In the closing remarks of the fourth round of hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the commission asked the witnesses to respond to several questions, including “What does it mean for a bank to act fairly and reasonably towards a customer in a consistent and ethical manner?”
The requirement to act “fairly and reasonably” towards a customer in a “consistent and ethical manner” is set out in clause 3.2 of the Code of Banking Practice (CBP), which is a voluntary code of conduct (currently under review) that sets standards of good banking practice that should be followed when dealing with individual and small business customers. (It should be noted that the revised CBP will is expected to expand on and explain the definition.)
The question from the commission was largely pointed towards what such an obligation required a bank to do in relation to agribusiness customers in an enforcement context (given the fourth round looked at issues affecting Australians who live in remote and regional communities, including farming finance).
Of all the responses from the big four, Westpac’s submission was the most explicit about the difficulties in defining what the clause of the CBP means.
Its submission reads: “Given the array of situations in which a bank may have dealings with a customer, it is difficult to define uniformly what it means for a bank to act fairly and reasonably towards a customer in a consistent and ethical manner in all situations.
“The question inevitably is one of perspective or judgment and raises subjective and objective considerations that will often be dependent on the circumstances. In that regard, it is worth noting that clause 3.2 (second sentence) recognises that considerations relevant to the discharge of the obligation include the bank’s conduct, the customer’s conduct and the contract between them.”
It continued: “Whilst it is difficult, in the abstract, to elaborate on the scope of the obligation under clause 3.2 of the CBP, in any enforcement context, the obligation is likely to require a bank to treat the customer with respect and to give due consideration to the customer’s interests, in considering the process and the potential outcome for the customer of any proposed enforcement action, as well as the bank’s interests consistent with its contractual entitlements.
“In relation to agribusiness customers, in an enforcement context, the obligation under clause 3.2 likely requires a bank to respect the customer’s emotional and generational connection to the land and, often, their desire to remain on their farm if possible.”
NAB highlighted that there have been a number of judgements made relating to this clause, including that the “clause preserves the entitlement of a bank to act with careful regard to its own interests under its contract(s) with a customer” and “does not require a bank to subordinate its own interests to those of a customer”.
NAB also outlined that some judgements have recognised that in giving effect to the clause, a bank will have regard to its prudential obligations.
The bank therefore stated that when it comes to acting fairly and reasonably towards a customer in a consistent and ethical manner, particularly when in relation to agribusiness customers in an enforcement context, it agrees with the judicial guidance.
NAB also submitted that “similar guidance should be applied in understanding community standards or expectations of fairness and/or honesty”.
The response from ANZ’s legal team to the question of what it meant for a bank to act reasonably and fairly to a customer outlined that while there may be “broad agreement that banks should act fairly and reasonably in a consistent and ethical manner”, the community’s expectations of what that may require in a particular case is “susceptible to disagreement, and change, over time”.
The bank added that the fact that it had changed some of its practices in relation to agribusiness customers in recent years did not mean that its previous practices involved misconduct or fell below community standards or expectations (CSEs).
It gave two main reasons for this conclusion: “First, obligations which are expressed in broad terms (such as a requirement to act fairly and reasonably) generally allow for a variety of responses. Although one response may be considered preferable to another, both may be consistent with CSEs.”
It gave the example of the bank potentially allowing additional time for a customer to sell assets to meet repayment obligations, which it said would not necessarily mean that the fact it allowed less time in earlier practices would be considered a breach.
“Secondly, changes may have occurred in CSEs since the events in question. Reasons for this may include greater public awareness of the circumstances or effect of particular conduct (since it occurred), the development of different expectations as a result of a particular incident or set of incidents (because it/they occurred), or changes in community attitudes to align with current approaches to such circumstances (if they were to occur today).”
ANZ went on to clarify that the definition of “in a consistent and ethical manner” is also tied to the obligation of acting “fairly and reasonably”, and reiterated that the customer’s conduct (and the bank’s response to customer conduct) is also considered, that the contract terms “provide necessary context for how the obligation… is to be construed” and that, in meeting its commitments to a customer, the bank will have regard to its prudential obligations.
The bank also suggested that there may be some cases where customer expectations and standards may require banks “to do more than act fairly and reasonably in a consistent and ethical manner”.
Noting that the CBP clause is similar to some of the requirements that banks must adhere to under the Corporations Act, CBA noted that the code places “more emphasis on fair, reasonable and ethical conduct, as opposed to efficiency (to which the clause does not refer”.
The bank did not further elaborate what this clause of the code means to the bank in its written submission. However, it did provide further detail in its response on behalf of CBA subsidiary Bankwest.
In its response, the group said that any consideration of whether the bank had breached clause 2.2 of the code should consider:
- whether the conduct was an honest or inadvertent mistake, or whether it was deliberate or dishonest;
- whether the conduct had an adverse impact on the consumer;
- what the relevant financial institution did once it became aware of the conduct; and
- how the conduct should be considered in the context of the overall activities of the financial institution and its relationship with the customer.
Its written submission reads: “Insofar as the last matter is concerned, while a particular event should be considered in the broader context of the bank’s relationship with the customer, it is also important that consideration be given to any particular event. That is, the fact that there may be more than one instance of conduct should not lead automatically to the conclusion that the cumulative effect of those events amounts to a breach of clause 2.2 of the code [clause 3.2 of the current code].
“Similarly, the fact that there may be only one instance of conduct should not lead automatically to a conclusion that it was an isolated event and therefore not a contravention of the code. An objective balancing exercise needs to be undertaken in each instance, taking all of the circumstances into account.”
The financial services watchdog wrote in its submission to the commission: “ASIC believes that fairness is of key importance in the financial services industry. This is not limited to compliance with the law, although this is an important safeguard.
“Fairness requires financial services entities to conduct themselves honestly and transparently, including through prompt, effective treatment and remediation of complaints without unnecessary barriers to resolution.
“It requires entities to have reasonable regard to the interests of their customers. Consumers should be treated honestly and fairly at all stages of their relationship with a financial services entity.”
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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.