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The Unpleasant Truth About Australian Banking

On 12 May 2000, the Australian Bankers Association appointed Richard Viney to conduct a review of Code (1996). The ABA Chairman was Mr Frank Cicutto, Chief Executive, National Australia Bank.

In undertaking the review, Viney was asked to take account of changes in the market for banking services and the changing behaviours of bank customers. The ABA, in all likelihood, believed banks adopting Code (2003) would lead to banks and individual and small business customers benefiting from responsible self-regulated banking.

The newly appointed ABA Chief Executive, David Bell was confident this second generation Code would be an effective demonstration to Government's policies and demonstrate self-regulation works. He is reported to have said this is a real alternative to the heavy hand of legislation, a dubious statement as it later turned out

There were submissions to the Viney review from government agencies, consumer groups and banks. Richard Viney's Issues Paper with interim recommendations was published and once the Issues Paper submissions were received, he published the Final Report.

There were differing views about appropriate monitoring, and the powers the Code Compliance Monitors would possess, and sanctions they could impose. Richard Viney's final recommendations ended up being in line with those taken from the bank CEOs organisation, the ABA.

The Richard Viney recommendations, detailed below were:

  1. inclusion of small business
  2. principles of fairness
  3. monitoring of sanctions
  4. dispute resolution; and
  5. periodic review and a forum for regular exchange.

The first three recommendations are dealt with in this section.

Inclusion of Small Businesses

The Code (1996) applied only to individuals. However, in light of the extension of coverage of the FOS, to cover small businesses, the review considered extending the coverage of the Code to small businesses.

ASIC favoured the extension to include small businesses out of recognition of small business customers being disadvantaged in their bargaining position when dealing with mega-banking organisations. The NSW Government, in its presentation to the Joint Consumers Submission, also favoured extending the Code protection to small business customers.

The ABA did not object to the extension. Richard Viney finally recommended Code (2003) cover all small businesses. Code (2003) defined small businesses as having fewer than 100 full-time people or their equivalent, if the business is or includes manufacture of goods, or, in any other case, fewer than 20 full-time people.

Principle of Fairness

The Code (1996) did not contain a provision on fairness. Actually, for Code (2003) the ABA sought to exclude fairness. It resisted including the provision on the grounds that it was a subjective concept and will vary from circumstance to circumstance.

However, the ABA eventually withdrew its objection to the fairness provision and Mr Viney recommended a subdued provision in Code (2003). The new clause stated banks will act 'fairly and reasonably towards customers in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us'.  

Monitoring and Sanctions

The importance of monitoring and sanctions were the most controversial issues in the review process. During the period monitoring was carried out through the Australian Payments System Council, it involved an annual self-assessment by banks, which was followed by an ASIC report on the results of the self-assessment process.

In the Joint Consumers Submission, the Australian Consumers Association, ASIC and the NSW Government objected to lack of transparency and independence of monitoring in Code (1996). For their part, the ABA acknowledged the need for change while avoiding inefficiency and disproportionate cost.

ASIC noted the importance of external monitoring to complement the self-assessment process. The Joint Consumer submission's continued to argue that the inadequacy of self-assessment of compliance monitoring called for validation of results to be carried out by an independent external body.

The Consumers Association promoted the need for compliance monitoring to be adequately resourced. The NSW Government's submission stated:

It is important that monitoring and reporting on the Banking Code of Practice is carried out by an organisation with experience in consumer banking issues, and which is seen to be independent of the banks. The Australian Securities and Investment Commission is one such agency. Compliance with the Code should be able to be independently double checked, and not rely entirely on a bank's self-assessment.

It was suggested that some parties were dissatisfied with lack of a provision in the Code for the imposition of sanctions for breaches. ASIC, for one, cited other industry codes such as the 'General Insurance Code of Practice', which established a regime for investigating alleged breaches and for imposing sanctions. This regime complemented both internal and external dispute-resolution procedures for resolving bank/ customer disputes. ASIC stated:

this review should consider establishing an independent regime for investigating alleged contraventions and imposing appropriate sanctions;

the code should detail who can make complaints about non-compliance, this should include consumers, consumer advocates, regulators and government agencies and dispute resolution schemes;

the process for making complaints; the decision-maker(s) and the decision-making process; and

available sanctions including a range of effective sanctions should be available so a flexible approach can be taken.

The Consumers Association cited the December 2000 Taskforce on Industry Self-Regulation's report, which argued for sanctions underpinned by regulatory mechanisms that it regarded was essential for Code credibility. The Australian Consumers Association stated:

The lack of sanctions in the banking code presents a fundamental weakness and raises doubts about the credibility of the code for industry participants and consumers. For example, there are no sanctions for breaches such as refusing to tell a customer about dispute mechanisms, not providing information on a request or not following customers instructions in relation to account cancellation. A range of sanctions, underpinned by regulatory mechanisms, is essential for code credibility.

The Joint Consumer submission also argued for including sanctions, citing comparable codes, such as the AAMI Customer Charter, which had penalty provisions. The Joint Consumer submission stated:

For a complaints process to be effective consumers must use it. However, unless they can establish a loss which opens the way for compensation, the consumers will generally not have any, or a sufficient incentive to report breaches of the code to the (proposed) administration body.

One way of addressing this issue, and in doing so providing industry with a cheap compliance-monitoring mechanism, would be to include in the code a penalty provision under which the subscriber would agree to pay a small sum to any customer whose complaint that a code provision had been breached was established. This sum would be paid irrespective of whether the customer suffered any loss or damage in consequence of the breach. The AAMI Customer Charter provides a possible model for a penalty provision of the kind proposed.

Richard Viney agreed. Without an independent regime for investigating complaints of Code contraventions, and without a capacity to impose appropriate sanctions, the banks commitment to the Code appeared to be perfunctory.

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

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