It is virtually impossible to function in the 21^st century without having a relationship with a bank, as the cash economy has been replaced with an efficient payments system.

However, less regulation in the banking and financial industry over the past forty years has resulted in banks accumulating monopoly powers. This was evident in 1991 and caused the government to commission a committee headed by Stephen Martin to investigate emerging issues. It recommended documenting of the Code of Banking Practice to set fair banking principles, representing a consensus of views in the banking and finance industry.

In order to balance the bank/ customer relationship, legislators and regulators, banks and customer advocates needed to implement fair and enforceable principles, enabling the banks and customers to trust each other. This paper reviews the effectiveness of self-regulation and its shortcomings, and problems that need to be dealt with.

This paper follows the history of events and reports, many with recommendations that have been overlooked. The reports include:

1981 Campbell Report

1991 Martin Report

1996 Australian Bankers Code

1997 Wallis Report

2001 Richard Viney Report

2003 Banking Code

2004 Banking Code

2005 ANU FEMAG Report

2008 McClelland Report

2008 Richard Viney Review

This paper examines the banks motives and the extent to which bank directors failed to respect the public’s need to implement fair and prudent practices, in the interest of all parties. These standards were painstakingly researched and documented in 1991 by the Martin Committee.

Banking And Integrity

In 1981 the Campbell Committee handed down its report noting potential shortcomings which have since been overlooked by politicians in an effort to encourage competition in the banking and financial sector. Banker’s integrity suffered.

However, bank directors and managers held on to the controls, becoming addicted to increasing profits and powers, which provided increasing financial rewards to bank shareholders and senior management based on rising profits. This was at the expense of banking efficacy and customer safeguards.

The research for this paper followed two pathways:

Part 1: Steps taken by legislators to allow banking to be more flexible, based on the government’s belief deregulation was necessary to encourage competition, and

Part 2: How banks wrestled consumer protection away from the legislators and regulators, claiming to introduce and enforce their own higher-standards.

Prior to 1991 banks relied on the courts and expensive lawyers to maintain their considerable advantage of being able to use vast resources to silence their critics. They also relied on the ABA’s public relations machine to make statements furthering the interests of the code subscribing banks.

Banks commitment to customer protection became secondary as banks encouraged legislators and regulators to turn a blind-eye while they increased powers and profits. The banks marginalised the self-regulated Code with Code Compliance Monitors sidestepping commitments to investigate complaints and make a determination on any allegation by any person a subscribing bank breached the Code.

In 2003 the Code of Banking Practice was revised with banks incorporating their preference to restrict the independence and authority of the newly appointed Code Compliance Monitors. Banks restricted the Code Compliance Monitors from naming them when they breached the Code (unless they were repeat offenders), and only then in the Compliance Monitors Annual Report.

Efficacy and Code (2004)

In 2004 the ABA published the modified Code and sixteen banks adopted it. At the time, 102 bank directors knew the bank CEOs constitution had already been preparred to limited the independence and authority of the Code Compliance Monitors.

The constitution, prepared in 2004, ‘identified how banks could control the way the Code Compliance Monitors carried out their role’.  With it, the Martin Committee’s ambition that ‘no-one-is-taken-for-a-ride’ would not be realised.

The 2004 constitution signalled a green light for banks to adopt the Code; ignoring promises they would comply with the Code (see bank promises in chapter 20). The banks simply promoted the Code without commenting on the constitution and used it as a cunning strategy to win customers trust.

This paper identifies problems that must have been experienced by many thousands of customers and small businesses that relied on the bank/ customer contract believing the key principles in the Code of Banking Practice were enforceable.

Senate Committee Report webpage (Sub No. 90): click here…

The Martin Committee stated best practice should not be the sole prerogative of banks. The Campbell Committee’s inquiry into the Australian financial system, on the other hand, endorsed the need for increased competition. Campbell’s recommendations were set out in its Final Report, published in September 1981.

This was the first major change in terms of regulation. Following the Campbell Committee’s 1979 Australian Financial System Inquiry, the role of the financial sector was said to have changed forever.

This Campbell Committee’s report is significant as it made a strong argument for various forms of self-regulation. It’s report threshed out the advantages of a protective scheme of co-regulation, which was self-regulation but with limited government involvement to the extent necessary to ensure the desired prudential objectives are achieved effectively and equitably.

The Committee’s members were highly esteemed banking and government officials. They were given the task of exploring the existing regulatory regimes and making recommendations to encourage greater competition in the banking sector.

The Campbell Committee’s members (September 1981), were:

J. K. Campbell

A.W. Coates

K.W. Halkerston

R.G. McCrossin

J.S. Mallyon

F. Argy

When the Committee’s report was published, Malcolm Fraser was Prime Minister and John Howard, Treasurer.

The Committee’s recommendations led to the government supporting deregulation, $A being floated, exchange controls removed and foreign banks allowed entry into Australian markets. Matters addressed, included:

Definitions and Background

The Campbell Committee explored different regulatory regimes with varying levels of government involvement. Extreme regulation meant a high level of ‘formal regulation and supervision’ by government. At the other extreme, deregulation meant the absence or a low level of government involvement with little or no regulation and supervision.

Full self-regulation meant leaving bankers police their own ranks whilst, in between, hybrid of co-regulation took on the features of both government regulation and self-regulation.

Purpose of Deregulation

In its report the Campbell Committee proceeded on the premise ‘the most efficient way to organise economic activity is through a competitive market system, which is subject to minimum regulation and government intervention.’

In the spirit of deregulation, the Committee went as far as making a case for removal of the then existing prohibition on entry of foreign banks into Australia. It did so on the firm belief ‘adequate and vigorous competition was an essential requirement for efficient operation of financial markets.’

Self-Regulate, Co-Regulate, Public Confidence

The Campbell Committee received submissions stressing adverse impact of regulation for efficient financial intermediation. On the other hand, the Rae Report of 1974 outlined the need for regulators to have regard for efficiency as well as investor protection.

The Rae Report raised concerns excessive attention to investor protection might impose costs on companies, discouraging recourse by them to the market. The restriction of options available to investors might then impair market efficiency.

Need for Efficiency v’s Cost Considerations

According to the Campbell Committee, in developing and revising customer protection, it was important government’s recognise the efficiency and cost considerations. The Committee acknowledged benefits of greater flexibility that came with self-regulation, but was conscious of possible conflicts between the interests of self-regulated banks and the community in general.

Campbell thought potential conflicts of interest could be avoided, in part, by broadening the membership of the self-regulating body to include representatives of affected groups. The Committee identified the shortcomings of self-regulation and took into account Rae Repor’s findings in 1974 and the Wilson Committee’s in the United Kingdom.

Shortcomings of Self-Regulation

There were certain shortcomings encouraging competition whilst supporting self-regulation. They were:

• • lack of investigatory powers, appropriate sanctions or authority to enforce rules meant the success of self-regulation depended heavily on voluntary acceptance of the power of the self-regulating authority; and
  • possibility of self-serving, anti-competitive regulation or non-enforcement rules; and
  • activities and organisations tend to develop outside the jurisdictional power of the self-regulatory body; and
  • increasing complex financial markets may be less amenable to informal, non-statutory methods of regulation, particularly by part-time committees.

Due to the Rae Report’s views and shortcomings of self-regulation, the Campbell Committee expressed a preference for co-regulation, with more direct government participation in the regulatory process.

The shift in direction by the government was demonstrated by the enactment of the Securities Industry Act as well as increased regulation of takeovers, and other market practices.

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

The first Code of Banking Practice was published in 1996, and later the ABA published its revised Code (2003). From inception, the Code (2003) was designed to provide banks with an opportunity to conceal dishonest and unethical banking practices.

It worked like this:

A subscribing bank receives a complaint alleging misconduct by a director or one of its senior executives, or any matter it does not want investigated, and the bank simply denies everything. The complainant then refers the bank to its duties set out in clause 35.7 of the Code, requiring it investigate all complaints other than those resolved to the customers satisfaction.

The bank, by failing to investigate the complaint, acknowledges there is a dispute and refers the complainant to the definition of dispute in clause 40. This states a dispute is only investigated if it fits in a very narrow definition:

• • dispute means a complaint in relation to a banking service, and
  • banking service means any financial service provided by our bank.

This was not intended in 1996 when the banks drafted their first code based on the Martin Committee’s report under the supervision of the parliament. The Code was intended to provide affordable remedies to bank customers without the resources of mega-banks, and required the bank investigate all complaints and to resolve bank/ customer disputes outside the courts.

This chapter looks at banking conduct and the banks use of their resources and the legal system allowing problematic issues to continue, unchecked.

Ambiguous Language in Code (2003)

Clauses 34 and 35 of the Code refer to Internal Dispute Resolution procedures used by banks to investigate customer complaints. The researchers found the subscribing banks had no intention of complying with Codes (2003). Whilst the Code required banks to have Internal Dispute Resolution procedures, they were ineffective for a number of reasons, one being there was no definition of a complaint.

This was one of the principles required of banks when self-regulation was being considered by the government and later introduced. Another, not unrelated, was the banks placing no importance on their commitment to ‘continuously work towards improving the standards of practice and service in the banking industry’ and relying on the Code Compliance Monitors to act as agents, and concealing bank misconduct (clause 2.1(a)).

Code Subscribing Bank statements

The researchers found subscribing banks had dismantled Internal Dispute Resolution practices required under Code (2003), whilst stating the banks:

• • have a Code of Ethics, setting out expectations of directors and staff in their business dealings with customers. It requires high standards of personal integrity and honesty in all dealings, and avoidance of conflicts of interests and observance of the law (published 30 September 2004).
  • expect actions of staff to reflect the ethical statements of the bank. Members of staff should not take any action which they know or should have known violates any reasonable law or regulation. The bank encourages staff to report in good faith suspected unlawful/unethical behaviour (published 30 October 2006).
  • have to comply with the Code of Banking Practice, developed by the Australian Bankers Association. The Code aims to improve bank/customer relationships through commitment to standards of behaviour and conduct and improved open disclosure.  We have specialists to provide information on how to manage your loans and accounts, both now and in the future.
  • Fit and Proper Policies developed and implemented based on APRAs fit and proper prudential standards. These set out procedures adopted by the banks to determine the fitness and propriety of individuals in responsible persons positions. These are required by APRA to be applied to such position holders by authorised deposit taking institutions (published 23 May 2009).

Applying Subscribing Bank strategies

The restrictions imposed on and agreed by the Code Compliance Monitors provided banks with an opportunity to introduce secondary issues. Relying on the Compliance Monitors as their mouthpiece, banks assert they have a right to disregard 250 clauses in the Code, declaring most customer complaints are really disputes.

The researchers found the Compliance Monitors repeatedly made similar responses when required to investigate complaints alleging a bank breached the Code. The Code Compliance Monitors would state:

• • In relation to your allegation the bank breached clause 35.7 of the Code of Banking Practice, on our initial assessment it appears the allegations you have made in relation to breaches of clause 35 will not be supported, based on the following:
  • Clause 35 relates to the obligation by banks that they have an Internal Dispute Resolution Process to resolve disputes;
  • Disputes are complaints that relate to a Banking Service provided by the bank to you (refer to the definition section in the Code);
  • A Banking Service relates to a financial service or product supplied by the bank to you (refer to the definition section in the Code).
  • The initial assessment of your complaint identifies you have made allegations to the bank regarding a matter that is not a Banking Service and therefore not considered a (dispute) (parenthesis inserted by Compliance Monitors) for the purpose of an internal resolution process required under the Code.
  • The bank is not bound by Code requirements in dealing with complaints you have made (Code Compliance Monitors, published 25 March 2010).

Code Compliance Monitors statement

If complainants are not satisfied with the Compliance Monitors initial findings they can be referred back to the Code Monitors for further investigation. In the above case, the Code Compliance Monitors replied, stating:

• • The Code Monitors note complaints you have raised in recent correspondence regarding alleged breaches of the Code. The complaints you have forwarded to us for consideration relate to a banking service.
  •  The Compliance Monitors do not have jurisdiction to consider matters that do not relate to a banking service. Accordingly, we will not be investigating your complaints and this decision will not change (signed Brian Givin, Chairman, Code Compliance Monitoring Committee, dated 9 July 2010).

This statement places the Code Compliance Monitors in the unenviable position of not being able to act in good faith and investigate any complaint by any person, as set out under clause 34(b)(ii) of the Code. This a paradox with the Code requiring banks investigate all complaints alleging breaches of the 250 clauses in the Code, while the Compliance Monitors allege they can hardly investigate any.

The ambiguous wording in Code (2003) provides banks an opportunity to silence the Code Monitors. However all fault cannot be levelled at the banks. The Code Monitors agreed with or were aware of limitations imposed on them by the banks, having been briefed on their duties prior to being appointed.

Likewise, the directors of the ABA and the FOS must accept some blame having appointed the Code Monitors, and having been briefed on the ambiguous wording in Code (2003) beforehand.  With ambiguous language, all the bank parties would have known the banks had a duty to investigate all complaints and the Code Compliance Monitors would be working with them to redirect all bank/ customer complaints and disputes to the courts. This was, of course, contrary to the wording and intention of the Code, and contrary to the Martin Committee principles in 1991.

Constrained Investigatory Powers

Clause 34(b) empowers the Code Compliance Monitors to investigate and to make a determination on any allegation from any person a bank breached the Code, but the Monitors will not resolve, or make any determination on, any other matter.

Clause 34(f) notes banks are required to comply with all reasonable requests of the Code Monitors in pursuance of their functions. Hence, the Compliance Monitors could not address dual-contract problems raised in submissions presented to the Code reviewer Jan McClelland in 2008.

Subject to paragraph 8.1 of the constitution, the Code Monitors are evidently not at liberty to investigate complaints being considered by the FOS until finalised, and then to accept the bank funded FOSs findings. This creates a hurdle for bank customers in their endeavours to have Code breaches investigated due to the conflict of interest that exists between banks and bank funded Compliance Monitors and the FOS.

The bank CEOs constitution evidently vests discretion with the Compliance Monitors conducting inquiries of their own, so long as the sole purpose of the inquiry is the monitoring of subscribing banks Code compliance. Banks process 4 billion transactions per year, and there is evidence they collectively receive several hundreds of thousands of complaints yearly, yet the monitors investigate about 25 transactions annually.

One Million Complaints, One Breach

In 2008, the Code Monitors stated they named one bank since 2003 ‘in connection with a Code breach’. This was despite the ANZ Banks publication stating it received 40,000 complaints per year which, by simple calculation, means 14 banks received a million complaints over five years since publishing Code (2003).

The limited number of alleged code breaches should have been investigated by the ACCC. In its 9 April 2008 submission to the Code reviewer, ACCC raised concerns about the language used in the Code that did not fulfil its own requirement in clause 2.1(d) ‘requiring information to be provided in plain language:

• • language used in the Code should be simplified. Wherever possible, it should be consumer friendly so the consumers have a clear understanding of their rights, and the banks’ obligations under the Code.

The ACCC also had access to the 2005 FEMAG code review, which referred to the bank CEOs constitution. This concern had not been addressed when the ACCC made further 2008 submissions to Ms McClelland. The ACCC commented on the Codes audience in 2005, stating they were nearly all non-legally trained customers, with a need to understand the wording in the bank/ customer contract without having to obtain expensive legal advice.

Since 2003, the Government regulators and Code Reviewers have failed to effectively deal with ambiguous words in the Code.

Restricted Powers to Sanction

Sections 34 of the Code sets out the consequences when banks are guilty of serious or systemic non-compliance; ignore the monitors request to remedy a breach or fail to do so in reasonable time, breach undertakings given to the monitors or not taken steps to prevent the breach reoccurring.

Paragraph 10.7 of the constitution prohibits the monitors making a public statement, except in their Annual Report, without approval of the FOS and ABA. By 2008, the only sanction the Code Monitors had imposed on a subscribing bank was the public naming of one bank in their 2008 Annual Report.

Lack of independence and transparency

Clause 34(h) of the Code limits the independence of Compliance Monitors by including further controls, with the banks requiring the monitors to carry out their functions, and set out its operating procedures ‘first having regard to the operating procedures of the FOS and then consulting with the FOS and ABA’.

Although it is difficult to determine what’s precisely meant by the phrase ‘first having regard to operating procedures of the FOS,’ the intention appears to limit the powers of the monitors to contradict, conflict with or impinge on the jurisdiction of the FOS, nor damage the banks.

The FOS made a submission to Code reviewer Jan McClelland on 4 August 2008, which appears self-serving. It was silent on the bad faith arrangement surrounding the constitution and the monitors limited powers, whilst purporting to seek clarification of the relationship between the FOS and Compliance Monitors. The FOS suggested:

• • A single entry point to raise alleged breaches of the Code would make the operation of the Code more streamlined and easier for customers ‘ that is, customers would be able to lodge their complaint with the FOS and have it referred to the appropriate organisation without having to navigate the complexities of which organisation is more appropriate having regard to the individual circumstances of their matter.

The FOS seems more concerned with structural issues surrounding the Code than the bank/ customer relationship. Rather than seeking to undo the FOS/ constitution relationship limiting the monitors dispute resolution powers, which differ from the monitors’ Code duties. At the moment, the FOS activities do not exclude them finding there have been Code breaches.

The FOS also has a duty to investigate their role working with the banks as it appointed the Code Compliance Monitors with limited powers. This should pose a greater concern to the FOS if its governance practices and duties are flawed.

Compromised Review Process

The transparency and efficacy of the Code managed by Code Compliance Monitors with limited independence and powers, requires an investigation, with real answers. Clause 5 of the Code requires the ABA to commission an independent and transparent code review every three years, in consultation with banks, consumer organisations, industry associates and relevant regulatory bodies.

The bank/ customer contract, while voluntary, notes banks must carryout a review of the code every three years. Given apparent lack of independence and rigor, the banks might be relying on ASIC’s position that it does not need to approve the banks self-regulated voluntary code.

The ABA is an industry body made up of bank CEO’s as representatives of banking and financial institutions and, with this, there is a real need for an independent review. However, no previous review has adequately addressed the banks involvement in the monitoring and constitution, nor serious conflicts of interest that exist.

Ms Jan McClelland in 2008 overlooked independence and transparency and remained silent on the need to address potential ‘conflicts of interest’ between banks, the FOS and Compliance Monitors, and the flawed application of the banks Internal Dispute Resolution clauses. These reviews also failed to address the application of reviews, the Code practices and the need to investigate Code breached and complaints outside the courts.

In 2012 legislators, regulators, banks and small business advocates should address the need for an independent Code review dealing with the constitution and the IDR process.

McClelland failed to adequately deal with these ‘Key Issues’ prior to handing her December 2008 Final Report to the ABA and subscribing banks. Stakeholders might assert McClelland failed to give equal weight to consumer opinions that was reluctant to deal with substantive issues, favouring potentially biased bank submissions that did not address the bank/ customer relationship.

The Code Compliance Monitors, acting as whistleblowers in their 11 March 2008 and 29 July 2008 submissions to McClelland, raised concerns by people who were in-the-know regarding lack of customer protection. No reviewer should have overlooked the problematic relationship between the code and constitution, which has been swept aside by reviewers and regulators.

Consumer advocacy groups might have expected ‘conflict of interest’ and relationship concerns to be effectively dealt with by Officers of subscribing banks following Ms Jan McClelland’s Final Report in 2008.

This paper questions the bank practices, suggesting they acted deceptively, intending to take away the rights of customers. Later sections in the paper discusses applications of banking codes in developed economies world-wide with no evidence of corrupt banking other than in Australia with self-regulated banking.

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

The level of detail completed by the Martin Committee was impressive. It was a cookbook of advice for parties to understand their role in the proposed change process. Unlike many Government manuscripts, this one was not intended to sit on a shelf as a forgotten dream.

For the report to achieve successful implementation, it required widespread support from the community and a complete change in direction by banks. The Committee was drawn to the idea of a Code of Banking Practice, which should be enforceable as a contract on account of the retention by the courts of their authority to enforce implied contractual terms.

The Committee’s report noted the importance of fairer terms for bank customers. This was out of fear that ‘the contractual terms of the banking relationship raised issues of public policy, not effectively dealt with by negotiation between substantially unequal parties.’

Minimum Terms and Conditions

The Martin Committee cited Lord Scarman, who had stated in a related decision of the House of Lords that ‘the business of banking is the business not of the customer, but of the bank.’

In a detailed analysis of banking law and practice, it was recommended the Australian Law Reform Commission be requested to set minimum terms and conditions of the banker-customer relationship, with the terms of reference specifying the need to:

• • distribute rights, responsibilities and the risk of loss in the banking relationship with fairness and equity; and
  • take into account the need for a workable and efficient payments system; and
  • encourage product development; and
  • encourage fair market competition; and
  • ensure bank customers are aware of their rights and responsibilities; and
  • ensure that banking contracts are not one-sided.

Disclosure Requirements

The Martin Committee’s recommendations embodied principles of disclosure and information as a right of individuals in line with the Freedom of Information Act 1982 (Cth). The concerns referred to how banks went about disclosing information ‘when it suits and denying access when it does not.’

It obtained evidence of this at Dubbo, NSW. It observed how a bank applied double standards as it selectively withheld and disclosed information at its convenience.

The Martin Committee cited the principle of access to information in the Freedom of Information Act 1982 (Cth) and invoked its object ‘to extend as far as possible the right of the community to access to information in the possession of the Government of the Commonwealth’ including ‘access to personal information as a right.’

Martin took the opportunity to share information on the United Kingdom’s Draft Code of Banking Conduct. ‘Through the UK Data Protection Act 1984, it provided for personal information to be made available.’

It was recommended a Code, contractually enforceable by banks customers and subject to ongoing monitoring by the Trade Practices Commission be developed.

To this end, there was a need for a process of consultation between the banking industry, consumer organisations, Commonwealth regulatory agencies and relevant State Government authorities.

The key bankers representative was the ABA, which was an advocate for the industry and formed many years earlier in an effort by banks to oppose a government proposal to nationalise the banking system.

The consultative process during the Martin Committee review took effect under the auspices of the Trade Practices Commission in which monitoring should have regard to the degree of compliance with the Code and, in the light of changing circumstances, to the ongoing appropriateness of the provisions in the Code.

Dispute Resolution

To avoid costs involved in litigation, the Martin report argued there was a need for the rationalisation of an industry-based dispute resolution procedure in the area of consumer financial services. To this end, the Committee sought speedy implementation by banks of effective complaint-handling schemes. Supporting this, it proposed banks promote the existence of their complaints departments, advising customers with brochures in bank branches and annual reports.

A number of comprehensive procedures for dispute resolution were recommended. As part of a more complete dispute resolution process, Martin observed banks were moving towards the ‘establishment of their own internal complaint-handling divisions, the commencement of the collection of detailed data arising from consumer complaints and the feeding of that data into their long-term planning.’

The ineffectiveness of internal dispute resolution procedures became evident with the Financial Ombudsman Service showing most customer complainants went directly to them, without previously being dealt with internally by the banks. The FOS believed the banks internal systems were inadequate, or that consumers lacked confidence in using them.

External: The Financial Ombudsman Service

The Martin Committee acknowledged the special focus on dispute resolution. Despite the development of the FOS, many submissions expressed the difficulties consumers and small businesses experienced in seeking to contest a banks action, decision or calculation.

The Martin Committee stated the Code ‘could not support the extension of the Ombudsman’s service to cover small business generally’. The Committee further stated the ‘size and complexity of many small business operations would swamp the Ombudsman’s office at the expense of small consumers.’

The Martin report stated many disputes arise because customers are unaware of their rights and obligations under their banking contracts. The Committee agreed with the Ombudsman’s recommendation that ‘improving communications between banks and customers will help to avoid potential disputes.’

This also furthered the argument for contracts to be written in plain language.

The National Australia Bank stated banking practices should be codified on a national basis. It further stated there should be a self-regulated Code and that the Ombudsman ‘is probably the one that first comes to mind as a possibility for ensuring adherence to a voluntary Code’.

Need for Independent Mediators

The Martin Committee recommended independent mediators, similar to the ones relied on by banks and foreign currency borrowers, be appointed to mediate cases that remain in dispute. The determinants of the mediator will not be binding on either party. The mediator should operate under conditions that:

• • mediation would not be possible where cases have already proceeded through all stages of appeal so the court processes are recognised; and
  • would not be possible where out of court settlements have been reached; and can be sought where cases are still in court without final decision, or pending, and any determinations of the mediator will be non-binding on both parties so both have the option of pursuing court action; and

both parties pay proportionally for their usage of the mediator.

Monitoring: Reserve Bank – Trade Practices Commission and Australian Payments System Council

The Martin Committee believed once a Code of Banking Practice was implemented it ought to be monitored by an appropriate Commonwealth regulatory authority. It noted ‘the value in having one agency at Commonwealth level with primary responsibility in relation to consumer banking issues.’ Independence from banks would be an important feature an agency at Commonwealth level would enjoy, which was the same independence the US Federal Reserve enjoyed.

The Martin Committee examined the US Federal Reserve’s responsibilities in regulation and monitoring of consumer financial services in America. However, the RBA expressed no desire to take on a similar role here, explaining the circumstances prevailing in the US, such as the difficulty of achieving consistency across many States and the large number of financial institutions was not relevant in Australian. The report expressed concern about the possible impact of additional duties on its overall efficiency.

The Trade Practices Commission was the committee’s choice for the monitoring body. Although the TPC did not have channels of communication with banks to the same degree as the RBA, it was experienced in Code development and monitoring, and had contact with the consumer movement. It possessed relevant powers and responsibilities under the Trade Practices Act 1974.

The Martin Committee thus recommended the ‘Trade Practices Commission be given formal responsibility for overseeing consumer banking issues at the Commonwealth level including the monitoring of the recommended Code of Banking Practice.’

The TPC was not, however, asked to monitor compliance with the 1993 Code. That position went to the Australian Payment System Council, a non-statutory government agency chaired by the Reserve Bank.

The authority of the Payment Council under the 1993 Code was limited to obtaining information from the Reserve Bank based on reports the banks provided. With this information, the Payment Council would submit to the Treasurer its reports on bank compliance with the Code.

The 1996 Code however provided no indication the banks would not comply with the pre-condition of the Attorney General’s Department that the Code be very vigorously administered.

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

When considering the consequences of the disingenuous code/customer relationship, and the ambiguous wording in the Code (2003), the researchers noted several legal issues.

Despite having no experience at law or in the legal processes, the researchers looked at the conduct of bank directors and banks, and the corrupt arrangements engineered by the CEOs, commencing in 2003.

There are sections in this paper relating to corrupt conduct, including:

• • breaches of contract;
  • misleading and deceptive conduct;
  • unconscionability; and
  • acting in bad faith.

In addition to corrupt concerns, which may raise questions of intent and fraud, there were secondary issues relating to the conduct of instructing banks and their lawyers. By keeping information regarding the terms of the unpublished CEOs constitution from customers and their lawyers (and the courts) subscribing banks and the Code Compliance Monitors misled their public, presumably taking no action while high-priced lawyers misled the courts.

When drafting this paper, the researchers discovered the unpublished constitution. It completely changed the powers, authority and independence of the Code Compliance Monitors, and their ability to investigate any allegation by any person if a subscribing bank breached the Code. These Code practices set out agreed standards in the interests of all parties, banks and customers alike.

There is a considerable amount of evidence underpinning the existence of banks corrupt dual contracts. The subscribing banks published, promoted and adopted Code (2004), after producing the CEOs constitution. This removes any credibility bestowed on the subscribing bank directors and managers (and associates) when documenting and publishing the banks practices and dispute resolution procedures.

Whist the express terms in bank/ customer agreements allow banks under certain circumstances to terminate contracts and take customers to court to recover funds, there can be extenuating circumstances. These circumstances might include banks being in breach of the bank/customer contract and concealing it, and banks acting dishonestly. Therefore the Code Compliance Monitors, when appointed, accepted they had a duty to investigate any such allegations.

However the unpublished constitution, known only to banks and their lawyers, placed unreported limitations on the Code Compliance Monitors that were out of reach of both customers and the courts.

Corrupt Conduct

This paper provides an opportunity for the public to consider the motives of bank directors and banks when offering contracts to customers with misleading and deceptive terms and conditions, without referring to the overriding CEOs constitution. The 20 February 2004 unpublished constitution was for the sole benefit of the deposit-taking institutions.

If overriding (unpublished) constitution was introduced with the knowledge of bank directors and the banks, it would constitute misleading and deceptive conduct. This being the case, it would be in breach of the Trade Practices Act 1974 (Cth) (s 18 of Australian Consumer Law).

It might also be alleged bank directors and the banks, and the ABA, acting together, intentionally misled and/ or deceived customers when they published, promoted and adopted the problematic Code (2004) a few months after the bank CEOs association adopted the 20 February 2006 constitution. If this was the case, the subscribing banks might have intended to limit the independence, authority and powers of the Code Compliance Monitors, breaching s52 and s55A of the Trade Practices Act.

Section 52 of the Trade Practices Act 1974 (Cth) (s 18 of Australian Consumer Law) provides that:

• • a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive, and
  • nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).

Section 55A of the Trade Practices Act 1974 (Cth) (s 34 of Australian Consumer Law) provides that:

A corporation shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics and the suitability for their purpose, or the quantity of any services, given that:

• • • the CEOs constitution sets out the subscribing banks interpretation and implementation plans under the Code in relation to such pertinent issues as Internal Dispute Resolution practices, and
    • the Code has the status of a schedule of implied terms and conditions within each individual contract entered into between a deposit-taking institution and client.

Section 45E of the Competition and Consumer Act 2010 (Cth) applies to a director or bank that has an obligation to supply specific services to customers. It must not make a contract or arrangement, or arrive at an understanding with employees, officers or agents, if a provision in the contract prevents them from supplying good or services (such as Code compliance and dispute resolution) to customers.

In this case, the supply of services, included warranties and compliance with the Code (2004). The Code set out key commitments and general obligations, including dispute resolution clauses that sixteen banks said required them to investigate all complaints (clause 35.7) and required the Code Compliance Monitors to investigate and make a determination on any allegation a subscribing bank breached the Code.

The bank CEOs constitution however limited the independence, powers and authority of Code Monitors carryout their duties and investigate any complaints. Obviously, the bank directors and banks drafting the 20 February 2004 constitution knew the Code, bound by it, was nothing more than a cunning strategy to win customers trust.

When customers lodged complaints with the Code Compliance Monitors, they found their rights denied due to the banks overarching constitution, which was kept from all customers signing contacts.  Without the bank customers understanding the impact of the changed contract conditions, they could argue being seriously and intentionally misled.

The bank directors and banks appear to have intentionally breached contracts with customers, and their conduct was in contravention of the Competition and Consumer Act 2010 (Cth).

Misleading Courts in Civil and Criminal Actions

In addition to allegations of misleading and deceptive conduct, the actions of bank directors and banks, and their lawyers, concealing the bank CEOs constitution from customers and customers’ lawyers and the court introduced more serious concerns. It might have been intended to infer to the court that customers had rights under clauses 34(b)(ii) and 35.7 without enforcing them. This meant the banks and directors and their lawyers might have deliberately acted to mislead the court with regard to the facts of cases.

The bank directors and banks knew their lawyers had a duty not to mislead the court with regard to the facts of cases. This meant that lawyers misled the court with the banks knowledge and this could be evidenced in cases when the court was provided copies of customers’ contracts including Facility Offers and General Standard Terms that included the Code as part of the contract. Whilst these three documents formed small businesses standard contracts, there is evidence this occurred during the past eight years, and the banks would therefore have acted unconsciously.

Whilst the conduct of banks and lawyers is potentially unconscionable, instructing lawyers to mislead the court gives rise to more serious concerns. The possibilities of bank directors permitting bank lawyers to litigate and conceal the CEOs constitution from the court supports assertions the directors and banks acted in bad faith.

There will be circumstances where criminal offences occurred involving unlawful conduct by banks and third parties. Such conduct is also referred to in the Code with the bank stating they would comply with all relevant laws, which certainly include breach of the Crimes Act as well as other banking services.

In such cases, banks are bound by clause 35.7, which requires them to investigate all complaints.  The Code Compliance Monitors also have a duty to investigate any allegations from any person banks failed to investigate such unlawful conducts by its management and staff.

In these circumstances, banks would indemnify internal dispute resolution staff and the Code Monitors, and their lawyers, when they are investigated civil matters. This protection would not apply if, whist carrying out an investigation, these parties cited evidence of criminal behaviour such as theft, fraud and other breaches of the Crimes Act by delinquent bank parties when carrying out investigations under the Code.

Constitution and Cartel Provisions

According to Part IV Division 1 of the Trade Practices Act 1974 (Cth) (Competition and Consumer Act 2010; Schedule 1; Part 1; Division 1; Cartel conduct), provisions of a contract, arrangement or understanding may be taken to be a cartel if they directly or indirectly prevent, restrict or limit the capacity to supply services, such as the code subscribing banks and bank CEOs members have.

Two criteria must be met in order for an agreement or arrangement to constitute a breach of the cartel provisions:

• • intention to prevent, restrict or limit the capacity, likely capacity or actual supply of [Code compliance monitoring and dispute resolution] services, which must be present in the agreement, and
  • subscribing banks and financial institutions must either be competitors or would be competitors [and provide effective and competitive banking products, services and warranties] but for an agreement to the contrary.

These conditions are satisfied if at least two parties to the contract, arrangement or understanding are, or are likely to be, or would be competitors, if they had not made an agreement [to introduce provisions and constitution] to the contrary and therefore would be in competition with each other in relation to the supply of relevant services.

As the sixteen banks and directors of the banks provide loans and manage deposits of nearly every Australian, customers have bound themselves to limitations set out in the bank CEOs constitution. These limitations removed customer warranties relating to reasonable banking standards and practices set out in Code (2003-2004). This paper raises concerns that the bank CEOs association members, by their conduct, limited and/or withdrew crucial services provided to customers, suggesting this constitutes cartel conduct.

Good Faith in Contractual Dealings

Did the sixteen code subscribing banks and their directors fail to act in good faith in achieving contractual objectives with customers published in the Code (2004) having regard to principles of fairness of in their bank/ customer relationships?

According to McDougall J in Tomlin v Ford Credit Australia [2005] NSWSC 540, citing Sir Anthony Mason at [116], parties have a duty to act in good faith in contracts, which generally requires:

• • an obligation on parties to co-operate in achieving contractual objectives (loyalty to the promise itself);
  • compliance with honest standards of the conduct; and
  • compliance with standards of conduct that are reasonable having regard to the interests of the parties.

Accepting this general view, this paper suggests consideration be given to whether the sixteen banks and directors of the banks would be acting in bad faith if they proceeded to:

• • enter into a contract with a client without disclosing the existence of the bank CEOs constitution and the restrictive effect it had on the banks ability to act in accordance with reasonable standards and practices in the Code, and therefore contractual obligations, and
  • refuse to pursue complaints through their Internal Dispute Resolution process, which they promoted as being obliged to do under the Code standards, except for the existence of the undisclosed bank CEOs constitution.

Conflicts of Interests

The body charged with powers and authority for determining the application of the Code was the bank CEOs association. It is alleged to have acted in a cartel-like way to further the sixteen subscribing banks interests.

In all likelihood this was due to less than independent Code Monitors, appointed or co-appointed by subscribing banks and the banks funded FOS, both being privy to the unpublished bank CEOs constitution. The constitution, produced in 2004, followed Code (2003) and preceded Code (2004), with bank directors and banks promoting Code compliance when they knew or should have been known certain practices were at best problematic and at worst untruthful, corrupt and intentionally dishonest.

The Martin Committee report stated principles of best practice should not have been the sole prerogative of banks because:

• • banks cannot be relied upon to secure, by themselves, the improved standards their customers need; and
  • while banks continue to have a major say in setting standards ¦ standards should be reflected in an objective assessment of adequacy.

This paper raises concerns with regard to conflicts of interests between the directors of the ABA and the ABA, directors of subscribing banks and the banks and the bank CEOs and the association’s members. It also raises concerns with regard to actions of the FOS and its officers and the Code Compliance Monitoring Committee.

It alleges conflicts of interest existed, with failed governance throughout the banking sector, and lack of regard for transparency in all operations and the appointment of Compliance Monitors and Code reviewers who lacked independence.

Banking Regulators

There must also be a concern to government regulators with statutory powers, failed to act in a responsible manner and use these powers.

An anomaly exists because the bank directors and banks use shareholders funds and the industry’s PR machine. Located at the ABA’s Pitt Street headquarters, this body is managed by directors employed by the sixteen subscribing banks and with PR funded by the same banks, acting to conceal the truth about practices undermining the bank/ customer agreement.

The ABA is a fertile atmosphere for subscribing banks, working together to promote high-practices and conceal dishonest practices, use their privileged positions to attract customers and sign agreements with customer, without intending to comply with them.

The researchers found the high-principles in Code (2004), with 250 clauses and sub-clauses, said to protect customers from deceitful bankers, are meaningless. This is not what the Martin Committee intended in 1991, nor the legislator’s expected when the Code was conceived. With such a financially powerful group, the future for customer protection, under the self-regulated Code looks anything but bright.

The regulators, like bank directors and managers, are bound to act in a responsible manner when being alerted to unlawful conduct.  Regardless of banks’ commitment to comply with the laws, regulators and banks governance should be beyond reproach. As with banks Internal Dispute Resolution staff, Compliance Monitors and lawyers, regulators and banks officers have a duty to investigate all allegations of unlawful conduct and breaches of the Crimes Act, rather than individuals and small businesses exposing corrupt and unlawful conduct.

Effective Governance

This paper does not infer any one person masterminded the problematic Code. However legislators must have been briefed on banks intentions when the ABA published the Code (2003). However, the requirement for effective governance across the industry has been overlooked.

When the Code (2003) was published, ABA senior officers were:

• • Mr John McFarlane, retired ANZ Bank, Chief Executive and ABA Chair, and
  • Ms Gail Kelly, presently Westpac’s Chief Executive and ABA Deputy Chair

The subscribing banks introduced the bank CEOs constitution on 20 February 2004 and, once again, it seems dishonest.

In 2004, when the Code was amended, the public would have had no idea the bank CEOs constitution existed. The senior ABA officers, were:

• • Mr John McFarlane, Chairman, and
  • Mr Ahmed Fahour, retired Citibank Chief Executive and ABA Deputy Chair.

A third notable event occurred in 2008. The Code Compliance Monitors appointed in 2004 made an early exit following a public statement regarding the problematic Code. However, the ABA directors resisted dealing with unethical concerns raised by them, acting as whistle-blowers. The senior ABA officers, were:

• • Mr John Stewart, ex-NAB Bank Chief Executive and ABA Chair, and
  • Mr Stewart Davis, ABA Deputy Chair and HSBC CEO

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

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…

Almost every Australian has a relationship with their bank. In today’s cashless society it’s practically impossible to get by without a bank account and reliance on electronic transfers. Debt is the norm. Therefore, today’s customers expect an easy relationship as banking and financial services are essential.

Following the 1981 Campbell Committee report, there was a seismic shift in banking competition. The sector went through a period of rapid expansion for the next ten years, and with expansion came excesses in certain areas. However, the House of Representatives commissioned a report to assess whether deregulation might have gone too far.

On 27 November 1991, the Standing Committee on Finance and Public Administration tabled a report on its inquiry into deregulation and competition in the banking and finance industry. This review was carried out by the Martin Committee and was titled a Pocket Full of Change. In carrying out the review, the committee members were required to travel widely drafting the report.

The Martin Committee

Recommendations in the Martin Committee’s report made a case for drafting a Code of Banking Practice. Martin Committee’s members included:

Stephen Martin (Chair)

J.N. Andrew

R.A. Braithwaite

R.I. Charlesworth

B.W. Courtice

A.J. Downer

S.C. Dubois

R.F. Edwards

R.P. Elliot

G. Gear

R.S. Hall

L.J. Scott

A.M. Somlyay

The Hon Paul Keating was Prime Minister.

With this report, a government task force was set up to draft a Code, with input from banks, consumer groups and government agencies. However, the ABA undertook the responsibility of drafting the first Code in 1993.

Not surprisingly, there were glaring differences between the government task force’s recommendations and the final ABA version, with the balance of power once again shifting back to the banks.

The Wallis Inquiry

In 1997, the Wallis Inquiry recommended to the government that rather than relying on the integrity of bankers, they should introduce co-regulation. Regulatory bodies, with comprehensive responsibilities to enforce consumer protection in the banking and finance sector would carry this out.

Members of the Wallis Committee (1997), were:

Stan Wallis (Chairman)

Bill Beerworth

Prof. Jeffrey Carmichael

Ian Harper

Linda Nicholls

Following her time as a member of the Wallis Inquiry, and having recommended to the government it should introduce co-regulation rather than self-regulation and relying on the integrity of banks, Linda Nicholls was appointed Director, St George Bank Limited. She remained in that position from 26 August 2002 to 1 December 2008.

Outcomes of the Wallis Inquiry included the government establishing several industry regulators: ASIC, APRA and later ACCC. Each was responsible for to enforcing provisions of the banks self-regulated codes, and other legally enforceable regimes. It was intended this would improve consumer protection for individual and small business customers of banks.

Between 1997 and 2003, Prime Minister, John Howard, Treasurer Peter Costello and Minister Financial for Services and Regulation, Joe Hockey headed the government’s task force team. They relied on government and non-government bodies to promote policies to improve banking performance and develop customer protection safeguards.

At the same time, senior bankers and the ABA gained influence with a government actively seeking to de-regulate the banking sector.

The Reserve Bank of Australia (RBA)

The primary purpose of the RBA is to conduct national monetary policy and ensure maintenance of a strong financial system.

It was formed in 1959 by virtue of the Reserve Bank Act 1959 and since 1996, the RBA Governor and Senior Officers have appeared twice yearly before the House of Representatives Standing Committee on Economics to report on monetary policy and matters falling within the responsibility of the Reserve Bank.’

Between 1995-2003, the RBA Board comprised:

Frank Lowy (member 1995; re-appointed 2000)

Jillian Broadbent (7 May 1998 until 2003)

Donald McGauchie (appointed March 2001)

Ian Macfarlene (Chairman in March 2001)

Dr S A Grenville

E A Evans

Hugh Morgan AO (Reappointed for 5 years, 29 July 2002)

R F E Warburton

Prof. Warwick McKibbin (Appointed July 2001), and

Dr Ken Henry (Noted as part of 2001 board)

Australian Securities and Investments Commission (ASIC)

The Wallis Inquiry’s recommendations included a need for a regulator to oversee market integrity and consumer protection. As a result, ASIC was established.

Since 1999, ASIC Board members included:

David Knott (Deputy Chair 1999, Chair, 18 November 2000);

Jillian Segal (Member 1997, Deputy Chair 2000 until 2002);

Peter Day (Deputy Chair until January 1999)

Alan Cameron

Prof Berna Collier (2001 – 2004)

Prior to 2001, this organisation was called the Australian Corporations and Financial Services Commission. Its function was to contribute to Australia’s economic reputation and wellbeing by ensuring financial markets were fair and transparent, supported by confident and informed investors and consumers.

ASIC commenced operations on 1 July 1998, following an overhaul of the nations regulatory framework in order to permit markets to adapt to challenges of the current and emerging corporate and financial environment.

Australian Prudential Regulation Authority (APRA)

APRA was established and currently oversees prudential regulation of authorised deposit-taking institutions, insurance companies and superannuation funds.  It was created as a statutory authority on 1 July 1998.

Since May 2000, Board members included:

Dr Jeff Carmichael (from 1998, Chair 17 March 2008)

Graeme Thompson (appointed 1998, CEO 17 March 2008)

Alan Cameron (ASIC representative)

Ian Macfarlene (RBA representative)

Dr John Laker (RBA representative)

Donald Mercer (appointed June 1998 for a 5-year term)

Prof. David Knox (appointed June 1998)

Ms Marian Micalizzi (appointed on 10 May 2000)

Dr Robert Austin (appointed1998 until 2000)

Rod Atfield (appointed 2001 until 2006)

Australian Competition and Consumer Commission (ACCC)

The ACCC was established at the same time with the primary purpose of ensuring individuals and businesses comply with the Commonwealth’s competition, fair trading and consumer protection laws.

ACCC Commissioners (1997 – 2005), were:

Prof Allan Fels (Chairman 1999 until 30 June 2003)

Allan Asher (Deputy Chairman July 1999)

Sitesh Bhojani (from 10 November 1999)

Dr Tom Parry (November 2000 until 6 June 2005)

Alan Tregilgas (November 2000 until 31 March 2004)

Ross Jones (From 4 June 1999 until June 2004)

John Martin  (From 4 June 1999 until June 2004)

Teresa Handicott (From 4 June 1999 until 2002)

Rhonda Smith (From 4 June 1999 until June 2002)

Don Watt (From 4 June 1999 until June 2002)

Warwick Wilkinson AM (From 4 June 1999 until 2002)

Prof Doug Williamson (From 4 June 1999 until 2002)

Graham Scott (From 4 June 199 until 1 April 2001)

Andrew Reeves (From 4 June 1999 until 2001)

Paul Bexter (from 4 June 1999 until 30 June 1999)

Dr David Cousins (from 14 July 1999 until 2002)

Yasmin King (From 27 October 1998 until 2001)

Jennifer McNeill (22 July 2002 – 2007)

Rod Shogren (May 1997 until 29 April 2002)

Graeme Samuel (Deputy Chair 2002, but majority vetoed it)

Ed Willett (nominated 2002 and later confirmed)

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

The architects of the Code of Banking Practice were members of the Martin Committee. During the infancy of self-regulation in the banking and financial sector, the government relied on advice from several advisory bodies, which included bankers.

Whilst it’s unlikely all government advisers would have been privy to the later inefficacy and shortcomings of bank/ customer contracts, the bankers in each group were. Some were also members of the bank CEOs association. All knew there were competing bank agreements, created to limit the independence, powers and authority of the Code Monitors and to lessen the rights of individual and small business customers.

Financial Sector Advisory Council

The Financial Sector Advisory Council was a non-statutory body established in 1998 to provide advice to the Government on policies intended to maintain an efficient, competitive and dynamic financial sector, with overarching objectives including fairness. The Financial Advisory Council members were skilled and experienced business professionals drawn from the banking and finance sector. As experts in the area of banking and finance, the government would have it difficult to find people with more experience, however some had dubious backgrounds.

The Council still reports to the Treasurer.

Financial Sector Advisory Council Members (2000), were:

Maurice Newman (Chairman) – Deutsche Bank and ASX (appointed 1998) (re-appointed 2000)

Paul Batchelor – AMP Limited (appointed November 1999)

Terry Budge – Bank of Western Australia (appointed March 1998)

Patricia Cross – Suncorp – Metway Limited (appointed March 1998)

Les Hosking – Australian Centre for Global Finance (appointed March 1998)

Ian MacFarlane – Governor of the RBA (appointed August 1999 until 2002)

David Murray – Commonwealth Bank of Australia (appointed August 1999)

Richard Sheppard – Macquarie Bank Limited (appointed March 1998)

John Trowbridge – Trowbridge Consulting Pty Limited (appointed 1998)

Charles Curran AO – QBE Insurance Group (appointed 22 August 2002)

Chris Mackay – UBS Warburg (appointed 22 August 2002)

David Murray, CBA, Chief Executive, was later Chairman, ABA and member of the bank CEOs association. He was aware of dual contracting by code subscribing banks since 20 February 2004.

Financial Sector Advisory Council Members (2005), were:

Maurice Newman AC (Chairman) – Deutsche Bank and ASX

Charles Curran AO – QBE Insurance Group

Jeremy Duffield – Managing Director, Vanguard Investments

Barry Fitzgerald – CEO, Adelaide Bank

Michael Hawker – CEO, Insurance Australia Group

Chris Mackay – CEO, UBS Australia

Gail Kelly – Managing Director, St George Bank

Linda Nicholls, Director, St George Bank

Les Owen – CEO, AXA Asia Pacific Holdings

Richard Shepard – Deputy Managing Director, Macquarie Bank

Alastair Walton – Vice Chair, Goldman Sachs JB Were

Gail Kelly, Managing Director, St George Bank, Deputy Chair, ABA and member of the bank CEOs association and Lind Nichols, Director, St Georg Bank. They were aware of dual contracting by banks since 20 February 2004.

Consumer Affairs Advisory Council

The Consumer Affairs Advisory Council was created to provide advice to the Minister for Financial Services and Regulation on consumer needs arising from market transactions and developments, and at the same time identify emerging issues affecting consumers.

The Consumer Advisory Council continues today and reports to Senator the Hon Ian Campbell, Parliamentary Secretary to the Treasurer and Manager of Government Business in the Senate, who has portfolio responsibility for consumer affairs.

In establishing the Consumer Advisory Council, the Minister for Financial Services and Regulation, Joe Hockey confirmed he was ‘confident the Advisory Council will be a significant consumer voice.

It is important for the government to have direct access to independent grass roots advice from people involved with consumer issues. The purpose of the Consumer Advisory Council is to be part of a framework so consumers are empowered and can make more informed choices.

Consumer Affairs Advisory Council Member (1999)

Colin Neave (Chair) – Financial Ombudsman Service

Gregory Bartels

Caroline De Mori

Janet Grieve

Fiona Guthrie

Emmanuel Hegarthy

Michael Kay

May Miler-Dawkins

Louise Sylvan – CEO Australian Consumers’ Association

Adriana Taylor

The Consumer Affairs Advisory Council was created under the following terms of reference:

• • investigate and report to the Minister on consumer issues referred to the body by the Minister; and
  • advise the Minister on consumer education matters referred to the body by the Minister; and

consider reports and papers referred to the body by the Minister and report on     their likely consumer impact; and

• • identify emerging issues impacting on consumers and draw those to the attention of the Minister.

Colin Neave, Chair, FOS, was aware of the governments Consumer Affairs Councils objectives when his office later appointed the Code Compliance Monitors. This meant he should have known the bank CEOs constitution, drafted on 20 February 2004, was inconsistent with the Advisory Councils objectives.

Self-Regulation Tasks Force

The Minister for Financial Services and Regulation, Joe Hockey responded to the Wallis Inquiry’s recommendations by creating a uniform prudential environment. He believed this would lead to greater certainty for bank customers.

These changes were part of the government’s goal of increasing competition and improving efficiency, while preserving integrity, security and fairness of the financial system Hockey strongly advocated for self-regulation in these words:

I have a great belief in allowing industry to regulate itself. However, where industry is unable to maintain appropriate standards through self-regulatory means and when there is severe market failure, I will look to prescribe industry Codes to make lack of compliance illegal and subject to enforcement under the Trade Practices Act.

In 1999, Minister Joe Hockey created the Self-Regulation Task Force. Its purpose was to provide feedback to government, industry and consumers on what constitutes best practice in industry self-regulation. The Task Force’s aim was to determine best ways to reduce regulatory burden on businesses, identify best practice in self-regulation and ultimately improve market outcomes for consumers.

Self-Regulation Task Force Members: (1999)

Berna Collier (Chair) – Clayton Utz

Peter Daly – Insurance Enquiries and Complaints Ltd

Louise Sylvan – Australian Consumers Association

Mark Paterson – ACCI

Johanna Plante – Australian Communications Industry Forum

Ella Keenan – Business and Professional Women of Australia

Rob Edwards – Australian Direct Marketing Association

Marina Santini Darling – GIO Australia Holdings Ltd

Gary Potts – Treasury

The principles of self-regulation that were established as a result of the Task Force’s investigations, and outcomes that led to banking and finance industry’s standards today will be discussed in later chapters.

Trade Practices Act Review Committee

In 2002, the Treasurer announced the review of competition provisions of the Trade Practices Act. The committee’s task was to determine whether the Trade Practices Act provided sufficient recognition for globalisation factors and for Australian companies to compete globally.

TPA Committee Members were:

Sir Daryl Dawson (Chairman)

Jillian Segal, former Deputy Chair, ASIC (current NAB Director)

Curt Rendall, representing small business

Jillian Segal was a former Deputy Chair, ASIC and is presently a National Australia Bank director.  Having experienced governance failures in 2004, the NAB directors apparently ignored the 2004 events when the bank CEOs constitution was produced that year.

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

The banks have been part of Australian society for more than a century however the government did not formally nationalise them until 1947. Since then, the government has attempted to establish a competitive banking and finance sector that is best for the industry and customers.

The Australian public needs to put its trust in the banks. Since deregulation in the 1980s, the ABA and its directors, the bank CEOs, have effectively been managing the banking industry.

The key ABA officers from 1997 were: Frank Cicutto, NAB, Chairman, Ed O’Neal, St George Bank, Deputy Chair and Jeff Oughton, Chief Executive.

Changing The Guard (2001-2003)

In 2001 – ABA undergoing culture change.

David Bell was appointed CEO.

David Murray, Commonwealth Bank, was elected Chairman, and

Ed O’Neal is re-elected Deputy Chairman.

In 2002/03 – ABA changing of the guard.

John McFarlene, ANZ Bank, replaced David Murray as Chairman.

Gail Kelly, St George Bank replaced O’Neal as Deputy Chair, and

David Bell continues in his role as CEO.

The ABA Member Banks (2002)

Adelaide Bank

AMP Bank

Arab Bank Australia

ANZ Bank Limited

Bank of Cyprus Australia

Bank of Western Australia

Bank of Queensland

Bendigo Bank

BNP Paribas

Citibank Limited

Commonwealth Bank of Australia

Credit Suisse First Boston

HSBC Bank

Mizuho Corporate Bank Limited

Laiki Bank (Australia)

Macquarie Bank Limited

National Australia Bank

NM Rothschild and Sons (Aust) Limited

Primary Industry Bank of Australia

St George Bank

Suncorp Metway Bank Limited

United Overseas Bank Limited

Westpac Banking Corporation

Richard Viney’s Code Review (2000-2003)

The Richard Viney Code review was carried out during the ABA changing of the guard. In 2000, Richard Viney heard the first set of submissions to the ABA review from consumer groups and government bodies.

In general, the submissions raised concerns regarding the lack of transparency in compliance monitoring. However ASIC stood aloof while the banks got on with their business. It was agreed there needed to be an external and independent monitoring body overseeing the banks compliance.

What Bank Customers Wanted

Issues raised in submissions, included:

Joint Consumer Organisations: requested compliance monitoring, complaints handling mechanisms, enforcement of sanctions against institutions breaching the Code, public reporting of Code compliance and powers to remove subscribers from the Code.

Australian Consumers Association: asked for pre-contract disclosure to all consumers with improved disclosure on fees and charges, clear guidelines for account closure and default, accuracy in advertising and accessible standards for internal dispute resolution.

Consumer and Business Affairs Victoria: called for greater transparency and accountability in compliance monitoring and sanctions for subscribers who breach the Code.

National Farmers Federation: asked banks adopting the Code that their members not be excluded from certain sections of it. An end to unilateral imposition of fees and charges was also called for, along with more direct communication of changes in rates and fees.

Standards Australia Committee: noted if an agency has a visible, accessible and responsive complaints handling system, consumers are less likely to turn to the ombudsman’s office.

As an issue of fairness, complaints procedures need to be available to the public and they should be given reasons for any decision not to uphold their complaint, and informed about appeal rights and further review.

ASIC: called for external monitoring, provisions on sanctions and publicity of breaches, regular Code review and disclosure on fees and charges.

ACCC: supported ASIC’s views and made the point that although policy underpinning the Trade Practices Act is the promotion of competition, it is not competition at any cost to society.

What the ABA and Banks wanted

Commonwealth Bank: believed there was a need for regular and transparent reviews of the Code, involving a wide process of consultation with community, consumer and government bodies.

National Australia Bank: said the Code must be independently monitored and reviewed every three years, using a transparent process with submissions from community.

Westpac and NAB: voiced concerns there were parts of the Code that duplicated legislation in the Privacy Act, Financial Services Reform Bill, Electronic Funds Transfer Code and Uniform Consumer Credit Code. Without good reasons, they believed the revised Code should not duplicate other regulation.

The Bankers Association: suggested the definition of a banking service be any financial service provided by a bank to a customer. They recommended establishment of a Code Compliance Monitoring Committee, however it should only be given a naming sanction for repeat offenders.

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

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 ground breaking 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…