The Unpleasant Truth About Australian Banking

Chapters 21 – 30

During the past eight years, subscribing banks worked with parties they funded or had a relationship with to implement arrangements they could rely on to keep bad banking news for the public. An earlier chapter notes that ANZ published advice it was receiving 40,00 complaints per year, supporting a proposition one million complaints resulted in one code breach between 2004 – 2008.

The code subscribing banks intended to have effective systems to keep code breaches concealed and out of the public domain. The thee strategies included:

Ambiguous wording introducec during McFarlane – Kelly period.

The bank CEOs constitution was introduced a few months later; and

Public relations funded by banks to conceal these practices.

To achieve this, the banks required contributors. These were people who reported to be banking industry experts and also willing to conceal the corrupt banking practices referred introduced from 2003, the McFarlane – Kelly period.

The code subscribing banks needed Code Compliance Monitors to be both.

However, on reflection, banks relied heavily on the FOS as they agreed to appoint or co-appoint the Code Compliance Monitors. The FOS had considerable experience in this field, acting as independent industry third parties who could investigate and rule on customer complaints in the wider banking and finance industry.

The subscribing banks, through the Australian Bankers Association the industry bodies, directly or indirectly funded contributors and industry experts. These experts carried out tasks when banks and the Australian Bankers Association had contractual or statutory duties to fulfill. 

The Code Compliance Monitors

In March and July 2008, Code Compliance Monitors acted as whistleblowers and their revelations were set out in submissions sent to Code reviewer, Jan McClelland. The banks and the Australian Bankers Association rejected these views without any explanation. The bank also concluded it was not sufficiently damaging to address the allegations inferring directors of subscribing banks were acting in a misleading and deceptive manner, a potential breach of the Trade Practices Act.

The McClelland review in 2008 was a turning point that brought to light the existence of serious problems with self-regulated banking. The bank directors and Australian Bankers Association executives were concealing the existence of the bank CEOs constitution, introduced four years earlier in 2004.

Independence is Implicit (2004)

From 1 April 2004, when the Code Compliance Monitors were employed, they publishing information and memorandums promoting the values they believed were essential additions to the national banking landscape. Their 31 March 2005 Annual Report, noted:

Whilst the code does not explicitly use the word independent in describing the role of the Code Compliance Monitors, their independence is implicit. They must act independently in discharging their role because it is essential if the Code of Banking Practice is to be taken seriously and therefore be effective in achieving its purpose.

The appointment of the Code Monitors was therefore consistent with the industry's promise to provide better banking practices to customers. The newly appointed Chairman of the Australian Bankers Association was John Stewart, CEO, National Australia Bank.

At a time when National Australia Bank was undergoing great scrutiny due to the Catherine Walter efforts to expose corrupted senior managers and directors conduct, Mr Stewart made a public declaration that subscribing banks would provide better banking practices, stating 'the industry remains committed, first and foremost, to providing the highest quality services to domestic consumers….'

Code Monitors Annual Report (2004)

In 2004, the Code Compliance Monitoring Committee's Annual Report identified its members as being:

Anthony Blunn AO, Chairman from 17 November 2003 until January 2009. The subscribing banks and FOS appointed him jointly.

Ian Gilbert was the member with senior level banking experience. He was replace by Russell Rechner on 14 September 2004. They were appointed by code subscribing bank CEOs and the ABA.

David Tennant was the member with relevant experience and knowledge to represent individual and small business customers. The FOS consumer and small business members appointed him.

From April 2004 until October 2006, the Code Compliance Monitors were supported by Executive Officer, Barbara Schade. This meant CEOs of subscribing banks and the Australian Bankers Association, and contributors, the FOS, appointed the independent Code Compliance Monitors. When they were appointed in 2004, there were fourteen self-regulated subscribing banks that funded all of these parties, either directly or indirectly.

All bank directors and banks, and contributors knew that in 1991, the Martin Committee had pioneered the importance of implementing the Code of Banking Practice. The research suggests from the Code's inception, directors of subscribing banks acted in good faith to adopt many high practices in the Martin report. The recommendations led to the appointment of monitors with responsibilities to monitor subscribing bank compliance and to investigate any allegation and make a determination a subscribing bank beached the Code.

In late 2003 and early 2004, the subscribing banks and the FOS were involved in selecting and appointing the Code Compliance Monitors. David Murray and Gail Kelly would have watched over this during the early stage and John McFarlene and Gail Kelly at the later stage. They were, at that time, the senior Australian Bankers Association officers.

The FOS played an important role, appointing or jointly appointing Anthony Blunn, Chairman, and David Tennant. 

Financial Ombudsman's Service

As stated earlier, apart from the Code Compliance Monitors other parties enjoyed a special relationship with the banks. First among this group was the FOS.

The FOS officers and staff worked hand in hand with the Australian Bankers Association and bank CEOs association. This relationship was required to create obstructions that meant the Code Compliance Monitors were unable to comply with their clause 34 commitments. Together, the subscribing banks and the FOS created many obstacles that have only recently been identified.

The research provided no insight into motives of the FOS, and its decision to support the appointment of Code Monitors once the bank CEOs constitution was introduced. The decision by subscribing bank directors and the banks to override code principles must have created great uneasiness. However, if it did create apprehension, there is no evidence of steps taken by the FOS officers to address this inconsistency unless the subscribing banks indemnified them.   

The FOS Officers (2004)

Its Annual Report (2004) notes officers and senior FOS members, were:

Jillian Segal  – Chair (appointed 1 Sep 2002 – 3 Sep 2004)

Michael Lavarch – Chair replacing Ms Segal (appointed 6 Sep 2004)

Jill Lester – Bank member representative (29 Aug 2001 – 28 Aug 2006)

Deborah Batten – Bank member representative (3 Jun 2002 – 21 Aug 2007)

Jeremy Griffith – Bank member representative (4 May 2003 – 19 Aug 2008)

Sujeetha Mahalingham – Consumer advocate (1 Sep 2002 – 28 Feb 2007)

Carolyn Bond – Consumer representative (30 Nov 2001 – 20 Feb 2006)

Roger Du Blet – Small Business Representative (1 Oct 2003 – 19 Aug 2008)

Colin Neave – FOS, Chief Ombudsman, 2004, and

Phillip Field – Banking and Finance Service Ombudsman in 2004.

The FOS Annual Report (2004) sets out details of its charter.

It has 30 bank and 17 non-bank members and its primary role is dispute resolution. It reported receiving 36,382 calls during that year and closing 6,117 cases. It stated the number of bank customers contacting the FOS was similar to the previous year.

The majority of FOS cases were received from subscribing bank customers, with the FOS reporting it closed 3,949 bank cases:

CBA received 1,105 complaints

ANZ Bank received 695

Westpac Bank received 664

National Australia Bank received 649

St George Bank received 193

Citibank received178

Suncorp-Metway received 117

Bankwest received 105

Bendigo and Adelaide Bank received 104

HSBC received 56

Bank of Queensland received 38

Bank of South Australia received 24, and

ING Bank (Australia) received 21

There were apparently real differences between the banks complaints management practices and their investigation procedures. The FOS statistics suggested the Code Compliance Monitors and the FOS should have considered it was imperative to investigate the underlying connection.

Of equal interest were the Code Compliance Monitors statistics. The Code Monitors reported closing 10 cases in 2004-2005, with 1 determination. This sent a message to legislators and regulators that the system was corrupt. The banks were not referring customers to the Compliance Monitoring Committee because they id not need to have an investigation into any allegation it breached Code practices.

The advent of the bank CEOs constitution and changes to the application of the code, and the banks pledge to indemnify the Code Compliance Monitors would have alerted them to impending claims. This would also have concerned bank directors if they had formed deceptive arrangements intended to conceal ineffective practices by party's they appointed and paid to investigate compliance with the Code and allegation that they breached the Code.

More concerning is the likelihood that bank directors and banks were willing to cross the threshold and be tangled up in deceptive, dishonest conduct in order to conceal the banks corrupt practices without regard to the commitment by suitable bank officers to act in good faith.

The FOS provided a bank-friendly service. Banks supported the FOS investigating complaints because damages were capped. However, during the McFarlane – Kelly period, third parties investigating Code breaches could easily reveal more weighty problems with far greater penalties, and uncapped damages.

Therefore by late 2003, subscribing banks realised they could not allow the Code Compliance Monitors to investigate all Code breaches: They might well find directors and senior bank executives acted dishonestly or unlawfully. In such cases, damages flowing to bank directors and senior executives could prove ruinous.

Bank CEOs Constitution (2004)

In late 2003, after publishing the Code, banks weighed up the advantages of discretely introducing dual-contracts. To put this into practice banks needed to trim the powers and authority of Code Compliance Monitors. To achieve this outcome, banks required FOS support.

The bank CEOs crafted a constitution. It could override the Code, imposing controls on their compliance guarantees. Mallesons drafted the 20 February 2004 constitution and subscribing banks introduced shortly afterwards. By introducing the bank CEOs constituting, the banks seized control of the Code Compliance Monitors powers and authority, and the banks have continued to rely on the problematic constitution despite the whistleblowers bringing this to public's attention in 2008.

Therefore, by the time Code (2004) was published and adopted by banks they had solved the problems facing them by integrating the Compliance Monitors powers with the unpublished bank CEOs constitution. Despite FEMEG exposing this in 2005, the bank directors and banks took no action to rectify any misleading and deceptive arrangements.

The constitution was misleading and deceptive, and customer unfriendly. Banks could override the Code Compliance Monitors powers and return to pre-Martin days when banks could once again employ highly skilled and expensive lawyers, and use courts to conceal or resolve most customer complaints to their advantage. It was a matter of using an expensive forum that only one party could afford.

The banks, faced with being found to have breached the Code favoured the opt-out arrangement, thereby compromising the fairness of the bank- customer contract.  This relied on Compliance Monitors agreeing to be bound by the unpublished bank CEOs constitution. This they did, and it solved the banks problems.

– cunning strategy to win customers trust

The banks use of the opt-out provisions relied on them concealing the constitution. It needed to be kept from the public, customers and their lawyers and courts. The banks must have considered sooner or later misleading and deceptive practices relying on customer signing contracts without access to the constitution was unconscionable. For almost nine years however subscribing banks have enjoyed the financial benefits from initiating the problematic arrangement.

Let there be no doubt, the researchers found evidence customers and their lawyers could check bank contacts before signing them and would have relied on banks not acting in bad faith or unconscionably. However, after 20 February 2004 constitution was introduced banks knew that customers signing contracts would experience no-joy under clause 35.7, when lodging complaints based on subscribing banks promise to investigate all complaints.

The customers were therefore in the no-win corner; unable to use the nations leading law firms, as banks could, because non-bank lawyers had no knowledge of the banks unpublished constitution. The subscribing banks publishing, adopting and promoting the Code (2004) was therefore nothing more than a cunning strategy by subscribing banks to win customers trust.

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

 

Clause 5 of the Code sets out the commitment by subscribing banks to appoint an independent expert to review of the Code every three years.

Clause 5.1 states:

The subscribing banks will require the Australia Bankers Association to commission an independent and transparent review of the code every three years, or sooner if appropriate, with the review being conducted in consultation with:

Banks adopting the Code;

Consumer organisations;

Other interesting industry associations;

Relevant regulatory bodies; and

Other interested stakeholders.

Clause 5.2 states:

The subscribing banks will participate in any such review and co-operate with the person conducting it.

Clause 5.3 states:

The banks will require the Australia Bankers Association to establish a forum (including consumer, small business and banking industry representatives) for the exchange of views on:

Banking services; and

The effectiveness of the Code

The banks will require the Australia Bankers Association to ensure that these views are taken into account in the next review of this Code.

Clause 5.4 states:

The banks will require the Australia Bankers Association to publish on its website:

the recommendations and report arising from the review of the Code and to make them available to the public in hard copy on request;

reasons why any such recommendation has not been accepted; and

quarterly progress reports on the implementation of those recommendations that have been accepted, until the implementation process is complete.

 (a) FEMAG Group Review in 2005

The first independent and transparent review was carried out in by a leading group of academics comprising members of the FEMAG group in 2005.

As early as 2005, community groups were noting the growing predicament facing self-regulated banking.  The FEMAG group suggested the bank CEOs association might not be as independent and effective as banks reported and advertised. The FEMAG group however, merely identified this as a potential problem.

The Code Compliance Monitors lack of independence was mere speculation and apparently not properly understood until early 2008 when the Committee members acted as whistle blowers. Having made a public statement regarding the subscribing banks self-serving behaviour, the monitors resigned in late in 2008.

This meant the FEMAG group had presented an optimistic and mistaken view that the directors of subscribing banks would consider its report and findings and address the structural failings. The reviewers were mistaken. Whilst the message was clear, the banks did no such thing, failing to accept they had duties under the APRA Act and exercise ‘good-old’ common sense.

Instead, the banks directors continued taking advantage of the ambiguity and dual contracting while the Australia Bankers Association, the jointly funded and operated PR machine, made repeated promises saying the banks were improving practices and services.

In fact, the banks behaviour was in stark contrast to statements being published by the Australian Bankers Association. Its Chief Executive, David Bell, was on record as stating banks approval ratings were at a record high:

Despite customer satisfaction reaching record levels, I know the banks will continue to strive to improve their products and services and aim for an even better result in the next survey.

Full details regarding the 2005 FEMAG review appear later in this paper.

(b) Jan McClelland Review in 2008

On 29 November 2007, Jan McClelland was appointed by the Australia Bankers Association to carry out the second independent and transparent review of the new Code. Ms McClelland had a long list of impressive credentials having worked in government agencies and privately owned companies.

An experienced senior executive, McClelland Chaired NSW Businesslink Pty Ltd and was a former Director General, NSW Department of Education and Training. She had also been Managing Director of NSW TAFE Commission, a fellow of the Australian Institute of Management, the Australian Council of Educational Leaders and Member of the Australian Institute of Company Directors.

It appeared that Ms McClelland was highly qualified and capable of independently reviewing the effectiveness of the Code. As a professional, McClelland would make enquiries into the origins of the Code and its efficacy and application. She would also have a sound knowledge of the history of the Code and previous reviews prior to commencing her assignment.

The McClelland review was supported by a large number of submissions referred by interested parties including the Financial Sector Union, CARE, COSBOA and the ABA. From the many submissions and her own research Ms McClelland’s task was to distil the relevant issues that needed being reviewed and researched. These included submissions referred to her by the Code Compliance Monitors when the issues paper was being considered and later when her report was underway.

The Code Compliance Monitoring Committee members elevated concerns that were particularly relevant. They expressed:

poor communication between banks and customers;

inadequate use of dispute resolution procedures, and

the importance of strengthening their independence.

All relevant and later swept aside.

As an independent reviewer, Ms McClelland would have studied the previous report by FEMAG. Lack of independence was a hot-issue for Code Compliance Monitoring Committee members in 2008 and Ms McClelland had a duty to target all hot-issues such as the Code Compliance Monitors lack of independence, dual contracting and the bank CEOs constitution, all part of opt-out provisions allowing banks to sidestep complying with the Code.

Code Compliance Monitoring Committee questions independence

In fact, Ms McClelland went part way by identifying independence of the Code Compliance Monitors as being a hot-issue. She provided a statement regarding it without recommending subscribing banks to publish the CEOs constitution and incorporate it in the Code.

The reviewer explained how the constitution hinders the Compliance Monitoring Committee’s ability to monitor code compliance and constrain its monitoring and sanctioning powers. Ms McClelland exercised her judgment as an expert and took the opt-out provisions no further.  When making recommendations, the reviewer placed little or no emphasis on the problems facing customers, suggesting an independent unit within the FOS and being accountable to the FOS Board (who were party to the dual contracting arrangement) might remedy the problem.

Despite controversial findings, or perhaps because of them, Ms McClelland’s Final Report added little weight to the dual contracting and code/ constitution irregularities that were necessary for concealing complaints and code breaches. It cast doubts on Ms McClelland’s authoritativeness, as there was a noticeable lack of potency and emphasis on the deceptive, unpublished constitution. The reviewers December 2008 report allowed subscribing banks to continue restricting the authority and powers of Code Compliance Monitoring Committee members.

The following lists of submissions were referred to Ms Jan McClelland in 2008.

Submissions received for the McClelland Issues Paper

Name of Organisation/ Rated

Great Value

Some Value

Limited Value

1 Financial and Consumer Rights Council Inc – Donna Letchford 18/02/08

X

2 NSW Office of Fair Trading  – Lyn Baker 01/03/08

X

3 Code Compliance Monitoring Committee – Kirsten Trott 11/03/08

X

4 Financial Counsellors Association of Queensland Inc – David Lawson 06/04/08

X

5 Australian Competition ad Consumer Commission  – Nigel Ridgway 09/04/08

X

6 Financial Sector Union of Australia – Leon Carter 22/04/08

X

7 Australian Bankers’ Association –

Ian Gilbert

30/04/08

X

Final set of McClelland submissions received

Name of Organisation/ Rated

Great Value

Some Value

Limited Value

1 CARE Financial Counselling Service – Carmel Franklin 24/06/08

X

2 Australian Payments Clearing Association 01/07/08

X

3 Credit Ombudsman Service –

Paul O’Shea

 

01/07/08

 

X

4 NSW Office of Fair Trading –

Lyn Baker

01/07/08

X

5 Financial Counsellors’ Association of Queensland – David Lawson 05/07/08

X

6 Northern Community Legal Service Inc – M. Aberdeen 28/07/08

X

7 Code Compliance Monitors – Tony Blunn AO 29/07/08

X

8 Australian Financial Counselling and Credit Reform Association –

Jan Pentland

30/07/08

X

9 Department of Business Law and Taxation, Monash  Uni –  Rhett Martin 30/07/08

X

10 CHOICE and Consumer Action Law Centre 31/07/08

X

11 Joint Submission on behalf of Consumer Advocates – Nicola Howell 31/07/08

X

12 Australian Government Office of the Privacy Commissioner 01/08/08

X

13 Financial Sector Union of Australia – Leon Carter 01/08/08

X

14 Financial Ombudsman Service – Philip Field 04/08/08

X

15 Australian Bankers’ Association –

Ian Gilbert

06/08/08

X

16 Legal Aid Commission of NSW – 07/08/08

X

17 ANZ Banking Group 08/08/08

X

18 Westpac Banking Corporation – 14/08/08

X

19 VEDA Advantage 01/09/08

X

20 Code Compliance Monitoring Committee – Memo 09/10/08

X

21 Director of Consumer Affairs, Victorian Department of Justice  –

Dr Claire Noone

06/12/08

X

22 CARE Financial Counselling Service – Carmel Franklin 19/01/10

X

23 DEACONS – Alison Deatz Undated

X

24 Greater Southern Area Health Service – June Price Undated

X

Ms McClelland’s Issues Paper and December 2008 Final Report seemed to deal only with matters the reviewer considered relevant or that the banks might consider important. It is noted that strong statements presented to Ms McClelland by Mr Tony Blunn, Code Compliance Monitoring Committee Chairman in the 11 March 2008 submissions were not even included in the earlier Issues Paper list.

This highlights the importance of the banks appointing totally objective reviewers and having a completely independent Code Compliance Monitoring Committee. The Final Report in 2008 was intended to reflect objective views referred to a reviewer based on her research and judgment. The reviewer’s task was to rekindle the efficacy and high-principles in the Code and to benchmark the Code Compliance Monitors performance alongside the aspirations of legislators, regulators, industry bodies and the public.

The banks maintain they will implement changes the reviewer recommends in order to improve the efficacy and utility of the Code. In this instance, it seems the reviewer underscored the basic principles of honesty and justice, and that independence and transparency were underscored and little emphasis was placed on KPIs raised in the FEMAG 2005 review.

It might be argued that Ms McClelland’s Issues Paper and Final Report were illogical and incoherent and the recommendations suited banks but not customers.

(c) Richard Viney 2nd Code Review – December 2008

Richard Viney was fully conversant with the origins of the 1996 Code, which evolved from the Martin Committee’s 1991 Report to Parliament. Mr Viney had previously performed a pivotal role assisting banks and the Australia Bankers Association draft Code (2003). In 2008, he was commissioned by the Code Compliance Monitors to carry out a review of events during the past five years.

Richard Viney could objectively look at the efficacy and application of the Code and the professionalism of the Code Compliance Monitors carrying out their functions in clause 34. Initially this seemed a progressive step because he had experience being familiar with the history of the Code and the Martin Committee’s aspirations and philosophies.

However, by 2008 the culture had changed. This occurred in two steps, the first in 2003 when the banks introduced ambiguous wording and a few months later in 2004 when they introduced the bank CEOs constitution. Both undermined the Code and Mr Viney would have found these alterations upset his recommendations presented to the subscribing banks when he carried out the 2001-2002 review.

In his second review, Mr Viney also had an added advantage of being able to consider the submissions referred to reviewer Jan McClelland earlier in the year. Therefore, he could refer to the issues Ms McClelland considered important and views presented to her by Code Compliance Monitoring Committee in their 11 March 2008 and 29 July 2008 submissions.

However, Mr Viney changed direction. He either supported or did not disagree with   Ms McClelland’s observations concluding the Code Compliance Monitor’s lack of power and authority apparently did not raise intractable problems.

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

Following the Martin Committee’s report, the government proposed banks design a Code of Banking Practice setting out ‘good banking practices’. To achieve this, the banks needed to include a dispute resolution procedure that was expedient, within the financial means of customers and, above all, fair.

The 1993 Code was said to be a plainly worded document describing broad principles of good banking. The boundary was reduced to incorporate banking services that were narrowly defined under the Code and related only to bank deposits, loans and similar facilities.

The Code failed to give effect to the government’s intention of setting high standards across a range of practices that banks were obliged to comply with. Even though the Code set out to improve banking standards, it was later criticised for lacking teeth due to its restricted application to all banking services and lack of enforceability.

This should have been identified and rectified following the 2001 review by Richard Viney, however, it wasn’t. Viney said the early Code was not meant to be a draft of his revised version, it would only be used to provide recommendations for the Code (2003).

In Viney’s perceptive words, ‘it will remain for the banks to take necessary steps to arrange for the drafting of a new Code to give effect to agreed recommendations.’

Richard Viney’s final 2001 report and recommendations led to practices set out in the 2003 Code, which were far more detailed than in the earlier 1993 version. Mr Viney included a range of initiatives still found in the present Code.

When the ABA published the 2003 version, they stated it was ‘a major step forward by Australian banks in listening to community concerns and delivering change’.

Australian Bankers Association’s CEO, David Bell, guaranteed Code (2003) ‘meets and beats similar Codes in other countries such as the UK, Canada, New Zealand and Hong Kong. It stands out both in scope and specific customer benefits it provides’.

Despite initial hoopla, the Code (1996) failed to define dispute resolution procedures whilst, at the same time, it broadened the scope of a ‘banking service’ that the banks subsequently relied on to justify failure to investigate all complaints.

These failures meant banks had unfettered discretion interpreting the meaning of the word ‘complaint’ for breaches of practices set out in the Code. It allowed the banks to handpick complaints they were willing to investigate rather than having to investigate all allegations and complaints relating to contraventions of the Code.

THE 2003 CODE – (PUBLISHED 1 AUGUST 2003)

The Code (2003) embodied Richard Viney’s recommendations in his Final Report in 2001. His recommendations for monitoring mechanisms and sanctions were detailed in his Final Response and led to the establishment of a Code Compliance Monitoring Committee and the appointment of expert monitors. This was set out in the Code, headed:

PART E: RESOLUTION OF DISPUTES, MONITORING AND SANCTIONS Clause 34 Monitoring and Sanctions:

The banks agree:

(a) To establish a Code Monitoring Committee comprising:

one person with relevant experience at a senior level in retail banking in Australia, to be appointed by member banks that adopted the code;

one person with relevant experience and knowledge as a consumer representative, to be appointed by the consumer and small business representatives on the Board of Directors of the Banking and Financial Ombudsman’s Service, and;

one person with experience in industry, commerce, public administration or government service, appointed jointly by the BFSO and [the ABA member] banks that adopted the code to serve the Chairperson of the CCMC.

(b) The Code Compliance Monitor’s functions will be:

to monitor banks compliance under this Code;

to investigate, and make a determination on, any allegation from any person that [subscribing banks] have breached the Code but the Code Compliance Monitor’s will not resolve or make a determination on any other matter; and

to make any other aspects of this Code referred to the Monitor’s by the Australian Bankers Association.

(c) To ensure the Code Compliance Monitors have sufficient resources and funding to carry out their functions satisfactorily and efficiently;

(d) To annually lodge with the Code Compliance Monitors (in a form acceptable to the Monitors) a report on each banks compliance with this Code;

(e) To empower the Code Compliance Monitors to conduct their own inquiries into banks compliance with the Code;

(f) To co-operate and comply with all reasonable requests of the Compliance Monitors in pursuance of their functions;

(g) To require the Code Compliance Monitors to arrange a regular independent review of their activities and to ensure a report of the review is lodged with ASIC and this review is to coincide with the periodic reviews in this Code (see clause 5);

(h) To empower the Code Compliance Monitors to carry out their functions and set operating procedures dealing with the following matters, first having regard to the operating procedures of FOS and then consulting with the FOS and the Australian Bankers Association:

 receipt of complaints;

 privacy requirements;

 civil and criminal implications

 time frames for acknowledging receipt of a complaint, its progress, responses from the parties to the complaint and for recording the outcome;

 use of external expertise; and

 fair recommendations, undertakings and reporting; and

(i) To empower the Code Compliance Monitors to name banks in connection with a breach of this Code, or in their report, where it can be shown banks have:

  been guilty of serious or systemic non-compliance;

  ignored the Code Monitors requests to remedy a breach or failed to do so within a reasonable time;

  breached an undertaking given to the Code Monitors; or

  not taken steps to prevent a breach re-occurring after having been warned that [a bank] might be named.

By its own provisions, Code (2003) ‘sets standards of good banking practice for the banks to follow when dealing with persons who are, or who may become, individual and small business customers and their guarantors.’

Whilst this apparently provides widespread and real protection for customers of banks adopting the Code, use of discretionary words such as empower rather than duties of the Code Compliance Monitors undermines the integrity, honesty and independence of Code Compliance Monitoring Committee members.

This is evidenced in clause 34(i). It empowers but doesn’t require Code Compliance Monitoring Committee members to carry out their functions. However, it also affords banks to use the courts when they have breached duties set out in the Code.

That said, the banks and Code Compliance Monitoring Committee members all knew that banks were required to comply with clause 2.1(d), which states that they ‘agree to provide information to customers in plain language.’ Any suggestion of banks relying on ambiguous wording in Code (2003) was therefore, in itself, a breach of Code.

Banks might argue however they can achieve the same result by gagging the Code Compliance Monitoring Committee members ability to name them in connection with breaches of the Code. Again, this is inconsistent with statements repeatedly made by the banks through the Australian Bankers Association’s PR machine that the Code is a binding contract on banks that formally subscribe to the Code.

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

 

Clause 10.3 in Code (2003) states ‘any written terms and conditions will include a statement by banks to the effect that relevant provisions of this Code apply to the banking service, but need not set out those provisions.’

On 16 October 2003, Ms Anna Dea, FOSs legal counsel, published a report titled ‘The New Code of Banking Practice – Issues for Litigation Lawyers‘. It sets out the FOSs views on the bank/customer’s legal agreement. The Ms Dea report (and bank funded FOSs position) is therefore one-and-the-same as views embraced by bank directors and CEOs.

Ms Dea’s 2003 report states ‘provisions of the Code are part of the contract between the banks and customers’. Shortly after Ms Dea’s report was published in 2003, the FOS and subscribing banks appointed Mr Anthony Blunn AO as Chairman of the Code Compliance Monitoring Committee.

In 2004, the FOS and banks then appointed another two Code Compliance Monitors. When appointing these monitors all parties ‘in-the-know’ would have known that the principles in the Code differed substantially from the Code Compliance Monitoring Committee member’s responsibilities due to the bank CEOs constitution.

Ms Dea’s report was published at the same time as the constitution was being drafted. Possibly Anna Dea’s report was intended to lessen negative comment about unclear statements in the 2003 Code prior to the FOS and banks appointing the new Code Compliance Monitors.

At the same time, the Australian Bankers Association was publishing PR statements regarding Code (2003)’s high standards. The Australian Bankers Association’s Chair, Mr David Murray, supported by David Bell (the ABAs Chief Executive), published a statement that was not ambiguous:

The Code sets out the banking industry’s key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for banking services. The ABA member banks agreed it was crucial the new Code be extended to cover small businesses. The aim is to treat personal customers and small businesses the same, wherever feasible.

The Code is a valuable safeguard for customers – it will benefit and assist them to have a better understanding of standards banks follow in day-to-day banking and financial transactions even if customers experience financial difficulty. If a bank adopts the Code, it is explicitly committed to act fairly and reasonably towards their customers in a consistent and ethical manner.

The adoption of the Code will be a mark of quality. Customers should be encouraged to check if their bank subscribes to the Code because it is a binding contract between a bank and its customers for which the institution will be held accountable. It is a strong charter because its provisions have contractual effect.

Mr Colin Neave supported the Australian Bankers Association statements. He stated the FOS was independent and in the same media release said:

The Code is a positive initiative for bank customers and will greatly assist the dispute resolution work of the Ombudsman’s office. I will have much greater guidance and support in reviewing a particular case, and it will help me decide whether a bank has observed good banking practices.

Customers were led to believe high banking standards applied to all Code clauses. Allens Arthur Robinson’s lawyer, Michael Quinlan, reinforced this belief stating, ‘the adopting banks will be contractually bound by promises and will be potentially liable for damages for any breach of the Code’. This statement is consistent with wording in the FOSs report by Ms Anna Dea.

Ms Anna Dea states banks have a contractual obligation to comply with all laws and would also give rise to an entitlement to make a claim for loss or damage based on breach of contract. This part of Code (2003) adds to the legal entitlements of existing and prospective customers and means provisions of the new Code could be relied on in breach of contract claims.

The above views appear consistent with amendments to the Trade Practices Act 1974 (Cth), which took effect in 1998. The Act provides a general power to make industry codes enforceable at law. Part IVB of the Trade Practices Act 1974 (TPA) provides for industry codes to be underpinned in the Act and section 51AD gives legislative backing to prescribed industry codes. It provides for the ACCC to act against parties who breach prescribed codes.

Section 51AE provides for industry codes to be prescribed in regulations proposed by the responsible Minister. These provisions, amongst other statutory provisions, will be discussed in more detail in later chapters.

CODE PRESCRIBES FAIRNESS

The Corporations Act 2001 (Cth) requires people who carry on a business of providing financial services to hold an Australian Financial Service Licence (‘AFS Licence’). In doing so, they must operate efficiently, honestly and fairly.

They also must ensure their staff and representatives are properly trained and supervised and have proper complaints handling procedures and belong to an independent complaints scheme. This lays the backdrop of fairness in all financial services, which include banking services among others.

The 2003 Code, intended to apply to all individuals and small businesses, creates an obligation on the part of banks to ‘act fairly and reasonably in a consistent and ethical manner.‘ To give effect to this clause, the 2003 version contained more detailed provisions on disclosure, principles of conduct, and periodic code review compared to its 1996 predecessor.

Arguably, the obligation to act with ‘fairness’ towards customers cannot be taken lightly in light of legal developments relating to concepts of fairness and equity. The dictionary meaning of fairness is ‘acting equitably, impartially, in accordance with rules’.

Aside from the dictionary meaning, the NSW Law Reform Commission (NSWLRC) and the High Court considered the concept of ‘fairness’ (or lack thereof). It includes issues of unconscionable conduct in light of decided cases and other statutes that refer to and require a consideration of fairness.

It can therefore be said the concept of fairness, as understood by individual and small businesses has developed beyond limitations of procedural fairness to now include substantive fairness in the actual contractual terms. The NSWLRC refers to the European Directive on Unfair Terms in Consumer Contracts, stating unfair contracts include those ‘contrary to the requirement of good faith… [and] cause a significant imbalance to the parties rights and obligations under the contract.’

As a result of the expanded community and legal meaning of fairness, practices considered acceptable in earlier decades may be ruled as unfair today. Examples of such practices include ‘terms irrevocably binding the consumer to terms with which he or she had no real opportunity of becoming acquainted before the conclusion of the contract.’

INTERNAL AND EXTERNAL DISPUTE RESOLUTION

The Code states banks have internal (IDR) and external (EDR) procedures for dispute resolution. These provisions are consistent with the duties of Compliance Monitors and the FOS. They require banks to investigate complaints or provide an opportunity for customers to allege they breached the Code in order to resolve complaints rather than having to use the courts.

The following discussion summarises clauses 34 to 36 of the Code (2003).

The Code subscribing banks are obliged to have an internal process for handling a complaint between bank and customer. A dispute exists when a complaint has been made by a customer alleging a breach of the Code that has not been immediately resolved.

The complaints handling process must be free of charge and meet Australian standards. It must also meet time frames specified in the Code and the banks must provide written reasons for their decision. This is set out in s 35.1.

Banks must respond within 21 days of becoming aware of a dispute. Within that time, banks must either complete the investigation and inform the customer of the outcome or advise more time is needed: s 35.3. If banks cannot resolve a dispute within a 45-day period, they must inform the customer of their reason [and] provide monthly progress updates and specify a date when a decision may be expected: s 35.5.

The banks must also have an external process available for resolving disputes which is impartial. This process must be free to the customer and consistent with the ASIC Policy Statement 139 ‘Approval of External Complaints Resolution Scheme’s 36. In practice, subscribing banks are members of the FOS that deals with financial disputes (for claims up to $150,000 in 2003).

In summary, the 2003 Code sets out detailed procedures for banks to comply with when investigating disputes and/or complaints from customers. These procedures should be free of charge and transparent with respect to the investigating officers duties and their findings. This provides an opportunity for parties with limited funds to deal with ‘Code breaches‘ and ‘financial disputes‘ without excessive legal costs.

In other words, clauses 34 to 36 in the Code are intended to provide a level playing field that is fair and reasonable, and accessible to all parties.

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

As suggested earlier, a get-out used by some, if not all Code subscribing banks is to confuse the words complaint and dispute. Glancing at the Code Compliance Monitoring Committee’s annual reports its evident few complaints are ever investigated by them. It seems the banks use their own interpretation of clause 40 to stonewall complainants.

PART F: APPLICATION AND DEFINITIONS

Part F section in the Code sets out how banks and Compliance Monitors can claim to be confused by key words. The banks use a definition to define a ‘banking service’ and in Part F we see this actually means ‘any financial service or product’. The banks fail to use the actual phrase in the Code text without an explanation.

This allows the banks and Code Compliance Monitors considerable latitude selecting the complaints they will investigate. However, by looking back at the evolution of the Code (2003), its not clear if subscribing banks ever intended the Code Compliance Monitors to investigate any allegation from any person that a subscribing bank breached the Code.

To go further, Code (2003) includes ambiguous words suggesting the banks had little interest in handing over control of complaints handling to the Code Monitors. The banks believe clause 40 provided them with an opportunity to promote motherhood statements like ‘acting fairly and reasonably towards [you] in a consistent and ethical manner’ without ever intending to deliver on the promise.

The Code Compliance Monitoring Committee members and the senior executives apparently agreed to work with this obscurity when appointed. The banks made commitments and promoted them with shareholder funded PR, however, the Code Monitors still had a duty to monitor the banks compliance.

There is an increasing body of evidence suggesting subscribing banks never intended to investigate all complaints when publishing the Code (2003). There is evidence that most subscribing banks have used ambiguous wording and jurisdiction issues to avoid having to comply with s 35 duties.

The jurisdiction issues can be used as follows:

A customer alleges a bank acted disingenuously or dishonestly and breached the Code and makes a complaint to the bank’s IDR department;

The bank provides a shabby response or ignores it, deliberately breaching s 35 by not properly investigating the complaint;

The customer then refers the complaint to the Code Compliance Monitoring Committee alleging the bank breached s 35.7;

The Code Compliance Monitors refer the complaint to the bank which claims it either investigated the complaint or the information is privileged;

The Code Monitors advise this is a dispute and s 40 notes disputes relate to a banking service, which is defined as a financial service or product.

Compliance Monitors respond stating they have no jurisdiction under s 34 to investigate specific allegations regarding breaches of the Code.

The ambiguous wording in Code (2003) is engineered so customers either walk away from the allegations or return to the pre-Martin era in 1991 and use courts to enforce customers rights.

The banks muddied-the-waters because the Code sets out the bank/ customer contract but very few clauses relate to a ‘financial service or product‘. Banks then appointed Code Compliance Monitors without powers to comply with s 34 and investigate any allegation a bank breached the Code because virtually all complaints fall outside the narrow definitions in clause 40.

Likewise, by providing an opportunity for banks to breach s 35 and preclude the Code Compliance Monitors from investigating and naming banks that breached the Code. It appears bank directors and the Australian Bankers Association initiated this complex arrangement to conceal misconduct by undermining Code (2003) principles, intended to protect individual and small business customers.

‘ Just Following Orders’

An example of how this practice is set out by Westpac in a letter to its customer dated 1 September 2009. Westpac’s Senior Counsel, Dispute Resolution Group, Ms Felicity Booth, states in her signed letter:

In your letter you articulate your complaint alleging that ‘if the constitution is to be relied upon then the Code was misrepresented to’¦ customers by failing to incorporate its effects on bank which breached the Code’.

We note that the Code identifies a number of standards of practice, disclosure and principles of conduct with respect to banking services. We further note that clause 35 states we will have an internal process for handling all disputes with you.

The Code identifies a dispute as being a complaint in relation to a banking service and defines a banking service as any financial service or product provided by us to you.

The complaint you articulated does not appear to fall within the terms of the Code given it is not a complaint with respect to a banking service.

Ms Booth fails to comment on Westpac’s commitments in s 2.1(d) stating the bank will provide information to you in plain language’ and s 35.7, its ‘dispute resolution process is available for all complaints other than those that are resolved to your satisfaction’.

The Westpac views are in stark contrast to stated intentions of the Code Compliance Monitors when appointed in 2004. The 2004/ 2005 Annual Report states:

The Code sets standards of good banking practice and requires banks to continuously work towards improving their standards of practice and service in the industry. The establishment of [the Compliance Monitors] represents a significant addition to the banking landscape.

The Code Compliance Monitoring Committee was established under a unique section of Code (2003) which requires the creation of a body that is specifically charged with monitoring compliance with the Code. Their role is to monitor compliance with the Code’¦ and to investigate complaints that allege the Code has been breached.

The Code Compliance Monitors fulfil their role by accepting, investigating and making determinations on any allegations by any person that the Code has been breached.

The Code Compliance Monitors views were further supported by their document headed ‘How do I complain?’ The document directs complainants to their email address . It states their duties were ‘established to monitor and ensure banks’ compliance with the Code and they can investigate any complaint from any person or organisation that a bank has breached its obligations under the Code.’

This interpretation was the subject of an internal memorandum sent to subscribing banks on 15 November 2004 by Ms Barbara Schade, Executive Director, Code Compliance Monitoring Committee, stating:

The Code Compliance Monitoring Committee defines a dispute as being a ‘complaint by customers that is not resolved at the first point of contact, and escalated to a complaints handling or customer relations area of the bank. This is slightly different to the FOSs definition of disputes and it explains the differences between our compliance role and the FOS dispute-handling role.

There were differences between the policies of banks and the Code Compliance Monitoring Committee’s role following the publication of Code (2004) because the appointment strength of the legislation and shortcomings of the application of the Code Compliance Monitors powers.

The ASIC Regulatory Guide 183 (RG 183) empowers ASIC to enforce administrative mechanisms to address customer complaints about breaches of the Code. In RG 183, clause 73, these administrative mechanisms were stipulated as:

Administration

RG 183.73: A code applicant must establish that the code is effectively administered. For a code to work effectively there needs to be an administrative body charged with overseeing the operation of the code that:

is independent of the industry or the industries that subscribe to the code and provide the body’s funding (e.g. with a balance of industry representative and consumer representatives and an independent Chair); and

has adequate resources to fulfil its functions and ensure that code objectives are not compromised.

RG 183.74: Without such a body, there is a risk that oversight of industry compliance with the code will be reduced, systemic problems will not be identified, and industry and consumer awareness of the code will be low.

RG 183.75: The code administration body should also be responsible for:

establishing appropriate data reporting and collection procedures;

monitoring compliance with the code;

publicly reporting annually on code compliance;

hearing complaints about breaches of the code and imposing sanctions and remedial measures as appropriate;

reporting systemic code breaches and instances of serious misconduct to ASIC;

recommending amendments to the code in response to emerging industry or consumer issues, or other issues identified in the monitoring process;

It seems ASIC’s mandate provides it with overarching policies that ensure industry codes’ are not inconsistent with Commonwealth legislation. RG 183.27 incorporates the Corporations Act 2001 (Cth) and states that codes ‘must not be inconsistent with the Act or other relevant Commonwealth laws for which ASIC is responsible’.

It states ASIC may only approve a code of conduct where:

The code is not inconsistent with the Corporations Act or any other law of the Commonwealth under which ASIC has regulatory responsibilities (see RG 183.28-RG 183.30); and

ASIC considers that it is appropriate to approve the code given:

The ability of the applicant to ensure that persons who claims to comply with the code will comply with it (see RG 183.310); and

The desirability of codes of conduct being harmonised to the greatest extent possible (see RG 183.32-RG 183.35).

The ASIC Regulatory Guide 183 provides ASIC jurisdiction to determine if the codes are inconsistent with the Corporations Act 2001 (Cth).

In Part 7.10 headed ‘Market Misconduct and Other Prohibited Conduct’, the Act prohibits false and misleading statements, dishonest conduct and misleading and deceptive conduct (ss 1041E, 1041G, 1041H) which suggests ASIC’s responsibility extends beyond the code.

ASIC can investigate factual circumstances and behaviour related to the code in order to ensure such conduct is not inconsistent with the Act. As such, it seems that RG 183 relates to ASIC’s mandate and jurisdiction to investigate bank parties conduct with regard to practices if there are grounds for finding them guilty of prohibited conduct as set out under the Corporations Act.

Of particular relevance in the context of unconscionability is clause 2.2. It states the banks ‘will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.’

Also relevant is clause 25.2. It states ‘with your agreement, we will try to help you to overcome your financial difficulties with any credit facility you have with us. We could for example, work with you to develop a repayment plan.’

It then seems relevant to review the growing trend of regulations prescribing the contractual terms and conditions and, in particular, how each one defines and deals with the concept of ‘unfairness and unconscionability‘.

Section 12CC of ASIC Act 2001 mirrored in s51AC of TPA 1974

The ASIC Act and the Trade Practices Act tackle boundaries of substantive unfairness. Section 51AC of the Trade Practices Act 1974 (Cth) (TPA) makes reference to conduct and circumstances courts may have regard to, including:

The relative strength of the bargaining positions of parties, that looks at whether as a result of the conduct, the debtor was required to comply with conditions that were not reasonably necessary to protect the legitimate interests of the creditor;

Undue influence, pressure or unfair tactics;

Failure to disclose intended conduct that would affect the debtor’s interests or risks that the creditor should have foreseen that would not have been apparent to the debtor; and

The extent to which the creditor was willing to negotiate the terms and conditions of any contract and the extent to which the parties acted in good faith.

Ms Elizabeth Sexton, General Counsel, FOS is reported to have said that the Code has the potential to be relevant to causes of action brought under s12CC ASIC Act.

Of importance is that courts may take note of requirements of any ‘applicable industry code’ or ‘any other industry code’ if a debtor acted on a reasonable belief that a bank would comply with that Code.

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

The Code is set out in six sections. The most important section for bank customers is Part B: Key Commitments and General Obligations.

KEY COMMITMENTS AND GENERAL OBLIGATIONS

Clause 2 sets out banks key commitments to customers and s 2.1 states what banks will do. It introduces three different cultures the banks must have wrestled with when documenting practices.

motherhood statements – we will continuously work towards improving the standards of practice and service.

ambiguous terms – imprecise words like ‘banking service’ that banks later rely on to conceal breaches and problematic practices, and

significant, high-principled clauses – a commitment to provide information in plain language and promises to act fairly and reasonably.

Later in this paper it’s apparent that the banks had no intention of appointing Code Compliance Monitors to investigate any allegations a bank breached the Code, due to the CEOs constitution. Therefore, so where the motherhood statements because the Code Compliance Monitors were powerless to find banks had breached significant, high-principled clauses in the Code.

Clause 4 is headed ‘Retention of customers rights’.

In addition to rights under the Code, it states customers retain rights they have under Federal Laws, especially the Trade Practices Act 1974, the ASIC Act 2001, Chapter 7 of the Corporations Act and under State and Territory laws.

Clause 3.2 states if the Code imposes obligations on banks, in addition to obligations applying under the law, the banks will also comply with the code.’ However this is problematic. If banks signed contracts with customers having already appointed Code Compliance Monitors without powers to investigate any complaint by any customer, and the bank CEOs had already drafted the constitution, their conduct and the banks may be considered misleading and deceptive, and possibly unconscionable. This is noted in the CBA v Amadio doctrine and ss51AA and 51AC of the TPA.

Whether by statute or contract, the conduct of creditors in their dealings with debtors is subject to increasing scrutiny. According to Mr Michael Quinlan’s report, the aggressive, self-interested pursuit of creditors rights is open to greater risk of being challenged.

Factors implying unconscionability under s 51AC(3) include respective bargaining positions of parties, the extent of disclosure of relevant risks, ability to negotiate terms of the contract and the extent to which parties acted in good faith. Dr Janine Pascoe states that ‘a uniform, national approach to harsh and unconscionable standard form contracts is needed.’

The issue of uniform unfair contract laws has come under the scrutiny of the Standing Committee of Officials of Consumer Affairs national working party that released a discussion paper on 1 February 2004. It noted in recent times it is the standard form contract which has become the focus of allegations of unfairness. Clauses in financial service contracts (including guarantees) were amongst the types of unfair terms noted in the Discussion Paper.

The expanded scope of s 51AC goes beyond indicators of unconscionability under the general principles in s 51AA. Section 51AC of the Trade Practices Act was designed to protect ‘business consumers.’ The expanded criteria reinforces the need to prevent procedural unfairness in pre-transaction negotiations and substantive unfairness in the terms of the contract. Section 51AC factors include requirements of any applicable industry code (s 51AC(3)(g)).

There is little doubt s 51AC has a far-reaching and flexible application. The courts have discretion to apply a requirement of good faith disclosure to surety transactions. Moreover, the lenders conduct can be judged by the normative standards incorporated into relevant industry codes. As discussed, the Code contains ambiguous wording and loopholes such as a lack of definition for ‘complaint‘, which effectively excludes the protective and beneficial safeguards of s 51AC of the TPA.

The Contracts Review Act 1980 (NSW)

The above provisions, in conjunction with s 7 of the Contracts Review Act 1980 enable relief to be granted where a court finds the contract to have been unjust in the circumstances relating to the contract at the time it was made.

ACTING IN GOOD FAITH

The inclusion of factors such as good faith and risk disclosure allows a court to focus squarely on issues of substantive unfairness. It is consistent with increasing tendency by courts to imply a general obligation of good faith into contracts. It is suggested the insertion of these factors actually apply new moral and ethical standards to business dealings.

A court may impose remedies including damages to consumers or businesses that have been hurt. Injunctions can restrain banks engaging in conduct that is in breach of the Code and a court can declare a contract void or vary terms of a contract or make orders requiring money to be refunded. The availability of ancillary orders under s 87 of the Trade Practices Act for s 51AC breaches provides a court with discretion to partially rescind the contract.

The NSWLRC noted this approach could be achieved under the Trade Practices Act. Section 80 of the Act allows a court to grant an injunction in terms that it deems to be appropriate in relation to contraventions of the Act. A court may use its broad powers to grant injunctions to prevent any breaches of misleading and deceptive conduct and unconscionable conduct. However the provisions are untested.

The ACCC has recourse to use injunctive powers of the Trade Practices Act in a guarantee case – ACCC v National Australia Bank Ltd (2001). In this case, the court ordered injunctions against a bank to restrain it from obtaining personal or business guarantees without properly explaining the nature of the guarantee and the need to obtain independent legal advice before signing. The court ordered the bank include a statement in its Internal Lending Manual requiring lending staff to comply with these procedures when obtaining personal guarantees, and to advise lending staff to this effect.

Therefore, although there are remedies within the court system, the Code intended by the Martin Committee to avoid costly litigation was reiterated by Dr Janine Pascoe. In her report, Dr Pascoe stated, ‘taking legal action is the very mischief the proscription of unfair provisions is aimed at preventing.’ Hence, without effective enforcement mechanisms, the Code has not addressed the needs of customers as promised by bank directors when and the Australian Bankers Association published Code (2003).

CODE COMPLIANCE MONITORS

As the Code established the need for a Monitoring Committee in 2003, banks and the FOS appointed its first Chairman, Mr Tony Blunn AO on 17 November 2003. The Australian Bankers Association’s CEO, David Bell and FOS Chair, Ms Jillian Segal announced these two organisations established the Code Compliance Monitoring Committee. Ms Segal stated she looked forward working with the Code Compliance Monitors resolving banks and customers disputes.

Mr Bell emphasised the Code Compliance Monitoring Committee’s role in 2003 and its importance, stating:

The Compliance Monitors will have a very important role especially when it comes to taking action against a bank, naming a bank means members of the public and regulators will know about the breach with resulting damage to the bank’s reputation. The code is contractually binding, so a regulator might even consider action of its own.

11 MAY 2004 CODE

On 11 May 2004, amendments were made to Code (2003) to accommodate changes in disclosure requirements for prospective guarantors. Amendments included:

expansion of clause 28.4(d) (i)

addition of clause 28.16, and

slight changes to clause 34.1(i) and (iii) with regard to BFSO replacing the ABIO.

It is apparent that when the Australian Bankers Association published Code (2004), and subscribing banks adopted it, the machinations referred to earlier were entrenched by the banks. They omitted making any reference to competing provisions of the bank CEOs constitution, which was already in place.

Both the modern Codes were inadequate as they lacked compliance and enforcement systems due to significant conflicts of interest. These included working relationships between the banks, the Australian Bankers Association role, the FOS, the bank CEOs constitution and appointment, funding and indemnities of Code Compliance Monitors.

All these relationships were motivated by a need to reduce competition and conceal problematic banking practices, and none were not at arms-length. The fact that banks funded these organisations may have allowed them to mistakenly believe it was their right to determine how it should be managed because it was their Code.

Banks might rebut conflict of interest allegations, as consumer advocates were part of a wider group of bank representatives. However, this fails to overcome the fact that the FOS acted to co-appoint and appoint the Code Compliance Monitoring Committee Chairman and consumer representative. Therefore it could be argued no conflicts of interests existed however both organisations required the Code Compliance Monitors to be bound by the CEOs constitution, suggesting they were inextricably linked.

The existence of the bank CEOs constitution and its capacity to manipulate the Code Compliance Monitors is expanded on in the next chapter. As the Code was intended to be a contract enforceable by law, if provisions are breached, there are no adequate provisions in the courts or within the Trade Practices Act, mirrored in the ASIC Act, to provide wide-ranging remedies for consumers.

Without appropriate legislation and effective regulation this, of course, requires bank customers to use the courts where banks enjoy a decisive ‘resources’ advantage. The cost of winning or losing is relatively incidental to bank executives as court actions are funded by shareholders.

This is not what Martin Committee members intended having expressed a ‘need for cheap, speedy, fair and accessible alternatives to the traditional court system if the customers are to receive justice in their dealings with the banks.’

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

Shortly after John McFarlane (ANZ) replaced David Murray (CBA), as Chair, and Gail Kelly (St George) replaced Ed O’Neal as Deputy Chair of the Bankers Association when it published the 2003 Code.

The guard had changed and the restructuring period was underway, despite it being evident self-regulation relied on totally independent monitoring for effective enforcement of Code practices.

The subscribing bank adopted the Code and an independent monitoring body was intended to supervise compliance. Its enforcement mechanisms were widely promoted by banks and the Bankers Association to create community perception the banks would honour their commitments in the Code. After the Compliance Monitors were appointed, ASIC limited its role enforcing self-regulated voluntary industry codes.

Whilst the government was motivated to modify policies and the oversight role of ASIC, its regulator there was widespread belief Compliance Monitors were capable of handling their role independently of banks and without the need for government interference. This had the effect of distancing ASIC from safeguards provided by the Code and left Compliance Monitors to act as sole guardians for consumer protection.

The evolution of the changed Codes, introduced in 2003 following the Viney report, and modified in 2004, made it clear to all the stakeholders the success of the Code and the Compliance Monitors rested on institutional integrity, honesty and independence, and the willingness of banks to cooperate and comply with their duties in the Code.

COMPLIANCE MONITORS FIRST REVIEW

In October 2005, the Foundation for Effective Markets and Governance (FEMAG) was commissioned by the Bankers Association and Compliance Monitors to conduct the first initial review of the Compliance Monitors activities. The review was made in accordance with requirements of Clause 34(g) of the Code with FEMAG, as its members had considerable experience and expertise in public policy and administration, with backgrounds in good governance, expertise in consumer protection and competition policy and in regulation and accountability of systems.

The Code Compliance Monitors had a duty under this Clause 34(g) to ensure the independent review of its activities was lodged with ASIC.

The decision by the Compliance Monitors to commission FEMAG to carry out the first initial review seemed apt due to the extraordinary credentials and widespread expertise. Its officers included its patron Professor Allan Fels AO, and directors Allan Asher and John Braithwaite.

FEMAG consisted of highly competent and esteemed academics with expertise in public policy and administration, with aspirations to contribute to community welfare, ‘especially the least advantaged, by assisting in optimal application of the market mechanism and good governance’. Its members had proficiency and global experience in the design and implementation of consumer protection, competition policy, regulation and accountability of sustainable systems.

The 2005 FEMAG reviewers

Robin Brown BA, M Public Policy (ANU): Director, Secretary-General and Consultant in Consumer Affairs, Council Member, Australian Consumers’ Association, Member, International Network of Civil Society Organisations on Competition and code Authority of the Australian Direct Marketing Association; formerly Chair and CEO of the Australian Federation of Consumer Organisations, Member, Australian Life Insurance Industry Complaints Tribunal

Bill Dee BA (ANU) LLB (Adelaide University): President, Society of Consumer Affairs Professionals in Business (Australia), Member, Standards Australia International Committee on business governance standards and convenor of its working group on fraud and corruption control, internal whistleblowing systems, organisational codes of conduct and Corporate Social Responsibility; formerly Executive, ACCC and responsible for development of legal compliance programs, codes of conduct and self-regulation.

Howard Hollow: Executive Director and formerly Senior Officer, ACCC, Project Manager, Consumer Assistance Facilitation Project Philippines

John Wood: Council Member, Australian Consumers’ Association, Chair, Consumer Advisory Panel, ASIC; formerly Deputy National Ombudsman in Australia, Director, Australian Federal Bureau of Consumer Affairs, President, Society of Consumer Affairs Professionals in Business, Editorial Board of the International Journal of Consumer Policy.

The Compliance Monitors evidently commissioned the most highly qualified organisation to carry out their first review, at the end of only its first year of operation. The information FEMAG had to rely on, however, was limited and many of its recommendations may have been based on the Compliance Monitors aspirations rather than historical evidence of its effective performance.

The Compliance Monitors 2004-2005 Annual Report sets out results achieved from its inception on 1 April 2004 until 31 March 2005, at the end of its first year of operation.  The report is headed ‘The Code of Banking Practice’ and the cover notes state it ‘sets standards of good banking practice and requires banks to continuously work towards improving the standards of practice and service in the banking industry’.

The Annual Report is also aspirational and states the Compliance Monitors role is to:

Monitor subscribing banks compliance with the Code; and

Investigate complaints the Code has been breached; and fulfils its role by:

  • accepting, investigating and making determinations on any allegation by any person the Code has been breached; and
  • requiring banks to complete a comprehensive statement addressing all aspects of compliance annually; and
  • undertaking compliance monitoring exercises including compliance visits;
  • liaising with other schemes that have regard to the Code such as FOS; and
  • engaging in dialogue with banks on their obligations under the Code; and
  • encouraging stakeholders such as consumer advocates to keep the Compliance Monitors informed on systemic Code issues, and working with banks and others to understand the Code and address misunderstanding and uncertainty; and
  • require banks to work continuously towards improving standards of practice; and
  • promote better informed decision about their banking services; and
  • promote information about the rights and obligations that arise out of the banker/ customer relationship and contract; and
  • require banks to act fairly and reasonably in a consistent and ethical manner as set out in clause 2.2 of the code.

Aspirations of the Compliance Monitors, 2004

The aspirations of the Monitors during this period was set out in an internal memorandum sent to subscribing banks on 15 November 2004 by the Code Compliance Monitoring Committee’s Executive Director, Barbara Schade.

Ms Schade defined the meaning of ‘dispute‘ as a complaint not resolved by the banks complaints handling department. This is different to the FOSs definition of dispute due to the difference between the Code Monitors compliance role and the FOSs dispute-handling role.

When FEMAG was commissioned by the Compliance Monitors to carry out the review in 2005, it was on the understanding ‘banks should ensure their response to any Compliance Monitors investigation focuses on the issue of compliance rather than dispute resolution.’

Compliance Monitors 2004 complaints handling flowchart

The complaints handling flowchart introduced by the Compliance Monitors sets out the twelve steps they follow, stating:

  1. A complaint sent to the Compliance Monitors is received and assessed by the Executive Officer; then
  2. If the Compliance Monitors cannot look at matters raised, for example where it predates the Code, the customer is advised and the case is closed; then
  3. If the Compliance Monitors can look at the matter, the complaint is referred to the bank; then
  4. The bank is asked to respond to the complaint; then
  5. The complaint and the bank’s response are reviewed by the Executive Officer; then
  6. The complaint is referred to the Compliance Monitors for review; then
  7. The Compliance Monitors meet to consider the complaint; then
  8. Notice of the Proposed Determination is issued to the complainant and bank; then
  9. Any submissions in response to the notice are reviewed by the Compliance Monitors; then
  10. Determination is issued to the complainant and bank; then
  11. The Committee liaises with the bank in respect of any remedial action required; then
  12. The case is closed.

In carrying out its review of the Compliance Monitors activities during the first year, FEMAG would have considered how effectively the Monitors and Executive Officer implemented the above steps.

The 2004-05 Annual Report notes the Compliance Monitors investigated and made a determination in one case, whilst the other 18 complaints remained open or were considered inappropriate due to:

  • 5 complaints predated the banks’ adoption of the code (no reference was made as to whether this refers to the 1996, 2003 or the 2004 code).
  • 2 complaints were simple queries that did not require determination.
  • 1 complaint had insufficient information to make a determination.
  • 1 complaint was about a financial service provider, not a bank.

At the end of the year, 9 complaints remained open.

As there was only one complaint investigated in accordance with the Compliance Monitors flowchart, and because the Monitors determined no breach occurred, the further aspirations of the Compliance Monitors and the FEMAG Report had to rely on remedies and sanctions, which had not been tested.

The 2004-05 Annual Report notes that ‘where there is a breach of the Code, the Compliance Monitors can require a bank to take remedial action or to give an undertaking as to future conduct. A bank can be publicly named if it fails to take the action prescribed by the Compliance Monitors, or where the breach is of a serious or systemic nature.’ As such, these principles were not applied during 2004/05.

In reporting its views with respect to how effective the Compliance Monitors practices were being implemented, FEMAG would rightly consider the force of the Monitors aspirations and its stated independence to ensure the future application of the high principles were paramount. Having regard to the Code Compliance Monitoring Committee’s resources, operating procedures, interpretation of its role under the Code and its relationship with other industry bodies, FEMAG tackled issues relevant to the institutional integrity and effectiveness of the newly formed consumer protection systems.

While the FEMAG review mentioned issues related to the bank CEOs constitution, that it was unable to explore, it concluded the Compliance Monitors were performing largely in accordance with their aspirations. However, FEMAG stated the potential existed for significant failures to arise due to flaws in the Code and the restrictive and opaque nature of the bank CEOs constitution.

In hindsight, it’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 undermining 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: 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. This underpinned the principles embodied in the 2003 and 2004 Codes, and was affirmed by FEMAG.

The FEMAG report identified ‘for a reporting system to work effectively it need strong, sustained leadership supporting a culture of open disclosure, transparency and effective response to performance problems.’

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 Committee’s establishment now provided the needed assurance to stakeholders.

Hence, the Compliance Monitors are vitally important for promoting the legitimacy of the subscribing banks’ 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):

    • general monitoring which involves planning and administering programs for the monitoring of banks compliance with the Code; and
    • 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 Committee’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 CCMC’s investigations should be published on the Compliance Monitors website, circulated to stakeholders and appear in the CCMC’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 don’t agree with you; we don’t think there is breach’). 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:

    • ensuring annual compliance statement are completed by the banks, and
    • 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.

–  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 Monitors and 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 Consumers’ 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.

 

The FEMAG review expressed a view Compliance Monitors should be more proactive rather than reactive in making themselves available and accessible to stakeholders. To emphasise this, its report stated only a few stakeholders had any interaction with the Compliance Monitors and this interaction has been quite limited. Its October 2005 report provided recommendations for improved practices by Compliance Monitors, to:

    • circulate quarterly email with updates to stakeholders and conduct forums regularly, and
    • expand their stakeholder base to include COSBOA, Small Business Coalition and State / Territory Small Business Commissioners, and
    • inform ASIC, ACCC and State and Territory Fair Trading and consumer protection agencies on compliance issues in conjunction with email updates.

These recommendations are supported by the few complaints by customers referred to the Compliance Monitors in 200405. This demonstrates that, at this early stage, there was a need for the Compliance Monitors to improve accessibility and transparency to their publics and stakeholders.

FEMAG stated the public profile of the Compliance Monitors thus far is quite low, and a banking representative commented the lack of a public profile by Compliance Monitors limits their effectiveness.’

Effectiveness of Monitors compliance monitoring  

The Compliance Monitors are required to publish an annual survey, which they started publishing in June 2004. This was a two-part process largely based on the UK Banking code Standards Board’s standards.

The review commented that the Compliance Monitors survey could be improved by including more meaningful information such as how many complaints were referred to the FOS, how many involved possible Code breaches and how many actual breaches were found. When assessing the effectiveness of the Compliance Monitors monitoring activities and techniques, FEMAG stated there is a need for:

benchmarks and key performance indicators (KPIs) against which the KPIs should be measured. These KPIs need to be developed from objectives. In paragraph 8 of its report, FEMAG makes suggestions on objectives the Monitors might adopt.

Monitoring by Compliance Monitors to date has been done by two means: an annual compliance statement that completed by the banks and the handling of complaints lodged with the Code Compliance Monitoring Committee.

FEMAG recommended KPIs, to:

provide independent and objective verification of compliance with the Code, and

ensure banks implement controls for compliance and for KPIs, and

provide the public with a degree of confidence the self regulatory scheme is working.

The recommendations should have been implemented when the Compliance Monitors were appointed. Any framework that relies on self regulation can potentially lack direction and enforceability without clear objectives being established. Regular reporting of the Compliance Monitors performance against KPIs to their publics and to stakeholders and regulatory bodies such as ASIC, ACCC and Fair Trade agencies is needed to ensure self regulation is working and is independent, transparent and fair, and not controlled or constrained by a few vested interests.

Key Issues Side-lined

Banks play an important part in the economic well being of Australians and whilst they are subject to a number of legislative requirements, the Code presented an opportunity for banks to demonstrate their commitment to self regulation in their relationship with customers.

In addition to the above issues raised in the FEMAG report, it identified key issues that went beyond the scope of the review. This is unfortunate, given the issues raised were relevant to the task at hand. Possibly FEMAG did not have financial resources to pursue its inquiry to significant depths or that it was constrained in terms of access to materials that might have assisted its review.

Restrictions on Investigative Powers

The FEMAG report states there is an overlap in the roles of the Compliance Monitors and the FOS and therefore continuing cooperation is necessary. FEMAG noted the lack of public profile limits Compliance Monitors effectiveness however they should not seek to achieve a similar profile to that achieved by the FOS.

In commenting on the difference in profile, FEMAG commented that:

as far as the Compliance Monitors are concerned, provided that when a person obtains information about the FOS from its website or otherwise, they can readily access effective information allowing them to decide whether they should raise a matter with the Code Compliance Monitoring Committee.

It may be appropriate for the FOS to encourage a consumer who makes a complaint to consider whether it might involve a breach of the Code and if so to make a simultaneous complaint to Code Compliance Monitors. It is not possible under the current arrangements for the FOS to refer the matter to the Compliance Monitors because of the privacy rights of a FOS complainant, without first obtaining consent from the complainant.

According to FEMAG, the Compliance Monitors investigative powers are set out in the Code. However, in their report it was not suggested these investigative powers were inadequate due to restrictions imposed by the bank CEOs constitution. It seems the FEMAG review avoided drawing adverse conclusions by distinguishing between evidence of factual non-implementation of high principles of the Code and evidence of structural flaws that may give rise to future failures.

The review did acknowledge however, there were instances when Compliance Monitors may be constrained from performing their duties due to provisions in the bank CEOs constitution. As discussed earlier, clause 34 of the Code makes clear stakeholders have a right to believe Monitors have powers to investigate all complaints other than those resolved to the satisfaction of customers.

This statement appears to give wide berth to categories of complaints Compliance Monitors can investigate. Yet, according to the review, paragraph 8.1(b) of the bank CEOs constitution restricts Monitors investigating complaints where it is or may be determined in another forum.

FEMAG reports that in the bank CEOs constitution, the term FORUM was defined widely as being any court, tribunal, arbitrator, mediator, independent conciliation body, complaint/ dispute resolution body, complaint/ dispute resolution scheme or Ombudsman in any jurisdiction.

This paragraph provides banks an optout provision detracting from high principles banks introduced in response to the Martin Committee’s recommendations. These principles were recommendations when the banks published the first Code in 1996.

While the report noted the optout provision competes with paragraph 34(i) of the Code, it raises potential limitations for action by Compliance Monitors where there may be serious or systemic noncompliance. The report noted in some instances the Monitors may be better able to take action to deal with systemic matters than either the FOS or ASIC.’

Prior to the Martin report and publication of the first Code in 1996, banks used their significant resources to abuse courts and dispose of customer complaints, covering up misconduct and adversely affecting individuals and small businesses. The Martin report dealt with this in depth because they believed rogue banks with access to vast resources misuse courts when dealing with complaints when individuals and small businesses could often not defend actions or seek redress if banks sought to conceal serious breaches.

When adopting the 11 May 2004 Code and remaining silent on the bank CEOs constitution, published three months earlier, banks appear to have successfully effected a coup d’état on an already feeble self regulatory system. As the optout provision excludes investigatory powers by the Compliance Monitors, as the alternate FORUM has jurisdiction, paragraph 8.1(b) of the bank CEOs constitution allows banks to transfer dubious concerns to courts or another FORUM, where they enjoy an unmatched advantage, rather than having Code Monitors investigating them.

Restrictions on Resources

Whilst the above matters confounded Compliance Monitors three years later when they reported their views to Jan McClelland’s review, in its 2005 report, FEMAG stated Compliance Monitors required additional resources if their full potential was to be realised. FEMAG was concerned the Monitors might not have sufficient resources to successfully discharge their functions set out in the Code, and state the Compliance Monitors:

were obliged to deal with a number of allegations of breaches of the Code very early in their life and these required commitment of a substantial proportion of their limited resources in order to inform themselves of issues in compliance and to develop procedures for real experience. In the Code, the function of monitoring compliance is paragraph 34 (b)(i) for investigation and determination of Code breach allegations in paragraph 34(b)(ii).

The FEMAG Report reinforces the notion Compliance Monitors are reliant on funding obtained from banks to carry out their two main functions of compliance monitoring and investigating and making determinations on customer complaints in relation to Code practices.

In setting out its report, FEMAG noted that:

case management was very good, but the lack of resources available to the Compliance Monitors in this area was a matter of concern as additional resources were needed to ensure a continuing capacity to manage cases and to obtain the greatest benefit from their results in terms of code compliance in general. And Compliance Monitors might require additional funding to fund activities aimed at increasing the effectiveness of the Compliance Monitors and, through this, its credibility which requires increased resources and further commitment from the signatory banks.

We consider the Compliance Monitors need personnel to undertake strategic thinking, business planning and drafting budgets, liaison with banks and other stakeholders at a senior level, writing bulletins and high level policy papers and drafting determinations; managing general monitoring activities; and managing cases of Code breach allegations; special inquiries and office administration.

ASIC, ACCC and State and Territory Fair Trading

FEMAG stated that:

ASIC is naturally aware of Compliance Monitors operations, but submissions from State and Territory Fair Trading and consumer protection agencies tells us they are lacking information about the Monitors, their role and activities. This is of some concern since they are responsible for administration of credit regulation.

[FEMAG] believe ASIC, ACCC, State and Territory Fair Trading and consumer protection agencies should be informed on the Code issues and receive email bulletins and dedicated quarterly reports even if these are to advise there are no significant compliance issues current, and that they be invited to the recommended forums.

FEMAG notes clause 13.3 of the constitution:

empowers Chairs of the association and FOS to jointly determine the budget of Compliance Monitors. This could be seen as potentially allowing banks to limit their resources and thus the effectiveness of the Monitors although the Code obliges banks to ensure the Monitors have sufficient resources to carry out their functions satisfactorily and efficiently. To improve resource control and to give greater confidence adequate resources are being provided, a more defined and accountable planning and budget process could be valuable.

Regardless of whether Compliance Monitors vulnerability has been exploited, this admission indicates these dynamics may come into play, and are largely invisible.

In the Appendix of the FEMAG Report headed Matters Beyond The Scope Of This Review, it notes:

the constitution constrains the Code Compliance Monitoring Committee from making public statements on their own behalf other than in the Annual Report without prior approval of both the FOS and chairs of the bank CEOs association. This could preclude the Monitors speaking publicly at conferences or forums where they are seeking to raise their profile and improve relationships with the banks or other stakeholders.

Besides constraining the independence of Compliance Monitors, it implies a lack of trust in them. There may well be matters the Compliance Monitors should make public from time to time other than in its Annual Report and the Code does not prevent them from doing so.

It is of paramount public interest the public perceives the Compliance Monitors as both a responsible and accountable independent body regulating the banking industry.

Requiring the Compliance Monitors to obtain approval of the banks that appointed them, the FOS and association Chairs, before they can issue public statements must be seen by stakeholders to severely undermine the perception of impendence. At issue is the timeliness with which information is made publicly available. By requiring prior approval, the banks can silence critics and according to the review ‘it could be some 12 months before a bank found to be in systemic breach could be named’.

The conduct of banks, being fiduciary institutions, is often measured against highest standards of care. It is contrary to public interest a bank in breach of its own Code be afforded protection from the scrutiny of the public eye.

Indemnity and exerting influence over Monitors

FEMAG responds to the need for full indemnity to be provided by the bank CEOs to Compliance Monitors make reciting comments by banks. The bank CEOs will have considered the most appropriate structure when they received the Viney Report in 2001, and preferred an unincorporated body to manage the affairs of the bank CEOs association and the Code Compliance Monitors Committee.

FEMAG commented on the effect of this decision without commenting on motives of the banks and stated:

paragraph 14.1 and 14.2 of the constitution provides for a ‘full indemnity by the Association, or its members, of Code Compliance Monitoring Committee members against liabilities arising out of their actions as members.’ However the bank CEOs association being unincorporated, the status of Compliance Monitors being unclear and doubts about access to liability insurance cover suggest the Compliance Monitors might not be adequately protected in all circumstances.

FEMAG concluded stating ‘consideration be given to establishing the Code Compliance Monitoring Committee as a legal entity in its own right.’ This suggestion diverts attention from the core issues of responsibility and accountability. If the Compliance Monitors are carrying out a public function, there should be a high level of accountability that arises from them should their actions or conduct cause damage.

To indemnify the Monitors against such responsibilities appears to weaken the obligation they have to the public to monitor high standards set out in the Code and to conduct themselves with integrity in regard to their duties.

It needs to be asked what the bank parties motives were when they drafted its constitution in 20 February 2004 limiting the independence and powers of the Monitors. Instead, the banks introduced the opt-out provision that safeguarded bank managers and officers if they act dishonestly or flout the Code.

It is unlikely either the individual and small business customers, or FEMAG, would have suspected the banks failure to incorporate the Code Compliance Monitoring Committee as a limited liability company meant they could justify indemnifying the Compliance Monitors for damages which might flow from their failure to comply with clause 34 of the Code.  Certainly, had that been the case, FEMAG would have raised this in 21 recommendations provided to the Compliance Monitors in their October 2005 report.

Merging parties: CCMC and the FOS

The FEMAG report analysed advantages and disadvantages of forming a single dispute resolution and Code compliance body through amalgamation of the Code Compliance Monitoring Committee with the FOS. It preferred amalgamation, as it concluded it would establish a stronger link and foster cooperation between them.

The issue of the Compliance Monitors autonomy and accountability should have been prioritised before suggesting amalgamation with the industry bodies. Independence is critical to Compliance Monitors in carrying out its role of compliance monitoring and for self-regulation to function effectively.

RECOMMENDATIONS AND SUMMATION

FEMAG recommendations

FEMAG made recommendations in its 2005 report not dealt with or evaluated by the Compliance Monitors in their 2006 Annual Report. The recommendations included:

(R1) develop its own budget associated with a business plan;

(R2) following the development of a business plan, its resources could be increased to provide for further employment of staff and contracted consultants;

(R3) increase the commitment of the Compliance Monitors for the next two years and thus to increase in their remuneration for that period;

(R4) as result of the above, improvements in procedures should be invited;

(R5) that the Committee give consideration to this;

(R6) email bulletins to member banks each quarter and conduct forums with the bank Code compliance staff on a regular basis;

(R7) email bulletins to financial counsellors and consumer organisations each quarter and conduct forums with them on a regular basis;

(R8) email COSBOA, State/Territory Small Business Commissioners with updated bulletins;

(R9) inform ASIC, ACCC, State and Territory Fair-Trading/ consumer protection agencies of compliance issues, and email quarterly reports inviting them to forums;

(R10) distribute an abridged version of the annual report to parliamentarians and seek to be included in the industry-based ombudsmen’s road shows;

(R11) build its profile amongst stakeholder groups, but do not seek to attain a high profile with the general public;

(R12) seek professional advice in the operation and effectiveness of it’s, the FOS and other appropriate websites and to have links on appropriate websites;

(R13) monitor the level of compliance with paragraph 9 of the Code concerning the display and availability of the Code at bank branches;

(R14) have a brief resume of it’s and the FOSs role, with contact details in Code booklets distributed by banks, and require same in the next version of the Code;

(R15) seek data on how many complaints referred to the FOS involve possible Code breaches and for how many actual breaches were found to exist;

(R16) obtain feedback on survey forms within three months of the receipt of all of the completed survey forms;

(R17) include all of the above techniques in its business plan as Compliance Monitors resources allow;

(R18) discuss this idea further with the FOS;

(R19) share information with the FOS with a view to the FOS developing a mechanism to transfer information about Code breaches to the Code Compliance Monitoring Committee;

(R20) discuss better ways of informing consumers about both bodies and encourage contact with Compliance Monitors in relation to Code issues; and

(R21) develop a business plan for a 3-year period setting out methods of monitoring that the Compliance Monitors will use.

2005 FEMAG report summation

The Code Compliance Monitoring Committee was established as an unincorporated body separate from the Bankers Association and the FOS. The FEMAG report looks to investigate whether the Compliance Monitors are able to effectively and efficiently undertake functions set out in the Code. The report makes the point that this may clearly be constrained by the manner of its establishment.

For the Compliance Monitoring Committee’s functions to be undertaken efficiently and effectively, FEMAG set out conditions that need to be satisfied. They include having:

satisfactory investigative powers; and

adequate resources; and

access and ability to collect compliance information regarding breaches of the code as soon as possible after their occurrence ; and

authority to interpret the code independently or to obtain authoritative interpretations; and

ability to make public statements on code compliance and to publicly name banks and as and when it thinks fit; and

ability to act with confidence as to the professional liability of Committee members.

2005 FEMAG report concludes:

these conditions are largely satisfied, however we think there are some issues that could very usefully be considered when the bank CEOS constitution and the Code are reviewed.

MATTERS BEYOND SCOPE OF FEMAG REVIEW

2005 FEMAG report states:

We were told, and we fully agree, that increased general monitoring by the Compliance Monitors would add greatly to the public confidence and through this the public credibility of the self-regulatory approach. It demonstrates commitment by banks to the Code and self-regulatory apparatus designed to deliver outcomes.

A number of stakeholder representatives raised concerns about the Compliance Monitors access to information from the FOS relating to Code breaches. We have recommended the Compliance Monitors require banks to provide information on Code breaches the FOS has raised with them because banks will not see complaints that relate to Code provisions

Other than banks, the BFSO is currently the main potential source of possible instances of code breaches, but potential code breaches also need to come to the Committee. In some cases this will occur because the complainant or, their adviser, sees value to the operation’ of making a parallel complaint to the CCMC.

Complaints that come to the FOS involving loss, and the FOS deals with, are potential instances of Code breaches. The FOS may not pursue a Code breach as to do so may not be in the interest of efficiently. There may well be a significant number of potential instances of Code breaches that do not get attended to.

Even where a complainant raises a potential instance of Code breach simultaneously with the FOS and the Compliance Monitors, the Monitors are currently constrained. Paragraph 8.1(b) of the bank CEOS constitution prevents Compliance Monitors considering a complaint if it is being or may be considered in another forum.

It is difficult to ascertain the extent FEMAG reviewers were constrained from exploring key issues raised in the Appendix. Regardless of these limitations, of greater concern to individuals and small businesses was lack of follow-up by later Code reviewers and banks following the insightful FEMAG report. Nor does it seem the FEMAG report was fully appreciate the banks, preferring to rely on options they held in Paragraph 8.1 of the bank CEOs constitution.

At the very least, substantive issues were raised by FEMAG regarding dubious structures and extraordinary relationships should have been dealt with more carefully by following reviewers. These structures and relationships signalled motives behind the unpublished constitution that should have raised alarm bells.

Bank motives seemed well disguised in a set of ethics and best-practice principles. FEMAG only suggested how banks might later control their Committee members. It seems dubious structures and flawed practices may have been excluded because they were beyond the scope of this review.

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