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The Unpleasant Truth About Australian Banking

The government required the Code of Banking Practice to incorporate best practices, and incorporate key principles of banking law. The proposed Code would require the banks to commit to a voluntary Code and carry out agreed practices. By doing so, the

Code safeguard customers in case of disputes.

The Martin Committee noted when customers are involved in disputes with banks; most customers were at a disadvantage due to their lack of resources when using the courts. There was some injustice requiring a party with limited funds to compete with the emerging mega-financial corporations.

Whilst this was the first time the government had sought to introduce a Code, it was not the first nation to embrace one. The Martin Committee sought to learn from other nations before introducing a similar bank/ customer contract.

Reviewing Codes: USA, the UK, New Zealand and Israel

The Martin Committee stated voluntary codes were essential to protect customers because they would set out banking practices. The Committee cited that in cases when banks are confronted in addressing complaints and disputes, consumers were at a disadvantage due to the resources available to major banks.

The Martin Committee investigated foreign banking practices to understand how the overseas regulators protected customers. The Martin Committee travelled to Europe and to the US and Canada to investigate and analyse regulators and how to present Code principles to financial institutions.

The Committee paid attention to banking systems and customer protection principals in New Zealand. It found the banking and financial associations in both the UK and NZ were in the process of compiling Codes for banks.

In the UK, their Code was introduced in December 1991. In New Zealand the Code was implemented, a few weeks later, in January 1992. When the Martin Committee travelled to the US, they found that Title 12 of the legal code governed their banking operations. These laws and regulations are supported by the existence of truth-in-lending practices, as an alternative dispute resolution process that was said to be fair, independent and low-cost.

Key OBJECTIVE: Customers Must Not Be Misled

The Martin Committee analysed banking practices in Israel. It noted banking was regulated through the '1941 Banking Ordinance' and '1981 Banking (Service to Customer) Law 5471'.

The Israeli laws regulating banking included clauses stating customers must not be misled.  These laws allowed the government to enforce fines and sanctions on banks when there was misconduct and these fines and sanctions, when enforced, might also be publicly announced.

In the UK, there was a banking committee jointly appointed by the government and Bank of England. Its purpose was to review banking services law and practices and was the responsibility of the Jack Committee. It would make recommendations on banking law and practice.

This included the enactment of the Banking Services Act to implement 18 proposed changes or clarifications to the banking law. It limited a period necessary to develop a Code of Best Practice, and the Code was to be used by an Ombudsman in determining disputes.

The Jack Committee proposed government should issue a formal banking code with statutory backing, in the event the Code was unsatisfactory or not fully implemented and observed by the banks. This meant the banks high-standards would be watched and vigorously administered

The Jack Committee made 26 recommendations about improved standards of banking practice that were to be included in the Code. However, following the subsequent UK White Paper, these recommendations were reduced to a proposal for a Code to be developed by the industry.

The draft UK Code was developed and has since been severely criticised. Similarly, many in New Zealand consider the NZ draft Code to be inadequate. The National Australia Banks representatives commented the NZ Code did not go far enough, but it did provide a starting point.

An alternate approach had been developed in Israel. Its code was being implemented elsewhere in Europe and was based on legislation allowing unfair contract terms to be dealt with in the abstract, rather than in specific disputes. European member countries all have similar legislation in force or under consideration.

The basic feature of such legislation is to provide a two-tiered mechanism.

At the first level provisions are made for consumer interests, represented by a public or private body during the negotiation process, to achieve fair, standard contractual terms. In some countries public resources are committed to providing a secretariat function when carrying out these negotiations.

At the next level there is a court or court-like agency with powers to order banks to cease using particular contract terms. This next level is considered essential for the effective conduct of negotiations at the first level.

In the United States, the concept of 'truth-in-lending' underpins consumer credit legislation. The intent of US legislation is to achieve a fairer marketplace through full disclosure, which requires truthful principles to be used by banks in all lending transactions. The truth in lending principles and legislation is looked at in later chapters.

Overarching Regulation

The Martin Committee noted the decision to extend coverage of section 52A of the Trade Practices Act 1974 concerning unconscionable banking conduct, had been provided to small businesses. This was intended to redress the inconsistency existing between banks and small businesses seeking to resolve complaints and disputes.

The Martin Committee sought to address ambiguity and lack of transparency of traditional banking law, and the need for an effective mechanism to replace the courts role ensuring standards of fairness in areas of uncertainty.

In relation to the codification of common law, the Committee appreciated how 'banking law continues to play an effective role in mediating the relationship between banker and customer.'

Implementing Martin Committee's Standards

With the Committee's review, the ABA considered it timely to codify important aspects of banking practices and the law. If the law was to be codified in the sense of introducing legislation, the ABA expressed a view that legislation administered by a Commonwealth agency would be more appropriate.

The ABA favoured codification of relevant common law. The Ombudsman, Attorney General's Department, Trade Practices Commission, NAB, Westpac and Metway all favored development of the Code.

The Attorney General's Department made it a pre-condition that an effective Code must be very vigorously administered. When the major banks were questioned about the concept of a Code with industry disclosure principles, they were not opposed to it but preferred it to be self-regulatory.

The Martin Committee's point of view was:

"Market forces are not of themselves sufficient to ensure bank services are delivered on fair and equitable terms. It is not appropriate for banks to have exclusive responsibility for setting standards of banking practice".

The Martin Committee cited the Jack Committee's review of banking services law and practices in the UK:

The developing of standards of best banking practice, previously the sole prerogative of banks, is no longer entirely appropriate. Competition cannot be relied upon to secure, by itself, the improved standards for which we see a need. While banks must continue to have a major say, those standards should be reflected in some objective assessment of their adequacy.

On 26 June 1992, the government endorsed the development of the Code of Banking Practice recommended by the Martin Committee. The government's reasons for support was recognition 'customers believe they are at a disadvantage in dealing with banks because of their relative financial weakness and the size and power of mega-banks and recognition there needs to be an acceptable balance of interests, and an appropriate Code would help to achieve this.'

A government's task force in consultation with banks drafted the Code with support with consumer groups and other relevant organisations over a period of six months. The Treasury and Trade Practices Commission jointly chaired the task force and its members included industry leaders such as Reserve Bank officials, Federal Bureau of Consumer Affairs and the Attorney General's Department.

In 1992, the Treasurer was Hon. John Dawkins; the Federal Minister of Consumer Affairs was Jeanette McHugh and the Federal Attorney-General was the current Chairman of the FOS, Michael Lavarch.

Chairman of the Trade Practices Commission was Allan Fels and Governor of the Reserve Bank was Bernard William Fraser.

The Martin Report of 1991 was therefore the first serious attempt by a contemporary Australian government to comprehensively review banking and develop a principle whereby standards of practice were documented. These standards addressed customer protection and fairness, and principles evaluated by the government and banks to be in touch with the wider global community.

Standards in Touch With Global Community

Following the Martin Committee's Report setting out the most significant changes to the banking industry since deregulation, the House Standing Committee on Banking, Finance and Public Administration assessed the progress of banks in implementing the report's recommendations.

The report titled 'Checking the Changes' was tabled in the Parliament in October 1992. It found the efforts of most banks undertaking to deal with implementing the Martin Committee's recommendations were unsatisfactory.

Among the findings of the 1992 report was a need for banks to be more committed to developing measures for more effective ways of dealing with disputes involving small businesses. The current reliance on expensive and cumbersome court processes was meant to be in the past.

While looking into dispute resolution processes, the Checking the Changes committee discovered a plan by the board of the dispute resolution scheme to limit the scope of the scheme, putting into question the independence of the scheme. The Checking the Changes committee recognised the fact that the board of the scheme was fully funded by the banks. Therefore, they made a final decision on terms of reference and funding of the Ombudsman.

Self-Regulation Reconsidered

Checking the Changes committee reiterated the significance of the scheme to give the banks customers confidence there is a mechanism in place if a complaint arises. The committee continued to support the self-regulatory approach in dispute resolution in the banking sector.

However, the committee warned banks if there was a chance of the scheme being curtailed by them, or if individual banks considered the scheme was one that they could opt out of freely without regard to the consequences for customers, options other than self-regulation may need to be considered. The review noted the Government's response to the Martin Committee's report, which stated:

The consumer groups and individual customers frequently complain about the shortcomings of banks. Customers believe they are at a disadvantage because of their relative financial weakness and the size and power of banks, there needs to be an acceptable balance of interests and an appropriate Code would help to achieve this'

At the same time, 'Checking the Changes' committee received a submission from the Australian Consumers Association titled, 'A Thimble Full of Change.' It set out how retail banks ignored the Banking Inquiry Report. The Consumers Association criticised banks for their cavalier attitude when complying with the Martin Committee's report and recommendations.

The 1992 review by the House Committee saw the proposed Code of Banking Practice as being crucial to re-establishing trust and confidence of consumers, especially after public perception of banks having fallen to historic lows because of events in the 1980's. Therefore it was necessary for the banking industry to produce a Code to address the needs of customers, particularly on how the Code would protect their rights.

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

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