Banks urged to improve code of conduct compliance

The final report from an independent review into the Banking Code of Practice has been released, laying out 116 recommendations for reforms to the Australian Banking Association’s (ABA) industry rule book on customer rights.

The review, which sought to assess if the code needed any updates, was led by former Treasury deputy secretary Mike Callaghan.

While the final report stated the banking code “does not need a complete overhaul or rewrite”, it has stated the rules “can and should be improved”.

It has called for the code to extend consumer protection and benefits, to clarify the operation and objective of the code and to strengthen compliance.

“Preconceived views that the code requires little updating should be avoided. It requires significant updating in a number of areas,” the report stated.

Among other challenges, the review found the effectiveness of the code can be mostly shaped by bank attitudes.

Consultations with ABA member banks had revealed some perceive the standards as “largely a regulatory burden, comparable with other regulatory and legislative requirements imposed on them”.

“While all banks should comply with regulatory requirements, the importance they place on the code will influence their approach to complying with a set of voluntary commitments,” the report explained.

“If the code is perceived as mainly an obligation that can restrict a bank’s activities and commercial interests, compliance may not have the same priority as it would if the code were viewed as important to the bank’s commercial success.”

Further, Mr Callaghan wrote steps towards boosting code compliance would help reinforce consumer and community trust in the banks – particularly as the code is to a degree, self-regulated.

“Banks should commit to take all reasonable steps to ensure appropriate systems, processes and programs to support an integrated approach to Code compliance are in place,” the report said.

“In addition, the banks should commit to a program of periodically reviewing the effectiveness of each component of their compliance framework through their internal and external audit arrangements, with the results of these audits submitted to the BCCC [Banking Code Compliance Committee] .”

Mr Callaghan was assisted by a consumer advisory panel, including Alexi Boyd, chief executive of Council of Small Business Organisations, Tom Abourizk, policy officer from the Consumer Action Law Centre and Drew MacRae, policy and advocacy officer at the Financial Rights Legal Centre.

The Australian Banking Association (ABA) will review the recommended changes, and what it will take when drafting a new code.

Any changes to the code as a result of the review will need to be endorsed by all 18 signatory banking groups, and to be reviewed and approved by ASIC.

All retail-facing ABA member banks have subscribed to the code.

Other recommended changes from the review include:

• The principle of responsible lending (“care and skill of a diligent and prudent banker”) should be set out in the code. The report stated, “This should incorporate, consistent with the law, that the commitment for responsible lending for individuals is that banks will undertake reasonable inquiries to assess a borrower’s capacity to repay the loan without substantial financial hardship and in doing so to consider the [borrower’s income, debt and expenses and the purpose for which the borrower is seeking the loan.”
• Banks should commit to assess all the information they have as to whether a co-borrower is receiving a substantial benefit under the loan.
• Banks should commit not to sell consumer credit insurance with low claim to premium ratios.

For small business lending in particular, the review has suggested:

• To help clarify what parts of the code apply to small business, and to recognise there is a difference in the requirements for lending to small business and lending to individuals, the references to small-business lending in part 5, “When you apply for a loan,” should be shifted to part 6: “Lending to small business”
• The code should specify that future earning capacity is taken into account when assessing a small business’ capacity to repay a loan.
• The code should clarify that a bank’s approval of a small business loan will not be dependent on a third party (such as the small business’ accountant) certifying the capacity of the small business to repay the loan.
• Banks should advise a small business if there is likely to be a delay in the initial indication of how long it would take for a decision, the reason for the delay, and give a revised estimate when a decision is likely.
• Banks should commit that if they require additional information when considering a loan application, they will endeavour to ensure that this does not delay the time it will take for the bank to make a decision.
• Banks should commit to tell small business the reason, if appropriate, as to why a loan was declined, along with what would be needed for the application to be reconsidered.

On loan guarantees, the review has recommended:

• Banks should commit to periodically audit the effectiveness of their processes and systems to support compliance with the guarantee provisions under the code.
• Banks should commit to proactively identifying guarantors who may require additional support to understand the guarantee information provided to them.
• Banks should commit to tailoring their approach to provide the information required to be given to the guarantor in a meaningful and accessible way to suit the needs of the guarantor, including where the guarantor’s first language is not English.
• Banks should commit to maintain records of any indicators that a guarantor may be vulnerable.
• Banks should commit, unless impractical to do so, to meet either face to face, videoconference or other means with the guarantor before accepting the guarantee, and particularly where the guarantor has not sought independent legal or financial advice. Banks should meet with the guarantor without the borrower being present.
• Banks should commit to conducting a pre-enforcement review of a guarantee to ensure that it has been obtained in accordance with the code, before commencing enforcement action.
• Banks should commit to explore all alternative options with a guarantor before a guarantor is forced to sell their principal place of residence.

Anna Bligh, ABA CEO commented the banks remain committed to improving the code for the benefit of Australian customers.

“Customers remain at the centre of everything banks do and this triennial review ensures that no matter the economic, policy or regulatory shifts we face, the enforceable Banking Code stays central to the bank-customer relationship,” she said.

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