In hindsight, itÃ¢â‚¬â„¢s difficult to appreciate how the bank CEOs constitution might compromise aspirations of the Compliance Monitors in the early days. FEMAG was mindful of contradictions between the Code principles and the CEOs constitution however it seems neither the Compliance Monitors nor FEMAG anticipated problems underminning the Martin Committee's high principles in 1991.
These were discussed earlier in this paper and stem from the notion individuals and small businesses require an alternate forum for resolving complaints and disputes with banks other than having to use the courts.
As stated earlier, Sir Ninian Stephen summed this up: Ã¢â‚¬Ëœthe 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.Ã¢â‚¬â„¢ This underpinned the principles embodied in the 2003 and 2004 Codes, and was affirmed by FEMAG.
The FEMAG report identified Ã¢â‚¬Ëœfor a reporting system to work effectively it need strong, sustained leadership supporting a culture of open disclosure, transparency and effective response to performance problems.Ã¢â‚¬â„¢
Compliance Monitors and FEMAG affirm best practice
In undertaking its review, FEMAG was of the belief that:
Those who subscribe to the notion of self-regulation should be able to demonstrate a high level of compliance with self-regulatory codes if credibility with the public at large, regulators and important stakeholders is to be achieved. This requires a level of commitment and resources.
This was supported in an interview in which FEMAG reported:
there had been a view amongst both consumer and government stakeholders that the industry was not accountable to anyone regarding the Code, but the Code Compliance Monitoring CommitteeÃ¢â‚¬â„¢s establishment now provided the needed assurance to stakeholders.
Hence, the Compliance Monitors are vitally important for promoting the legitimacy of the subscribing banksÃ¢â‚¬â„¢ Code because they provide needed assurance to stakeholders that the banking industry has a body it is accountable to.
Though not stated in the Code, FEMAG suggested it is clear the Compliance Monitors objective is to achieve the highest possible compliance with the Code by signatory banks. To achieve this end, the Code gives the Compliance Monitors two broad functions (reiterated in the bank CEOs constitution):
Ã‚Â· general monitoring which involves planning and administering programs for the monitoring of banks compliance with the Code; and
Ã‚Â· investigating and determining Code breach allegations and publicly naming banks for serious or systemic non-compliance with Compliance Monitors requests.
Compliance Monitors need independence, transparency and fairness
FEMAG supported the Martin CommitteeÃ¢â‚¬â„¢s underlying principles in the first Code that were set out by the Bankers Association |and supported by stakeholders. With respect to independence, FEMAG noted that:
Although it does not use the word independent, arguably the Code implies the Compliance Monitors are able to operate as an independent agency without influence from the banks and other parties; this seems a necessary threshold condition for pursuit of the above objective.
The FEMAG Report was the first to make public the issue of the banks unpublished constitution. During 2004-05, principles of the Code and protection that were provided to individuals and small businesses were such that any conflict of interest or abuse was not anticipated. However, FEMAG provided a small window into how banks later used the CEOs constitution to restrict the authority and independence of the Compliance Monitors and operation of the CCMC.
The muddled organisational structure in place following establishment of the Code Compliance Monitoring Committee bound by an unpublished constitution required the banks with support of the FOS to appoint the first Compliance Monitors. This paradox undermined the principle of independence, as the banks and the FOS would have been privy to the bank CEOs constitution.
In 2005, it seems possible, if not probable, the Compliance Monitors and FEMAG did not fully consider the potential limitations the constitution might impose on the Compliance Monitors. As a consequence, FEMAG noted clauses 3.1 and 4.3 of the constitution generally reflected the intent of the Code in empowering the Compliance Monitors to carry out their functions.
With respect to the need for the Compliance Monitors to have fair and transparent practices for investigating alleged breaches of the Code, FEMAG stated while the Code Compliance Monitoring Committee has in place well-prepared documents setting out its procedures:
this document has only been used in-house thus far. A number of stakeholders suggested the procedures document and the form letters used in the course of the CCMCÃ¢â‚¬â„¢s investigations should be published on the Compliance Monitors website, circulated to stakeholders and appear in the CCMCÃ¢â‚¬â„¢s Annual Report and on its website as complaints are made and resolved. The CCMC could be more visible and transparent in procedures and frequently communicate with the banks on what they considered were current issues, Bank representatives interviewed in the course of the review supported meetings with the Monitors because it would give them an open forum to identify industry-wide systemic issues, problems in relation to the code, ways to improve processes which are the source of complaints, query interpretations and to explore ways in which the Monitors may be able to do things better in their relationship with banks. It was also suggested Monitors might make recommendations for amendments to the Code if they perceived problems with its practical application in the marketplace.
For the principles set out in the Code to be effective, FEMAG emphasised the need for effective self-reporting by subscribing banks.
self-reporting of Code breaches as they occur would be a useful extension of this. This would be similar to self-reporting by financial institutions under the FSR legislation and immediate self-reporting against the Code would certainly be a powerful demonstration of commitment to the Code by signatory banks. Stakeholders suggested that currently there is a culture of defensiveness when potential Code breaches are brought to the attention of some signatory banks. (We donÃ¢â‚¬â„¢t agree with you; we donÃ¢â‚¬â„¢t think there is breachÃ¢â‚¬â„¢). The community perception of commitment to self-regulation is enhanced if the banks, in their relationship with the Compliance Monitors, are not adversarial or defensive, but rather co-operative and transparent; where disclosure about breaches and their rectification is the norm.
FEMAG noted the stakeholders suggested procedures documents and form letters used in the course of investigations should be published on the Compliance Monitors website and circulated to key stakeholders. Additionally, the report reinforced the Compliance Monitors duties, which included:
Ã‚Â· ensuring annual compliance statement are completed by the banks, and
Ã‚Â· investigating and making a determination on any allegation from any person a bank breached the Code.
The FEMAG Report also noted the bank CEOs association was an unincorporated, unregistered entity. As its constitution did not provide for a governing committee, general meetings of members would govern the affairs of the association. Members consequently had an opportunity to exert influence over the appointment of Compliance Monitors and continuing activities of the Code Compliance Monitoring Committee. This meant the bank CEOs association could agree on the selection and on the continuing appointment of their preferred monitors.
Ã¢â‚¬Â¦ is the pathway is paved with good intentions
In essence, the bank CEOs were responsible for publishing the 2004 Code, its PR and funding through the Bankers Association and for appointing the Compliance Monitors who were limited in their authority and powers due to the banks CEOs unpublished constitution. The sixteen banks then agreed to indemnify Code Compliance Monitors with assets of the association and member banks.
To achieve this, banks relied on support of the FOS when appointing their preferred Compliance Monitors as set out in clause 34 of the Code. Throughout this process, it seems all these parties had access to the bank CEOs unpublished constitution.
Compliance Monitorsand their relationship with stakeholders
FEMAG invited submissions and sought interviews with the following:
1. Tony Blunn AO, Chair, Compliance Monitoring Committee; and
2. Russell Rechner, Member, Compliance Monitoring Committee; and
3. David Tennant, Member, Compliance Monitoring Committee; and
4. Barbara Schade, CEO, Code Compliance Monitoring Committee; and
5. Ian Gilbert, Bankers Association and former Code Monitor, and
6. Colin Neave, Ombudsman and senior staff of the FOS; and
7. Peter Kell, CEO, Australian ConsumersÃ¢â‚¬â„¢ Association; and
8. Jan Pentland, President, Australian Financial Counselling and Credit Reform Association (AFCCRA); and
9. Roger Knight, Former Head of Compliance, British Banking Standards Board
10. Carolyn Bond, Consumer Credit Legal Service; and
11. Marylyn Webster, Good Shepherd; and
12. Karen Cox and Katherine Lane, Consumer Credit Legal Centre; and
13. ANZ Banking Group Limited; and
14. Westpac Bank; and
15. St George Bank; and
16. National Australia Bank.
Other invitations were provided to:
1. Australian Chamber of Commerce and Industry; and
2. ASIC; and
3. Brotherhood of St Laurence; and
4. Commonwealth Treasury; and
5. Consumer Credit Legal Service Victoria; and
6. Consumers Federation of Australia; and
7. COSBOA; and
8. Victorian Financial Counsellors Association.
Written submissions were also received from the following:
1. ANZ Banking Group Limited; and
2. Australian Bankers Association; and
3. Commonwealth Bank of Australia; and
4. Financial Ombudsman Services; and
5. Consumer Credit Legal Centre NSW; and
6. Fair Trading Agencies in: NSW; WA; SA and Victoria
Whilst many parties in the first and third groups had knowledge of the bank CEOs constitution, there is no evidence the second group did prior to FEMAG publishing its report. From stakeholder meetings and its own research, FEMAG produced its October 2005 report.