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The Unpleasant Truth About Australian Banking

In an effort to expand market share in the 1980's following deregulation, banks commenced a period of mergers and acquisitions. The major banks became mega- corporations. This meant customers unfairly dealt by the giant corporations would have little prospect of funding any action in the courts to resolve differences or disputes.

Former Governor General and Justice of the High Court of Australia, Sir Ninian Stephen, supported this position. His famous quote was: ‘the Chief Justice of a State said to me just the other day that on his salary he could not possibly afford to litigate in his own court.’

The move to improve competition and reduce regulation in the 1980’s changed the structure of the industry. This caused the government to commission a report into deregulation, and its success in the banking and finance sector. The Parliamentary report was intended to address any community dissatisfaction and lack of confidence in the banking system.

The Martin Committee’s Review (1991)

The Martin Committee’s intentions for its report were:

to go forward learning from experiences of the 1980s and building on that experience to ensure the 1990s and beyond reflected the very valuable knowledge that has been obtained, and to ensure the people of Australia that the government has their particular interests in terms of not only secure but a strong financial system guaranteed.

On 28 November 1991, the House of Representatives Standing Committee on Finance and Public Administration completed its report titled ‘A Pocket Full of Change: Report on Banking and Deregulation’.

Stephen Martin was the Committee Chair; Paul Keating was Prime Minister.

The Martin Committee report recommended documenting and adopting a Code of Banking Practice. The report reflected on the intentions behind the adoption of the Code and made recommendations, many not making there way into the first 1993 Code. This Code was groundbreaking and not published and adopted by subscribing banks until 1996.

Fairness, an Overarching Principle

The idea of fairness in the bank/ customer contract struck a chord with members of the Martin Committee and formed an overarching principle to its recommendations. According to Martin Committee, introduction of a Code of Banking Practice was ‘a way of remedying many of the unfair practices prevalent in banking.’

Specifically, transparency would be fostered as a ‘Code would provide a single source of information for a customer to refer to, and more significantly a Code would include provisions designed to ensure customers are adequately informed of the full details of the financial products they were about to use.

Also, ‘negotiating of a Code between the banking industry, government and consumer organisations would provide an opportunity to ensure all provisions are fair.’

Before the Parliament, on 27 November 1991, Stephen Martin presented the report with minutes of proceedings and evidence received by the Committee. He explained the importance of fairer banking providing ‘the Code as an alternative to a raft of legislation.’ A Code that would offer transparency and better disclosure of terms and conditions underlying the banking relationship would foster a fairer relationship between the parties.

In a radio interview two days later, Stephen Martin talked about paying attention to the ‘ordinary man and woman in the street' who want a basic banking service and to be given ‘a report card on whether or not deregulation of the Australian financial services industry is, in fact, working and whether consumers were benefiting.’ Martin stated, ‘not for a minute are we suggesting banks shouldn't be making profits but I think what we are suggesting to them is that, yes, sure, on the way to making profits they've got to make sure they look after the ordinary man and woman in the street that wants a basic banking service; and I think they're trying to provide that.’

High Cost of Litigation - Delaying Tactics - Abuse of Process

The Martin Committee expressed concern for individuals and small businesses, giving particular attention to issues relating to the adequacy of means of redress available to customers in cases of dispute with their bank. It emphasised significant power imbalances between customers and banks, in these ways:

banks control nearly all relevant information and documentation; and

banks have access to specialist advice and legal assistance, and the resources to pursue disputes to the end, whereas customers, particularly poorer customers, do not; and

banks have inherent faith in internal operating systems and bankers may be reluctant to admit failures in those systems; and

in many cases banks interests resisting claims outweigh that of an individual customer in pressing it, as banks are protecting a system whereas the customer is seeking redress on a one-off basis; and

in terms of will and financial resources, there is often little incentive for banks to settle a dispute, even if the bank would be likely to lose any eventual case because banks know they can outlast most customers; and

in matters that are litigated, the bank, as a repeat player, is in a position to select a particular matter to run to a hearing in order to obtain a favourable precedent.

The Martin Committee examined the principal remedy of court litigation and its inherent difficulties such as high-cost of litigation, the powerful position of banks in the litigation process, unnecessarily protracted proceedings, an inability to continue legal actions and failure to ensure adequate discovery or belated discovery.

They recommended the ‘Australian Law Reform Commission examine powers of the courts to deal with abuse of processes… this requires consideration to be given to the need for legislation to assist courts to deal with abuse of process… the Senate Committee on Legal and Constitutional Affairs, as part of its inquiry into the cost of justice, should investigate the issue of the cost of justice in cases between banks and customers.’ 

Delays in court proceedings were a concern. The trial and appeal process can mean years of waiting. Superior resources a bank could use to delay a case for years placed great financial strain on an individual or small business litigant.

The Martin Committee report expressed the ‘need for cheap, speedy, fair and accessible alternatives to the traditional court system if customers are to receive justice in their dealings with the banks.’ This reinforced its recommendation for documenting key banking principles in the Code of Banking Practice.

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

 

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