Banks failing to uphold guarantor obligations: Report

The Banking Code Compliance Committee (BCCC), which monitors banks’ adherence with the Banking Code of Practice, has released a report summarising its inquiry into guarantee obligations.

The review was prompted by “unexplained inconsistencies” in banks’ breach data over a number of years, as well as concerns around evidence given in the royal commission.

More than $500 billion of both consumer and small-business credit was supported by guarantees in 2018.

But after completing performance audits with 13 banks, the BCCC has found non-compliance with a number of the industry code’s provisions, including pre-guarantee disclosure requirements.

The committee has raised concerns about failures to consistently provide full disclosure of key information to guarantors – an issue linked to poor record-keeping practices and challenges associated with systems, business units and subsidiary brands.

The audits also found multiple instances where banks could not demonstrate their compliance.

While the banks were ticked off for having adequate policies and processes, they also were said to:

• Lack effective record management practices
  Examples included not being able to show key information was given to a prospective guarantor before accepting the guarantee, or not being able to show the guarantee was executed in the absence of the borrower.
  Further, community legal centres cited instances where they had requested guarantee documents on behalf of clients and key documents had either not been retained or had been lost.
• Conduct inadequate or ineffective monitoring of compliance controls
  All of the audited banks found control gaps in their guarantee process not previously detected by routine monitoring activities.
• Rely too heavily on legal advice when considering the enforceability of a guarantee
  Banks were found to consider what actions to take on a case-by-case basis when they became aware that they had not complied with the code.
  While it is appropriate to obtain legal advice, the BCCC said, it is also important for the banks to avoid an overly legalistic approach – referring to a code obligation to engage with guarantors in a fair, reasonable, ethical manner. The banks also did not provide details about when or how they communicate non-compliance to affected customers and guarantors.
• Lack capability to collect guarantee-related data
  The banks confirmed they had difficultly providing requested data about guarantees. Information was stored in a variety of ways, including as paper files in branches or storage facilities, in individual customer files, with different systems for subsidiary brands and businesses across. Collecting data was largely a manual process, according to the report.
  Some of the banks also could not distinguish between consumer and small-business loan guarantees. The majority of banks do not have readily available data about guarantee outcomes, such as the number of guarantees enforced for any given period.

BCCC chair Ian Govey said the code obligations are a crucial safeguard to ensure guarantors understand the risks involved when providing a guarantee.

“When things go wrong, the Committee expects banks to hold themselves accountable, making sure breaches are dealt with appropriately and pro-actively,” Mr Govey said.

“Banks should not wait for a guarantor to make a complaint or raise an issue.”

The report also noted that when it receives claims from guarantors, the Australian Financial Complaints Authority (AFCA), may decide that the bank cannot rely on the guarantee if it finds the company did not meet its obligations in the first place.

One case study in the report examined an instance where a bank sought to repossess the guarantor’s home after the borrower defaulted on her small-business loan.

The guarantor, a pensioner whose only income was a disability pension and had poor eyesight and trouble speaking, had signed the guarantee to assist her daughter (the borrower).

The bank pre-filled an acknowledgment saying she had been properly advised and understood the guarantee, before the guarantor had an opportunity to seek independent legal and financial advice.

The BCCC reported that when the business failed and the bank took steps to enforce the guarantee, its validity was challenged – as the bank had difficulty demonstrating how the staff member was satisfied the guarantor knew and understood the risks involved before accepting the agreement.

The BCCC has also listed 23 recommendations to improve industry practice, across staff training, record-keeping and data storage; processes, systems and technology; interactions with guarantors; and checks and balances.

Such suggestions include meeting with prospective guarantors face to face when possible, requiring staff to consider the guarantor’s circumstances when delivering key disclosures, particularly if they need help understanding; and collecting guarantor outcome data, to track guarantee trends.

The banks have been urged to consider the report and recommendations against their own practices and to develop an implementation plan to close any gaps.

“The BCCC expects all banks to take an active role in improving industry practice across the guarantee provisions,” Mr Govey said.

“The committee will follow up with code subscribers to seek updates on steps being taken to implement its recommendations and enhance their capability to comply with the code’s guarantee provisions.”

The BCCC has said it will follow up with the banks on whether they have improved guarantor and customer outcomes in March next year.

Currently 19 banks have signed up to the Banking Code of Practice – including the big four, AMP, Suncorp, HSBC, ING, Citigroup and Bendigo and Adelaide Bank.

The code was developed by and is owned by the Australian Banking Association (ABA).

[Related: Red tape choking small-bank lending: BOQ]