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The Unpleasant Truth About Australian Banking

The directors of code subscribing banks appear reckless when they promoted their commitment to new Code (2003), alleging it was a contract and promoting it as such. The directors of seventeen subscribing banks did the same in 2004, led by McFarlene, ANZ, and Les Matheson, Citibank.  They would not have supported by the Australian Bankers Association public relations machine making statements relating to revised Code (2004) if they were not satisfied the information was true and correct.

Was this a problem?

Apparently it was. Six months after bank directors had adopted the new Code (2003), researchers found evidence Mallesons had drafted the bank CEOs constitution. It weakened the Code Compliance Monitors powers and authority by removing the commitment by banks to investigate all complaints. The directors of subscribing banks dismantled the efficacy of the code by introducing the bank CEOs constitution and followed this by allowing the Australian Bankers Association to publish the revised Code (2004). Each step was authorised by a code subscribing bank director.

Was the CEOs Constitution a Problem?

It cased a problem to banks and customers.  Because principles outlined in the code and included in bank contracts with their individual and small business customers became redundant.

The might be argued banks only appointed Code Compliance Monitoring Committee members to comply with appearances of the McFarlane – Kelly Code (2003) rather then to enrich the fairness of the bank/ customer relationship. Most damaging for all small businesses was the potentially misleading commitment by subscribing banks to require the Code Compliance Monitors to investigate and make a determination on any allegation a bank breached the code.

How did Bank Directors React?   

On 31 May 2004, National Australia Bank was the first to adopt Code (2004). When doing so, it knew the constitution removed the NAB's commitment to require Code Compliance Monitors to investigate any complaint it beached the code.  A short after NAB adopted the code, thirteen other banks followed. Again, it might be argued that directors of all fourteen banks had no intention of complying with the written words in Code (2004), in particular clause 35.7.

During the John McFarlane - Gail Kelly era, banks engineered the escape route rather then having to investigate all complaints. Clause 8.1(c) of the constitution was kept from the public, which obviously suited banks and the Code Compliance Monitoring Committee. It certainly limited the workload on the latter because it relieved them of having to comply with their clause 34 commitments.

However when Code (2004) was published in May, banks were still willing to declare it was contractually binding, stating:

The Code is contractually binding on subscribing banks. When your bank adopts the code, it becomes a binding agreement between you and your bank and comes into effect when your bank adopts the Code. It establishes the banking industry's key commitments and obligations to individual and small business customers on standards of practice.

On adopting the Code, your bank will continuously work towards improving its standards of practice and service, and provide general information about your rights and obligations under the banker/ customer relationship. It will provide the information in plain language and act fairly and reasonably towards you in a consistent and ethical manner.

Revised Code (2004) Protects Guarantors

In May 2004, some changes were made to the Code (2003) guarantee provisions. The revised code was re-published containing only a few changes. The Australian Bankers Association, the banks PR machine, reinforced the message that when a bank adopts the Code, and if you think it breached Code (2004), a first step is to raise the issue with your bank. The PR machine stated:

The Code provides high standards of disclosure for prospective guarantors before they agree to guarantee someone else's debt. The banks will provide important and relevant information for prospective guarantors before they commit to guaranteeing someone else's debt.

The modifications will fine-tune the Code (2003) to ensure prospective guarantors receive appropriate and relevant disclosure. Before taking a guarantee from you, your bank must provide prominent notice to you to seek independent legal and financial advice on the effect of the guarantee.

However, the banks knew advice being provided to customers and their lawyers, was untruthful. It seemed only bank directors and the ABA, and the Code Compliance Monitors and FOS had knowledge of the bank CEOs constitution. However, this had been kept from customers since 20 February 2004.

Monitors Investigate Any Code Breach

The problematic code allowed customers and their lawyers to read a facility offer with general standard terms, bound by the Code, and agree to sign a contract. The customer and lawyer did not know banks had documented an overarching constitution and kept the changed terms from them. The customers were then invited to sign bank contracts believing:

[Subscribing] banks will have an internal complaint handling service to assist you. Code Compliance Monitors have been appointed to investigate possible breaches of the Code. Anyone can refer a possible breach of the Code to them and they will investigate complaints banks are not meeting their obligations under the Code.

The Compliance Monitors will make the final decision on a breach of the Code in a written determination to the complainant and bank. Code Monitors who monitor compliance have powers to publicly name a bank found guilty of a serious or systemic breach of the Code.

The Code gives customers rights the banks must observe. These rights cover complaints handling and provision for independent monitors to investigate complaints about Code breaches. Any person may make a complaint to the Compliance Monitors about a breach of the Code.

Each bank will lodge an Annual Report with the Compliance Monitors on its compliance with the Code.

Bank Directors and Corporate Responsibility

The subscribing banks promoted they were making major commitments to improve reporting, and consultation about social obligations. They stated:

[We] are now producing Social Accountability Charters, not as a peripheral event but as a core practice. These Charters set out what stakeholders can expect across the marketplace with banking practices, employee practices, occupational health and safety, environmental practices and so on.

Overall, the banking industry is doing a lot for empowering people with the appropriate financial skills, knowledge and information to ensure they are better placed to make informed decisions about their money and avoid being misled on financial matters. At the heart of the bank/customer relationship is trust.

It is difficult to gain and maintain trust if people are confused about the terms on which the relationship is based. Empowering people with the appropriate financial skills, knowledge and information will ensure they are better placed to make informed decisions.

It is important so customers are not misled on financial matters. Code (2004) commits banks to ensure their staff are trained to competently and efficiently discharge their authorised functions and help the customer choose banking products and services. The banking industry in Australia is widely recognised for its leadership in the area of corporate responsibility.

The directors of the Australian Bankers Association said for banks to accomplish their goals in relation to corporate responsibility, they would need to achieve this through voluntary adoption of business practices that reflect the flexible and strategic decision-making by the bank's directors.

Fair Dealing Requires Transparency

Transparency, the desire for fair dealing, responsible treatment of stakeholders and positive links into the community get reflected in everyday bank activities and corporate responsibility practices. Your bank will give you terms and conditions either before or as soon as practicable after you take up an ongoing banking service. The Code sets out world-class self-regulatory practices.

It sets very high standards of conduct for banks in dealings with customers. The (2004) modifications will fine-tune the Code to ensure that prospective guarantors receive appropriate and relevant disclosure. The Code is designed to foster good relationships between banks and customers, including guarantors, and this is based on good standards of conduct. 

The Australian Bankers Association says that the Federal Government's proposed refinements to financial services provisions of the Corporations Act 2001 will provide better outcomes for customers. The proposals will mean disclosure of information for consumers will be better aligned to consumer needs.

Following publication of Code (2004), subscribing banks decided against publishing the bank CEOs constitution. Instead, they only published and adopted principles in the supposedly world class Code.

In these circumstances, subscribing bank directors were mindful of responsibilities to comply with the Fair Trading Act and other legislation. However directors were still willing stand-aside while their CEO's authorised the Australian Bankers Association to male public statements regarding the efficacy of Code (2004).

The bank directors, having affirmed their commitment to Code (2004), expanded the network to second-generation bank employees, trained to innocently promote CEOs self-styled public standards.  They made pledges under Part B, clause 7(b) requiring them to train staff to competently and efficiently discharge their functions under the Code, first having adequate knowledge of the provision of Code (2004).

The revised Code (2004) included 6 sections, covering 250 clauses:

PART A: INTRODUCTION

PART B: OUR KEY COMMITMENTS AND GENERAL OBLIGATIONS

PART C: DISCLOSURES

PART D: PRINCIPLES OF CONDUCT

PART E: RESOLUTION OF DISPUTES, MONITORING AND SANTIONS

PART F: APPLICATION AND DEFINITIONS

The banks authorised the Australian Bankers Association to publish statements promoting their high-principles and code safeguards. And, throughout this period, banks managing directors managed and administered the ABA. They also acted to administer, appoint and fund the Code Compliance Monitoring Committee.

Despite having this close relationship, there have been 250 bank directors during the past nine years. All should have been aware of the many unanswered questions that related to the changed Code principles.

These changed principles were inconsistent with aspirations proposed by the Martin Committee in 1991. The changed culture followed a decision by bank directors and their CEOs to produce a code complicated by the use of ambiguous wording, despite provisions under the code that the banks key commitment in clause 2.1(d) were to provide information to customers in plain language.

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

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