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The Unpleasant Truth About Australian Banking

Soon after banks adopted the 1996 Code, it was clear that the introduction of enforcement mechanisms were paramount. Despite recommendations made by the Martin Committee, banking suffered from a lack of credibility and trust. At the time, the media was continuing to report incidents of banks bending rules and breaking the law.

The Code (1996) was flawed structurally and did not provide adequate incentives for banks with good intentions to implement it as a set of agreed principles and binding practices. Accountability and transparency of the complaints resolution process, in a deregulated banking environment, was essentially left to courts to enforce. The banks defective contractual provision in the Code was an outcome that most customers could not afford.

The Wallis Inquiry's Report

Recommendations of the Financial System Inquiry (the Wallis Inquiry) and the House Standing Committee on Industry, Science and Technology's report 'Finding a Balance: Towards Fair Trading in Australia' were meant to require the government to promote institutional integrity in banking. This would happen with co-regulation and the regulatory bodies with powers to enforce codes of practice. With co-regulation there could be legally binding regimes with powers to enforce consumer protection for individual and small business customers of banks.

The Wallis Inquiry's recommendations included forming strong national regulatory bodies with wide-ranging responsibilities, and empowering them to enforce consumer protection and safeguards in the banking industry. The 'Finding a Balance: Towards Fair Trading' report recognised the presence of unfair conduct between big and small businesses, and this was potentially a major worry for efficient markets.

This was raised in several government inquiries but never actually addressed. The mega-banks were allowed to introduce their own system of self-regulation, a decision generally not accepted. This meant small business was forced to turn to the courts when banks failed to adhere to their own self-regulated codes and rules.

The Wallis Inquiry report was designed to review the effectiveness of the financial sectors reforms, which had taken place through the 1990s. The 1997 report contained 115 recommendations on a wide variety of financial system issues. It concluded stating market regulation in the banking industry should be directed at sectors rather than to particular institutions, with a number of government institutions required to successfully monitor the self-regulated industry.

Corporate and Financial Services Commission

A major recommendation by the Wallis Inquiry was the establishment of a national regulatory body. This was called the Corporate and Financial Services Commission, which later became ASIC.

The Commission would oversee 'corporations and financial market's integrity, and consumer protection'. This meant it would combine the market integrity and consumer protection roles of the Australian Securities Commission, Insurance and Superannuation Commission and the Australian Payments System Council.

The Wallis Inquiry's report recommended the Corporate and Financial Services Commission should have sole responsibility for administering consumer protection regulation in the banking and finance sectors. It would therefore be responsible for relevant provisions under the Trade Practices Act 1974 (Cth) for the prevention of fraud.

The Wallis Inquiry's report recommended the Corporate and Financial Services Commission should have powers:

to obtain documents and question persons, and accept legally enforceable undertakings;

for protection from liability for persons who provide investigative assistance;

to impose administrative sanctions, such as banning or disqualification orders;

to initiate civil actions and to seek punitive court orders such as financial penalties and a range of remedial court orders; and

to initiate and to refer matters to the Director of Public Prosecutions for criminal prosecution.

Australian Prudential Regulation Commission

Another major recommendation in the Wallis Inquiry was creation of the Australian Prudential Regulation Commission. Its role was to carry out prudential regulation in the financial system.

The Wallis report proposed the Australian Prudential Regulation Commission should have powers under legislation to establish and enforce prudential regulations of approved and licensed financial entities and decisions of the Corporate and Financial Services Commission should not be subject to administrative or other reviews.

The Reserve Bank of Australia

The Reserve Bank was in existence at this time. However, the Wallis Inquiry's report recommended responsibility for prudential supervision of the financial system to be removed and invested in the Australian Prudential Supervisory Commission. It further recommended a Payments Systems Board be established to ensure payments systems policy was in line with public policy aims.

Following the Wallis Inquiry's report in April 1997, the House Standing Committee on Industry, Science and Technology published its report the following month titled Finding a Balance: Towards Fair Trading in Australia.

The Wallis committee recognised the existence of unfair conduct by big businesses towards small business. It considered this was a major worry. It stated concerns were justified and should be addressed urgently. The committee's recommendations were therefore directed at providing any unfairly treated small businesses with adequate redress.

Finding a Balance: Towards Fair Trading

In the Finding a Balance: Towards Fair Trading report, it noted several serious business conduct issues related to small business finance. The Fair Trading report therefore focused entirely on the conduct of banking and finance institutions. Amongst these issues the Towards Fair Trading report noted lack of disclosure of loan terms and conditions by banks and the obstructive behaviour relating to the banks dispute resolution practices stood out.

For example, complaints received from small businesses in relation to dealings with more powerful firms shared common features, including:

inadequate disclosure of relevant and important commercial information which the weaker party should be aware of before entering the transaction; and

inadequate and unclear disclosure of important terms of the contract particularly those which are weighed against the weaker party, and

especially when contract terms can operate against the interests of the weaker party and are not brought to the attention of that party, and

where the full import of those [unfair] terms are not spelt out to the weaker party.

Such conduct could be illegal under legislation and common law, as it might be unconscionable or misleading, and deceptive. However, it was often difficult to enforce best standards through legislation, partly because the law was restrictive in its interpretation and application of general principles.

Deceptive and Misleading Conduct

Under s 18 Australian Consumer Law (Cth), a person [or party] must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or decieve.

To prove deceptive and misleading conduct, it requires a victim to prove to the court that on the balance of probabilities the bank intended or was aware of falsity and/or the misleading nature of representations they made to individual and small business customers. This must be considered as one of the consequences of banks relying on two different agreements, one with their customers and the other with the Code Compliance Monitors. Such an arrangement would make it impossible for individual and small business customers to use the Code to protect their interests.

In this case, sixteen banks acted as one body, and make promises to their customers that they will comply with the Code practices.  Allegations relating to misleading and deceptive conduct arise from the unpublished bank CEOs constitution, which was in place when banks adopted Code (2004) and incorporate the Code as an undertaking in contracts they present to small businesses.

By acting to conceal the constitution from the public, the directors of the sixteen subscribing banks intentionally acted to rely on the Code Monitors inability to comply with their clause 34 duties in Codes 2003, and 2004. Keeping the constitution from customers and their lawyers meant the banks diluted the fair and prudent banking practices that were intended to represent a consensus in the banking and financial sector. The bank prepared contracts could not be relied on when customers signed the banks contracts.

At a later date, a court may find these were misleading and deceptive practices by banks relying on advice from the nations most expensive lawyers.

Unconscionable Conduct

Under s 21 of Australian Consumer Law (Cth), a person [or party] must not, in trade or commerce, in connection with the supply or possible supply of services to another person [or party] engage in conduct that is, in all the circumstances, unconscionable. 

In dealing with unconscionable conduct, the mere presence of inequality is not, in itself, conclusive of any illegal conduct. Rather, inequality must be such that the individual or small business 'suffered from an inability to protect its interests if the bank was sufficiently aware of its inability, and takes advantage of the individual or small business weaker position'. Hence, there will have been many cases when banks had a duty to disclose the efficacy of their Internal Disputer Resolution practices and Code Compliance Monitors code compliance and complaints handling procedures.

While courts must be satisfied merely on the balance of probabilities rather than the higher criminal standards of beyond reasonable doubt, it requires individuals and small businesses to prove a hypothetical alternative. For instance, damage would not have occurred had the bank investigated the complaint and not acted in the way it did.

Banks Rely on Weaker Party's Inability to Protect Interests

Both false and misleading conduct and unconscionable conduct are difficult to prove in terms of evidentiary availability and because customers proving they relied on such conduct. This can prove extremely costly.

The legislators had to incorporate big business powers in its dealings with small business whilst maintaining efficient markets. Using courts was out of reach for most customers, whilst the banks and ABA introduced measures to paralyse investigations into unfair and potentially fraudulent bank conduct. All possible because banks knew the public could not fund litigation to enforce the fair trading provisions.

Few individual or small businesses could absorb the cost or justify the risks associated with running a long-drawn-out court case that would potentially cost many millions of dollars. The banks have now become mega-corporations, operating without oversight by effective regulators.

Senate Committee Report webpage (Sub No. 90): Click Here...

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