative

regimes for the retention of documents, relating to a banking service you have, or had,

with us: followed by existing clauses 11.2(a), 11.2(b), 11.2(c) and 11.2(d).

OPENING OF ACCOUNTS - Clause 16

47. That Clause 16 of the Code be amended to include reference to Anti Money Laundering

and Counter Terrorism Finance legislation.

48. That customer identification issues faced by remote Indigenous communities be

addressed in a general commitment in the Code in relation to the provision of

appropriate banking services to Indigenous communities, particularly those in remote

locations.

CHANGES TO TERMS AND CONDITIONS - Clause 18

49. That clause 18.1 of the Code be amended to:

a) include the use of electronic communication to meet the notification requirements of

the information prescribed in this Clause; and

b) include an additional exception in the clause that the requirement to provide at least

30 days notice does not apply where the change is beneficial to the customer or in

other circumstances consistent with the legislative regime relating to the notification

of changes of terms and conditions.

50. That the ABA continue to pursue discussions with ASIC relating to consistency of

legislative and regulatory provisions in relation to notification of changes to terms and

conditions.


22

CHARGEBACKS - Clause 20 and Clause 10

51. That Clause 20(d) is amended to include additional means of providing the annual

information on chargebacks, such as by Internet, websites or other electronic means as

follows:

(d) include general information about chargebacks with credit card statements at least

once every 12 months including by access to our website or other electronic

communications in accordance with the electronic communication provisions of this

Code.

52. That clause 10.5(b) of the Code be amended to include reference to timeframes set by

credit card providers as follows:

(b) a prominent statement of the time frames within which you should report a disputed

transaction (so that we may reasonably ask for a chargeback where such a right exists

and within the timeframes set by the relevant credit card provider) and a note to the effect

that, where the Electronic Funds Transfer code of conduct applies, there may be no such

time frames in certain circumstances; and

PRIVACY AND CONFIDENTIALITY - Clause 22

53. That any changes to Clause 22 be considered in the context of the report by the

Australian Law Reform Commission into privacy legislation.

54. That the proposed principles on privacy suggested by consumer advocates be taken into

account in reviewing clause 22 in the context of the report by the Australian Law Reform

Commission into privacy legislation.

STATEMENT OF ACCOUNTS - Clause 24

55. That Clause 24 of the Code be aligned with the relevant EFT Code provisions when they

are finalised.

56. In the interim clause 24.1 of the Code be amended to include a new paragraph (e)

(e) where the transaction information has already been provided to you by other means.

ADVERTISING - Clause 30

57. That clause 30 on Advertising be retained in the Code.

58. That clause 30.1 be amended to include reference to legislative requirements in relation

to advertising by banks as follows:

We will ensure that our advertising and promotional literature drawing attention to a

banking service is not deceptive or misleading in accordance with legislative

requirements.

INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35,

36 and 37

59. That clause 35.1 (b) in relation to internal dispute resolution standards be amended to

read as follows:


23

(b) meet the standards set out in any internal complaints handling standard or guideline

that ASIC declares is to apply to this Code;

60. That clause 36 (b) in relation to external dispute resolution policy statements or

guidelines be amended to read as follows:

(b) consistent with any external dispute resolution standard or guide that ASIC declares

is to apply to this Code.

61. That clause 35.1 (a) be amended as follows:

a) be free and accessible.

62. That any additional legal or other costs which may be incurred and/or imposed on

customers by banks should be reasonable having particular regard to the impact on

customers experiencing financial difficulties.

APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39

63. That clause 39 be amended to reflect the changes in the Code following this review,

making it clear that subscription to the Code means subscription to the entire Code.

64. That the application and transitional provisions clarify that the requirement for third

party debt collectors and finance and mortgage brokers to be members of an ASIC

approved EDR scheme, as recommended by the review:

a) apply to any new contracts entered into after the commencement date of the new

Code; but

b) do not apply retrospectively to contracts which have been signed prior to the

commencement of the new Code and the terms of which extend beyond the

commencement date of the new Code.

CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New

Provision

65. That the Code include a new clause on Customers in Remote Indigenous Communities.

66. That the new clause on Customers in Indigenous Communities records the support of

subscribing banks to the Indigenous Commitment Statement and incorporates principles

in relation to the provision of appropriate banking services to customers in remote

Indigenous communities where such services are currently provided, taking into account

the following issues:

a) Provision of information and communication with customers in indigenous

communities;

b) Account suitability for customers in remote indigenous communities;

c) Identification issues relating to the opening of accounts for customers in remote

Indigenous communities;

d) Indigenous cultural and community awareness training for staff operating in

indigenous communities;


24

e) The implications of government programs such as income management programs on

the provision of banking services and products in remote indigenous communities.

LANGUAGE AND STRUCTURE OF THE CODE

67. That the language of the revised Code be simplified and less formal.

68. That the structure of the Code be amended to link related topics more closely together in

the Code.

69. That the Code be drafted in a way that will keep pace with rapid developments in the

consumer and financial regulatory environments.

STAFF TRAINING AND COMPETENCY - Clause 7

70. That clause 7 (a) of the Code be amended to make explicit reference to compliance with

the Code as follows:

can competently and efficiently discharge their functions and provide the banking

services they are authorised to provide in compliance with the Code; and

71. That clause 7 (b) of the Code be amended to include reference to the practical

application of the Code to banking transactions and services as follows:

have an adequate knowledge of the provisions of this Code and its application to banking

transactions and banking services.

UNFAIR CONTRACT TERMS

72. That the issue of the inclusion of unfair contract terms in the Code be considered in the

context of the proposed national regulation of consumer credit.

ACCOUNT COMBINATION- Clause 17

73. That clause 17 of the Code be amended to make it clear that banks will not exercise their

right to combine accounts:

a) While the bank is considering an application for financial hardship assistance in

accordance with the financial hardship provisions of the Code, subject to the

customer‟s agreement that funds in another account (s) can be held by the bank until

a decision is made to approve or decline the application for assistance; or

b) While the customer is complying with an agreed repayment arrangement under the

financial hardship provisions of the Code.

USE OF FINANCE AND MORTGAGE BROKERS

74. That the requirement that banks only use Finance and Mortgage Brokers who are

members of an ASIC approved EDR scheme be considered in the context of the

development of national legislation on finance broking.


25

PROMOTION OF THE CODE – Clause 9

75. That clauses 9 (a) and (c) of the Code be amended to include a commitment by

subscribing banks to prominently display a copy of the Code at their branches and on

their websites.


26

CHAPTER 1 - INTRODUCTION

1.1 Appointment of the Review

I was appointed by the Australian Bankers‟ Association (ABA) on 29 November 2007 to

conduct a review of the Code of Banking Practice (Code). The commencement of the review

was publicised in a press release issued by the ABA on 21 December 2007 and by letters sent

by me on 3 January 2008 to consumer representatives, Chief Executives of State Government

Departments of Fair Trading, Commonwealth regulatory agencies and industry associations

and other organisations that might have an interest in the review.

1.2 The Code of Banking Practice

The Code of Banking Practice is a voluntary code of conduct which sets standards of good

banking practice for banks to follow when dealing with individual and small business

customers and their guarantors. The Code was first published in November 1993, and with the

agreement of the Federal Treasurer, became fully operative from 1 November 1996.

Clause 5 of the Code prescribes that the ABA is to commission an independent and transparent

review of the Code at least every 3 years in consultation with: banks which adopt the Code;

consumer organisations; other interested industry associations; relevant regulatory bodies; and

other interested stakeholders.

The first review of the Code was undertaken in 2000 and 2001. The current version of the

Code, which was published in May 2004, reflects the outcomes of the extensive consultation

undertaken during the first review of the Code.

1.3 Terms of Reference

The terms of reference for the review are set out in full at Appendix A of the Issues Paper,

which I published on 28 May 2008.

1.4 Approach

1.4.1 Preparation for the Review

On 16 May 2007 the ABA advised consumers, regulators and stakeholders of the forthcoming

review of the Code and sought their views on the scope of the review and the issues to be

considered by the review. Ten organisations responded identifying issues and providing

comments and suggestions on proposed amendments to the Code. Copies of this

correspondence were provided to me at the time of my appointment to provide a context to the

review and to assist me in shaping the review methodology.


27

At the time of my engagement, the ABA arranged for me to meet with members of the ABA‟s

Community and Consumer Consultative Forum1 (Consultative Forum) and with representatives

of Code subscribing banks to seek their views on relevant issues and to consult with them on

the proposed methodology and timeframe for the review.

Because of the strong foundation established by the previous review of the Code, consumer

advocates, regulators and banks were generally of the view that the current Code does not need

to be changed significantly. Nonetheless, they acknowledged that the current review provides

an opportunity to review the provisions of the Code in the context of legislative, economic,

social and technological changes which have occurred since the previous review.

1.4.2 Announcement of the Review

The commencement of the review was publicised in a press release issued by the ABA on 21

December 2007.

On 3 January 2008 I wrote to consumer representatives, Chief Executives of State Government

Departments of Fair Trading, Commonwealth regulatory agencies, industry associations and

other persons and organisations who might have an interest in the review advising them of the

commencement of the review and inviting submissions and consultations with them on issues,

comments and suggestions.

A Code Review website was established in April 2008. The website included a copy of the

current Code, the terms of reference of the review, copies of press releases and updates on the

review process. Major submissions received during the review process were also published on

the website.

1.4.3 Consultations

Between January and May 2008 I held meetings and discussions with consumer advocates,

financial counselling organisations, government departments, industry associations, interested

organisations and individuals. I also met with representatives of Code subscribing banks and

attended presentations and discussions on aspects of banking practice organised by individual

subscribing banks.

1.4.4 Initial Submissions

A number of organisations indicated that they would not be making written submissions to the

Review until after the release of the Issues Paper. Others chose to make submissions outlining

issues identified during consultations with me. Sixteen submissions were received (ten from

organisations and six from individuals). Seven submissions from organisations were published

on the website with the permission of those organisations.

1.4.4 Review of Documentation

In addition to extensive consultation with organisations and individuals, I undertook a review

of documentation on banking and related practices overseas and in other sectors, legislative and

1 Established under Clause 5.3 of the Code


28

regulatory changes and decisions of courts, regulators and dispute resolution bodies which

might impact on the Code.

1.4.5 Attendance at Forums

During the course of the review, I attended forums organised by the Australian Securities and

Investment Commission (ASIC), the Australian Competition and Consumer Commission

(ACCC) and the ABA on issues relevant to the Code review. These included an ASIC Remote

Lending Forum on 13 March 2008, a forum on financial hardship organised by the ABA on 2

May 2008, an ACCC/ASIC Debt Collection Forum on 5 September 2008 and a number of

meetings of the Consultative Forum.

1.4.6 Issues Paper

On 28 May 2008 I published an Issues Paper that identified key issues raised by consumer

advocates, financial counsellors, regulators, banks and individuals in submissions and

consultations. The Issues Paper made a number of interim recommendations in relation to

these issues. Responses to the Issues Paper were invited by 9 July 2008. At the request of

stakeholders, this date was extended to 31 July 2008.

Twenty five submissions were received in response to the Issues Paper. Twenty four

submissions received in response to the Issues Paper were published on the Code review

website in early August 2008.

1.4.7 Final Report

Following receipt of submissions in response to the Issues Paper, I undertook an analysis of the

respective positions of consumer advocates, regulators, banks and industry representatives on

key issues and others identified by them in their submissions and continued to hold

consultations with interested parties.

Having carefully considered the various views and submissions put to me, I developed a set of

recommendations which I proposed to include in my final report. These were provided to the

ABA, consumer advocates, ASIC, the New South Wales Office of Fair Trading (NSW OFT),

the Financial Ombudsman Service (FOS) and the Code Compliance Monitoring Committee

(CCMC) on 20 November 2008 for comment and discussion prior to the finalization of my

report. Their comments and discussions on the proposed recommendations have been helpful

to me in finalising my recommendations in the Final Report.

1.5 Structure of the Report

This report is intended to be read in conjunction with the Issues Paper. For ease of reference,

the Final Report follows a similar format to the Issues Paper.

The key and most contentious issues identified by consumer advocates, regulators and

banks are discussed at the beginning of the report.

The report then discusses a range of other issues identified in submissions and consultations

that require attention to reflect changes in the regulatory environment or banking practice.

The report also includes discussion on a number of additional issues that were not included

in the Issues Paper but were raised in the JCS in response to the Issues Paper.


29

For each issue, the report provides a brief outline of what the Issues Paper recommended, the

responses to the Issues Paper, my assessment of the various perspectives on the issue and

recommendations. The report identifies the relevant clause(s) of the Code in discussing each

issue. The report also identifies where there is currently no Code provision in relation to a

particular issue.

A consolidated set of recommendations is included at the commencement of the report.

1.6 Acknowledgements

I would like to thank the many organisations and individuals who have contributed to the

review2. They have been most generous in giving their time and in sharing information,

insights and suggestions on the Code and related banking standards and services. They have

approached the consultations in a spirit of cooperation and with a genuine desire to achieve a

Code that works effectively for banks and consumers and contributes to the economic and

social wellbeing of Australia.

I also wish to acknowledge the outstanding work of the previous Code reviewer, Mr Richard

Viney, in establishing a strong base and platform for the current review. His support and

assistance to me during the review process have been greatly appreciated.

2More than one hundred and fifty individuals and over sixty organisations have contributed to the review by

submissions, consultation and correspondence.


30

CHAPTER 2 - CONTEXT

2.1 Economic and Regulatory Changes

The review has been undertaken at an unprecedented time in Australia‟s financial and

economic history. The global economic downturn has created uncertainty for banks in respect

to the availability of finance and the cost of borrowing and has had a significant impact on the

financial situation of individual consumers. At the same time there has been a strong focus on

national regulation of the financial services sector.

The Issues Paper discussed changes in the global economic and national financial regulatory

environments and their impact on the Code of Banking Practice3. Developments in the

financial services regulatory environment in Australia since the previous review of the Code

include;

Anti-Money Laundering and Counter-Terrorism Financing Act 2006;

The Australian Government Productivity Commission‟s Inquiry into Australia‟s

Consumer Policy Framework 2007-2008 and the proposed national regulation of

consumer credit;

The Australian Law Reform Commission Review of Privacy Legislation;

Projects sponsored by the Ministerial Council of Consumer Affairs on matters such as

responsible lending; proposed legislative amendments in relation to fringe lending;

reverse mortgages; and unfair contract provisions;

The Senate Economic Committee‟s review of the Australian Securities and Investment

Commission (Fair Bank & Credit Card Fees) Amendment Bill 2007;

ASIC‟s review of online financial services disclosures;

The development of a new ASIC dispute resolution standard;

The merger of Financial Ombudsman Services;

Account switching;

The establishment of a Financial Services Working Group to look at the current key

issues associated with financial services advice and disclosure.

Reviews of other Codes of Practice and the development of new codes of Practice in the

financial services industry have also taken place since the previous review of the Code. These

include:

The Review of the Electronic Funds Transfer Code of Practice by ASIC;

3 Issues Paper, May 2008, pp13-19

http://parlinfoweb.aph.gov.au/piweb/browse.aspx?path=Legislation%20%3E%20Current%20Bills%20by%20Title%20%3E%20Australian%20Securities%20and%20Investments%20Commission%20(Fair%20Bank%20and%20Credit%20Card%20Fees)%20Amendment%20Bill%202007




31

The review and introduction of a revised British Banking Code in March 2008;

The General Insurance Code of Practice which came into operation in July 2006;

The development by the Association of Building Societies and Credit Unions (Abacus)

of a Mutuals Code of Practice;

The development by the Mortgage and Finance Association of Australia (MFAA) of a

Code of Practice for its members;

The development by Senior Australian Equity Release Association (SEQUAL), a not for

profit organisation established in 2005 to oversee lenders of equity release loans, also

referred to as reverse mortgages, of a Code of Conduct for its members.

Publications of decisions and findings of the BFSO and CCMC have also shaped the

implementation of Code provisions by subscribing banks, as have guidelines published from

time to time by the ABA.

Since the Issues Paper was published on 28 May 2008, there have been further developments in

the economic and regulatory environment in which banks operate. These include a further

deterioration in the global economy, action by the Commonwealth Government to provide

guarantees up to a certain limit for customers‟ deposits, and two significant acquisitions of

banks by other banks.

In addition there have been further changes in the financial services regulatory environment

including:

On 2 October 2008 the Council of Australian Governments adopted a plan for the transfer

of all consumer credit regulation from the States and Territories to the Commonwealth.

The Ministerial Council on Consumer Affairs (MCCA) in August 2008 released a

consultation Regulatory Impact Statement on Responsible Lending Practices in Relation to

Consumer Credit Cards.4

The Australian Law Reform Commission, as part of its major review of Australian privacy

law and practice, has proposed the introduction of a more comprehensive credit reporting

regime that would allow the types of information that may be recorded on a credit file to be

expanded to include information about current credit accounts, the dates those accounts

were opened and closed, and the credit limits of each.

These changes and how they impact on the Code are discussed in relation to the relevant

provisions of the Code.

2.2 Status and Standing of the Code

The Code is recognised by consumers, regulators, banks and the financial services industry as

of a high standard for a voluntary self-regulatory instrument.

4 Responsible Lending Practices in Relation to Consumer Credit Cards, Regulatory Impact Statement, August

2008


32

The Code has the strong support of subscribing banks, although an issue of contention on the

part of consumer advocates is that not all ABA member banks subscribe to the Code5. There

are currently 14 Code subscribing banks.

Consumer advocates, regulators and banks acknowledge that the Code has been effective in:

establishing a strong foundation for a culture of continuous improvement in banking

standards and services;

facilitating more effective relationships between the banking industry and consumers ,

particularly through the Consultative Forum established under clause 5.3 of the Code;

providing useful guidance to banks and consumers on banking issues, standards and

services;

providing a useful tool for consumer advocates and financial counsellors in gaining

assistance for their clients;

providing a useful resource for the FOS in carrying out its dispute resolution function;

and

providing a useful resource for the CCMC in carrying out its compliance monitoring


However, consumer advocates and regulators consider that the leading position which the Code

of Banking Practice has held as an industry code of practice has been overtaken in some

respects by new and revised Codes of Practice in the banking and financial services sector in

Australia and overseas. In their view, it is imperative that the Code of Banking Practice, at the

very least, keeps pace with regulatory and economic changes as well as changes in social and

community expectations.

Ideally, the Code of Banking Practice should continue to lead the way in achieving continuous

improvements in banking practice. It is my hope that this review will result not only in the

Code of Banking Practice being updated to reflect changes in the social, economic and

regulatory environment but also in the continuing recognition of the Code as a leading code of

practice in the banking and financial services sector.

5 Joint consumer submission to the review of the Code of Banking Practice and the Review Issues Paper, 31 July

2008, pp. 6-8


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CHAPTER 3 - RESPONSIBLE LENDING

3.1 Credit Assessment - Clause 25.1

3.1.1 Issues Paper

Credit assessment was a key issue, and one of the most contentious, for the Code review.

Consumer advocates and regulators are particularly concerned to prevent situations occurring

where low income earners and pensioners are offered credit cards or increases in their credit

card limits when they are not in a position to be able to make the repayments, leading to

increasing levels of debt and financial difficulty. They advocate the expansion of Clause 25.1

to strengthen the obligations and requirements of banks in assessing the capacity of borrowers

to meet their repayments.

Subscriber banks, on the other hand, do not support any expansion of clause 25.1 arguing that

the clause is a lending principle not lending process, and that if the clause is highly prescriptive

and process oriented, it could place subscriber banks at a competitive disadvantage with non-

bank credit providers and non-Code subscribers. They also argued that banks have a

commitment and responsibility to provide services to all spectrums of the community and that

figures show that overall credit card customers are paying back more than they are borrowing.

They further argued that the legislative regulation of credit assessment processes in the ACT

has not resulted in an improvement in credit facility delinquency rates compared with other

parts of Australia which are not subject to such regulation.

The Issues Paper6 discussed in some detail the views of consumer advocates, regulators and

subscribing banks on clause 25.1 as well as bank credit assessment methodologies and the

current regulatory environment relating to consumer credit. The Issues Paper concluded that

clause 25.1 of the Code of Banking Practice reflects current legislative and regulatory

requirements as well as the principles and outcome that consumers and regulators are seeking

to achieve in relation to responsible lending, namely a rigorous assessment of a customer‟s

capacity to repay the credit facility7.

The Issues Paper recommended that Clause 25.1 be retained but as a stand alone provision in

the Code and expanded to include reference to credit assessment policies to be developed by

the ABA in consultation with consumers, regulators and banks, and published on the ABA

website and the websites of subscribing banks. The Issues Paper also recommended that the

policies be reviewed annually by the Consultative Forum to ensure currency with relevant

legislation, standards and best practice. The Issues further recommended the inclusion of a

commitment to responsible lending as an additional key commitment in clause 2 of the Code.

6 Issues Paper, 28 May 2008, pp.20-26

7 Issues Paper, 28 May 2008, p.28


34

The interim recommendations in the Issues Paper were based on the British Banking Code

which includes general commitments on responsible lending and credit assessment. The

British Banking Code is supported by separate more detailed guidelines developed by the

British Bankers Association. The interim recommendations were similarly intended to

formalise the linkages between the Code of Banking Practice and policies or guidelines

published by the ABA from time to time in relation to Code provisions. They were also

intended to build on the constructive relationship and dialogue between the ABA and consumer

advocates in the Consultative Forum, established in accordance with clause 5.3 of the Code,

which I had the opportunity to observe during the review process.

3.1.2 Responses to the Issues Paper

Most consumer and regulator responses to the Issues Paper welcomed the inclusion of a

general principle of responsible lending as a key commitment in the Code. They also

supported the retention of clause 25.1 as a stand alone provision on credit assessment. The

ABA was also prepared to accept these interim recommendations.

Regulators, the FOS, Credit Ombudsman Service Limited (COSL) and some financial

counsellors supported the recommendations relating to the development and review of credit

assessment policies by the ABA in consultation with stakeholders. However, neither the JCS

nor the ABA supported this recommendation. Both expressed the need for the provisions of

the Code to be clear and definitive and to stand alone as far as possible without the need for

reference to other sources or documents. Also it was considered inappropriate by both

consumer advocates and subscribing banks for the role of the Joint Consultative Forum to

extend to policy formulation or review.

Consumer advocates acknowledged that Clause 25.1 of the current Code, which deals with

credit assessment, was a welcome addition following the last Code review. However, they

argued that the credit assessment provisions of the Code should be more prescriptive in relation

to the processes that banks must follow in assessing the capacity of customers to repay credit

facilities or increases in their credit card limits. Such processes, they advocated, would ensure

that an adequate assessment is made of the capacity of customers, particularly low income

earners, pensioners and members of the community with low financial literacy levels, to meet

their repayment obligations.

Consumer advocates are also keen to ensure that subscriber banks do not fall behind advances

in „responsible lending‟ in banking or in other parts of the financial services sector in Australia

and overseas. Codes of practice recently adopted by the British Bankers Association, the

Abacus draft Mutuals Code of Practice, the Mortgage and Finance Association of Australia

(MFAA) Code of Practice, the ACT Fair Trading Act and the draft Finance Broking Bill 2007

were cited as examples of better practice that consumer advocates and regulators would like to

see Australian banks at least follow or preferably surpass.

Consumer advocates referred to decisions from external dispute resolution (EDR) schemes

such as the COSL and the FOS in relation to maladministration as well as decisions of the

courts in relation to the Contracts Review Act 1980 and the Uniform Consumer Credit Code

that reinforce the obligation of lenders to make an adequate assessment of a borrower‟s

capacity to repay the credit facility. Such decisions make it clear that relying simply on credit


35

and behavioural scoring will rarely, if ever, be sufficient.8 Consumer advocates expressed

concerns about the possible implementation of so-called „positive credit reporting‟

emphasizing that any proposal to expand the credit reporting system does not obviate the

urgent need for greater specificity on responsible lending in the Code.

Consumer advocates suggested an amendment to the Code that is partially based on the draft

Mutuals Code of Practice and the draft Finance Broking Bill 2007. The suggested amendment

proposed two parts to the credit assessment clause, one part dealing with responsible lending

and assessment of a customer‟s capacity to repay the credit facility, and a second part dealing

with unsolicited offers of credit limit increases.

In its response to the Issues Paper, the ABA continued to support the retention of the credit

assessment provision in the Code as it is currently formulated. The ABA asserted that clause

25.1 is a standard, an outcome orientated provision that does not impose an invariable “one size

fits all” credit assessment process. It places the onus on the bank to apply the standard of a

diligent and prudent banker to select and apply its credit assessment methods and to form its

opinion about the customer‟s ability to repay. The ABA asserted that banks already set what

are acceptable standards for lending. There is ample evidence in the current market that the

standard set by banks is higher and more robust than those applied by non-bank credit

providers such as non-conforming lenders.

The ABA stressed that credit risk is the risk banks accept with a lending decision. A bank‟s

own internal data and its prudential regulator will inform the bank whether its credit

assessment practices and procedures are adequate. Individual bank‟s policies and procedures

are subject to the prudential supervision of by the Australian Prudential Regulation Authority

(APRA). There are clear commercial in-confidence and potential competition issues involved

in such a process and an ongoing process of review.

The ABA noted that data published by the Reserve Bank of Australia in May 2008 in relation

to credit cards indicate that customers have been adjusting their management of their credit

cards taking account of current economic conditions. The ABA also commented that the ACT

credit assessment process that was introduced through provisions in the Fair Trading Act

(ACT) 2002 has had no impact on banks‟ credit card default rate in the ACT compared with the

rest of Australia when tested in 2005.9

The ABA commented that the British Banking Code takes a more practical approach to the

credit assessment than the Abacus Mutuals Code of Practice. In the United Kingdom (UK) a

Guidance for Subscribers document has been produced as an aid to interpretation of the

Banking Code. The guide recognizes that there is a range of tools and methodologies available

to banks to assess the credit worthiness of the customer including internal credit scoring tools.

The ABA noted however that there are significant differences between the UK and Australia in

relation to credit reporting. The UK, like the United States of America (USA) has a positive

8 Similar views were expressed in the submission from the COSL

9 Based on data obtained from banks for the relevant period.


36

system of credit reporting which enables banks to obtain details of credit provided by other

financial institutions10

compared to the negative system of credit reporting in Australia11

.

The ANZ Bank submitted that the most appropriate credit assessment method differs

depending on a customer‟s circumstances, such as whether the customer is new to the bank or

has been a long standing customer with an established credit history. A manual assessment of

financial information is the most appropriate method to properly assess new applicants for

credit where there is a lack of any other information. Internal scoring tools are not generally

applied to assess the capacity of a customer for a credit card limit increase offer unless that

score can be based on nine months of the customer‟s transactional and repayment data. This is

based on research12

undertaken by the bank which has identified that where the bank has built

up information about a customer‟s credit behaviour over this timeframe, automatic scoring is a

more reliable technique to assess further credit applications.

The ANZ bank submitted that banks need the flexibility to select the most appropriate

mechanisms for the circumstances and pointed to the British Banking Code as a possible model

for a way forward.

3.2 Unsolicited Offers of Credit Card Limit Increases – Clause 25.1

Consumer advocates submitted that the practice of making unsolicited offers of credit card

limit increases is inconsistent with a framework that is based on assessing, and responding to,

the actual product needs of customers. They indicated that, at a minimum, they would favour

an amendment to the Code that places greater obligations on banks in relation to unsolicited

offers of credit limit increases. The Joint Consumer Submission recommended that Clause

25.1 be expanded to include reference to the circumstances in which unsolicited offers of credit

limit increases will not be made, the type of information that will be provided to customers

receiving an offer including information about how they can decline the offer.

The ABA suggested that the Code could point to the initiatives that the ABA and member

banks took in April 2004 in providing further information to credit card customers to help them

make better decisions about whether to accept or decline an offer of a credit card limit increase.

Such information includes advice to customers on how much they would have to pay if they

accept the offer, advice that they should not accept any credit card credit limit increase offer if

10Such information includes the date accounts are opened; the credit limit or the amount of the loan; payment

terms; payment history; and payment arrangements entered into with the credit provider.

11 Information is collected on whether a credit provider has sought a credit report in connection with an

application for credit, and reports of default, court actions and bankruptcy. 12 ANZ pointed to 2005 survey data of a group of recently acquired credit card customers which showed that

customers assessed using behavioural scoring methodologies were less likely to be experiencing difficulties in

repaying their credit card repayments than those assessed on the basis of self reported financial details. They also

pointed to the results of another 2005 survey of credit card customers in the ACT which showed that the

requirement for manual assessment of customers‟ financial situations has not reduced the default rate compared with other locations where behavioural scoring is used. They further commented that there was a high rate (24%)

of data errors and omissions in the credit applications.


37

their circumstances have changed or are likely to change, how they can decline the offer or opt

for a lower limit, and how to reduce their credit card limit.

In September 2006 the ABA developed a set of principles for banks to take into account, when

considering whether to approach a customer to offer a credit limit increase on a credit card.

The principles include consideration of factors such as: the customer‟s credit card repayments

history; whether, in the course of dealing with the cardholder, the bank becomes aware that the

cardholder is in receipt of a welfare payment that is the cardholder's sole source of income; the

cardholder‟s recent credit card history and/or whether the bank is aware of other information

that suggests the cardholder may be likely to be experiencing financial stress; and whether the

cardholder is a new customer and/or whether the cardholder has acquired any other products

from the bank.

3.3 Developments since the Last Code Review

3.3.1 Subscribing Banks‟ Policies on Responsible Lending

Since the last Code review, a number of banks have introduced responsible lending policies.

The policies deal mainly with the issue of offers of credit limit increases and dealing with

customers experiencing financial hardship, an issue that is discussed in the next section of this

report.

The policies on offers of credit card limit increases refer to the circumstances in which

unsolicited offers of credit card limit increases will not be made and the type of information

that will accompany any offers that are made.

3.3.2 National Regulation of Consumer Credit

On 2 October 2008 the Council of Australian Governments adopted a plan for the transfer of

all consumer credit regulation from the States and Territories to the Commonwealth.

Under the first phase of the action plan, which is to be completed by mid 2009, the Uniform

Consumer Credit Code will be enacted as Commonwealth legislation and ASIC will become

the sole, national regulator for consumer credit lending and finance broking. A national

licensing regime is to be established for providers of consumer credit and credit-related

brokering services. Licensees will be required to observe a number of general conduct

requirements, including responsible lending practices, and to be members of an external

dispute resolution body.

The second phase of the action plan, which is to be completed by mid 2010, will include

among other matters, a review of unsolicited credit card limit extension offers.


38

3.3.3 Ministerial Council on Consumer Affairs Regulatory Impact

Statement on Responsible Lending Practices in relation to Consumer

Credit Cards

The MCCA in August 2008 released a consultation Regulatory Impact Statement on

Responsible Lending Practices in Relation to Consumer Credit Cards.13

The focus of the paper is on factors which appear to contribute to the situation of a small

percentage14

, but substantial number of consumers who are burdened with ongoing

unmanageable credit card debts. These factors were identified as including:

Essential information is received at a time when it is unlikely to be useful;

Credit providers‟ assessment practices maximise the amount of credit granted;

Minimum repayment percentages are set out at a very low level; and

The legislative requirements are remedial not preventative and the remedy does not

have any systematic effect.

The paper asserts that the aim of Government intervention is to assist consumer choice of

competitively priced credit card products and protect consumers, especially vulnerable or

disadvantaged consumers, from lending practices which irresponsibly provide continuing credit

at levels which cannot be repaid without substantial hardship while at the same time

minimising the effect on consumers who manage their cards satisfactorily.

The paper canvasses a number of options relating to penalties, education and training, types of

regulatory models, the timing and type of information provided to customers, relief for

customers, and increasing minimum repayment requirements.

3.3.4 Australian Law Reform Commission Review of Privacy Legislation

The Australian Law Reform Commission, as part of its major review of Australian privacy law

and practice, has proposed the introduction of a more comprehensive credit reporting regime.

At the moment, the Privacy Act generally allows credit files to include only „negative‟

information, such previous defaults. The ALRC proposes to expand the types of information

that may be recorded on a credit file, to include information about current credit accounts, the

dates those accounts were opened and closed, and the credit limits of each.

3.3.5 Financial Ombudsman Service

The FOS, formerly the Banking and Financial Services Ombudsman (BFSO), each year deals

with a number of cases deemed to be maladministration in granting credit. Annual reports for

the past three years show that credit card issues represent the majority of consumer finance

matters referred to the BFSO each year. Maladministration in granting credit card credit

represents approximately 10% of consumer finance problems handled by the BFSO.

13 Responsible Lending Practices in Relation to Consumer Credit Cards, Regulatory Impact Statement, August 2008

14 Estimated in the paper to be approximately 10% of cardholders.


39

While each case is determined on the basis of its particular facts a number of themes or

systemic issues have been identified and guidelines developed in relation to maladministration

in the granting of credit, whether by way of credit cards or personal loans. Bulletin 50 states

that:

When considering any application for credit, we expect lenders to obtain sufficient information

from the consumer about his/her personal and financial position to assess the consumer’s capacity to repay the debt. The types of information which they might consider include salary deposits,

Centrelink payments, other regular funds being deposited, and regular debits to meet other

financial commitments. The BFSO draws a distinction between credit assessment for personal loans and credit cards noting that personal loan lending policies require some verification of

income and savings, employment details and history, residential details and assets and income. 15

BFSO has also made it clear that

In the absence of special circumstances the decision by a bank to increase a consumer’s credit limit

when the consumer did not have the capacity to repay is considered to be maladministration.16

3.4 The Way Forward

Much has changed since the last Code review in the area of credit assessment. The sub prime

mortgage situation in the United States and the current economic climate have heightened

community awareness of the devastating consequences that irresponsible lending practices can

have on individuals, financial institutions and the economy in general. They have also

illuminated the importance of robust financial institutions to national and global economic

security and prosperity.

3.4.1 Credit Assessment

Consumer advocates, financial counsellors, financial services employees, governments and

regulatory bodies are demanding tighter controls over lending practices to ensure that the more

vulnerable members of our society are not provided with credit which they are unable to repay.

They want banks to lead the way.

At the same time, banks need the flexibility to be able to apply different methodologies to the

different circumstances of their customers in order to ensure that debts will be repaid without

undue financial hardship on borrowers.

While the current clause 25.1 of the Code provides a strong foundation for the credit

assessment policies and practices of banks, both in meeting their prudential obligations and in

ensuring that customers have the capacity to repay credit facilities approved by banks, there is

evidence from disputes referred to the BFSO, allegations of Code breaches referred to the

CCMC, and examples provided by consumer advocates that there have been instances where

credit facilities have been approved to borrowers who did not have the capacity to repay the

credit facility.

15 BFSO Bulletin 50, June 2006, p.3

16 BFSO Bulletin 50, June 2006, p.8


40

In considering the way forward I have taken into account guidelines and comments of the

BFSO (now the FOS) that there should be an appropriate assessment of a customer‟s financial

position in determining their capacity to repay the credit facility. I propose that clause 25.1 be

amended to reflect this requirement.

I have also taken into account that credit assessment approaches will vary depending on

whether the application for credit or an increase in credit is from a new or existing bank

customer and that banks need to have the flexibility to apply different credit assessment

methodologies appropriate to their customers‟ circumstances17

.

While I agree that a rigorous assessment of income and expenditure of new customer

applications is appropriate, a “one size fits all‟ manual process driven approach, which was

recommended by consumer advocates would not only be time consuming and costly, but it

would be unnecessary in relation to existing bank customers. I am also satisfied on the

evidence provided to me by banks that their credit assessment methodologies are rigorous and

as reliable as manual methodologies in predicting risk of credit stress in the case of existing

bank customers whose financial situation and credit history are known to the bank.

In proposing a clause that would specify the types of credit assessment facilities that banks may

apply as appropriate to a customer‟s circumstances, I have taken note of the concerns of ASIC

and consumer advocates that such a provision should not be so flexible as to be meaningless or

confusing for consumers and difficult to enforce by regulators. I have also taken account of the

approach taken in respect of the British Code of Banking Practice which requires banks to

apply more than one methodology in assessing a customer‟s capacity to repay a credit facility

and the suggestion by the ANZ Bank that such an approach could be taken in the Code of

Banking Practice. In addition, I am mindful of the proposed national regulation of consumer

credit and the intention to require licensed providers to meet responsible lending standards and

that the Code should position banks to meet those requirements.

I had also considered recommending the inclusion of two additional provisions in relation to

periodic review of credit assessment methodologies and promotion of responsible use of credit

to customers using a variety of approaches. Similar provisions are included in the Abacus

Mutuals Code of Practice and were suggested by consumer advocates. However, I have taken

note of ASIC‟s comments that such provisions are covered by the existing key commitment to

continuous improvement and the new key commitment that I propose be included in the Code

on responsible lending. I have therefore decided not to recommend their inclusion as new

provisions in clause 25.1 but to incorporate them in a new proposed key commitment on

responsible lending.

3.4.2 Unsolicited Offers of Credit Limit Increases

My recommendations in relation to unsolicited offers of credit card limit increases take into

account the recommendations of consumer advocates for strengthened provisions. They also

build on guidelines developed by the ABA and reflect the practices of some individual banks.

17 This is consistent with the approach taken in the British Code of Banking Practice.


41

While I had considered proposing two provisions18

in relation to the factors that banks would

take into account in deciding whether to make an offer of an increase in the credit limit of a

credit card facility, I have taken into account the views of ASIC and banks that the overlap and

duplication of the two proposed provisions would be confusing for consumers and pose

difficulties in determining compliance with the provisions. I have therefore proposed one

provision that sets out the factors that banks will take into account in determining whether to

make an unsolicited offer of a credit limit increase to customers. These are designed to ensure

that unsolicited offers of credit limit increases will require additional consideration for

customers with a poor credit history, those who are having difficulty meeting their current

credit facility repayments, those receiving Centrelink or similar benefits as a sole source of

income and customers who have requested not to receive unsolicited offers of credit limit

increases. I have also taken into account the views of ASIC and consumer advocates that this

provision should apply not only to unsolicited offers of credit card limit increases but also to

unsolicited offers of other credit facility limit increases.

Recommendations

General Principle of Responsible Lending

1. That a key commitment to responsible lending be included in the current Clause 2 of the

Code, Our key commitments to you, along the following lines:

We will be responsible lenders in approving credit, offering credit limit increases,

supporting customers facing financial difficulty; and promoting the responsible use of

credit.

Provision of Credit

2. That a separate clause on provision of credit be included in the Code, building on Clause

25.1 but expanded to include two parts, one relating to approval of an application for a

credit facility and another relating to unsolicited or other offers of credit card limit

increases, which covers the following:

A. Approval of an Application for a Credit Facility

1) Before we approve your application for a credit facility or for an increase in your

existing credit facility, we will exercise the care and skill of a diligent and prudent

banker in selecting and applying appropriate assessment methods to your

circumstances and financial position and in forming our opinion about your ability

to repay the credit facility.

2) Our credit assessment methods will vary depending on a range of factors including

the credit facility product, whether you are a new customer or have an existing

banking relationship with us, the information you have provided to us and the

18 One provision was the recommended Unsolicited or Other Credit Limit Increase Offers clause (1). The other

was a proposed (2) additional provision that banks would not make an unsolicited offer to increase a customer‟s

credit limit if they have a poor credit history, have been repeatedly been overdue in making repayments, have only made minimum repayments in the previous six months, are receiving Centrelink benefits or have asked not to

receive credit limit increase offers.


42

information available to us from other sources. Our credit assessment methodologies

will include, as appropriate to your circumstances, consideration of at least two of the

following factors:

e) Information you have provided on your income and financial commitments;

f) How you have handled your finances in the past;

g) Our internal credit scoring techniques;

h) Information from credit reference agencies.

B. Unsolicited or Other Credit Limit Increase Offers

1) If we decide to make you an offer of an increase in the credit limit of your credit

facility, we will take into account the following criteria:

a) Your recent credit facility repayments history, including whether you have been

able to meet repayments or whether you have a history of missed or late payment;

b) Your income, if in the course of our dealing personally with you, we become

aware that you are in receipt of a welfare payment that is your sole source of

income;

c) Your recent credit facility history, including whether you have a history of

consistently reaching or exceeding the credit limit while making only the

minimum monthly repayments, and/or whether we are aware of other information

that suggests you may be likely to be experiencing financial stress;

d) Your banking relationship with us, including whether you are a new customer

and/or whether you have acquired any other products from us; and

e) Your request not to receive unsolicited offers of credit limit increases, if you have

made such a request.

2) If we decide to make you an offer to increase your credit limit on an existing credit

facility, we will provide information on:

a) The new minimum monthly payment and repayment period if you accept the offer

and the credit facility limit is fully drawn on;

b) How to request a lower credit facility limit than the one we have offered;

c) How and when to reject the offer, for example, if your are having difficulties

meeting your current repayments, or if your financial circumstances have

changed or are likely to change such that you cannot afford to meet increased

repayments; and

d) Easy and efficient ways to reduce your credit facility limit and how long it will

take to process your request for a reduction in your credit facility limit.


43

CHAPTER 4 - FINANCIAL HARDSHIP

4.1 Financial Hardship - Clause 25.2

4.1.1 Issues Paper

Clause 25.2 of the Code dealing with financial hardship was also a significant issue for the

Code review. Consumers, financial counsellors, and regulators recognize that banks have

made substantial progress since the last Code review in handling cases of financial hardship

including the establishment of dedicated teams in some cases. Nonetheless there continue to be

reported cases of alleged breaches of the hardship provisions of the Code19

.

Both the BFSO and the CCMC have issued bulletins setting out guidelines on the

implementation of Clause 25.2. The hardship provisions of the Code have also been the

subject of much debate and discussion at meetings of the Consultative Forum established under

Clause 5.3 of the Code.

While the ABA asserts that the provisions of Clause 25.2 are sound in principle, it

acknowledges that there would be merit in establishing some common, agreed protocols for the

effective operation of Clause 25.2. To this end on 2 May 2008 the ABA convened a forum of

representatives from subscribing banks, consumer advocates, the BFSO and CCMC to discuss

the issue of financial hardship and the expectations of banks and consumers in relation to the

operation of clause 25.2. An outcome of the forum was an agreement to provide financial

counsellors and consumer representatives with the names of the appropriate contact in banks

who can assist with hardship cases. It was also agreed that a working group would be

established to develop some common, agreed protocols for the effective operation of Clause

25.2.

The Issues Paper recommended that Clause 25.2 be retained as a stand alone clause and that the

clause include reference to working with customers and their financial counsellors or

representative in developing a repayment plan. The Issues Paper also recommended that the

clause include reference to protocols for identifying and managing customers who are

experiencing financial difficulty, to be developed by the ABA in consultation with consumer

representatives, regulators and banks, published on the ABA‟s website and reviewed annually

by the Consultative Forum to ensure currency with relevant laws and standards.

4.1.2 Response to the Issues Paper

The JCS noted that there are many excellent examples of banks implementing clause 25.2 in an

effective manner, and improving their practices and processes to the benefit of consumers.

This is particularly the case where banks have instituted a dedicated hardship team. Consumer

19 The Code Compliance Monitoring Committee, 2007-08 Annual Report, p7 reports that the Code Compliance Monitoring Committee, has received a total of 28 cases involving alleged breaches of clause 25.2 in the period

2004-05 to 2007-08.


44

advocates also noted the work that has been initiated following the stakeholder forum hosted

by the ABA on 2 May 2008.

Nonetheless, consumer advocates continue to have concerns about the operation of Clause 25.2

of the Code. They identified issues including poor communication, difficulties in being

referred to the correct person within the bank; lack of timeliness, difficulties in obtaining

recognition of client authorities, contacting clients directly after being notified that a financial

counsellor is acting for them; failure to confirm agreements in writing, unrealistic expectations

about repayment plans, lack of clarity about what happens at the conclusion of a repayment

plan, and a punitive attitude towards consumers in hardship, particularly evidenced when

consumers are referred to the collections area, rather than the hardship area of a bank.

While consumer advocates welcomed the recommended formal recognition of the role of

financial counsellors in the Code, they cautioned against an implicit or explicit requirement

that consumers seeking to access hardship assistance within a bank must also be working with

a financial counsellor. Consumer advocates also commented that a repayment plan might not

be the only outcome of hardship discussions, and it would be unnecessarily restrictive to

reference this as the only option in the proposed change. They cautioned against a „one-size

fits all‟ approach, noting that “the circumstances of individual consumers demand specific

consideration”.

Consumer advocates did not support the interim recommendation that clause 25.3 include a

reference to protocols for identifying and managing customers in financial difficulty, asserting

that this issue should be addressed squarely in the Code itself. While acknowledging that there

would be scope for further guidance and best practice examples to be developed by the ABA

and banks, in consultation with consumer groups and the Consultative Committee, the Joint

Consumer Submission argued that this process should not be used as an alternative to

providing at least some more specific detail in the Code.

Consumer advocates noted that the broad language of clause 25.2 has allowed for flexibility

and innovation by Code subscribers in addressing issues of financial hardship. They advocated

that the broad principles of Clause 25.2 be supplemented with some more specific conduct

rules drawing on the draft Abacus Code and the MFAA Code as well as the BFSO for

guidance.

The ABA, on the other hand, continues to believe that, in the main, the provisions of clause

25.2, which were modeled on the British Code of Banking Practice, are adequate.

The ABA did not support the recommendation that it is necessary for the Code to point to

relevant protocols to be developed on an ongoing basis and reviewed every 12 months as there

is sufficient material developed by the FOS and CCMC to guide banks in relation to this

clause.

The ABA indicated, however, that it is agreeable to clause 25.2 being amended to provide that

a bank will make available for use by financial counsellors a readily accessible point for the

first communication with the bank on behalf of a customer who is seeking to rely on Clause

25.2. Thereafter the ongoing communication should be a matter between the financial

counsellor and the bank rather than be specified in process form in the Code.


45

Individual banks advocated that any protocols should be principles based and cautioned against

a „one size fits all‟ approach. Banks need the flexibility to apply existing hardship programs to

the particular circumstances of customers who are experiencing financial difficulty.

The BFSO has noted that clause 25.2 of the Code of Banking Practice “calls for a broader and

more flexible approach than under section 66 of the Uniform Consumer Credit Code

(UCCC)”.20

. While the BFSO has also emphasised that a “case by case approach will always

be required”,21

it has provided some guidance on its expectations in relation to the

implementation of clause 25.2 in particular circumstances. However, the BFSO has also

commented that there is room for the development of processes which more effectively

recognize when clause 25.2 applies and how the bank member should give effect to the

centralized obligation.

The Commonwealth Treasury suggested that the Code could include obligations on the banks

to put any variation to the loan terms or repayment schedule into writing promptly after

assessing the customer‟s financial situation and formulating a new repayment plan. Noting

provisions in the British Banking Code as a possible precedent, the Treasury commented that

customers in financial difficulty should be encouraged to come forward earlier, preferably

before the customer defaults. The Commonwealth Treasury also suggested that the Code

include a requirement on banks to encourage customers in financial difficulty to seek advice

from financial counsellors.

4.1.3 The Way Forward

In framing my recommendations, I am mindful of the general view by consumer advocates,

banks and regulators that a „one size fits all‟ approach is not appropriate in dealing with cases

of financial hardship and that there must be flexibility to deal with each matter on a case by

case basis. I also appreciate that clause 25.2 in its current form has allowed for flexibility and

innovation by Code subscribers in addressing issues of financial hardship. For these reasons I

do not support the inclusion of prescriptive processes in the financial hardship clause of the

Code.

Nonetheless I believe that the current provisions of clause 25.2 could be strengthened by

expanding the clause to include key principles for dealing with customers facing financial

difficulty which reflect good practice as identified by consumer advocates, regulators and

banks themselves. The recommendations address implementation issues identified by

consumers and regulators including early intervention, communication with customers,

financial counsellors and other representatives, confirmation of agreed arrangements in writing,

moratorium on enforcement while an application for assistance is being considered by a bank,

provision of information, training of staff and regular review of processes.

The recommendations also take into account the comments by the FOS and consumer

advocates that a period of grace should be allowed for customers whose applications for

20

BFSO Bulletin 53, March 2007 Customers in Financial difficulty – Code of Banking Practice and UCCC

Obligations, p18

21 BFSO Bulletin 53, March 2007 Customers in Financial difficulty – Code of Banking Practice and UCCC

Obligations, p18


46

assistance have been rejected in order to allow them time to obtain financial or other advice

before banks proceed to enforcement action or to assign the debt. The recommendations also

take into account the comment by ASIC that when an application for assistance is rejected,

customers should not only be notified of the decision but also the reasons for the decision.

The recommendations incorporate the suggestion of ASIC that, in the interests of simplification

and consistent with comments later in the report on the language and format of the Code, there

should be a single reference to financial counsellors and representatives of customers rather

than repeating reference to them in each clause. They also include the suggestion by ASIC that

customers and their financial counsellors and representatives should be able to obtain

information on processes for dealing with customers in financial difficulty, including relevant

contact numbers, at their request and not just when they receive a default notice.

Recommendations

3. That a separate clause on financial hardship be included in the Code, building on Clause

25.2 but expanded to cover the following:

1) With your agreement, we will try to help you overcome your financial difficulties with

any credit facility you have with us. We will deal with you or, at your request, with

your financial counsellor or representative.

2) If, in the course of our personal dealings with you, we identify that you might be

experiencing difficulties in meeting your repayments we may contact you and invite

you to discuss your situation with us and the options available to assist you in

meeting your obligations in these circumstances.

3) If at any time you feel you are experiencing difficulties in meeting your repayments,

you should make contact with us as soon as possible to discuss your situation with us

and the options available to assist you in meeting your obligations in these

circumstances.

4) If, at the time, the hardship variation provisions of the Uniform Consumer Credit

Code could apply to your circumstances, we will inform you about them.

5) We will provide you with information about our processes for dealing with customers

in financial difficulty, including relevant contact numbers, at your request and when

we send you a default notice.

6) We will respond promptly and courteously to any requests for assistance from you.

7) We will take into account the information available to us, including the information

you provide to us, about your financial situation and determine whether or not we are

able to provide assistance and the nature and extent of such assistance.

8) We will inform you in writing of our decision whether or not to provide you with

assistance and the reasons for our decision. If we agree to provide you with

assistance we will confirm in writing the agreed arrangements.

9) While we are considering your application for assistance where you are experiencing

financial difficulty in relation to a credit facility with us, we will not commence any

enforcement action in relation to the debt or assign the debt. If we reject your

application for assistance, we will allow you a reasonable period of time to obtain


47

advice, before we commence enforcement action in relation to the debt or assign the

debt. If we have commenced enforcement action before you made the request, we

will not proceed to judgement whilst we are considering your situation.

10) We will not require you to access your Superannuation Fund to repay your credit

facility with us.

11) We will have information about our processes for dealing with customers in financial

difficulty available on our website.

12) We will ensure that relevant staff are trained in the financial hardship provisions of

the Code, and applicable consumer credit legislation.


48

CHAPTER 5 - DEBT COLLECTION

5.1 Debt Collection - Clause 29

5.1.1 Issues Paper

Debt collection was another key issue raised by consumer advocates and financial counsellors

in consultations and submissions on the Code Review. Consumer advocates and financial

counsellors expressed concern about the conduct of some debt collectors in pursuing debts.

They are concerned that when banks on-sell debts to third party debt collectors, the purchasers

are not bound by the Code of Banking Practice and that the current ACCC and ASIC debt

collection guidelines do not apply. They submitted that the contract of sale of the debt should

include a requirement for the purchaser of the debt to comply with the Code.

The ABA took a different view arguing that the contractual effect with the customer of a

bank‟s adoption of the Code is that on assignment of the contract, the provisions of the contract

also apply to third parties. As such third parties would be bound by provisions such as external

dispute resolution and debt collection guidelines.

Consumer advocates and the ABA submitted that the debt collection provisions of the Code

should be updated to reflect the more recent 2005 ACCC and ASIC guidelines and make

provision for changes to the guidelines from time to time.

Reconciliation Australia pointed to the particular needs of Indigenous Communities in relation

to debt collection and suggested that the debt collection provisions of the Code take into

specific issues relating to indigenous communities.

The Issues Paper recommended that that Clause 29 of the Code be amended to include

reference to the updated ACCC and ASIC debt collection guidelines and that the debt

collection clause in the Code be relocated to be closer to the clause on financial hardship. The

Issues Paper also recommended that the debt collection clause be expanded to include

reference to debt collection policies and guidelines to be developed by the ABA in consultation

with consumers, regulators and banks, published on the ABA website and reviewed annually

by the Consultative Forum to ensure currency with relevant laws and standards and taking into

consideration provisions for isolated and Indigenous communities.


Consumer advocates supported updating the reference to the ACCC and ASIC guidelines,

relocating the debt collection clause to be closer to the financial difficulties clause and the

consideration of specific issues for isolated and indigenous consumers in the review of the debt

collection provisions of the Code.

However, consumer advocates did not support the interim recommendation that further

guidelines be developed by the ABA in consultation with consumers, regulators and banks as

the ACCC and ASIC guidelines provide significant guidance on conduct of debt collectors, and

additional matters should be included in the Code, rather than in guidelines.


49

Consumer advocates want the Code to make it absolutely clear that the provisions of the Code,

including the commitment to act consistently with the ACCC and ASIC guidelines, continue to

apply if a consumer debt is assigned to a third party. They disputed the ABA‟s view that this

concern is already covered by legislation and asserted that “the matter needs to be codified in

order to put the issue beyond doubt”.

The ABA agreed that clause 29 should be amended to refer to the current ACCC and ASIC

Debt Collection Guideline for Collectors and Creditors October 2005 and make provision for

updates from time to time. The ABA also agreed that banks will require their collection agents

to comply with the ACCC and ASIC Guidelines.

The ABA maintained that a debt collector who purchases the debt from a bank becomes a

creditor for recovery of the debt and as such is covered by the ACCC and ASIC Guidelines

which apply to both creditors and collectors. The purchaser of the bank‟s debt becomes

entitled to recover the debt according to the terms of the contract with the customer. The

ABA‟s view is that the terms of the contract include the requirement to comply with clause 29

and hence the ASIC and ACCC Guidelines.

The ABA did not agree with the interim recommendation that the Code should include a

requirement for ongoing consultation and review of debt collection policies and guidelines

practices as the regulation of debt collection is a matter for ASIC and ACCC and clause 5.3

relating to the Consultative Forum already achieves the result of consultation.

The FOS supported the four interim recommendations on debt collection in the Issues Paper.

Both the FOS and the CCMC have published bulletins and guidelines on the debt collection

provisions of the Code and the ACCC and ASIC guidelines. In its 2007-08 Annual Report the

BFSO reported that debt collection represented 7.1% of credit card problems in the area of

consumer finance. The CCMC reported in its Annual Report that there has been a total of 18

cases of alleged breaches of clause 29 in the period 2003-04 to 2007-08 with 8 breaches found.

Issues identified by the FOS and CCMC relate to the practices of some banks continuing to

communicate directly with clients who have authorised another person to represent them and

the short timeframes provided to consumers to respond to demands for repayment of monies.

5.1 3 The Way Forward

While the ASIC and ACCC Guidelines are comprehensive and do not need to be

supplemented, I agree that there is merit in clarifying that the Code provisions, and hence the

ASIC and ACCC Guidelines, apply to debt collectors acting as agents of the banks as well as to

debt collectors who have purchased the debt from the bank and are pursuing the debt in their

own right. There is also merit in reinforcing that third parties to whom debts are sold must be

members of and ASIC approved external dispute resolution scheme. I have recommended

accordingly.

Recommendations

4. That Clause 29 of the Code is amended to include reference to ACCC and ASIC debt

collection guidelines as amended or replaced from time to time.

5. That the debt collection clause follow the proposed revised clause on Financial Hardship

and include the following:


50

a) We will comply with the Australian Competition and Consumer Commission and

Australian Securities and Investments Commission guideline “Debt Collection

Guideline for Collectors and Creditors, October 2005,” as amended or replaced from

time to time, when collecting amounts due to us. We will ensure that our debt

collection agents do likewise.

b) If we sell a debt to a third party we will choose firms that agree to observe the ACCC

and ASIC debt collection guidelines referred to in (1) and that are members of an

ASIC approved external dispute resolution scheme.


51

CHAPTER 6 - GUARANTEES

6.1 Guarantees - Clause 28

6.1.1 Issues Paper

The Issues Paper discussed four issues relating to clause 28 of the Code on guarantees:

Commercial asset financing guarantors;

The 24 hour cooling of period:

Undisclosed principal and agency arrangements: and

Compliance under clause 28 with Privacy Principles under the Privacy Act.

The first three issues were raised by the ABA in its submission to the Review. The fourth issue

was raised by the Privacy Commissioner in consultations with the review.

Consumer advocates, financial counsellors and regulators, did not propose any amendments to

clause 28, which they regard as providing strong protection for guarantors.

6.1.1 1 Commercial Asset Financing Guarantors

The Issues Paper recommended an amendment to clause 28.16 of the Code in an attempt to

deal with the issue of commercial asset financing loans without diminishing the protection

provided by the Code in relation to guarantors in other situations. Clause 28.16 provides

flexibility in relation to the guarantor provisions of the Code for director guarantors. The

Issues Paper recommended that this flexibility be extended to „related guarantors‟. The Issues

Paper proposed that a definitions of „related guarantor‟ be included in clause 40 of the Code to

include persons who are officers of the debtor under the facility; or are employed in a general

managerial capacity by the debtor under the facility; or are otherwise involved in the day to day

affairs of the business of the debtor under the facility; and through that relationship have access

to the financial and business records of the debtor under the facility.

6.1 1 2 Cooling off Period

The review took into account the flexibility in relation to the „cooling off‟ period included in

the initial draft Abacus Mutuals Code of Practice and recommended that clause 28.5 similarly

be amended to allow a shorter „cooling off‟ period if the guarantor has obtained independent

legal advice or if the guarantor requests a shorter period of time.

6.1.1.3 Undisclosed Principle and Agent Arrangements

The Issues Paper discussed the application of clause 28 of the Code to undisclosed principal

and agent arrangements in response to concerns raised by the ABA that the disclosure

requirements of Clause 28 of the Code can be impractical and costly for principal and agent. In

addition they can have the effect of forcing the disclosure of the undisclosed principal.

While the concerns of the ABA were raised in the context of discussion about the guarantee

provisions of the Code, the concerns extended more broadly to other provisions of the Code.


52

The ABA suggested that one option could be to exclude from the Code products or services

offered by banks on an undisclosed basis. Alternatively, consideration should be given to each

of the individual sections of the Code to determine whether it is reasonable for them to apply to

principal agent transactions taking into account customer protection and competition issues.

The ABA, however, acknowledged that the latter approach is less attractive because the Code

would be become more complex if it was to be littered with exceptions on a clause-by-clause

basis throughout the Code.

The review invited comments and suggestions in relation to how the Code should deal with

such arrangements. The Issues Paper also recommended that the ABA, in consultation with

banks, consumers and regulators, develop proposals for inclusion in the Code in relation to

guarantees involving principal and agent arrangements

6.1.1.4 Compliance with Privacy Principles

The Issues Paper referred to questions raised by the Office of the Privacy Commissioner

regarding the extent to which Clause 28 of the Code is consistent with elements of section 18N

of the Privacy Act, which regulates disclosures by credit providers of personal information in

reports relating to credit worthiness. Sections 18N (1) (ba), (bg) and (bh) relate specifically to

disclosures by guarantors. The Issues Paper recommended that clause 28.4 be amended to

include a new provision (f) relating to privacy requirements in relation to the disclosure of

information under clauses 28.4 (b), (c), (d) and (e) of the Code.


6.1.2.1 General Comments on the Guarantee Provisions of the Code

Consumer advocates strongly opposed any “watering down” of the current provisions relating

to guarantees. They argued that the protection of the guarantor, who has no financial interest in

the transaction, should be the prime consideration of the review rather than considerations

about the delay or inconvenience of the transaction from the borrower‟s perspective or

concerns about the impact on the competitiveness of banks. They also suggested that some of

the problems referred to by the ABA could be overcome if the subscriber bank-owned finance

companies were automatically covered by the Code.

Consumer advocates pointed to the 2006 report on guarantors released by the NSW Law

Reform Commission22

and its support for the guarantee provisions of the Banking Code of

Practice. They observed that the guarantee provisions in the Banking Code are largely

replicated in the Model Law suggested by the NSW Law Reform Commission.

Consumer advocates drew particular attention to the discussion in the NSW Law Reform

Commission Report about whether guarantee provisions might be unduly burdensome in the

case of commercial transactions where the prospective guarantor has some involvement in the

business of the borrower. They noted that the Commission explicitly did not recommend

exempting anyone other than a sole director guarantor from the guarantee protections.

In its response to the Issues Paper, the ABA commented that the guarantee provisions of the

Code should be simplified while at the same time preserving their important purpose.

22 NSW Law Reform Commission, Report 107, Guaranteeing Someone else‟s debt, November 2006


53

The FOS commented that the guarantee provisions of the Code appear to be working well, in

that the FOS does not receive many disputes relating to allegedly unenforceable guarantees on

the basis of unconscionable conduct.

6.2.1.2 Commercial Asset Financing Guarantors

Consumer advocates were opposed to the proposed amendments to clause 28.16 and clause 40

to extend the flexibility currently available to director guarantors to related guarantors. They

expressed concern that the proposed definition of related guarantors is too wide, and risks

catching prospective guarantors who, in practice, have no real involvement in the borrower‟s

financial position, and who may be vulnerable to exploitation of their family or other personal

relationships.

Consumer advocates suggested that an alternative amendment to the Code would be to revert to

the original recommendation of the 2001 Review of the Banking Code that a bank be required

to provide a prospective guarantor with all relevant information about the principal debtor and

the transaction or facility to be guaranteed which was in the possession of the bank; and which

a prospective guarantor would reasonably require in order to decide whether or not to enter the

guarantee. Consumer advocates commented that a provision along these lines might allow for

banks to tailor information disclosure to the needs of the prospective guarantor. Consumer

advocates further suggested that if the reviewer is minded to make a recommendation along the

lines of the interim recommendation, the Code should also include provisions that, in the event

of a dispute where the exception was relied upon, the bank should bear the onus of

demonstrating that it took reasonable steps to ensure that the guarantor was a person involved

in the day to day affairs of the borrower, such that the disclosure of the information was not

relevant.

The FOS was also concerned with the proposed extension of Clause 28.16 to a “related

guarantor” as it may mean that a person, who is notionally an officer of the company or

employed in a general managerial capacity but is not involved in the day to day management of

the company, may not receive the benefit of the provisions of the Code. This in turn may lead

to an increase in disputes based on the ground that the guarantee is unconscionable having

regard to what is commonly known as the “special wives equity”.

The ABA repeated its concerns about the commercial asset financing and director guarantor

provisions of the Code and their impact on the competitive position of banks in commercial

asset financing situations. The ABA suggested that one solution would be to exclude all

commercial asset financing facilities for both incorporated and unincorporated businesses from

the guarantee provisions of the Code entirely, placing banks in a similar operating environment

to non-regulated participants in the market. The ABA supported the reviewer‟s interim

recommendations as “a better balanced approach” to dealing with the issue but suggested that

one way to limit the scope of “related guarantor” and the flexibility available under clause

28.16 would be to express the definition of “related guarantor” so as to apply only in the case

of commercial asset financing facilities.

The ANZ Bank supported the interim recommendations in relation to guarantees as did

Westpac. In noting that the recommendations extend beyond commercial asset financing to

small business guarantees generally, Westpac commented that it makes sense for small

business guarantees to be treated the same way whether they are applying for a commercial

asset facility or another business facility. Westpac also noted that the recommendations


54

provide protection for small business guarantors by giving them the choice of whether they

wish to receive the full suite of disclosure materials. Westpac did observe that the test of

„related guarantor‟ will require some analysis of the guarantor‟s involvement in the borrowing

company and submitted that the process of making the assessment should be based on

representations from the guarantor in respect of such items as beneficial interest in the business

and control over decisions of the business.

6.2.1.3 Cooling Off Period

Consumer advocates did not support the proposal in the Issues Paper to allow the guarantor to

waive the 24 hour waiting period, expressing concern about situations where a guarantor is at

risk of being unduly influenced or pressured by a borrower or another person involved in the

transaction to sign the guarantee. They also noted that that the NSW Law Reform Commission

recommended a 24 hour waiting period.23

The FOS had no objection to amending Clause 28.5 to allow a shorter period if the guarantor

has obtained independent legal advice. However, it did not support allowing a shorter period at

the request of a guarantor who has not had the benefit of independent legal advice expressing

concern about possible undue pressure on a guarantor by the principal debtor.

6.2.1.4 Principal and Agent Arrangements

Consumer advocates and representatives of the Department of Business Law and Taxation at

Monash University expressed concern about the ABA‟s proposal to exclude from the Code

products and services that are offered on an undisclosed principal and agent basis. Consumer

advocates argued that the ABA‟s suggestion that compliance with the clause 28 can be

impractical and costly for the principal and agent is not an adequate reason for exempting these

transactions from the Code. They argued that the Code obligations flow through to the agent of

the bank, and the fact that the transaction is offered on an undisclosed principal basis is not a

reason for change.

While consumer advocates were “not opposed to the argument that the Code should not force a

principal to be disclosed”, they suggested that perhaps the Code requirements might disclose

that the principal is an institution that subscribes to the Code. The Department of Business

Law and Taxation at Monash University took a much stronger view however, arguing that if

the transaction involves a principal agent relationship, the principal should be disclosed.

The ABA argued that the Code should be amended to remove any requirement for the bank to

disclose the Code or other Code or bank identifying material in terms and conditions relating to

undisclosed bank principal and agency finance contracts. This would be subject to the terms

and conditions of those contracts otherwise reflecting relevant provisions of the Code.

The ABA suggested that the benefits of the Code provisions should be reflected in the terms

and conditions in the agent‟s finance contracts (as they must in a bank‟s terms and conditions)

but without reference to the Code as is required under clause 10.3 of the Code. In regard to the

existence of internal dispute resolution (IDR) and external dispute resolution (EDR) facilities,

23 NSW Law Reform Commission, Report 107, Guaranteeing Someone else‟s debt, November 2006, p138


55

this could be expressed in the terms and conditions in the agent‟s finance contracts indicating

that such facilities are available without naming them. If those facilities are to be availed of,

the disclosure of how these may be accessed would entail disclosure of the agency relationship.

6.2.1.5 Privacy Principles

The Office of the Privacy Commissioner supported an amendment being made to Clause 28 to

clarify that disclosures of debtors‟ personal information to guarantors should only be made if

they are permitted by Part IIIA of the Privacy Act. Consumer advocates also supported the

recommendation.

The ABA argued that the inclusion of a new provision in the guarantee clause of the Code

requiring compliance with the Privacy Act is not necessary. It was never the intention of the

relevant provisions of clause 28 to require a bank to disclose information to the prospective

guarantor if the debtor had refused to consent to the provision of that information. The ABA

argued that, in the absence of the debtor‟s consent the bank is unable to comply with clause 28

and therefore cannot proceed to take the guarantee or otherwise it would breach the Code (and

section 18N of the Privacy Act which would entail a further breach of the Code).

6.2.1.6 Enforcement

In addition to commenting on the interim recommendations in the Issues Paper, consumer

advocates also recommended an expansion of the Code provisions on guarantees by the

inclusion of provisions that prevent a bank from instituting proceedings against a guarantor

before the borrower (or at least at the same time as the borrower) and prevent a bank from

forcing the sale of a guarantor‟s home before it has exercised its rights on any mortgage given

by the borrower, and given the guarantor the opportunity to repay the balance prior to

foreclosure.


The Issues Paper commented that the guarantee provisions of the Code of Banking Practice are

long and complex. For this reason I am attracted to the suggestion by consumer of an

amendment to the Code along the lines of the initial recommendation of the last Code Review

which would enable the disclosure obligations to be tailored to the specific needs of the

prospective guarantor. At the same time, however, I appreciate that the current guarantee

provisions in the Code were developed after considerable debate during the previous Code

review and subsequent amendment. The provisions are well regarded by regulators and the

FOS and that they appear to be providing strong protection for guarantors, as indicated by the

relatively small number of cases referred to the FOS or CCMC for resolution. For these

reasons I propose only minimal changes to the guarantee provisions of the Code.

6.1.3.1 Commercial Asset Financing Guarantees

In considering the issue of guarantees for commercial asset financing guarantees, I am mindful

of the comments of the NSW Law Reform Commission that the protection for guarantors must

also take into account the interests of lenders and borrowers.

That protection must, however, recognize that guarantees are an essential tool in facilitating access

to credit. Reform measures intended to protect guarantors must, therefore, take into account the


56

interests of lenders and borrowers and ensure that the utility and convenience of guarantees as a

credit risk-minimising device remain largely undiminished.24

Clause 28.15 was inserted into the guarantee provisions of the Code of Banking Practice as a

way of achieving this balance in commercial asset financing situations. In practice, however, it

would appear that the clause is diminishing the “utility and convenience” of such guarantees as

a credit risk-minimising device for Code subscribing banks and small businesses seeking ready

access to commercial asset financing credit. The problem stems from the narrow definition of

commercial asset financing guarantor in Clause 40 which restricts the definition to situations

where the guarantor is a director or sole director of the company.

I had attempted to rectify the problem by proposing that the category of director guarantors

covered by clause 28.16 be broadened in order to provide greater flexibility in relation to

guarantors for small business loans where the business is independently owned and operated, is

closely controlled by the owners and managers and where the owners and managers contribute

most, if not all, of the capital and are the principal decision makers for the business.25

However, I am persuaded by the concerns of consumer advocates and the FOS that the

potential impact of this recommendation could be to weaken the protection for guarantors in

small family business situations or in situations where the guarantor is operating under

influence or pressure from the borrower. I am also persuaded by comments of consumer

advocates and Westpac in relation to the measures that would need to be put in place to satisfy

banks that guarantors were in fact covered by these provisions that I should not pursue the

interim recommendations in relation to clause 28.16 and clause 40.

Instead I propose to deal with the issue of commercial asset financing loans by recommending

that the definition of commercial asset guarantor in clause 28.15 be amended to include owners

who contribute capital to the business and managers who are directly involved in decision

making for the business. My revised recommendation confines the change to commercial asset

financing situations and keeps amendments to the current guarantee provisions to a minimum.

6.1.3.2 Cooling Off Period

The revised recommendation avoids the need to change clause 28.4 to allow guarantors to

waive the 24 cooling off period, a provision which was opposed by consumer advocates and

the FOS. I also note that the draft Mutuals Code of Practice no longer includes the capacity for

the 24 hour period to be waived at the request of the guarantor. I do not propose to recommend

any changes to the current 24 hour cooling off provision in the Code.

6.1.3.3 Principal and Agent Arrangements

While I appreciate that there might be circumstances where banks and agents would prefer that

the principal remains undisclosed, the suggestion of consumer advocates to include reference in

the agent‟s finance contracts that the principal is an agent that subscribes to the Code would

24 NSW Law Reform Commission, Report 107, Guaranteeing someone else‟s debt, November 2006, p 7

25 This is consistent with the qualitative characteristics of small businesses identified by an Australian Bureau of

Statistics study in 1999, Australian bureau of Statistics, Small Business in Australia 1999 (ABS Catalogue no1321.0.2000) at 137-142 reported in NSW Law Reform Commission, Report 107, Guaranteeing Someone

else‟s debt, November 2006, p 91


57

seem preferable to the options put forward by the ABA including excluding principal and agent

arrangements from the Code, specifying whether each particular clause of the Code applies to

such arrangements, or remaining silent about the agency relationship until there is a need to

disclose it.

The ABA‟s position on the application of the Code to principal and agent arrangements

appears to be inconsistent with its expressed views in relation to the obligations on the part of

debt collectors acting as agents of the banks and third party debt collectors who purchase debts

from subscribing banks to comply with the provisions of the Code. I also note that the

definition of banking service in clause 40 of the Code includes any financial service or product

provided by subscribing banks, whether supplied directly or through an intermediary. This

would appear to support the proposition that the Code applies to principal and agent

arrangements. I therefore propose to make no recommendations in relation to principle and

agent arrangements.

6.1.3.4 Privacy Principles

Clause 3.1 Compliance with laws specifically refers to privacy laws. As I now propose that

clause 3.1 be retained, I accept the ABA‟s point that it is not necessary to include a specific

commitment to comply with Part IIIA of the Privacy Act in the Guarantees clause of the Code.

6.1.3.5 Enforcement

In considering the suggestion by consumer advocates that the guarantee provisions in the Code

be expanded to prevent a bank from instituting proceedings against a guarantor before the

borrower (or at least at the same time as the borrower) and prevent a bank from forcing the sale

of a guarantor‟s home before the bank has exercised its rights on any mortgage given by the

borrower, and given the guarantor the opportunity to repay the balance prior to foreclosure, I

note the comments of the NSW Law Reform Commission in relation to the underlying

principles of guarantees.

The law must also consider the interests of lenders. Financial institutions are engaged in a

commercial profit-based enterprise. When they offer credit facilities, they want to be certain the

loan, including interest and other charges, will be repaid. The contract of guarantee is a device they use to minimise their risk by ensuring that, if the borrower is unable to pay the loan, someone else

will. Any regulatory regime must take this into account. Moreover, the regime must give lenders

confidence that, if they comply with it, the guarantee will be enforced and not be the subject of

unnecessary and unpredictable litigation. It is only in these ways that finance for personal consumption and business purposes will remain reasonable accessible.

26

The NSW Law Reform Commission also commented that:

At common law, the secondary liability of the guarantor does not prevent the creditor from enforcing the guarantee before instituting proceedings against the principal debtor. In other words,

subject to legislative or contractual provision to the contrary, once the principal debtor is in

default, the creditor may sue the guarantor instead of the debtor for the amount owed.27




58

Nonetheless, the suggestion of consumer advocates that banks should do everything possible to

recover the outstanding debt in order to avoid having to force the sale of a guarantor‟s home

makes sound practical sense. Clause 28.14 of the current Code makes it clear that a

subscribing bank will attempt to recover the debt from the borrower before proceeding with

judgement against the guarantor. I propose to recommend an expansion of the current clause

28.14 to make it clear that enforcement of any security provided by the guarantor will only be

taken after attempts have been made to enforce any security against the debtor.

Recommendations

6. That the definition of commercial asset financing guarantor in Clause 40 of the Code be

amended to broaden the class of guarantors to include directors, owners or managers of

the business that is managed by or under the direction of the director, owner or manager.

7. That Clause 28.14 of the Code be expanded to provide that enforcement of a judgement

against the guarantor or any security provided by the guarantor will only be taken after

attempts have been made to enforce the judgement against the debtor and/or enforce any

security against the debtor.

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#director


59

CHAPTER 7 - JOINT DEBTORS

7.1 Joint Debtors - Clause 26

7.1.1 The Issues Paper

The Issues Paper commented on concerns raised by the Consumer Credit Legal Centre that

Clause 26.1 of the Code relating to joint debtors is being applied inappropriately by some

banks to avoid the guarantee provisions prescribed in clause 28 of the Code. Clause 26.1

provides that banks will not accept a third party as a co-debtor where it is clear on the facts

known to the bank that the third party will not receive any direct benefit under the loan. The

Consumer Credit Legal Centre alleged that, with the increasing complexity of interfamilial

financial interests, banks sometimes accept a family member as a co-borrower in circumstances

where the family member might have a significant interest in the loan but will not receive any

direct benefit from it. In so doing they avoid the guarantee provisions prescribed in Clause 28

of the Code.


In responding to the Issues Paper, consumer advocates commented that the Code should

provide greater protection for co-borrowers, where any „direct benefit‟ under clause 26.1 is

apparent rather than real. They recommended that clause 26.1 should be amended to make it

clear that the clause only applies where a co-borrower will substantially receive a direct benefit

under the loan.

Consumer advocates also raised the need for the Code to provide protection for sole borrowers

taking out a loan in their own name, but where the benefit is taken by another person. They

suggested that if a bank has information that a sole borrower will not substantially receive any

direct benefit from the loan, the borrower should be required to get independent legal advice

before proceeding.

The ABA noted that banks also have concerns about the practical application of the “direct

benefit” requirement in clause 26.1. The ABA advocated a more flexible approach to provide

for situations where the joint debtor might receive an indirect benefit from the loan, such as

where a parent becomes a co-borrower for auto finance for their child. The ABA noted that

under the current wording of clause 26.1, the only way of proceeding in such a situation would

be for the parents to become guarantors for the child. However, in terms of credit assessment

standards, the income of the debtor or child, rather than of the guarantors or parents, would be

taken into account in deciding whether to approve the loan.

The draft Mutuals Code of Practice is modeled on the Code of Banking Practice but refers only

to receipt of a benefit, not a direct benefit. Clause (11.2) of the draft Mutuals Code of Practice

provides:

We will not accept you as a co-borrower if we are aware, or ought to be aware, that you will not

receive a benefit from the loan or facility.


60

The Financial Services Ombudsman has made comments on the joint and several liabilities of

joint debtors for the repayment of a debt and on how this affects them in situations where one

of the co-debtors is encountering financial difficulty. The FOS however has commented that

where a person is documented as a co borrower but is in substance a guarantor, the legal

principles that will be applied will be those relating to the latter.28

No cases of alleged

breaches of clause 26 of the Code have been referred to the CCMC.


Clause 26.1 in its current form or as amended in line with the recommendation of consumer

advocates requires a judgement to be made by the lending bank as to what is a „real benefit‟

and/or whether it will be „substantially‟ received by the co-borrower. In the event of a dispute

or an alleged breach in relation to these provisions, it would be for the FOS or CCMC to

determine if that judgement was reasonable in the particular circumstances.

I consider that a preferable approach would be to adopt a provision similar to the clause in the

draft Mutuals Code of Practice that refers simply to receipt of a benefit. This would allow a

more objective assessment to be made without regard to the nature and quantum of benefit to

be received. It would also enable co-borrowers to receive protection from the credit

assessment, financial difficulties and debt collection provisions of the Code. The protections of

the Guarantee provisions of the Code would continue to apply in situations where the

guarantors do not receive a benefit from the credit facility.

Recommendations

8. That Clause 26.1 of the Code be amended to provide:

We will not accept you as a co-debtor under a credit facility where it is clear, on the facts

known to us, that you will not receive a benefit under the facility.

28 Banking and Financial Services Ombudsman Policy and Procedures Manual, p 124


61

CHAPTER 8 - CODE COMPLIANCE MONITORING COMMITTEE AND THE FINANCIAL OMBUDSMAN SERVICE

8.1 Code Compliance Monitoring Committee - Clause 34

8.1.1 Issues Paper

The relationship between the Code compliance monitoring function of the CCMC and the

dispute resolution role of the FOS was identified by consumer advocates, financial counsellors,

regulators and banks as an issue which needs to be resolved as part of this review. The Issues

Paper commented that the delineation of responsibilities between the two organisations is not

clear causing confusion on the part of consumers and their representative as to which path they

should choose in order to have a matter resolved. Banks themselves to have to manage

complaints under two separate frameworks and in some instances handle the same complaint

twice. Further, communication between the FOS and the CCMC and sharing of data about

Code issues is poor and there has been a lack of consistency in messages about Code

compliance emanating from the organisations.

The Issues Paper recommended that the relationship between the CCMC and BFSO be clarified

in the context of the establishment of the FOS. In order to simplify the process for consumers

the Issues Paper recommended that all alleged breaches of the Code be referred to the FOS in

the first instance for determination as to whether the matter should be referred to a case

manager in the FOS for dispute resolution or to the CCMC for consideration as to whether

there has been a breach of the Code.

The Issues Paper also made recommendations in relation to the composition of the CCMC and

its role in Code compliance monitoring, making determinations as to whether there has been a

breach of the Code, conducting systemic inquiries in relation to Code issues, determining

sanctions in accordance with the Code, preparing an annual report on Code compliance,

contributing to joint publications with the FOS on Code issues and promoting awareness of the

Code among banks through the provision of feedback on emerging Code compliance issues.

The Issues Paper also recommended that the charter, constitution, terms of reference and

operating protocols of the CCCMC incorporate principles of procedural fairness and provide

guidance on the factors that should be considered in determining a matter and that

consideration be given to broadening the range of sanctions available to the CCMC.


The ABA agreed that the structural and governance aspects of the CCMC and its relationship

with the Banking Ombudsman (as part of the FOS) need to be reviewed. In commenting on the

most appropriate structure and governance arrangements for the CCMC, the ABA stressed that

the dispute resolution function of the Banking Ombudsman (as part of the FOS) is different to

the compliance monitoring function of the CCMC although there is no reason why both

functions can not operate within the framework of a single body. Further there is a need for the


62

sharing of a reasonable level of information between the Banking Ombudsman and the CCMC

for the Code compliance monitoring function to work effectively.

The ABA commented that the perception of independence of the CCMC from Code

subscribing banks is also critical to the credibility of the Code. At the same time, however,

there must be some form of overarching governance of the CCMC. In the ABA‟s opinion, the

proposal by the CCMC that it should be constituted by bank charter does not meet the

fundamental principles of independence or governance.

The ABA stressed that more clear and effective arrangements between the CCMC and the

Banking Ombudsman are needed to avoid confusion and inconvenience for consumers and

duplication of processes for banks.

The ABA advanced a number of principles that should govern the operation of the CCMC and

its relationship with the FOS. The principles relate to:

the accountability of the CCMC to an entity that is independent from the banks;

the independence of the CCMC and the FOS from banks and from each other in

carrying out their code compliance monitoring and dispute resolution roles respectively;

sharing of administrative resources; information sharing;

agreed protocols to ensure that the handling of a complaint that a bank has breached the

Code is determined once and finally;

promotion and community awareness of the Code compliance monitoring role of the of

the CCMC;

efficient administration of dispute resolution and Code compliance monitoring.

The ABA submitted that the Banking Ombudsman (as part of the FOS) and the CCMC

components of the Code should be formally and structurally integrated within the FOS, that the

CCMC should be accountable to a specified committee or other mechanism of the FOS Board,

and that the charter, constitution, terms of reference and operating protocols of the proposed

committee of the FOS Board (or other mechanism) of the FOS and of the CCMC be developed

by the FOS and the CCMC in consultation with the ABA and consumer interests.

The ABA also submitted that the current provisions of clause 34 of the Code should be retained

in their present terms subject to any necessary, consequential changes due to the structural

integration of the CCMC with the FOS. The ABA proposed that the FOS, the CCMC and the

ABA should monitor the proposed arrangements to ensure they deliver effective, efficient and

fair outcomes for consumers and banks and that the arrangements do not detract from the

integrity and the reputation of the Code as an industry code of the highest standard.

Under the ABA‟s proposed model all complaints would be made through the FOS single

gateway mechanism for determination as a compliance monitoring issue or a dispute giving

rise to a claim for compensation. The existence, role and function of that CCMC would need

to be readily visible to ensure complainants know and understand their choices when seeking

the assistance of the CCMC or the FOS.


63

The ABA also recommended that the description in the Code of the bank appointed member of

the CCMC be amended to make it clear this appointee is a representative of Code subscribing

banks.

At the time of the last review, consumer advocates strongly advocated for the establishment of

an independent body to monitor compliance with the Code provisions. They argued that the

Code compliance monitoring function is separate to that of dispute resolution, and should be

structurally separate from dispute resolution in order for the compliance function to be

effective.

Consumer advocates continue to support an independent compliance body; however, they

recognise that the current arrangements are not working as well as they might, and that there is

room for clarification and improvement. However, the clarification and improvement should

not need to be at the expense of the effectiveness of the CCMC.

In considering the structure and role of the CCMC, and the relationship between the CCMC

and the FOS, consumer advocates identified a number of key issues including that:

The CCMC should be independent of the FOS and of the industry, and be able to be an

effective watchdog over code compliance.

Individuals and advocates should have the right to choose to take a matter directly to

the CCMC.

The roles and functions of the CCMC and FOS should be clearly delineated and the

distinction between the dispute resolution functions of the FOS and the Code

compliance monitoring functions of the CCMC should be clarified so that it is well

understood by consumers, the organisations themselves and banks.

The processes for taking a matter to the FOS or the CCMC also need to be clarified.

There should be sharing of information on Code issues between the FOS and the

CCMC.

While consumer advocates noted that the interim recommendation in the Issues Paper

addresses some of these issues, in particular, the concerns about choice of venue and access to

the information collected by the FOS, they were concerned however that the interim

recommendation jeopardises the independence of the CCMC.

Consumer advocates stressed that any new arrangements must reflect the difference between

the functions of compliance monitoring and dispute resolution. The function of dispute

resolution is to resolve individual disputes in a manner that is satisfactory to the individual

parties involved. It is not a regulatory function. In contrast, compliance monitoring is more

closely akin to a regulatory or disciplinary function. Merging or blurring of these functions

risks compromising their effectiveness.

Consumer advocates expressed the view that the governance arrangements for the CCMC

should make it absolutely clear that the CCMC is independent of the subscribing banks, and of

FOS. They recommended that the CCMC and the FOS should remain functionally separate

bodies.

While emphasizing that dispute resolution and compliance monitoring are distinct functions,

consumer advocates noted that the functions are complementary. They commented that there


64

needs to be a close working relationship between the bodies responsible for compliance

monitoring and those responsible for dispute resolution. The relationship between the bodies,

and the roles of the bodies, also needs to be clear to consumers and consumer advocates.

Consumer advocates expressed a strong view that consumers should be free to choose to refer a

matter to the FOS or directly to the CCMC. They did not support the interim recommendation

that FOS play a „triage‟ role in determining whether a matter should be referred to a case

manager in the FOS for dispute resolution or to the CCMC for consideration as to whether

there has or has not been a breach of the Code.

Instead consumer advocates recommended the inclusion in the Code of principles outlining

when and how Code issues identified by the FOS in the course of undertaking its dispute

resolution functions are to be referred to the CCMC. The principles would ensure that an

alleged breach of the Code is determined only once, by the FOS if the alleged breach is

identified and determined in the course of handling a dispute, or by the CCMC when the

alleged Code breach is referred directly to the CCMC by a consumer or representative or when

the FOS identifies a potential Code issue but does not make a determination on this aspect of

the complaint

Consumer advocates supported proposed measures to clarify the respective roles of the CCMC

and the FOS and to promote sharing of information about potential Code breaches between the

CCMC and the FOS. Consumer advocates recommended that these and other matters should

be set out in a Memorandum of Understanding or similar document between the CCMC and

the FOS.

Consumer advocates also recommended that the FOS and the CCMC should work together to

develop common statements about their respective roles, for the use in publications, websites,

and other communications to consumers and their advocates. In addition, FOS staff should

receive training on the compliance role, and on the identification of matters that might be

appropriately referred to the CCMC.

Consumer advocates supported the explicit inclusion of CCMC functions in the Code

including: conducting its own enquiries into banks‟ compliance with the Code; preparing an

annual report on compliance with the Code; contributing to joint publications between the

CCMC and FOS on Code issues; and promoting awareness of the Code among banks through

the provision of feedback on Code issues.

The FOS supported the interim recommendation for a single entry point to raise alleged

breaches of the Code as it would make the operation of the Code more streamlined and easier

for customers.

However, the FOS expressed concern that there remains an overlap between the functions of

FOS and the CCMC, particularly in relation to the investigation of systemic issues. The FOS

submitted that, as an ASIC approved external dispute resolution scheme, it has an obligation to

investigate and resolve systemic issues in accordance with clause 9 of the Banking & Finance

Division Terms of Reference. Systemic issues usually involve an overlap between a breach of

the Code and other obligations. Rarely do they relate solely to a breach of a Code provision.

The FOS put the view that if a matter is considered to be one more appropriately dealt with by

FOS and also raises a systemic issue, the systemic issue should also be resolved by FOS unless

it is referred to the CCMC. If the systemic issue has been resolved in its entirety by FOS in


65

accordance with its Terms of Reference, it should not be the subject of a separate investigation

by the CCMC. The FOS recommended that the recommendation should make it clear that the

CCMC‟s role to conduct inquiries into systemic issues does not include those previously

considered by the FOS.

I had the opportunity to attend a meeting on 7 October convened by the ABA and including a

consumer advocate, the Banking Ombudsman, the members of the CCMC and Mr Dick Viney,

the previous code reviewer, who is currently undertaking a review of the CCMC, to discuss

issues relating to the structure and governance of the CCMC and its relationship with the FOS.

There was general agreement on the need for consumers and their representatives to be able to

choose to send a matter directly to the CCMC or the FOS, improved information exchange

between the FOS and the CCMC, and the development of protocols in relation to when and

how the FOS or the CCMC would deal with alleged breaches of the Code. An outstanding

issue, however, was the most appropriate structure for the CCMC.

Following the meeting the CCMC put forward two options for consideration:

Folding the CCMC into the corporate structure of the newly established FOS (FOS); or

Establishing a separate legal identity for the CCMC.

Under the first option, the ultimate governing body would be the Board of the FOS. There may

also be an additional, separate reference group made up of a smaller sub-committee of the FOS

Board, or the FOS Banking Advisory Group. This type of arrangement would facilitate the

free flow of information between the FOS and the CCMC. The CCMC noted that there would

need to be more detailed consideration of how the relationships between the Committee, its

staff and the governance layer(s) will operate in practice, particularly if occasions arise where

the needs or views of the Committee differ from those of the FOS.

The second option would involve the Committee becoming the Board of the Code Compliance

process. The CCMC commented that this would formalise what has effectively become the

CCMC‟s operational structure, with the development of a detailed ongoing work plan and

management processes. Establishing the CCMC as a separate legal entity would require

completion of legal processes including and annual audit of finances. It would also require

more formal settling of the information sharing arrangements between the Committee and the

BFSO function of the FOS. The provision of administrative support by the FOS could continue

if agreed. The CCMC noted that the establishment of a separate legal entity would deal

absolutely with the independence issues raised by a number of stakeholders, including

consumer advocates.


While I agree with the general view that the Code compliance monitoring function of the

CCMC needs to be independent of the banks and of the dispute resolution role of the FOS, I do

not share the view of consumer advocates or the CCMC that the CCMC needs to be established

as a separate legal entity to achieve such independence. The Joint Consumer Submission

referred to functional independence between the code compliance monitoring function of the

CCMC and the dispute resolution function of the FOS. It also noted however that the functions

are complementary and the effective performance of those functions depends on exchange of

information between the two processes.


66

In my view the functional independence of the Code compliance monitoring function of the

CCMC and dispute resolution function of the FOS can be achieved by the establishment of the

CCMC as a separate Unit within the FOS reporting directly to the FOS Board. The CCMC

would have separate terms of reference in relation to its code compliance monitoring function

and be accountable to the FOS Board for the performance of its functions in accordance with

the Code.

The terms of reference would deal with referrals of alleged breaches of the Code direct to the

CCMC by consumers or their representatives as well as with those situations where alleged

breaches of the Code are inherent in a dispute being handled by the FOS. The terms of

reference would also deal with the exchange of information between the FOS and the CCMC in

relation to Code issues and access to case files. The terms of reference would make it clear that

decisions of the CCMC made in accordance with its compliance monitoring, investigation and

reporting functions under the Code and its Terms of Reference are final.

The establishment of the CCMC as a separate unit within the FOS would ensure that the

compliance monitoring, investigation and reporting functions of the CCMC are independent of

the dispute resolution functions and processes of the FOS, while recognising the

complementary nature of the functions in some cases, such as where a dispute involves an

alleged breach of the Code or when a Code matter is referred to the CCMC by the FOS.

In my view the establishment of the CCMC as a separate unit within the FOS is preferable to

the establishment of the CCMC as a separate company as proposed by consumer advocates and

the CCMC. The benefit that a separate company would provide in respect of structural and

perceived independence of dispute resolution and Code compliance monitoring processes

would in my view be outweighed by the additional costs of meeting legal and administrative

requirements for the new entity and potential difficulties in relation to information exchange

between the FOS and a separate Code compliance monitoring company.

The proposed establishment of the CCMC as a separate Unit within the FOS provides for

independence of dispute resolution and Code compliance monitoring, independence of referral

of matters to the FOS or the CCMC, independence of decision making in respect of dispute

resolution and Code compliance matters, access to information, and achievement of cost

efficiencies through economies of scale in relation to corporate support services. My

recommendations reflect these important principles.

The interim recommendation in the Issues Paper that the sanctions available to the CCMC be

expanded received support from consumer advocates, a number of other responses to the Issues

Paper and ASIC. However, in view of the extensive work that will need to be undertaken to

establish the structure and terms of reference of the CCMC and to develop the protocols for the

exchange of information and referral of matters between the CCMC and the FOS, the

introduction of additional sanctions at this time could add further complications and impede the

implementation of these key changes. For this reason I propose that any consideration of

additional sanctions for the CCMC be deferred until after the establishment of the CCMC

within the FOS, the terms of reference of the CCMC and the protocols for the exchange of

information and the referral of matters between the CCMC and the FOS have been finalised.


67

Recommendations

9. The CCMC be established as a separate independent unit within the FOS reporting

directly to and accountable to the FOS Board for the performance of its prescribed


10. That separate terms of reference for the CCMC be developed by the CCMC in

consultation with the ABA, the FOS, ASIC and consumer interests. The terms of

reference for the CCMC should be consistent with the compliance monitoring,

investigation and reporting functions of the CCMC under the Code and be published on

the CCMC, FOS and ABA websites.

11. That the terms of reference and operating protocols of the CCMC make it clear that the

CCMC and the FOS have different functions of Code compliance monitoring and

dispute resolution respectively and guarantee the independence of the CCMC and the

FOS from one to the other in the performance of those functions respectively as well as

independence from banks.

12. That the terms of reference and operating protocols of the CCMC and the Code make it

clear that individuals and organisations have the right to make complaints about Code

breaches directly to the CCMC.

13. That the Code make it clear that the CCMC retains its powers under the Code to conduct

investigations in response to complaints of Code breaches from any person or

organisation, and also to initiate investigations and reviews on its own initiative, and to

make determinations in relation to those investigations.

14. That the Code also spell out functions of the CCMC as including to:

a) conduct its own enquiries into banks‟ compliance with the Code;

b) prepare an annual report on compliance with the Code;

c) contribute to joint publications between the CCMC and FOS on Code interpretation

and compliance issues; and

d) promote awareness of the Code with banks through the provision of feedback on

Code issues.

15. That the charter, constitution, terms of reference and operating protocols of the FOS and

of the CCMC make it clear that the following arrangements apply in matters that are

referred to the FOS or the CCMC.

a) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issue and finds that there has been a Code breach, that

determination is a final determination as to whether a Code breach has been

established. The FOS must report its determination to the CCMC for further

monitoring as appropriate and provide access to its case file on the matter if required

by the CCMC.

b) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issue and finds that there has been no Code breach, the

determination of FOS is final and the CCMC cannot investigate the matter. The FOS


68

must inform the CCMC of its decision and provide access to its case file on the matter


c) Where the FOS, in performance of its prescribed function of dispute resolution,

identifies a Code issue, but does not make a determination on this aspect of the

dispute, the FOS must refer the issue to the CCMC and provide access to its case file


d) Except where the FOS, in performance of its prescribed function of dispute

resolution, identifies a Code issue and determines whether there has been a Code

breach, in all other cases the CCMC shall have sole responsibility to make a

determination whether a breach of the Code has occurred.

e) If a customer seeks to refer a dispute to the FOS alleging a breach of the Code but

there is no financial loss, the FOS must advise the customer of the right to take the

matter to the CCMC.

f) Where the CCMC, in accordance with its prescribed function of Code compliance

monitoring, determines whether a breach of the Code has occurred, that

determination is a final determination as between the CCMC and the FOS as to

whether a Code breach has been established.

g) There will be free flow of information between the FOS and the CCMC to enable the

FOS and the CCMC to perform and discharge their respective functions properly.

16. That the FOS and the CCMC ensure that the community is aware of the CCMC‟s

existence, role and separate function in relation to compliance monitoring and establish

a Memorandum of Understanding that sets out their respective roles, agreed protocols

for handling Code matters, and protocols for the sharing of information.

17. That staff at FOS and the CCMC be jointly trained on the distinction between the dispute

resolution function of the FOS and the compliance monitoring function of the CCMC

and the protocols for handling matters including the referral of matters from the FOS to

the CCMC and the sharing of information in accordance with the MOU between the

FOS and CCMC.

18. That the description in clause 34(a) (i) of the Code of the bank appointed member of the

CCMC be amended to make it clear that the appointee is a representative of Code

subscribing banks.


69

CHAPTER 9 - FEES AND CHARGES

9.1 Exception Fees – New Provision

9.1.1 Issues Paper

The issue of fees and charges was raised by consumer advocates and regulators during

consultations and in submissions to the Review. Of particular concern are exception fees (also

referred to as default fees or penalty fees) which are applied by banks for late payment, default,

bounced cheques or exceeding credit limits. The concerns of consumer advocates and

regulators focus on:

The charging of exception fees including that they are charged unilaterally and

automatically, often in relation to trivial defaults or unintentional errors by consumers

and in situations which compound the problem for people experiencing financial

difficulties.

The amount charged disproportionate to the penalised transaction and cost to the banks.

The lack of assistance provided by banks to assist customers to avoid exception fees.

The issue of exception fees is not covered in the Code and the FOS does not have the

capacity to investigate any complaints on these issues, other than whether they have

been charged according to the requirements of the Uniform Consumer Credit Code.

While regulators and consumer advocates acknowledged that banks are entitled to recover

costs incurred by them upon default by a customer and welcomed the initiative by the ABA

and subscriber banks to provide the community with more information on exception fees, they

argued that the Code should include reference to the provision of information on exception

fees. They also argued that provisions similar to those in the Abacus draft Mutuals Code of

Practice, which require financial institutions to ensure that any exception fees charged are

reasonable having regard to their costs, should be included in the Code of Banking Practice.

Citing the decision of a recent test case in the UK High Court of Justice, which found that fees

charged by a bank in relation to the customer‟s overdrawing of their account or overdraft limit

were not common law penalties, the ABA refuted the claims of consumer advocates that

exception fees are penalty fees29

.

The ABA also argued that a Code of practice not be used as a means of price control and that

even the general policy basis of the UCCC is predicated on disclosure and competition as the

means of controlling prices. The ABA noted that its focus on achieving transparency through

the publication of exception fees and in fostering an environment of competition has had

benefits for consumers through a reduction of exception fees and the introduction of low fee or

no fee accounts for particular customers.

29 ABA Submission, 30 April 2008, p.8


70

In the Issues Paper I attempted to address the concerns of consumer advocates and regulators in

relation to the issue of disclosure of exception fees by recommending that the Code provide for

the disclosure of fees and charges, not just standard fees and charges, and that exception fees

be included in the definition of fees and charges.

In relation to the issue of the quantum of exception fees I recommended that the definition of

fees and charges include reference to the reasonable recovery of costs incurred by the banks

when customers default on their repayments, exceed their overdraft limit or are overdrawn on

their account.

I also recommended that the ABA continue to publish information on its website about current

exception fees and how customers can avoid them, as I recognised that this is an effective

means of addressing the issue of disclosure, educating customers in the type and amount of

fees and how they can be avoided and fostering competition among banks to drive down the

cost of such fees for customers.


Consumer advocates drew attention to their public campaign on penalty fees and reiterated

their view that the Code could do more. While supporting the interim recommendation to

amend the definition of fees and charges to include reference to the reasonable recovery of

costs, they argued that the Code should go further and include a new provision on exception

fees that commits banks to imposing such fees only when they have been disclosed, are

reasonably necessary and represent a reasonable recovery of costs. Further they argued that the

Code should include principles relating to when and how such fees will be applied, including

circumstances when they will not be applied, for example, when a customer is involved in

hardship discussions with a bank.

The NSW OFT also advocated the inclusion of a separate clause in the Code, expressing a clear

commitment that fees for default or overdrawing an account would be limited to cost recovery.

Consumer Affairs Victoria recognised the work that the ABA has done on exception fees and

welcomed the reference to reasonable recovery of costs for exception fees. Consumer Affairs

Victoria suggested supported the Commonwealth Treasury‟s view that the ABA should

promote standardization of fee terminology across banks.

Deacons proposed that the definition of fees and charges should make it clear that it only

includes those charged by participating banks themselves and not fees and charges imposed on

banks by third parties, including government fees and charges as this would make it difficult

for banks to comply with the notification requirements in elation to new or changed fees and

charges. Deacons also commented that not only should the ABA publish information about

exception fees but that individual banks should do likewise.

The interim recommendations relating to the disclosure of exception fees and the inclusion of

reference to reasonable recovery of costs in the definition of fees and charges were not

supported by the ABA or individual banks responding to the Issues Paper. However, the

ongoing publication of information on exception fees on the ABA‟s website was supported.

The ABA and banks argued that the disclosure of bank fees and charges is regulated under

Chapter 7 of the Corporations Act 2001 (FSR) and the Consumer Credit Code (UCCC) and that

these provisions leave little or no scope for additional coverage under the Code.


71

They also asserted that a market driven approach to the disclosure and reduction of exception

fees is a more effective mechanism for driving down fees and charges than the regulation of

bank fees. This is evidenced by the substantial reduction in exception fees and the increase in

the number of accounts offered by banks with low or zero fees for set numbers of monthly

transactions which has resulted from the initiative of the ABA and banks to publish details of

exception fees on the ABA‟s website together with information on how such fees can be

avoided.

A further point put by the ABA was that regulation of bank fees and charges discourages

innovation, increases compliance costs for industry and may actually lead to an increase in

prices for consumers, a view that is supported by the Commonwealth Treasury.30

Rather than expand the disclosure obligation under the Code from “standard fees and charges”

to all “fees and charges,” the ABA submitted that the Code should be simplified and aligned

with the legislative requirements by referring to the legislated regime disclosures for fees and

charges.

The ABA also recommended that the issue of exception fees be linked to the issue of Account

Suitability and that Clause 14 of the Code should be amended to make it clear that it is

intended to cover exception fees as part of a customer‟s stated account suitability needs. The

ABA also supported the inclusion of a definition of “exception fees” in the Code to overdrawn

fees, over-limit fees on overdrafts and credit cards, credit card late payment fees and

dishonoured cheques and direct debit items.

I am persuaded by the strength of views from consumer advocates, regulators and individual

contributions to the review that the issue of exception fees is such a significant one as to

warrant a separate clause on exception fees in the Code. Such a clause should focus on the

disclosure of exception fees and the provision of information to customers on how to avoid

such fees rather than on the prohibition of such fees or the quantum of such fees as advocated

by consumer advocates. My reasons are based on consideration of:

The need for consistency with the regulated regime on disclosure of fees and charges31

;

The recognition and support by consumer advocates, regulators, banks and the Senate

Committee on Economics32

for the initiatives taken by the ABA and banks to publish

information on the ABA‟s website on exception fees and no or low fee accounts and the

demonstrated effectiveness of this approach in achieving a reduction in exception fees

as well as an increase in the number of basic accounts;

30 Australian Government The Treasury, Financial Services and Credit Reform, Improving, Simplifying and

Standardising Financial Services and Credit Reform, Green Paper, June 2008, p15

31 The disclosure requirements of Section 1013D (1) and (2) include “an amount that the holder will or may have

to pay, or that will or may be deducted or debited, as a fee, expense or charge in relation to a particular transaction

in relation to the financial product”.

32 Senate Committee on Economics Report on Inquiry into Australian Securities and Investment Commission (Fair

Bank and Credit Card Fees) Amendment Bill 2008, 16 September 2008

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#amount

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#hold

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#have

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#charge

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#transaction

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html#financial_product


72

The expressed concerns of the ABA, banks and the Commonwealth Treasury33

on the

potential negative impacts of the regulation of the level of bank fees and charges on the

competitiveness of banks and costs to consumers;

The practical difficulties of determining and regulating what is a reasonable recovery of

costs; and

The recommendation of the Senate Economics Committee that the Reserve Bank

should collect and publish annually in its monthly bulletin detailed data on the

incidence and quantum of default charges.34

This will provide a regular independent

and transparent review of default charges.

As exception fees affect all bank customers not simply low income earners, I do not accept the

proposition of the ABA that exception fees should be addressed only through clause 14 of the

Code in relation to account suitability. Consistent with the „regulated regime‟ referred to by

the ABA, it is appropriate for exception fees to be covered by other Code provisions in the

same way as „standard fees and charges‟ are covered. In this regard, I note that the draft

Mutuals Code of Practice refers to the disclosure of all applicable fees and charges including

“including non-standard fees that only apply in particular situations (for example, fees if you

overdraw your account or are late in making your payments).”35

At the same time, however, I

accept that there is merit in including reference to exception fees in clause 14 of the Code in

addition to the other proposed references to exception fees that I am recommending.

Consumer advocates and the ABA recommended the inclusion of a definition of exception fees

(ABA) or penalty fees (consumer advocates) covering a range of different types of transactions

and accounts and I have included a recommendation on this issue.

Recommendations

19. That a new clause on „exception fees‟ be included in the Code that commits banks to:

a) Disclosure of exception fees in relation to the products to which such fees apply;

b) Publication of facts sheet on exception fees on the ABA‟s website;

c) Provision of information on how customers can avoid „exception fees‟;

d) Provision of information on accounts or facilities which have minimal or no

exception fees; and

20. That reference to „standard fees and charges‟ in the Code be replaced by „fees and

charges.‟

21. That Clause 40 be amended to replace the reference to „standard fees and charges‟ with

„fees and charges‟.

33 Australian Government The Treasury, Financial Services and Credit Reform, Improving, Simplifying and

Standardising Financial Services and Credit Reform, Green Paper, June 2008, p15

34 Senate Committee on Economics Report on Inquiry into Australian Securities and Investment Commission (Fair Bank and Credit Card Fees) Amendment Bill 2008, 16 September 2008, p.20

35 Clause 3 (3) final draft Abacus Code


73

22. That the definition of „fees and charges‟ in clause 40 includes „standard fees and

charges‟ and „exception fees‟ disclosed in accordance with legislative requirements.

23. That the definition of „standard fees and charges‟ in clause 40 be retained.

24. That the definition of „exception fees‟ in Clause 40 include overdrawn fees, over-limit

fees on overdrafts and credit cards, credit card late payment fees, dishonoured cheques,

direct debit items and ATM failed transaction costs.


74

CHAPTER 10 – OTHER ISSUES

10.1 REVERSE MORTGAGES – New Provision

10.1 1 Issues Paper

As equity release products or reverse mortgages have only entered the market in large numbers

since the last Code Review and are of particular interest to older people, the Issues Paper,

proposed the inclusion of reference to equity release products or reverse mortgages in the Code

and a commitment to comply with the Senior Australian Equity Release Association of Lenders

(SEQUAL) Code which governs such products


The recommendation was supported by banks, consumer advocates and regulators. The NSW

OFT suggested that the Code should require that providers of such products be members of an

ASIC approved EDR scheme. ASIC and consumer representatives suggested that the code

require consumers to be informed of the risks of such products. As both issues are addressed in

the SEQUAL Code, I do not consider it necessary or appropriate to specify these elements of

the SEQUAL Code in the Code of Banking Practice and not other elements of the SEQUAL

Code. I have however accepted the recommendation of consumer advocates that there should

be a new Code clause on reverse mortgages and that compliance with the SEQUAL Code

should apply to banks and their agents.

Recommendations

25. That a new clause be introduced in the Code to govern equity release products, also

commonly referred to as reverse mortgages. This clause should commit subscribing

banks and their agents to compliance with the SEQUAL Code.

10.2 DIRECT DEBITS - Clause 29

10.2.1 Issues Paper

The Review was told by consumer advocates and financial counsellors that the requirements of

Clause 19 of the Code, which place an obligation on subscribing banks to take and process

promptly instructions from customers to cancel a direct debit request and to deal promptly with

complaints that a direct debit was unauthorized or otherwise irregular, are not being met by

some banks. They reported that people are still being forced to go to the debit user despite the

provision in Clause 19 that banks will not direct or suggest a direct referral to the debit user.

At the suggestion of the ABA the Issues Paper recommended that the Code should distinguish

between a cancellation of a direct debts, which will be processed directly by a bank, and a

changes of direct deposit arrangements, and should be referred in the first instance to the debit

user as this represents a change to the contractual relationship between the consumer and debit

user, in order to further clarify the application of clause 19.


75


The ABA, responding banks and the Australian Payments Clearing Authority (APCA)

supported the interim recommendation, and the ABA undertook to continue to remind banks of

their responsibilities under clause 19 where instances of non-compliance are brought to the

ABA‟s attention.

In their response to the Issues Paper consumer advocates reported that, despite the Code

provision, their clients often find it very difficult for to cancel a direct debit, because branch

staff refuse to accept the instructions or appear to have knowledge of the Code provision, and

refer consumers back to the merchant. Consumer advocates recommended additional

provisions in the Code relating to training of staff as well as an expansion of clause 19 to

require banks to act immediately to requests by customers to cancel direct debits and the

inclusion of incentives to ensure compliance with the Code, such as reimbursement of penalty

fees incurred as a result of a direct debit payment proceeding when it should have been

cancelled by the bank at the request of the customer.

While I do not support the inclusion of negative incentives as proposed by consumer advocates,

I do agree that, given the apparent problems with the implementation of clause 19, further

training of staff in the provisions of clause 19, particularly as proposed, will be important in

ensuring compliance with the Code provisions and addressing consumer concerns.

Recommendations

26. That clause 19 of the Code be expanded to include reference to a variation of direct debit

arrangement as distinct from cancellation of direct debit payments along the following

lines:

a) We will take, by telephone or in writing, and promptly process your:

instruction to cancel a direct debit request relevant to a banking service we provide to

you; and

complaint that a direct debit was unauthorised or otherwise irregular.

b) We will not direct or suggest that you should first raise any such request or complaint

directly with the debit user (but we may suggest that you also contact the debit user).

c) Where you wish to change the terms of a direct debit arrangement with a merchant,

as distinct from seeking to cancel a direct debit facility, you will need to contact the

merchant directly to make the change.

27. That staff are trained in the provisions of Clause 19 including:

a) the distinction between cancellation of direct debits and changes to the terms of direct

debit arrangements; and

b) the need to process cancellation requests and complaints promptly in order to avoid

the possibility of the customer‟s banking facility becoming overdrawn and incurring

exception fees due to the continuing payment of the direct debit facility.


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10.3 ACCOUNT SWITCHING – New Provision

10.3.1 Issues Paper

The Issues Paper recommended that the Code include a new provision on switching accounts,

reflecting the Commonwealth Government‟s announcement in February 2008 on new measure

to make it easier for customers to switch accounts between banks and the ABA‟s four key

principles for account switching which are agreed to by APCA and are published on the ABA‟s

website. The Issues Paper also recommended that the four key principles be published on

individual bank websites as well as the ABA‟s website.


The recommendations were supported by the ABA, banks, ASPCA, FOS, consumer advocates

and Deacons although there were some differences in their comments and suggestions on the

issue.

Both the ABA and APCA noted that the Issues Paper refers to a central registry facility

for the recording of customers‟ direct debit and credit arrangements to facilitate

switching. They requested that the Final Report clarify that this facility is not under

consideration in the current switching arrangement initiative.

The APCA recommended that the Code provisions should explicitly list the four key

principles agreed to by the ABA.

The ABA commented that the final recommendations and the Code provisions should

recognise that the account switching initiative applies to personal customers and not to

small business customers.

FOS, on the other hand, proposed that the account switching provision should apply to

both personal and small business customers who wish to switch accounts and that it

should also apply equally to savings, credit card and loan accounts.

Consumer advocates suggested that the interim recommendations could be strengthened

by including timeframes, a commitment to reverse penalty fees incurred during the

switching process; and requiring banks to provide clear information to consumers about

the switching process.

Deacons commented that as not all customers have access to the internet, subscribing

banks should also actively inform their customers of switching arrangements through

other means.

As the account switching arrangements for personal customers are new, and taking into

account the comments of consumer advocates that the Code should provide clear guidance on

issues, I propose that the elements of the four key principles should be included in the Code

rather than by reference to the ABA‟s website. The principles include obligations in industry

codes of practice in regards to timeliness, the provision of information to customers, and

dealing fairly with customers. These address points raised by consumer advocates.

Also, as the account switching arrangements are in their infancy and their implementation will

occur progressively and be subject to quarterly progress reports to government, I propose that

the Code provisions be confined to personal customers, with the possible extension to small


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businesses when the arrangements for personal customers have been implemented and are

operating efficiently and effectively.

In November 2008 ASIC amended the Electronic Funds Transfer Code of Conduct to make

specific provision for switching arrangements. As the switching arrangements are intended to

operate in the electronic banking environments for direct entry and periodical payments, it is

unnecessary for the EFT Code switching provisions to be repeated in the Code.

Recommendations

28. That the Code include a new provision on switching accounts for personal customers.

29. That the new Code provision on switching accounts reflect the four key principles

announced by the ABA on 9 February 2008 and available on the ABA website with a

focus on:

a) Obligations of the old financial institution to provide a list of the customer‟s direct

debit and credit arrangements over the past 13 months to the customer in order to

facilitate the establishment of the arrangements for the new account;

b) Obligations of the new financial institution to provide the customer with information

and support to help the customer make the switch. If requested by the consumer, the

new financial institution will assist in notifying the Direct Entry users of the new

direct debit and direct credit arrangements and assist with closing the customer‟s old

bank account;

c) Obligations in regards to timeliness, the provision of information to customers on

how to avoid exception fees, and dealing fairly with customers throughout the

account switching process;

d) Provision of quarterly progress reports to the Government.

30. That the Code include a provision that banks will publish their account switching

arrangements on the ABA website and on their individual websites.

10.4 ELECTRONIC BANKING - Clause 33

10.4.1 Issues Paper

It is important that the Code reflects developments in electronic banking which have occurred

since the last review and changes in the Electronic Funds Transfer (“EFT”) Code of Conduct

which result from the current review of the EFT Code by ASIC. The Issues Paper commented

that clause 33 in the current Code, which deals with electronic communications, is complex

and recommended that it should be simplified along the lines of the Abacus Draft Code Clause

15 and taking into account the proposed approach by ASIC as set out in the consultation paper

on Facilitating Online Financial Services Disclosures. The Issues Paper also recommended

that the Code clarify that in the event of any inconsistency between the Banking Code of

Practice and the EFT Code, the latter will prevail.


The recommendations were supported by the ABA, APCA, responding banks and consumer

advocates.


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The ABA and APCA commented on the complexities in relation to the interrelationship

between the electronic communications provisions of the Code, the EFT Code and provisions

in the UCCC and Corporations Act 2001 and the need for these to be clarified. While the

specific details of the interrelationships needs to be considered in the context of the outcomes

of ASIC‟s review of the EFT Code, it would be helpful for the code to explain in simple terms

the relationships between the EFT code, Code of Banking practice and provisions of the UCCC

and Corporations Act 2001.

While supporting the interim recommendations, consumer advocates, expressed concern that

the right to be notified when information is available electronically not be removed. I do not

propose recommending that this be removed. Consumer advocates also noted that clause 39.2

of the code refers to the overlap between the EFT code and the Code of Banking Practice. For

ease of reference and to avoid overlap and duplication, I propose that this clause be amended

and relocated to the electronic communications provisions of the code in clause 33.the

I agree with the ANZ Bank‟s suggestion that it may be useful to incorporate provisions to

address the issue to „phishing”, the practice where hackers „fish‟ for a customers personal

details by using hoax emails claiming to be from financial institutions. ASIC has also

suggested that the Code might address this issue.

Recommendations

31. That Clause 33 be simplified, taking into account the proposed revisions to the Electronic

Funds Transfer Code by ASIC, with a focus on:

a) Providing customers with the option of receiving material electronically if it is

available;

b) Notifying customers by electronic communication when and how information can be

retrieved electronically;

c) Incorporating electronic communication as a product feature and including this in

any product disclosures

d) Providing information electronically in a form that allows the customer to retain it;

and

e) Protecting customers from ‟phishing‟ by including a commitment that customers will

not be sent an email or SMS message requesting them to reply via the same electronic

communication channel or to click on a hyperlink and provide information on their

account details, financial details, login or other security password details

32. That the relationship between the Code of Banking Practice, EFT Code and electronic

communication provisions in the Corporations Act and UCCC be clarified and reflected

in the Code based on the following:

a) The EFT Code electronic communication provisions will apply to all transactions

covered by that code;

b) The Code of Banking Practice electronic communications provisions will not apply to

those transactions covered by the EFT Code electronic communications provisions;


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c) The Code of Banking Practice will apply to all other electronic communications with

the customer except where the law specifically provides for these circumstances, such

as the UCCC and the Corporations Act.

33. That Clause 39.2 of the Code be relocated to Clause 33 of the Code and amended along

as follows:

To the extent of any inconsistency, this Code is to be read subject to the Electronic Funds

Transfer Code of Conduct and the electronic communications provisions in the

Corporations Act 2001 and UCCC.

10.5 COMMUNICATION – New Provision

10.5.1 Issues Paper

The Issues Paper recommended that a commitment to communicate in a timely and courteous

manner be included in the general principles of the Code. This was in response to concerns

raised by consumer advocates and financial counsellors about how some banks communicate

with their customers and financial representatives and a suggestion by ASIC that the inclusion

of a commitment to communicate in a timely manner would strengthen the Code.


The interim recommendation was supported by the ABA, banks and consumer advocates.

Consumer advocates also recommended that timelines be specified and that arrangements

agreed to by telephone be confirmed in writing. The design and structure of the Code of

Banking Practice includes key commitments in clause 2 that outline general principles for the

conduct of banks, with details of how these commitments apply to particular functions or

transactions included in specific provisions elsewhere in the Code. As timelines will vary

across banks and across different functions and transactions, it would be inappropriate to

specify timelines in clause 2 of the Code. Also, as the commitment to confirm agreed financial

hardship arrangements has been recommended for inclusion in the financial hardship

provisions of the Code, I do not consider that the key commitment on communication should

include this level of detail. I have agreed however that the key commitment should make

reference to all forms of communication including telephone, written communications and

electronic communications.

Recommendation

34. That a key commitment to communicate with customers and their representatives in a

timely and courteous manner be included in the current Clause 2 of the Code, Our key

commitments to you, along the following lines:

We will communicate with you and/or your representatives in a timely and courteous

manner, whether by telephone or in written communications including electronic

communications.


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10.6 ACCOUNT SUITABILITY - Clause 14

10.6.1 Issues Paper

The Issues Paper recommended that clause 14 of the Code relating to account suitability be

amended in two respects:

That the last sentence of the clause requiring banks to provide details of suitable

accounts if customers ask for the information or if, in the course of dealing personally

with the customer, banks become aware that the customer is in receipt of Centrelink or

other benefits be removed. This was recommended to address the issue raised by the

ABA that the provision of such information could be construed as the provision of

advice and, if provided by staff who are not qualified financial advisors, could be in

breach of the Financial Services Reform Act.

That the clause include reference to Indigenous customers. This was included to

address issues raised by Reconciliation Australia in relation to the specific needs of

indigenous communities particularly those in remote locations.


Consumer advocates adopted a similar position to that previously expressed by ASIC that

banks should take a more proactive approach in informing customers about basic accounts,

similar to the commitments in the British Code of Banking. While appreciating the issue raised

by the ABA about the potential risk of breaching FSR requirements, consumer advocates were

opposed to the removal of the last sentence of clause 14. However, they did put forward a

suggestion as to how the commitment could be retained in such a way as to address the ABA‟s

concerns. Their suggestions have been helpful in assisting me to frame my recommendations.

In responding to the Issues Paper the ABA made a similar suggestion to consumer advocates as

to how clause 14 might be amended to overcome previous concerns about FSR implications.

This too was helpful in assisting me to frame my recommendations in relation to account

suitability.

I have noted that ABA‟s concerns about the lack of clarity in relation to the definition of „low

income earners‟ and have made recommendations accordingly.

I have also welcomed the ABA‟s suggestion that clause 14 include reference to exception fees,

although as stated earlier in the report, I do not accept that this should be the only avenue for

dealing with this issue in the Code.

I have also taken into account the comment by ASIC that clause 14 should also include a

positive obligation on banks to inform customers about reduced or no fee accounts by

recommending that banks promote the availability of such accounts on their websites and by

other means.

While there was general support for the need for the Code to address issues specifically

pertaining to remote Indigenous communities, I have noted the concerns by the ABA and banks

that any such provisions need to be framed carefully and sensitively. On reflection, I have

decided that there should be a new clause in the Code that refers specifically to the needs of

Indigenous communities particularly those in remote parts of Australia.


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Recommendations

35. That clause 14 of the Code be amended along the following lines:

a) If you tell us that you are a low income earner or a disadvantaged person (regardless

of whether you are an existing or prospective customer but not if you are a small

business), we will provide you with details of accounts which may be suitable to your

needs. Depending on your needs this information may include details of accounts

which attract no or low fees and charges and how you can avoid incurring exception

fees.

b) If you ask for this information or if, in the course of dealing with you, we become

aware that you are in receipt of Centrelink or like benefits, or assess that your needs

are suited to an account which attracts no or low fees and charges, we will provide

you with factual information about these accounts.

c) We will publish information about accounts which attract no or low fees and charges

on our websites and through other means.

36. That a definition of „low income earner‟ be included in the definitions in clause 40 of the

Code to include persons receiving Centrelink or like benefits and persons meeting the

Australian Bureau of Statistics definition of „low income earner‟.

37. That account suitability provisions for Indigenous customers be included in a general

commitment in the Code in relation to the provision of appropriate banking services to

Indigenous communities, particularly those in remote locations.

10.7 DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13

10.7.1 Issues Paper

The Issues Paper recommended that clause 10 of the Code be simplified to clarify and

eliminate any overlap or duplication with other Code provisions and that this work be informed

by the work of the Australian Government Financial Services Working Group looking at the

length, complexity and readability of disclosure documentation in financial services. The

interim recommendations were supported by the ABA, responding banks and consumer

advocates.


The ABA pointed out that the disclosure obligations in clause 10 need to be retained in the

code in accordance with the Financial Services Reform Act. The ABA put forward suggestions

as to how the provisions in clause 13 of the Code in relation to operation of accounts could be

incorporated in clause 10 to remove unnecessary overlap and duplication without diminishing

the obligations in either clause. I found these suggestions helpful and have incorporated them

in the proposed recommendations.


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Recommendations

38. That clause 10 be simplified to clarify and eliminate any overlap or duplication with

other Code provisions.

39. That the review of Clause 10 be informed by the work of the Australian Government

Financial Services Working Group looking at the length, complexity and readability of

disclosure documentation in financial services.

40. That clause 10.2(e) of the Code be amended to incorporate all of the provisions of clause

13 of the Code, thus removing overlap and duplication as follows:

(e) inform you that, at your request, we will provide you with general descriptive

information about our banking services, including where appropriate:

- our account opening procedures;

- our obligations regarding the confidentiality of your information;

- complaint handling procedures;

- bank cheques;

- informing us promptly when you are in financial difficulty;

- your taking care to read the terms and conditions of your banking service(s); and

- cheques, if your account provides cheque access, including:

- cheque clearance times;

- the effect of crossing a cheque; explaining what “not negotiable” and “account payee

only” mean and the effect of deleting “or bearer” on a cheque where these words

appear on a cheque;

- stopping payment on cheques;

- reducing the risk of unauthorised alteration of a cheque you write;

- cheque dishonour;

- post dated cheques; and

- stale cheques.

41. That clause 13 of the Code be deleted.

10.8 COMPLIANCE WITH LAWS - Clause 3

10.8.1 Issues Paper

In response to concerns by the ABA, banks and the CCMC in relation to the implications of

clause 3.1 of the Code in respect of the CCMC‟s breach reporting requirements, and taking into

account that a number of clauses in the Code have specific reference to relevant laws, the

Issues Paper recommended that references and pointers to relevant laws be included in clauses

in the Code as appropriate and that consideration be given to deleting Clause 3 of the Code.


83


While the recommendations were supported by the ABA and banks, they were not otherwise

supported.

Both consumer advocates and the ABA suggested that a way to overcome the issue in relation

to breach reporting in relation to clause 3.1 would be to make it clear in the code that clause 3.1

does not require banks to report to the CCMC on breaches of the law that are not breaches of

the Code provisions.

I found these suggestions helpful in resolving the issue and have incorporated them in the

proposed recommendations.

Recommendations

42. That clause 3.1 of the Code in relation to compliance with laws be retained.

43. That clause 34 of the Code be amended to make it clear that the functions of the CCMC


reporting of clause 3.1 unless they are also breaches of other provisions in the Code.

10.9 KEY COMMITMENTS

10.9.1 Issues Paper

The Issues Paper discussed concerns raised by the CCMC about the lack of clarity in relation to

the extent of its compliance monitoring, investigation of alleged breaches of the Code and

reporting function under clause 34 of the Code in respect of key commitments in clause 2 of

the Code, such as continuous improvement (clause 2.1(a)) and acting fairly and reasonably

(clause 2.2). However, no interim recommendations were made.


The ABA, individual bank submissions, and the JCS agreed that that the CCMC‟s role in

relation to alleged breaches of provisions in clause 2 of the Code needs to be clarified.

However, their positions differed in that:

The ABA emphasized that the key commitments are guiding principles and should be

distinguished and separate from the stricter, enforceable provisions of the Code.

The JCS advocated that consumers should have independent rights under clause 2.2 of

the Code.


I am mindful from my consultations with consumer advocates and financial counsellors that, in

the absence of more specific Code provisions relating to customers facing financial difficulties,

the conduct of debt collectors and the role of financial counsellors and representatives in

assisting customers, they have sometimes resorted to clause 2.2 as a means of having their

complaint dealt with by the CCMC. My recommendations to strengthen the Code provisions in

relation to financial hardship, debt collection and recognition of the role of financial

counsellors and representatives, will obviate the need for clause 2.2 to be used as the sole

vehicle for dealing with alleged breaches of the Code in such cases.


84

I also note that the Abacus Mutuals Code of Practice (Part C Our key promises to you)

provides that:

This Part of the Code contains general principles or values applying to our members and

customers, as well as the broader community.

Where they overlap, these principles should be interpreted by reference to the more specific and

detailed commitments of Part D-Delivering on our promises.

Consistent with the approach recommended in relation to clause 3 of the Code, Compliance

with laws where the compliance monitoring, investigation and reporting functions of the

CCMC would not extend to clause 3 unless there are also breaches of other provision of the

Code, I consider that a similar approach in relation to key commitments in clause 2 would be

appropriate, particularly as each of the key commitments can be linked to a specific

provision(s) in the Code.

Recommendations

44. That the Code make it clear that the provisions of clause 2 of the Code, Our Key

commitments to you are general guiding principles and should be interpreted by

reference to the relevant more detailed code provisions.

45. That Clause 34 of the Code be amended to make it clear that the functions of the CCMC


reporting in relation to clause 2 of the Code unless they are also breaches of other

provisions in the Code.

10.10 COPIES OF DOCUMENTS - Clause 11

10.10.1 Issues Paper

The Issues Paper recommended that clause 11 be amended to make it consistent with the 7 year

statutory requirement for the provision of copies of documents.


The recommendation was supported by the ABA, banks and consumer advocates but was not

supported by the FOS. FOS argued that some documents are retained by banks for periods in

excess of 7 years and that when these documents are available, a customer should be able to

request copies of them. FOS submitted that clause 11 is appropriately worded and ought to

remain unchanged. I consider that clause 11.2 in its current form accommodates the concerns

of banks because, if documents are only retained in accordance with the 7 year statutory

requirement, banks will not have them and will therefore not be able to provide them.

However, clause 11.2 could reinforce this by the inclusion of a reference to legislative

requirements.

Recommendations

46. That clause 11.2 be amended to include reference to legislative requirements as follows:

At your request, we will give you documents we have in accordance with legislative

regimes for the retention of documents, relating to a banking service you have, or had,

with us: followed by existing clauses 11.2(a), 11.2(b), 11.2(c) and 11.2(d).


85

10.11 OPENING OF ACCOUNTS - Clause 16


The Issues Paper recommended that clause 16 of the code be amended to include reference to

Anti Money Laundering and counter Terrorism Finance (AML/CTF) legislation and that the

clause include reference to information tailored to customer identification issues faced by

remote Indigenous communities.


The proposed recommendations were supported by the ABA, banks and consumer advocates.

On reflection I consider that the customer identification issues faced by remote Indigenous

communities be included in a general provision in the Code relating to the provision of

appropriate banking services to Indigenous communities, particularly those in remote locations.

Recommendations

47. That Clause 16 of the Code be amended to include reference to the Anti Money

Laundering and Counter Terrorism Financing legislation.

48. That customer identification issues faced by remote Indigenous communities be

addressed in a general commitment in the Code in relation to the provision of

appropriate banking services to Indigenous communities, particularly those in remote

locations.

10.12 CHANGES TO TERMS AND CONDITIONS - Clause 18


The Issues Paper recommended that clause 18 be amended to include the use of electronic

communication to meet the notification requirements of the information prescribed in this

clause.


The recommendation was supported by the ABA, banks and consumer advocates who also

commented that the Code provisions on terms and conditions should be consistent with the

requirements of the Corporations Act 2001. The ANZ bank also emphasized the need for

greater alignment between the Code provisions, EFT Code of Conduct (EFT Code), the

Uniform Consumer Credit Code (UCCC) and the Financial Services Reform Act 2001 (FSR).

My recommendations reflect these comments and suggestions.

Recommendations

49. That clause 18.1 of the Code be amended to:

a) include the use of electronic communication to meet the notification requirements of

the information prescribed in this Clause; and

b) include an additional exception in the clause that the requirement to provide at least

30 days notice does not apply where the change is beneficial to the customer or in


86

other circumstances consistent with the legislative regime relating to the notification

of changes of terms and conditions.

50. That the ABA continue to pursue discussions with ASIC relating to consistency of

legislative and regulatory provisions in relation to notification of changes to terms and

conditions.

10.13 CHARGEBACKS - Clause 20 and Clause 10

10.13.1 The Issues Paper

The Issues Paper recommended that clause 20 be amended to include alternative means of

providing the annual information on chargebacks, such as by Internet, websites or other

electronic means.


The interim recommendations were supported by the ABA and responding banks however

consumer advocates were concerned that the interim recommendation could result in banks

unilaterally choosing to provide the information on chargebacks electronically, rather than with

statements. ASIC was also concerned that the provision of information on chargebacks should

be additional to and not an alternative to the annual provision of information with credit card

statements. I have attempted to address these concerns by linking the provision of information

on chargebacks in clause 20 to the electronic communications provision of the Code which

retain the right for customers to receive information other than by electronic communications if

they choose. This will also achieve consistency between related provisions in the Code.

Consumer advocates were also concerned that the timeframes imposed by banks in relation to

reporting unauthorised transactions were in some cases significantly shorter than those required

by the card issuers. I have is addressed by a proposed amendment to clause 10.5 of the Code in

relation to terms and conditions for credit cards.

Recommendations

51. That Clause 20(d) is amended to include additional means of providing the annual

information on chargebacks, such as by Internet, websites or other electronic means as

follows:

(d) include general information about chargebacks with credit card statements at least

once every 12 months including by access to our website or other electronic

communications in accordance with the electronic communication provisions of this

Code.

52. That clause 10.5(b) of the Code be amended to include reference to timeframes set by

credit card providers as follows:

(b) a prominent statement of the time frames within which you should report a disputed

transaction (so that we may reasonably ask for a chargeback where such a right exists

and within the timeframes set by the relevant credit card provider) and a note to the

effect that, where the Electronic Funds Transfer code of conduct applies, there may be

no such time frames in certain circumstances; and


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10.14 PRIVACY AND CONFIDENTIALITY - Clause 22


The Issues Paper recommended that any changes to Clause 22 relating to Privacy and

confidentiality be considered in the context of the report by the Australian Law Reform

Commission into privacy legislation. The recommendation was made in response to questions

raised by the Privacy Commissioner as to whether the privacy and confidentiality provisions in

Clause 22 are in harmony with the credit reporting provisions of the Privacy Act, and a

recommendation by the FSU that the Code include a provision dealing with the transfer of data

overseas. At the time of the Issues Paper the report of the review of privacy legislation by the

Australian Law reform Commission had not been released.

The report of the Australian Law reform Commission has now been released and has made

recommendations in relation to credit reporting36

and cross-border data flows.37

As noted by

the Privacy Commissioner in response to the Issues Paper any legislative changes that might

flow from the review will take some time


There was general support for the recommendation with the ABA proposing that clause 22

should be amended to refer only to a bank‟s contractual duty of confidentiality to its customer

and consumer advocates proposing the inclusion of additional privacy commitments in the

Code including:

Recognition of the importance of the „personal information security‟ obligations

explicit in the privacy principles of the Privacy Act;

Increased controls on the re-use of data obtained for one purpose for another purpose;

An obligation on subscribing banks to ensure that compliance with the Code privacy

provisions is incorporated into contracts with third parties that might deal with the

personal information of customers.

In view of the recommended retention of clause 3.1 which refers to compliance with privacy

laws and the fact that clause 22 refers to a general duty of confidentiality towards customers or

potential customers in addition to duties under the Privacy Act 1988, I consider that the

concerns of the Privacy Commissioner in relation to compliance with privacy principles are

covered by these two clauses and provide safeguards for consumers pending any legislative

changes which might arise from the implementation of recommendations of the Australian Law

Reform commission‟s review of Australian privacy laws. The proposals put forward by

consumer advocates should also be considered in the context of any revision to the current code

provisions as a result of the implementation of recommendations of the Australian Law Reform

commission‟s review of Australian privacy laws

36 ALRC Report Number 108, Review of Australian Privacy Laws, Part G recommendations 54 to 59

37 ALRC Report Number 108, Review of Australian Privacy Laws, Part D recommendation 31


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Recommendations

53. That any changes to Clause 22 be considered in the context of the report by the

Australian Law Reform Commission into privacy legislation.

54. That the proposed principles on privacy suggested by consumer advocates be taken into

account in reviewing clause 22 in the context of the report by the Australian Law Reform

Commission into privacy legislation.

10.15 STATEMENT OF ACCOUNTS - Clause 24


The Issues Paper recommended that clause 24 of the Code be aligned with the relevant EFT

Code provisions when they are finalised in order to clarify the relationship between Code

provisions in respect of statements of accounts and related provisions in the EFT Code and to

remove the obligation to send a statement when the information has already been provided by

another means, such as by internet banking transaction records.


As the interim recommendation was generally supported, I propose to make no changes to the

interim recommendation.

As the ABA‟s suggestion that a new paragraph (e) be added to clause 24.1 “(e) where the

transaction information has already been provided to you by other means,” would assist in the

interim in clarifying the situation in relation to statements of accounts, I am proposing an

additional recommendation to this effect.

Recommendations

55. That Clause 24 of the Code be aligned with the relevant EFT Code provisions when they

are finalised.

56. In the interim clause 24.1 of the Code be amended to include a new paragraph (e)

(e) where the transaction information has already been provided to you by other means.

10.16 ADVERTISING - Clause 30


The ABA argued that clause 30 of the Code in relation to advertising is largely a duplication of

statutory provisions and requirements and is therefore unnecessary and should be deleted. The

Issues Paper, however, recommended that clause 30 be retained in the Code as it is not

inconsistent with and serves to reinforce the statutory requirements of banks in relation to

advertising and promotion.


While the interim recommendation was supported by consumer advocates and regulators, it

was not supported by the ABA, which argued that clause 30.1 has been overtaken by


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legislation such as the UCCC, the ASIC Act, the FSR and the Corporations Act that place

statutory obligations on bank advertising.

I considered a possible amendment to clause 30.1 to refer simply to an obligation to meet

legislative requirements in relation to advertising. However, as a statement of commitment to

ensuring that advertising that is not deceptive or misleading, the current provisions of the Code

are stronger than a statement that simply refers to legal obligations. Nonetheless, in order to

ensure clarity of clause 30.1 for the purposes of implementation, monitoring and compliance, I

propose an amendment to clause 30.1 with the inclusion of a reference to legislative

requirements.

Recommendations

57. That clause 30 on Advertising be retained in the Code.

58. That clause 30.1 be amended to include reference to legislative requirements in relation

to advertising by banks as follows:

We will ensure that our advertising and promotional literature drawing attention to a

banking service is not deceptive or misleading in accordance with legislative

requirements.

10.17 INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35, 36 and 37


The Issues Paper recommended that Clauses 35, 36 and 37 in relation to internal and external

dispute resolution be amended to reflect the most recent complaints handling AS ISO 10002-

2004 when ASIC announces that this is the current standard

10.17 2 Responses to the Issues Paper

The recommendation was supported in principle by the ABA and consumers.

The ABA made a suggestion as to how clauses 35 and 36 could be updated in such a way as to

keep pace with future changes to the relevant standards or policies determined by ASIC. I

agree with the suggestion as it will assist in ensuring that the Code keeps pace with legislative

or policy changes and I have incorporated the suggestion in my recommendations.

I also considered the recommendation by consumer advocates that the Code should make it

clear that access to internal dispute resolution processes is free of charge to consumers, even if

the bank has engaged a solicitor or other third parties. The current provision in clause 35.1 (a)

provides a clear commitment that the process will be free of charge and I had interpreted this to

include fees, charges and costs. However, for the purposes of clarity and noting the concerns

of consumer advocates that legal or other costs should not passed on to consumers, I proposed

an amendment to clause 35.1(a) to read “be free of charge, including in those cases where we

have incurred legal or other costs in handling your dispute”.

In my consultation with bank representatives on my proposed recommendations, however, they

pointed out that free of charge means that there will be no fee or charge in relation to the

internal process for handling disputes. However, in the event that the bank incurs external


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legal or other third party costs in handling a matter, such costs may be passed on to the

customer at the discretion of a bank.

Initially I regarded the response of the banks to this issue to be inconsistent with the principle

of clause 35.1 in that the practice has the potential to impose an additional cost burden on

customers that would not normally be imposed if the matter was handled internally. Further, as

the customer has no control in relation to the incurring of such costs or the amount of such

costs, in cases of customers experiencing financial difficulties, this could result in a

compounding of the debt.

However, when I also consider that clause 35 applies to all customers, not only those

experiencing financial difficulties, there may be circumstances where customers pursue matters

through legal representatives or legal proceedings resulting in substantial legal costs for banks.

There might also be circumstances where a bank requires technical legal or other advice. In

such circumstances, it would be inappropriate to impose a restriction on the capacity of banks

to engage external legal or other advice and assistance in handling the matter and/or to pass on

those costs where appropriate.

I have therefore decided not to proceed with my earlier proposed recommendation to amend

clause 35.1 (a) by referring specifically to legal or other costs incurred in handling the dispute.

Instead, I propose to recommend an alternative amendment to clause 35.1, which is based on

the draft Mutuals Code of Practice and provides that the internal process for handling disputes

will be free and accessible.

I have also decided to recommend that any additional legal or other third party costs which

may be incurred and/or passed on to customers by banks should be reasonable having

particular regard to the impact on customers experiencing financial difficulties.

Recommendations

59. That clause 35.1 (b) in relation to internal dispute resolution standards be amended to

read as follows:

(b) meet the standards set out in any internal complaints handling standard or guideline

that ASIC declares is to apply to this Code;

60. That clause 36 (b) in relation to external dispute resolution policy statements or

guidelines be amended to read as follows

(b) consistent with any external dispute resolution standard or guide that ASIC declares

is to apply to this Code.

61. That clause 35.1 (a) be amended as follows:

a) be free and accessible.

62. That any additional legal or other costs which may be incurred and/or imposed on

customers by banks should be reasonable having particular regard to the impact on

customers experiencing financial difficulties.


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10.18 APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39

10.18 1 Issues Paper

The Issues Paper commented that clause 39 Application and transitional provisions will

require updating once any changes to the Code have been finalised.


In commenting on this issue consumer advocates hoped that there would not be the long delays

that accompanied the sign-up of banks to the revised code following the last review and that

subscribing banks should be required to sign up to the Code in its entirety and not with

conditions.

I agree that subscribing banks should sign up to the Code in its entirety. I also hope that not

only the current subscribing banks sign up to the Code promptly after the new Code has been

finalised but that other banks who do not currently subscribe to the Code decide to do so.

In my discussions with banks about my proposed recommendations they noted that the

application and transitional provisions will need to clarify that the requirement for third party

debt collectors and finance and mortgage brokers to be members of an ASIC approved EDR

scheme, as recommended by the review do not apply retrospectively to contracts which have

been signed prior to the commencement of the new Code and which extend beyond that

commencement date. However they would apply to any new contracts entered into after the


Recommendations

63. That clause 39 be amended to reflect the changes in the Code following this review,

making it clear that subscription to the Code means subscription to the entire Code.

64. That the application and transitional provisions clarify that the requirement for third

party debt collectors and finance and mortgage brokers to be members of an ASIC

approved EDR scheme, as recommended by the review:

a) apply to any new contracts entered into after the commencement date of the new

Code; but

b) do not apply retrospectively to contracts which have been signed prior to the

commencement of the new Code and the terms of which extend beyond the


10.19 CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New Provision


A number of consumer organisations and regulatory authorities suggested that the Code should

refer to special provisions for Indigenous customers. The Issues Paper recommended that the

Code include reference to the Indigenous Commitment Statement and incorporate principles in


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relation to the provision of appropriate banking services to Indigenous communities,

particularly those in remote locations.


The interim recommendations were supported by the ABA, banks, consumer advocates and

other organisations responding to the Issues Paper. Taking into account the constructive

suggestions made in the responses I proposed that a new clause on customers in remote

Indigenous Communities be included in the Code focusing on a range of matters relating to the

delivery of banking services in remote Indigenous communities including information and

communication., account suitability, identification issues relating to opening of accounts,

indigenous cultural and community awareness of staff providing banking services to remote

Indigenous communities and the implications of government programs.

In consultations with banks on my proposed recommendations, the ABA stressed that the

proposed Code provision should focus on the provision of banking services in those remote

Indigenous communities where such services are currently available. ASIC, however,

suggested that, as the Code applies to both current and prospective customers, reference be

made to exploring options that increase access to services for Indigenous Customers and those

in remote locations and/or have regard to issues of remoteness in setting fees. In relation to

this suggestion, I note that some subscribing banks are already taking initiatives to improve

their banking services and support for remote Indigenous communities. Taking into account

these initiatives, and that decisions about the location and type of banking services offered by

banks are commercial and policy decisions which are beyond the scope of the Code and this

review, it would be more appropriate for ASIC‟s suggestion to be considered in that context

rather than through a specific provision in the Code.

Recommendations

65. That the Code include a new clause on Customers in Remote Indigenous Communities.

66. That the new clause on Customers in Indigenous Communities records the support of

subscribing banks for the Indigenous Commitment Statement and incorporates

principles in relation to the provision of appropriate banking services to customers in

remote Indigenous communities where such services are currently provided, taking into

account the following issues:

a) Provision of information and communication with customers in indigenous

communities;

b) Account suitability for customers in remote indigenous communities;

c) Identification issues relating to the opening of accounts for customers in remote

Indigenous communities;

d) Indigenous cultural and community awareness training for staff operating in

indigenous communities;

e) The implications of government programs such as income management programs on

the provision of banking services and products in remote indigenous communities.


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10.20 LANGUAGE AND STRUCTURE OF THE CODE


The ACCC expressed the view that the Code needs to be expressed in plain English.

In conducting the review I observed that, in comparison with the British Banking Code, draft

Mutuals Code of Practice and the General Insurance Code of Practice, the Code of Banking

Practice is quite formal, complex and not particularly „consumer friendly.‟ The ACCC

commented to me that the Code needs to be expressed in plain English. It will be important,

when the Code is redrafted following this review, that the document is easy to read and follow

and that the language and terms can be understood by most consumers.

The Issues Paper recommended that the language of the revised Code be simplified and less

formal, the structure of the Code be amended to link related topics more closely together in the

Code and the Code be drafted as a principles based reference for banks and consumers in a way

that will keep pace with rapid developments in the consumer and financial regulatory

environments.


The interim recommendations were supported by the ABA, responding banks, consumer

advocates although consumer advocates were concerned that any move towards a more

principles-based approach might have the effect of eliminating the specific detail and

benchmarks that are required for an effective Code that is contractually binding. I have

factored consideration of these concerns in my recommendations in relation to specific

provisions in the Code. However, it is important in the rapidly changing regulatory

environment of financial and related services, that the Code is not so specific as to become

dated as laws, polices or guidelines change. I have therefore retained a recommendation to this

effect.

Recommendations

67. That the language of the revised Code be simplified and less formal.

68. That the structure of the Code be amended to link related topics more closely together in

the Code.

69. That the Code be drafted in a way that will keep pace with rapid developments in the

consumer and financial regulatory environments.


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CHAPTER 11 – OTHER MATTERS RAISED IN SUBMISSIONS TO THE ISSUES PAPER

11.1 STAFF TRAINING AND COMPETENCY - Clause 7

11.1.1 Issues Paper

The Issues Paper did not make specific recommendations in relation to this issue.

11.2 Response to the Issues Paper

Consumer advocates in their response to the Issues Paper expressed concern that staff in

branches are not aware of or are not implementing key Code requirements in relation to

functions such as the cancellation of direct debits, informing of basic accounts and

implementing effective hardship policies and processes. Consumer advocates commented that

in some cases staff appear to be unaware of the Code itself.

I share the view of consumer advocates that bank staff in corporate offices and branches should

not only be aware of the Code and how to gain access to it but they should also be trained in

how it applies to banking transactions and services. I have made recommendations

accordingly. These recommendations are in addition to specific recommendations I have made

in relation to training of staff in functions such as hardship and cancellation of direct debits as

well as in relation to cultural awareness for staff providing banking services to customers in

Indigenous communities.

Recommendations

70. That clause 7 (a) of the Code be amended to make explicit reference to compliance with

the Code as follows:

can competently and efficiently discharge their functions and provide the banking

services they are authorised to provide in compliance with the Code; and

71. That clause 7 (b) of the Code be amended to include reference to the practical

application of the Code to banking transactions and services as follows:

have an adequate knowledge of the provisions of this Code and its application to banking

transactions and banking services.

11.2 UNFAIR CONTRACT TERMS

11.2.1 Issues Paper

The Issues Paper did not comment or make recommendations on this issue.

11.2.2 Response to the Issues Paper

Consumer advocates submitted in their response to the Issues Paper that the Code of Banking

Practice should include provisions on unfair contract terms similar to those included in the


95

Abacus Code. In view of the proposed assumption of responsibility by the Commonwealth

Government of consumer credit and general consumer protection regulation and the proposed

implementation timetable involving two stages over the next two years38

, I do not propose to

recommend the inclusion of unfair contract terms in the Code. The addition of such terms at

this stage would in my view add to the already complex interrelationships within the current

legislated regime at a time when the focus is on consolidating and clarifying the regulation of

consumer credit. I believe that the issue of the inclusion of unfair contract terms in the Code

should be considered in the context of the national regulation of consumer credit and have

recommended accordingly

Recommendation

72. That the issue of the inclusion of unfair contract terms in the Code be considered in the

context of the proposed national regulation of consumer credit.

11.3 ACCOUNT COMBINATION- Clause 17

11.3.1 Issues Paper

The Issues Paper did not comment on or make recommendations in relation to account

combination as it was not raised as an issue was not raised in consultations.


In their response to the Issues Paper consumer advocates expressed concern that the

combination of accounts by banks without advance notification, as is permitted under clause

17.1 of the Code, can have a detrimental effect on customers in financial difficulty. Consistent

with the approach I recommended in relation to on-selling of debt in cases of financial

hardship, I was persuaded that a similar approach should be adopted in relation to placing a

„moratorium‟ on account combination while a bank is assessing an application for assistance in

cases of financial hardship.

In consultations with banks on my proposed recommendations they were concerned that this

could have the unintended consequence of limiting the capacity of banks to recover funds to

repay the debt in certain circumstances. For example, the proposed amendment to clause could

allow for the possibility of an unscrupulous customer using the amended clause to „take their

money and run‟ by making an application for assistance in repaying their debt on the grounds

of financial hardship, withdrawing all their funds, and discontinuing repayment of the debt and

their relationship with the bank. While the preferred approach of the ABA and banks is to

leave clause 17 as it is, they put forward a suggestion as to how their concerns could be

accommodated if I decide to proceed with my proposed recommendation to amend clause 17.

The suggestion involves the inclusion of a safeguard for banks. The safeguard would provide

38 The first piece of legislation covering national credit system is scheduled to be in place by mid 2009 with

further legislation in relation to small business, margin lending and credit card limit extension offers scheduled to

be in place by mid 2010. The Council of Australian Governments at its 2 October 2008 meeting agreed to a new

consumer policy framework comprising a single national consumer law based on the Trade Practices Act 1974,

drawing on the recommendations of the Productivity Commission and best practice in State and Territory

consumer laws, including a provision regulating unfair contract terms.


96

that banks would not exercise their right to combine accounts while a bank is assessing an

application for assistance in cases of financial hardship provided that the customer agrees that

the bank can hold the funds in their other account(s) until the matter is resolved by way of a

decision to approve or decline an application for financial hardship assistance. This would

place an obligation on banks to resolve matters promptly so as not to unduly prevent customers

from accessing their funds.

The suggestion provides protection for customers experiencing financial difficulties genuinely

seeking assistance in meeting their repayment obligations while protecting banks from the

possible misuse of the clause by unscrupulous customers seeking to avoid their repayment

commitments entirely.

I consider that the proposed suggestion of the banks has merit in addressing the concerns of

consumer advocates and provide protection for banks and have amended my proposed

recommendation accordingly.

Recommendations

73. That clause 17 of the Code be amended to make it clear that banks will not exercise their

right to combine accounts:

a) While the bank is considering an application for financial hardship assistance in

accordance with the financial hardship provisions of the Code, subject to the

customer‟s agreement that funds in another account (s) can be held by the bank until

a decision is made to approve or decline the application for assistance; or

b) While the customer is complying with an agreed repayment arrangement under the

financial hardship provisions of the Code.

11.4 USE OF FINANCE AND MORTGAGE BROKERS

11.4.1 Issues Paper

The Issues Paper did not comment or make recommendations on this issue as it was not raised

as an issue of concern during consultations.


In responding to the Issues Paper consumer advocates recommended that, consistent with

proposals being developed by the MCCA in relation to national finance broking legislation, the

Code should prescribe that subscribing banks only use finance and mortgage brokers who are

members of an ASIC approved EDR scheme. The requirement that finance and mortgage

brokers be members of an ASIC approved EDR scheme is consistent with the approach I taken

in relation to debt collectors. However, unlike debt collection, the Code does not currently

include specific reference to finance and mortgage brokers. I therefore consider that the

inclusion of a requirement for finance and mortgage brokers to be members of an ASIC

approved EDR scheme should be considered in the context of the development of national

legislation on finance broking. I have recommended accordingly.


97

Recommendation

74. That the requirement that banks only use Finance and Mortgage Brokers who are

members of an ASIC approved EDR scheme be considered in the context of the

development of national legislation on finance broking.

11.5 PROMOTION OF THE CODE – Clause 9

11.5.1 Issues Paper

The Issues Paper did not make recommendations in relation to this issue.


In responding to the Issues Paper consumer advocates expressed concern at the lack of

consumer awareness of the Code and of their rights under the Code. Citing the findings of a

CCMC shadow shopping survey of the availability of the Code in branches, consumer

advocates identified the need for the Code to be promoted and more prominently displayed.

My own experiences and observations in relation to the accessibility of the Code in branches

and on websites align with the findings of the CCMC shadow shopping survey and consumer

advocate comments that the code is not readily available in branches or on websites and that

there is very limited community awareness of the Code. I note that clause 37.1 of the Code

commits banks to prominently publicise the availability and accessibility of internal and

external processes for resolving disputes including at branches and through internet sites and

telephone banking services. I see no reason why such a commitment cannot be extended to

clause 9 of the Code in relation to Availability of copies of this code and I make

recommendations accordingly.

Recommendation

75. That clauses 9 (a) and (c) of the Code be amended to include a commitment by

subscribing banks to prominently display a copy of the Code at their branches and on

their websites.


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CONTRIBUTIONS TO THE REVIEW BY SUBMISSIONS, CONSULTATIONS AND CORRESPONDENCE

Australia and New Zealand Banking Group (ANZ)

Australian Bankers‟ Association (ABA)

Adelaide Bank Limited

Archer Field

Association of Building Societies and Credit Unions (Abacus Australian Mutuals)

Australian Capital Territory Department of Justice and community Services – Office of

Regulatory Services

Australian Competition and Consumer Commission

Australian Finance Conference

Australian Financial Counseling and Credit Reform Association (AFCCRA)

Australian Financial Literacy Association

Australian Government The Treasury

Australian Payments Clearing Association (APCA)

Australian Government Office of the Privacy Commissioner

Australian Securities and Investment Commission

Banking and Financial Services Ombudsman

Bank of Queensland Limited

BankWest

Bendigo Bank

Beryl Glasson

Care Financial Counselling Service

Choice

Citibank Australia

Code Compliance Monitoring Committee (CCMC)

Commonwealth Bank of Australia

Consumer Action Law Centre

Consumer Credit Legal Centre (NSW) Inc

Consumer Affairs Law Centre of the ACT

Council of Small Business Associations of Australia (COSBOA)

http://www.reviewbankcode2.com.au/ArticleDocuments/213/CoBP-Issues%20Paper-%20Final.pdf.aspx



http://www.reviewbankcode2.com.au/ArticleDocuments/213/ABA-84819-v1-Code_of_Banking_Practice_Review_Issues_Paper__ABA_Submission_August_2008.DOC.aspx



http://www.reviewbankcode2.com.au/ArticleDocuments/213/APCA%20Submission.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Australian%20Government%20Office%20of%20the%20Privacy%20Commissioner%20Submission%20to%20the%20Issues%20Paper.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Letter%20re%20banking%20code%20of%20practice.doc.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/CCMC%20response%20to%20issues%20paper.pdf.aspx


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COTA Over 50s Ltd

Credit Ombudsman Service Limited

Deacons

Department of Business Law and Taxation, Monash University

Department of Justice – Consumer Affairs Victoria

Director of Consumer Affairs, Victorian Department of Justice

Financial and Consumer Rights Council Inc

Financial Counsellors Association of Queensland Inc (FCAQ)

Financial Ombudsman Service (FOS)

Financial Sector Union of Australia (FSU)

Good Shepherd Youth and Family Services

HSBC Bank Australia Pty Ltd

ING Bank (Australia) Pty Ltd

Insurance Council of Australia Ltd

Joint Submission on behalf of Consumer Advocates

June Price, Social Welfare Worker, Aged Care Assessment Team, Greater Southern Area

Health Service

Marilyn Reynolds

Mark Capotondi

Ministerial Council on Consumer Affairs Secretariat

Mission Australia

National Australia Bank Limited

New South Wales Legal Aid Office

New South Wales Office of Fair Trading (NSW OFT)

Northern Community Legal Service Inc (NCLS)

Northern Territory Department of Justice

Office of the Minister for Consumer Affairs South Australia

Office of the Public Advocate Queensland

Peter Bower

Peter Neil

Privacy Commissioner

Richard Viney, Code Reviewer 2001

Reconciliation Australia

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Submission%20-%20Banking%20Code%20Review%20Credit%20Ombudsman%20Service.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/001.PDF.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Submission%20-%20Review%20of%20Banking%20Code%20of%20conduct%20-%20Department%20of%20Business%20Law%20and%20Taxation%20Monash%20University.doc.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/1021_001.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/FCAQ%20Issues%20Banking%20Code%20of%20Practice%20Submission.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/FOS%20Response%20to%20the%20Banking%20Code%20Review.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/FSU%20sub%20to%20Banking%20code%20review%20-%20Disc%20paper%20response%20-%202008%20-%20FINAL.doc.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Joint%20Consumer%20Submission%20to%20the%20Bank%20Code%20review%2031%20July%202008%20Joint%20Submission%20by%20Consumer%20Advocates.pdf.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/June%20Price%20Submission.doc.aspx




http://www.reviewbankcode2.com.au/ArticleDocuments/213/OFT%20letter%20re%20Code.doc.aspx

http://www.reviewbankcode2.com.au/ArticleDocuments/213/Northern%20Community%20Legal%20Service%20NCLS%20Salisbury%20South%20Australia.doc.aspx


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Roger Price MP

South Australian Office of Consumer and Business Affairs

St George Bank

Suncorp Metway Ltd

Tasmanian Department of Justice - Consumer Affairs and Fair Trading

The Australian Institute for a Just, Sustainable, Peaceful Future Ltd

Veda Advantage

Victorian Council of Social Services

Western Australian Department of Consumer and Employment Protection

Westpac Banking Corporation

http://www.reviewbankcode2.com.au/ArticleDocuments/080924Banking%20Code.doc.aspx



http://www.reviewbankcode2.com.au/ArticleDocuments/213/4382_001.pdf.aspx