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The Unpleasant Truth About Australian Banking

Events in 1993 when the first Code was being drafted, it led government and banks to assess the effectiveness of self-regulated banking. It was claimed banks needed to put in words their practices while providing an effective mechanism for monitoring complaints and incorporating effective dispute resolution procedures.

This required a straightforward evaluation by banks placing in front of government a commitment to comply with agreed practices and underwrite self-regulation. The banks had to convince the government and public they would introduce a transparent and effective self-regulated structure with honest and fair systems to ensure practices would benefit customers.

Based on guarantees by the banks, the practices set out in the new Code (2003) were acceptable to individual and small business advocates providing, of course, that the banks compiled with the key commitments and obligations in Part B of the Code. The public and government were cast in a role whereby they had to trust bank directors to deliver banking commitments set out in clause 2.1, including an undertaking to use plain language.

Directors Guarantee to Comply with New Code (2003)

Following the publication of the new Code on 1 August 2003, bank directors knew that the promises regarding principles and practices in Code (2003) were problematic. Despite this, they were willing allow the banks to make pubic statements that they would adopt the new Code and deliver promises contained in it.

The directors of the following banks were first to make a commitment their bank would stand by the commitments in Code (2003):

Adelaide Bank Limited - 12 August 2003

Australian and New Zealand Banking Group - 12 August 2003

Bank of South Australia - 12 August 2003

Commonwealth Bank of Australia - 12 August 2003

St George Bank Limited - 12 August 2003

National Australia Bank Limited - 29 August 2003

Bank of Queensland Limited - 7 October 2003

ING Bank (Australia) Limited - 3 November 2003

Bank of Western Australia - 19 January 2004

Citibank Australia - 5 April 2004

HSBC Bank Australia - 10 May 2004

Champions of New Code (2003)

On 1 August 2003 when Code (2003) was published, Australian Bankers Association records noted:

John McFarlane(Chief Executive, ANZ Bank) had replaced David Murray (CBA) as ABA Chair on 17 June 2003, and

Gail Kelly(Chief Executive, St George Bank) had replace Ed O'Neal as Deputy Chair, and

David Bell,ABA Chief Executive and non-bank member.

Code (2003) required the eleven subscribing banks to comply with clause 35.7 and investigate all complaints. It was anticipated that the banks and its bank funded partner, the FOS, would appoint independent Code Compliance Monitoring Committee members to monitor compliance with the Code's fair and prudent banking practices.

Whilst this was happening, the banks were using the ABA public relations network to promote their commitment to investigate all customer complaints. This was reinforced under the Code when Compliance Monitors were being appointed.

Supporting the subscribing bank promises and reinforcing their commitment to the Code principles, was an understanding the Code Compliance Monitoring Committee would investigate and make a determination on any allegation from any person that a code subscribing bank breached the code'  

However, shortly after new Code was published, and banks adopted it, the many commitments made by them in the Code were found to be untrue. Directors of the eleven banks adopting the new Code watched as the ABA commenced a hard-hitting media campaign, whilst remaining silent on the use of ambiguous words undermining it.

Non-bank people would have had no idea that shortly after banks made a commitment to the ABA to publish the new Code they were setting in place the Code Compliance Monitoring Committee Association. The association members included only CEOs of subscribing banks and they had a different set of rules. This well kept secret of banks had the effect of varying a few key-principles set out in the revised Code. As noted earlier, a little vinegar sours the wine

New Code (2003) Declarations

It was clear subscribing banks and their directors wanted the public and customers to believe was what the ABA public relations team was telling them. This was summed up in statements made by the industry body, the Australian Bankers Association, after the McFarlane -Kelly code was published on 1 August 2003. The architects of new Code stated, banks:

Must be sure they are ready to comply with their obligations under the revised Code before they adopt it because the Code is an enforceable contract between the bank and the customer.

The Code is a voluntary code in the sense a bank has a choice whether or not to adopt it. Once a bank has adopted the Code, it binds the bank contractually to the customer. So if a bank breaches the Code, it has breached its contract to the customer.

This Code meets and beats similar codes in other countries such as the UK, Canada, New Zealand and Hong Kong. The ABAs Code stands out both in scope and the specific customer benefits it provides.

Banks will submit to independent monitoring of compliance and if a bank has systemically or seriously breached the Code it is liable to be publicly named.

Each subscribing bank will lodge an annual report with the Code Monitors on its compliance with the Code in much the same way as banks have done under the original 1993 Code in reporting annually on compliance to ASIC.

David Bell, Chief Executive of the ABA and Jillian Segal, Chair of the FOS, published a joint statement by their organisations announcing the appointment of Mr Tony Blunn, AO, as Chairman of the independent Code Compliance Monitoring Committee for monitoring banks compliance with the Code.

The Code Compliance Monitoring Committee will have a very important role, especially when it comes to taking action against a bank the Code is contractually binding, so a regulator might even consider action of its own.

The Compliance Monitoring Committee will be able to receive complaints from anyone who thinks that a bank has breached the Code. They will have powers to investigate any complaint and decide whether a breach of the Code has occurred.

Mr Blunn emphasised the independence of the Code Compliance Monitoring Committee who he believed had an important role in the broader structure of governance arrangements of the banking sector.

The statement must have been intended to send a message to legislators, regulators and the public that the new Code was an enforceable bank/ customer contract and that banks would submit willingly to being independently monitored.  The Code Compliance Monitoring Committee members, being independent, and the regulators might be willing to take an action against any rogue banks or bankers. The rhetoric had the effect of making the public believe that the eleven banks would faithfully lodge an Annual Code Compliance report with the Code Members.

All worthy principles, assuming of course that the Code Compliance Monitoring Committee members were in fact independent and the Code was an enforceable contract. Later, it appears the rhetoric was only ‘spin' and not commitments made by the eleven subscribing banks.

Modified Code (2004) Declarations

On 14 May 2004, the subscribing bank directors and banks authorised the Australian Bankers Association to publish modified Code (2004), while the banks were publicly congratulating themselves on having a world-class Code of Banking Practice. According to the banks and the Australian Bankers Association, Code (2004) initiated new high-standards of conduct in dealings between the banks and their individual and small business customers.

The banks and the ABA emphasised the important role of the Code Compliance Monitors, publishing information to enlighten customers and the public, that:

The modified Code (2004) makes provisions for independent Code Compliance Monitoring Committee members to investigate and monitor complaints about code breaches. All banks subscribing to the Code have agreed the monitors may be empowered to conduct their own enquiries into banks compliance with the Code. Any person may make a complaint to the Compliance Monitors about a breach of the code.

The banks adopting Code (2004) have already agreed to be monitored by the independent Code Compliance Monitoring Committee members. The ABA assured bank customers the Code Compliance Monitoring Committee members have been set up as an independent body with consumer, small business and banking industry representatives.

The bank guarantee to consumers in Code (2004) grants and confirms existing rights to customers. This included disclosure of fees and changes to terms, fees and charges; privacy and confidentiality; complaints handling and others. In fact, the banks were at pains to promote a new modified contract bound by ethics, good faith, high-principles and honesty but with no mention of ambiguous wording in the Code that banks could rely on the skirt Internal Dispute Resolution duties.

Additionally, there was no mention in the Code or in the ABA media publications about the newly introduce (unpublished) bank CEOs constitution. This was a well-guarded arrangement that limited the powers and authority of the Code Compliance Monitoring Committee members.

Likewise, there was no mention about the Code Compliance Monitoring Committee's ability to name banks when breaching the Code. It was becoming necessary for banks to continue relying on the Australian Bankers Association public relations department to keep promoting partly truthful statements in order to keep legislators, regulators and the public on side.

The banks emphasised one of the most important commitments made when adopting Code (2003) was that: they would act fairly and reasonably towards customers in a consistent and ethical manner.  When they adopted the Code the banks doubled their declarations promoting high-principles of fair and prudent banking practices based on good intentions.

According to ASIC records, ten months after publishing the modified version of the new Code, the Australian Bankers Association was incorporated and on 20 June 2005, the directors comprised the CEOs of subscribing banks. It seems problematic that the directors of the banks could ever argue that they intended to comply with their duties under the APRA Act.

It required that directors of deposit taking institutions have:

appropriate skills, experience and knowledge,

and to act with honesty and integrity,

and to be fit and proper, and

to have appropriate governance standards.

The ASIC records note the Australian Bankers Association directors appointed on 20 June 2005, were:

John McFarlene - ANZ Bank Limited

Gail Kelly - St George Bank Limited

David Murray - Commonwealth Bank of Australia Limited

Barry Fitzpatrick - Adelaide Bank Limited

David Liddy - Bank of Queensland Limited

Daniel McArthur - Bank of Western Australia Limited

Robert Hunt - Bendigo Bank Limited

Leslie Matheson - Citibank Australia Limited

Stuart Davis - HSBC Australia Limited

John Stewart - National Australia Bank Limited

John Mulcahy - Suncorp Metway Limited

David Morgan - Westpac Bank Limited

The ASIC records also note that on 22 September 2005, CBA Managing Director, Ralph Norris, was appointed.

Shortly after Code (2004) was published, the Australian Bankers Association released a series of declarations emphasising subscribing banks commitment to the Code and to the community. The ABA reported banks value communities where they operate and have made commitments to giving something back to these communities.

The Australian Bankers Association publications stated this was evidenced by the fact that many banks acknowledge corporate responsibility and adopted programs and practices that demonstrate a commitment to social and environmental performance, as well as financial performance.

When the ABA published Code (2004) sixteen banks adopted it.  They again told the public that the Code was a contract. This was a courageous statement because bank directors had prior-knowledge of the bank CEOs constitution, probably commissioned and drawn up in the McFarlane - Kelly period prior to 20 February 2004. 

The introduction of the bank CEOs constitution was a well-guarded arrangement and kept from legislators, regulators and the public. It allowed banks to use the Code to their advantage and not having to deal with individual and small business complaints because their Code commitments could always be transferred to another forum when customers alleged they breached the code.

And having to deal with breaches of the Code was not something subscribing banks would have to deal with in the short term.

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

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