The code of conduct is the banking industry’s customer charter on best banking practice standards.
The current code, which was finalised in 2013, is in the process of being updated.
Following a review of the code by Phil Khoury, managing director of Cameron Ralph Pty Ltd, the Australian Banking Association (ABA) agreed to implement 96 of the 99 recommendations made in “some form”.
However, the code has been updated once again, with the royal commission highlighting this week that a new draft version had been sent to the Australian Securities and Investments Commission (ASIC) in April 2018 for approval.
This version amends the definition of a “small business”.
In the new version, the term equates to a business with fewer than 100 full-time equivalent employees (as suggested by Mr Khoury in his review), an annual turnover of less than $10 million and less than $3 million (rather than the originally stated $5 million) in total debt.
When asked about the new limit during the first day of the third round of hearings for the royal commission’s look at small business lending, Mr Khoury said: “It’s less in two ways. Firstly, a smaller number, but secondly, that it is intended to take into account all the loan exposures of the small business rather than the facility that’s in question.”
Speaking about the annual turnover limit, Mr Khoury said he believe that it “complicates the definition”.
He said: “At various times over the last few years in, a number of arguments have been put to us that the turnover test is — is too onerous for banks to administer.
“Clearly, that’s not the case in other countries; a turnover test is not uncommon. But we had not recommended it because we thought it was just unnecessarily complicated. And there are practical issues about that for someone like the Financial Ombudsman Service, for example, or AFCA now, of having to decide what the turnover is and obtain evidence about the turnover through tax returns or some other means, making the process of figuring out whether a small business is in or out lengthier and — and more complicated.”
He added: “[I]f you go back to the original premise that the code is a promise from the banking industry to its customers in plain-speaking language that will engender trust, my recommendation is that you would say it more simply than that.”
Notably, Mr Khoury told the commission that he had been “urged” by most of the representatives of small business “not to overdo recommendation in terms of responsible lending” over fears that “an onerous responsible lending obligation [could] cause access to credit to dry up” — an idea that was met with “furious agreement”.
Mr Khoury also noted that the new code had included his recommendation to outline why a small business lender was refused credit and given an idea of what would have made the application successful, but said that he took “exception to the language”.
The code reads: “If we decide not to approve a loan to a small business, we will, if appropriate, tell the small business the general reason why.”
Mr Khoury told the royal commission: “I think small business, reading that, would — would treat it as weasel words, really, ‘if appropriate’, ‘general reason why’ and so on.
“We did urge the banks to try and be as plain speaking as possible in all of this and not to guard against, you know, rare occurrences.”
Commissioner Hayne said that it would be hard, however, for the bank to tell the borrower that they did not “trust” them, adding: “At some point, a bank has got to make a judgment about the customer.”
In conclusion, Mr Khoury said: “Overall, I think it’s a big step forward. It’s a mix of things, from my point of view: some excellent, some very good and some where I’m a little disappointed about it. But, I think overall, it’s a big step forward in terms of how it’s framed, its accessibility and language, and the substantive protections that are proposed under it.
“I think you would have to concede that it was, you know, a substantial step forward.”
Retail banks wishing to join the Australian Bankers’ Association will be required to sign up to the new code of practice before becoming a member, the association has revealed.
As a prerequisite for membership, the Australian Bankers’ Association (ABA) will require banks to be signatories of the new Code of Banking Practice, which is pending approval of the new code from the Australian Securities and Investments Commission (ASIC).
Binding and enforceable, the new code sets out the banking industry’s key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services.
The updated code outlines changes for both individuals and small businesses, including:
- plain English contracts
- ending unsolicited offers of credit card increases
- the mandated ability for customers to cancel a credit card online
- improved transparency around fees by telling customers about service fees immediately before they occur
- when entering into contractual arrangements, signatories will be required to include a legally binding statement which notes that the code is applicable
Following the new code’s approval, banks will have 12 months to implement the reform.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.