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

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

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

The Martin Committee

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

Stephen Martin (Chair)

J.N. Andrew

R.A. Braithwaite

R.I. Charlesworth

B.W. Courtice

A.J. Downer

S.C. Dubois

R.F. Edwards

R.P. Elliot

G. Gear

R.S. Hall

L.J. Scott

A.M. Somlyay

The Hon Paul Keating was Prime Minister.

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

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

The Wallis Inquiry

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

Members of the Wallis Committee (1997), were:

Stan Wallis (Chairman)

Bill Beerworth

Prof. Jeffrey Carmichael

Ian Harper

Linda Nicholls

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

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

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

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

The Reserve Bank of Australia (RBA)

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

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

Between 1995-2003, the RBA Board comprised:

Frank Lowy (member 1995; re-appointed 2000)

Jillian Broadbent (7 May 1998 until 2003)

Donald McGauchie (appointed March 2001)

Ian Macfarlene (Chairman in March 2001)

Dr S A Grenville

E A Evans

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

R F E Warburton

Prof. Warwick McKibbin (Appointed July 2001), and

Dr Ken Henry (Noted as part of 2001 board)

Australian Securities and Investments Commission (ASIC)

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

Since 1999, ASIC Board members included:

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

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

Peter Day (Deputy Chair until January 1999)

Alan Cameron

Prof Berna Collier (2001 – 2004)

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

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

Australian Prudential Regulation Authority (APRA)

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

Since May 2000, Board members included:

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

Graeme Thompson (appointed 1998, CEO 17 March 2008)

Alan Cameron (ASIC representative)

Ian Macfarlene (RBA representative)

Dr John Laker (RBA representative)

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

Prof. David Knox (appointed June 1998)

Ms Marian Micalizzi (appointed on 10 May 2000)

Dr Robert Austin (appointed1998 until 2000)

Rod Atfield (appointed 2001 until 2006)

Australian Competition and Consumer Commission (ACCC)

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

ACCC Commissioners (1997 – 2005), were:

Prof Allan Fels (Chairman 1999 until 30 June 2003)

Allan Asher (Deputy Chairman July 1999)

Sitesh Bhojani (from 10 November 1999)

Dr Tom Parry (November 2000 until 6 June 2005)

Alan Tregilgas (November 2000 until 31 March 2004)

Ross Jones (From 4 June 1999 until June 2004)

John Martin  (From 4 June 1999 until June 2004)

Teresa Handicott (From 4 June 1999 until 2002)

Rhonda Smith (From 4 June 1999 until June 2002)

Don Watt (From 4 June 1999 until June 2002)

Warwick Wilkinson AM (From 4 June 1999 until 2002)

Prof Doug Williamson (From 4 June 1999 until 2002)

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

Andrew Reeves (From 4 June 1999 until 2001)

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

Dr David Cousins (from 14 July 1999 until 2002)

Yasmin King (From 27 October 1998 until 2001)

Jennifer McNeill (22 July 2002 – 2007)

Rod Shogren (May 1997 until 29 April 2002)

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

Ed Willett (nominated 2002 and later confirmed)

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

The Martin Committee’s report attracted the attention of the ABA and received a negative response. In an interview with Channel 9 on 20 June 1993, Don Argus, Chief Executive, NAB and Chief Officer ABA called the draft Code prepared by the government task force a complex document. His criticism wasn’t directed at the Parliament’s objectives, it was at the cost of implementing it. He stated the cost of implementation would be approximately $300 million.

Mr Argus continued to undermine the cost of introducing a Code, stating ‘if civil penalties were attached, then whoever is doing business is going to have to cover themselves for the potential of very large claims on civil penalties [if bankers act dishonestly].’ Mr Argus was apparently concerned banks would lose their significant advantages in the courts. He defended the banks position, expressing disappointment with the lack of a better understanding of the principles of commercial and prudential law in place.

Wearing both hats, the NAB – ABA Chief suggested the existing law was not comprehensive and added ‘if the Australian public believes there should be re-regulation of the banking industry, then there is a formal process to go through, and that is to legislate through Parliament’.

In applying the rights of customers in the industry in 1993, the Martin Committee was faced with interpreting the relevant commercial laws, and the inability of these laws to protect the customers when the first Code was drafted.

Bankers: Relationships with Customers

Banks enter into agreements and relationships with customers, providing a myriad of products and services. At the heart of this relationship lies a promise. Assuming proper formation and constitution, this bank/ customer relationship will be governed by the general principles of contract law, which assumes all parties are autonomous agents and have equal bargaining powers.

Therefore both parties retain a capacity to freely bind themselves to legal obligations towards the other. Put simply, there has been an offer by one party, an acceptance by the other, and these actions are sufficiently certain to become legally binding. The intention to form legal relations must therefore be present for both parties and consideration must be exchanged.

Any vitiating factors such as misrepresentation and unconscionable conduct must be absent. This reports demonstrates how the banks intended the Code to undermine this relationship.

Bankers: Contractual Duties

A contractual relationship exists between a bank and its customer when the customer agrees to open an account, take a loan or purchase a financial product. A duty of care arises between a bank and customer where a contract expressly states the bank will exercise reasonable care in performing its contractual obligations. The duty of care may also arise if it is implied into the contract by the courts. This frequently happens in relation to performance of professional obligations.

Assuming a contract exists between a bank and customer, the actual terms of the contract may not be entirely clear. Firstly, while the express terms and conditions of a contract will generally be paramount, they are subject to relevant statutory duties and obligations. For example, there are implied contractual terms contained in provisions prohibiting misleading and deceptive conduct and unconscionable conduct in both the Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commissions Act 2001 (Cth). These have been increasingly litigated in recent years.

In addition to misleading and deceptive conduct the courts have implied many terms and conditions on the basis of business efficacy or necessity. Courts approach such cases with differing presumptions, depending on the nature of the transaction.

Such obligations arising within a contractual relationship will not be valid prior to its formation and will cease to bind parties where the contract is validly terminated, or when the customer becomes bankrupt or is liquidated. This means the customer’s ability to pursue banks in court for breach of such provisions is limited by the point at which the contract was formed and terminated, and by the terms of the contract itself. These are often numerous and difficult to understand for non-legal practitioners.

There may be other legal obligations that co-exist or exist regardless of contractual duties.

Bankers: Duty-of-Care

A duty of care may arise in tort either contiguously with or irrespective of an existing contractual relationship, such as when the bank adheres to contractual terms but its actions are negligent and cause harm to the client. Banks and financial institutions are therefore likely to come under a duty to exercise ‘reasonable care’ prior to forming a contract. Since the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd. this has included negligent misstatement of financial products offered by the bank, and may give rise to an action in damages for pure economic loss.

Ultimately it is up to the court to make the decision as to whether, as a matter of policy, the financier owes a duty of care to the customer. Where the financier is specifically requested to advise, a duty to do so with due care and skill will likely arise, but the less vulnerable the client and the more tenuous the relationship with financier, the more difficult it will be to establish a duty.

If a duty of care is established, the responsibilities incumbent on the bank will depend upon the circumstances that exist and will be adjusted according to the seriousness of the risk involved. Without legal assistance, it is usually difficult for any complainant to determine what duties the bank owes.

Compounding these difficulties is the fact that establishing a legal claim against a bank for breach of duty of care requires the complainant to go through an arduous process of obtaining evidentiary documentation from institutions. In doing this, the complainant will likely find the bank will not cooperate and is willing to use its vast resources to draw out the litigation.

Bankers: Fiduciary-Duties

A fiduciary relationship on the other hand is distinct from a tortuous duty of care in that the banker/ customer relationship may be recognised as such and will depend on the circumstances. This is particularly relevant where there is ‘an inequality of bargaining power and the scope for one party unilaterally to exercise a discretion or power may affect the rights or interests of another party and that a dependency or vulnerability on the part of one party that causes that party to rely on another’.

A fiduciary duty is more likely to exist the more immediate the relationship (ie: the bank was not conducting business with the customer through intermediaries), and the customer did not have independent advice. Where the role of advisor is assumed, fiduciary duties of care will exist however, it is likely to be restricted to issues the banker was employed to advise on.

Bankers: Duty Not-to-Mislead

Financial service providers are subject to statutory obligations to not engage in misleading or deceptive conduct, or conduct which is likely to be misleading or deceptive. These provisions were contained in the Trade Practices Act 1974 (Cth) when the 1993 Code was created, but later transferred to the Australian Securities and Investment Commission Act (Cth).

These obligations are much broader than obligations the common law imposes on bankers and financiers. Interestingly the general law has little role to play in interpreting these statutory protections. Rather, they set out the norm of conduct (Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 348) which should not be interpreted according to established principles of liability under the general law since it may be offended by acts both honest and reasonable (Yorke v Lucas (1985) 158 CLR 661 at 666), is morally neutral.

Faced with applying the law and legal principles, the next chapter looks at how the Martin Committee members attempted to present the 1993 Code of Banking Practice as a contact, and to act as the foundation stone of justice in the bank/ customer relationship.

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

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

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

Financial Sector Advisory Council

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

The Council still reports to the Treasurer.

Financial Sector Advisory Council Members (2000), were:

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

Paul Batchelor – AMP Limited (appointed November 1999)

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

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

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

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

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

Richard Sheppard – Macquarie Bank Limited (appointed March 1998)

John Trowbridge – Trowbridge Consulting Pty Limited (appointed 1998)

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

Chris Mackay – UBS Warburg (appointed 22 August 2002)

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

Financial Sector Advisory Council Members (2005), were:

Maurice Newman AC (Chairman) – Deutsche Bank and ASX

Charles Curran AO – QBE Insurance Group

Jeremy Duffield – Managing Director, Vanguard Investments

Barry Fitzgerald – CEO, Adelaide Bank

Michael Hawker – CEO, Insurance Australia Group

Chris Mackay – CEO, UBS Australia

Gail Kelly – Managing Director, St George Bank

Linda Nicholls, Director, St George Bank

Les Owen – CEO, AXA Asia Pacific Holdings

Richard Shepard – Deputy Managing Director, Macquarie Bank

Alastair Walton – Vice Chair, Goldman Sachs JB Were

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

Consumer Affairs Advisory Council

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

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

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

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

Consumer Affairs Advisory Council Member (1999)

Colin Neave (Chair) – Financial Ombudsman Service

Gregory Bartels

Caroline De Mori

Janet Grieve

Fiona Guthrie

Emmanuel Hegarthy

Michael Kay

May Miler-Dawkins

Louise Sylvan – CEO Australian Consumers’ Association

Adriana Taylor

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

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

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

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

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

Self-Regulation Tasks Force

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

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

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

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

Self-Regulation Task Force Members: (1999)

Berna Collier (Chair) – Clayton Utz

Peter Daly – Insurance Enquiries and Complaints Ltd

Louise Sylvan – Australian Consumers Association

Mark Paterson – ACCI

Johanna Plante – Australian Communications Industry Forum

Ella Keenan – Business and Professional Women of Australia

Rob Edwards – Australian Direct Marketing Association

Marina Santini Darling – GIO Australia Holdings Ltd

Gary Potts – Treasury

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

Trade Practices Act Review Committee

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

TPA Committee Members were:

Sir Daryl Dawson (Chairman)

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

Curt Rendall, representing small business

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

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

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

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

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

Changing The Guard (2001-2003)

In 2001 – ABA undergoing culture change.

David Bell was appointed CEO.

David Murray, Commonwealth Bank, was elected Chairman, and

Ed O’Neal is re-elected Deputy Chairman.

In 2002/03 – ABA changing of the guard.

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

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

David Bell continues in his role as CEO.

The ABA Member Banks (2002)

Adelaide Bank

AMP Bank

Arab Bank Australia

ANZ Bank Limited

Bank of Cyprus Australia

Bank of Western Australia

Bank of Queensland

Bendigo Bank

BNP Paribas

Citibank Limited

Commonwealth Bank of Australia

Credit Suisse First Boston

HSBC Bank

Mizuho Corporate Bank Limited

Laiki Bank (Australia)

Macquarie Bank Limited

National Australia Bank

NM Rothschild and Sons (Aust) Limited

Primary Industry Bank of Australia

St George Bank

Suncorp Metway Bank Limited

United Overseas Bank Limited

Westpac Banking Corporation

Richard Viney’s Code Review (2000-2003)

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

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

What Bank Customers Wanted

Issues raised in submissions, included:

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

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

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

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

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

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

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

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

What the ABA and Banks wanted

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

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

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

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

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

Soon after banks adopted the 1996 Code, it was clear that the introduction of enforcement mechanisms were paramount. Despite recommendations made by the Martin Committee, banking suffered from a lack of credibility and trust. At the time, the media was continuing to report incidents of banks bending rules and breaking the law.

The Code (1996) was flawed structurally and did not provide adequate incentives for banks with good intentions to implement it as a set of agreed principles and binding practices. Accountability and transparency of the complaints resolution process, in a deregulated banking environment, was essentially left to courts to enforce. The banks defective contractual provision in the Code was an outcome that most customers could not afford.

The Wallis Inquiry’s Report

Recommendations of the Financial System Inquiry (the Wallis Inquiry) and the House Standing Committee on Industry, Science and Technology’s report ‘Finding a Balance: Towards Fair Trading in Australia’ were meant to require the government to promote institutional integrity in banking. This would happen with co-regulation and the regulatory bodies with powers to enforce codes of practice. With co-regulation there could be legally binding regimes with powers to enforce consumer protection for individual and small business customers of banks.

The Wallis Inquiry’s recommendations included forming strong national regulatory bodies with wide-ranging responsibilities, and empowering them to enforce consumer protection and safeguards in the banking industry. The ‘Finding a Balance: Towards Fair Trading’ report recognised the presence of unfair conduct between big and small businesses, and this was potentially a major worry for efficient markets.

This was raised in several government inquiries but never actually addressed. The mega-banks were allowed to introduce their own system of self-regulation, a decision generally not accepted. This meant small business was forced to turn to the courts when banks failed to adhere to their own self-regulated codes and rules.

The Wallis Inquiry report was designed to review the effectiveness of the financial sectors reforms, which had taken place through the 1990s. The 1997 report contained 115 recommendations on a wide variety of financial system issues. It concluded stating market regulation in the banking industry should be directed at sectors rather than to particular institutions, with a number of government institutions required to successfully monitor the self-regulated industry.

Corporate and Financial Services Commission

A major recommendation by the Wallis Inquiry was the establishment of a national regulatory body. This was called the Corporate and Financial Services Commission, which later became ASIC.

The Commission would oversee ‘corporations and financial market’s integrity, and consumer protection’. This meant it would combine the market integrity and consumer protection roles of the Australian Securities Commission, Insurance and Superannuation Commission and the Australian Payments System Council.

The Wallis Inquiry’s report recommended the Corporate and Financial Services Commission should have sole responsibility for administering consumer protection regulation in the banking and finance sectors. It would therefore be responsible for relevant provisions under the Trade Practices Act 1974 (Cth) for the prevention of fraud.

The Wallis Inquiry’s report recommended the Corporate and Financial Services Commission should have powers:

to obtain documents and question persons, and accept legally enforceable undertakings;

for protection from liability for persons who provide investigative assistance;

to impose administrative sanctions, such as banning or disqualification orders;

to initiate civil actions and to seek punitive court orders such as financial penalties and a range of remedial court orders; and

to initiate and to refer matters to the Director of Public Prosecutions for criminal prosecution.

Australian Prudential Regulation Commission

Another major recommendation in the Wallis Inquiry was creation of the Australian Prudential Regulation Commission. Its role was to carry out prudential regulation in the financial system.

The Wallis report proposed the Australian Prudential Regulation Commission should have powers under legislation to establish and enforce prudential regulations of approved and licensed financial entities and decisions of the Corporate and Financial Services Commission should not be subject to administrative or other reviews.

The Reserve Bank of Australia

The Reserve Bank was in existence at this time. However, the Wallis Inquiry’s report recommended responsibility for prudential supervision of the financial system to be removed and invested in the Australian Prudential Supervisory Commission. It further recommended a Payments Systems Board be established to ensure payments systems policy was in line with public policy aims.

Following the Wallis Inquiry’s report in April 1997, the House Standing Committee on Industry, Science and Technology published its report the following month titled Finding a Balance: Towards Fair Trading in Australia.

The Wallis committee recognised the existence of unfair conduct by big businesses towards small business. It considered this was a major worry. It stated concerns were justified and should be addressed urgently. The committee’s recommendations were therefore directed at providing any unfairly treated small businesses with adequate redress.

Finding a Balance: Towards Fair Trading

In the Finding a Balance: Towards Fair Trading report, it noted several serious business conduct issues related to small business finance. The Fair Trading report therefore focused entirely on the conduct of banking and finance institutions. Amongst these issues the Towards Fair Trading report noted lack of disclosure of loan terms and conditions by banks and the obstructive behaviour relating to the banks dispute resolution practices stood out.

For example, complaints received from small businesses in relation to dealings with more powerful firms shared common features, including:

inadequate disclosure of relevant and important commercial information which the weaker party should be aware of before entering the transaction; and

inadequate and unclear disclosure of important terms of the contract particularly those which are weighed against the weaker party, and

especially when contract terms can operate against the interests of the weaker party and are not brought to the attention of that party, and

where the full import of those [unfair] terms are not spelt out to the weaker party.

Such conduct could be illegal under legislation and common law, as it might be unconscionable or misleading, and deceptive. However, it was often difficult to enforce best standards through legislation, partly because the law was restrictive in its interpretation and application of general principles.

Deceptive and Misleading Conduct

Under s 18 Australian Consumer Law (Cth), a person [or party] must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

To prove deceptive and misleading conduct, it requires a victim to prove to the court that on the balance of probabilities the bank intended or was aware of falsity and/or the misleading nature of representations they made to individual and small business customers. This must be considered as one of the consequences of banks relying on two different agreements, one with their customers and the other with the Code Compliance Monitors. Such an arrangement would make it impossible for individual and small business customers to use the Code to protect their interests.

In this case, sixteen banks acted as one body, and make promises to their customers that they will comply with the Code practices.  Allegations relating to misleading and deceptive conduct arise from the unpublished bank CEOs constitution, which was in place when banks adopted Code (2004) and incorporate the Code as an undertaking in contracts they present to small businesses.

By acting to conceal the constitution from the public, the directors of the sixteen subscribing banks intentionally acted to rely on the Code Monitors inability to comply with their clause 34 duties in Codes 2003, and 2004. Keeping the constitution from customers and their lawyers meant the banks diluted the fair and prudent banking practices that were intended to represent a consensus in the banking and financial sector. The bank prepared contracts could not be relied on when customers signed the banks contracts.

At a later date, a court may find these were misleading and deceptive practices by banks relying on advice from the nations most expensive lawyers.

Unconscionable Conduct

Under s 21 of Australian Consumer Law (Cth), a person [or party] must not, in trade or commerce, in connection with the supply or possible supply of services to another person [or party] engage in conduct that is, in all the circumstances, unconscionable.

In dealing with unconscionable conduct, the mere presence of inequality is not, in itself, conclusive of any illegal conduct. Rather, inequality must be such that the individual or small business ‘suffered from an inability to protect its interests if the bank was sufficiently aware of its inability, and takes advantage of the individual or small business weaker position’. Hence, there will have been many cases when banks had a duty to disclose the efficacy of their Internal Disputer Resolution practices and Code Compliance Monitors code compliance and complaints handling procedures.

While courts must be satisfied merely on the balance of probabilities rather than the higher criminal standards of beyond reasonable doubt, it requires individuals and small businesses to prove a hypothetical alternative. For instance, damage would not have occurred had the bank investigated the complaint and not acted in the way it did.

Banks Rely on Weaker Party’s Inability to Protect Interests

Both false and misleading conduct and unconscionable conduct are difficult to prove in terms of evidentiary availability and because customers proving they relied on such conduct. This can prove extremely costly.

The legislators had to incorporate big business powers in its dealings with small business whilst maintaining efficient markets. Using courts was out of reach for most customers, whilst the banks and ABA introduced measures to paralyse investigations into unfair and potentially fraudulent bank conduct. All possible because banks knew the public could not fund litigation to enforce the fair trading provisions.

Few individual or small businesses could absorb the cost or justify the risks associated with running a long-drawn-out court case that would potentially cost many millions of dollars. The banks have now become mega-corporations, operating without oversight by effective regulators.

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

The Australian Securities and Investments Commission Act 1989 (Cth) was established with functions and powers articulated in the ASIC Act 2001 (Cth). Many of its functions and powers are referred by the Corporations Act 2001 (Cth) and Corporations Regulations 2001 (Cth).

Fair Trading Amendments to the Act 1974 (Cth)

The Wallis Inquiry and ‘Finding a Balance: Towards Fair Trading’ reports were published at about the same time in 1997. Parliament was therefore able to take stock of their recommendations.

In 1998, amendments to the Trade Practices Act 1974 provided a general power to make industry codes of conduct enforceable. At the same time, Australian Competition and Consumer Commission had a duty to ensure industry participants comply with code provisions and take action against code breaches.

Member from McEwen, Fran Bailey, recognised many of the issues raised by the Fair Trading report and committed the government to ensure small business owners could confront problems without inherent unfairness and inequalities.

The Federal Minister had authority under the Trade Practices Act 1974 to consider initiating a proposal for the prescription of any industry code of conduct, if:

the code would remedy an identified market failure or promote a social policy objective;

the code would be the most effective means for remedying that market failure or promoting that policy objective;

the benefits of the code to the community would outweigh any costs; and significant and irremediable deficiencies in existing self-regulatory regime;

systemic enforcement issues exist because there is a history of breaches of voluntary industry codes; and

a range of self-regulatory options and light-handed quasi-regulatory options have been examined and demonstrated to be ineffective.

The principal body responsible for ensuring effective operation of the codes is ASIC. It can approve codes, sets standards for Internal Dispute Resolution, sets standards for and approve External Dispute Resolution processes and bodies that must be utilised in the event of an Internal Dispute Resolution failure.

ASIC can investigate complaints not resolved within External Dispute Resolution schemes. If a breach of these schemes is found, ASIC can distribute penalties under the Corporations Act.

However, it was suggested ASIC had not taken up this role with any apparent zeal. Despite originally being statutorily bound to enforce codes of practice in the banking and finance sector, ASIC consistently characterised codes as non-enforceable.

Amendments to the Trade Practice Act 1974

In August 2000, the Treasury Taskforce on Industry Self-Regulation reported on recent developments in Australia whereby industry self-regulatory schemes were incorporated into regulatory frameworks. The Self-Regulation Taskforce was commissioned by the Minister for Financial Services and Regulation, Joe Hockey, in order to provide information to government, industry and consumers about best practices for industry self-regulation.

The objective of the taskforce was to reduce the regulatory burden on business, to identify best practice and to improve market outcomes for consumers. The Self-Regulation paper stated government is presently in the process of developing and implementing regulatory regimes in the financial services sector, allowing for the development of industry codes and complaint handling schemes.

The Minister for Financial Services and Regulation recognised there would be situations where ‘industry self-regulatory schemes may need to be underpinned in legislation…’

Dispute Resolution 101

One of the major issues raised was unfair conduct by banks when handling individual and small business disputes. Banks exploited their ability to engage the best and most expensive legal advisers to prolong cases, knowing small businesses were commonly unable to match the mega-banks financial resources.

According to the Taskforce report, a general perception existed that the prevalent attitude of banking and financial institutions towards dispute resolution was: “We’ll see you in Court – take it or leave it”.

The prevalence of such an attitude caused ‘Australians for Banking Justice Association’ to call for the establishment of an independent body to hear, judge and determine claims of commercial customers. Despite these concerns, substantiated by examples of real experiences, the ABA insisted existing legislative protections were adequate. The ABA opposed reform, including the common law equitable doctrines of economic duress and undue influence, and the TPA 1974 (Cth) provisions relating to unconscionable conduct and misleading and deceptive conduct.

In 2000, ASIC had been instrumental in ensuring banks complied with the Code and their duty to commission regular reviews. ASIC made submissions to Richard Viney, the person commissioned to carry out the first review. The Viney report is discussed elsewhere in this paper however banking practices and complaints handling remained paramount.

2001: ASIC’s Deputy Chair, Jillian Segal

In November 2001, ASIC’s Deputy Chair, Jillian Segal, paradoxically discussed how ASIC sees itself as a regulator at a time of industry self-regulation:

Following the Wallis Inquiry’s report in 1997, we have seen many changes to Australian regulatory landscape. These not only include the establishment of ASIC and APRA, but changes to the Corporations Law (now known as the Corporations Act). In some cases, the shift has been away from prescription to relying on disclosure.

In other areas, an emphasis has been placed on compliance systems. In one sense, these changes represent shifts to greater self-regulation within a framework over sighted by ASIC, its regulator.

On 7 September 2004 Jillian Segal was appointed director, National Australia Bank. This was four months after the National Australia Bank adopted Code (2004), and seven months after subscribing banks documented their Code Compliance Monitoring Committee’s constitution. In light of the NABs directors’ decision to promote being bound by the Code and its dispute resolution procedures, Ms Segal’s roles raise a lack of commitment by her and other NAB directors to fair and honest banking.

Institutional Weaknesses

In contrast to Ms Segal’s 2001 assertions, in 2003 ASIC announced that it no longer monitored compliance of banking Code (2003). In Regulatory Guide 183 ASIC separated voluntary and mandatory codes and in an internal policy statement noted it no longer approved voluntary codes such as banks Code (2003).

In doing so, and mindful of the changed banking culture during the David Murray/ Gail Kelly and John McFarlane/ Gail Kelly ABA periods, ASIC justified its position, stating:

It is not mandatory for any industry in the financial services sector to develop a code. Where a code exists, that code does not have to be approved by ASIC. However, where approval by ASIC is sought and obtained, it will be a signal to consumers this is a code they can have confidence in. An approved code will respond to identified and emerging consumer issues and delivers substantial benefits to consumers.

In a later report, ASIC detached itself from its regulatory function. It recast its role as limited to working with industry to develop or update codes, approving independent external dispute-resolution schemes and liaising on a formal and informal basis with stakeholders representing consumer interests through a Consumer Advisory Panel that met quarterly.

Chairman, ASIC during this initial this period was David Knott.

ASIC: Unwilling To Use Its Powers

ASIC’s willingness to exercise powers has been uncertain. Lack of transparency in decision-making means consumers receive minimal guidance on how to utilise the ASIC provisions to their benefit. For example, the ASIC Act (Cth) prohibits unconscionable and misleading conduct, as a measure of consumer protection in relation to financial services.

Federal Member for New England Tony Windsor sought to review this inconsistency without success. The Federal Member asked ASICs Minister:

What action is ASIC taking to enforce the ASIC Act in respect of the revelations to the Parliamentary Committee on Corporations and Financial Services that a solicitor for Commonwealth Bank made false representations to a Parliamentary Hearing about the disputed balance of a customer’s account?

Will the Minister explain the Government’s and ASIC policy on ASICs intervention in [some] cases and can he say whether ASIC leaves it to the customer to take private legal action even when ASIC is aware that a bank has engaged in false and misleading conduct.

Can the Minister explain obligations banks have to act in accordance with their industry code and if a dispute arises whether the banks must offer dispute resolution to customers under the Code of Banking Practice before taking legal action?

Does ASIC have evidence banks have not been providing dispute resolution to their customers before taking legal action against them despite their obligation under the Code of Banking Practice to do so?

Why has ASIC not taken action against any bank for failing to adhere to the Code of Banking Practice for not providing dispute resolution to customers as banks are obliged to do under the code?

The response by ASIC was that relevant answers are unable to be provided.

Passing the Poison Chalice: Does it Stop

The Finding a Balance: Towards Fair Trading report stated the Commonwealth, States and Territories have legislative provisions capable of underpinning industry codes. This assumes self-regulation had failed and individuals and small business had other effective legal mechanisms to obtain justice if banks acted unlawfully, or bank directors breached Trade Practices legislation.

Governments, State and Federal, can provide an incentive for banks to employ non-litigious resolution with customers. In light of considerable resources at the disposal of these institutions, this is an unreasonable assumption. In this context, it is not surprising where a system of co-regulation becomes one of self-regulation, through default of government and regulators, consumers will be disadvantaged no matter how many additional legislative protections customers are afforded.

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

In a statement made on 2 September 1997, Treasurer Peter Costello said the Wallis Inquiry found the Australian financial sector’s performance was close to the world average, rather than among world’s best.’ In response the government introduced a package of legislation, establishing regulatory bodies to enforce new industry codes and to monitor compliance with legislative obligations:

The package of Bills before us gives effect to major changes to the structures of regulatory bodies by establishing two mega-regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, lovingly known as APRA and ASIC. The government is therefore changing the regulation of financial services markets – for example, collective investments, superannuation, company law, Corporations Law, payments systems, financial sector shareholdings and banking, and at the same time changing the regulatory bodies themselves.

In doing this, the key recommendations of the Wallis Inquiry and the ‘Finding a Balance: Towards Fair Trading’ committee were not reflected in the government’s scheme. Rather, the government set in motion the creation of regulatory authorities with little to no real powers over the conduct of big business and banking.

By seeking to keep separate regulation of consumer protection and regulation of prudential supervision, Wallis Inquiry made comprehensive recommendations that could not be contemplated. ASIC, APRA and the RBA were envisaged, together, to uphold a scheme of co-regulation in the banking and finance sector.

Together ASIC and APRA would monitor and enforce compliance with the Code, as well as consumer protection and prudential law. Due to fundamental flaws establishing these Acts, and lack of resources and political will, ASIC and APRA were left with no real enforcement powers within their jurisdictions.

The Financial Sector Reform Act 1998 (Cth)

The following year, the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth), in part, carried out Wallis Inquiry’s recommendations creating the government regulator APRA, and expanded the responsibilities of the Australian Securities and Investment Commission. ASIC was designed to oversee enforcement of the system of market regulators, including monitoring compliance with the Code of Banking Practice. This was removed from the jurisdiction of the Australian Payments System Council, noting:

The Australian Securities and Investment Commission has the function of monitoring and promoting market integrity and consumer protection in relation to the payments system by promoting the adoption of approved industry standards and codes of practice, protection of consumer interests, community awareness of payments system issues, sound customer-banker relationships (including through monitoring the operation of industry standards and codes of practice) and compliance with such standards and codes.

With this provision forming part of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC continues to be the monitoring body, bound to ensure compliance with most industry codes.

The APRA Act 1998 and Amendment Act 2003

The general powers of the APRA Act sets out the framework for its operation, as well as establishing its powers and functions. The Act established APRA with three main purposes to:

1. Regulate bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation or for retirement income standards.
2. Administer the financial claims schemes provided for in the Banking Act 1959 (Cth) and the Insurance Act 1973 (Cth).
3. Develop administrative practices and procedures to be applied in performing the regulatory role and administration.

In the Second Reading Speech on the Australian Prudential Regulation Authority Bill 1998, Treasurer Peter Costello announced the intention of the legislation was to put in place a structure designed to improve efficiency and competitiveness of the Australian financial system, while preserving its integrity, security and fairness. The government sought to replace various agencies charged with prudential supervision of financial systems within a single regulatory authority.

APRA’s jurisdiction would be to supervise:

banks and other deposit-taking institutions; and

life and general insurance companies, and

superannuation funds and retirement income accounts.

APRA was to be an independent regulator like the Reserve Bank, but subject to policy determination powers of the Treasurer in the event of an irreconcilable disagreement with the government. It was emphasised in Parliament that by having a single regulator at arm’s length (in the same way as the Reserve Bank operates autonomously of government’s decision-making), consumers would be provided stability and independent supervision.

However, the final APRA Act 1998 did not provide the level of independence envisaged.

Lack of an Independent Board

It was suggested that APRA should be accountable through an independent board, and operate under a charter to ensure prudential regulation was balanced with considerations of efficiency, contestability and industry competition. The APRA Bill envisaged the three main functions for the board, which was to:

1.     determine APRA policies (including goals, priorities, strategies and administrative policies); and

2.     ensure APRA performs its functions properly, efficiently and effectively, and

3.     ensure APRA operations are conducted having regard to its purposes.

The APRA Board would comprise nine members: a Chair, CEO, two members (to include either the Governor or Deputy Governor of the Reserve Bank or an officer of the Reserve Bank Service), one member who is an ASIC representative and four other members. The Board briefly functioned like this after the establishment of APRA in 1998, and after the HIH collapse, however a subsequent Royal Commission prompted the revision of its structure through amendments to the Act in 2003.

The present APRA Act provides for a smaller but potentially less independent team, more open to manipulation by a confluence of private and public interests. The APRA members comprise people appointed by the Governor-General on a full-time or part-time basis.

The appointment of the APRA Chair and Deputy arrives directly from the Governor-General, who, by constitutional convention, acts upon the recommendation by the Prime Minister. In essence, the restriction on the number of members narrows the potential for representation from key stakeholder groups and the hierarchy in APRA may now be heavily influenced by the government of the day.

While members are limited to a five-year term, the APRA Bill should be regarded as positive. It reinforces a need for the government of the day to gain influence, as it has the potential to roughly correlate to electoral terms. To guarantee independence from the private sector, the APRA Bill limits the appointment of anyone who is a director, officer or employee of a body regulated by APRA, and the member’s appointment is terminated if they become an officer or employee of an APRA regulated body.

However, under the Act, directors, officers or employees of bodies regulated by APRA may be appointed if the Minister considers their performance will not be compromised. While members are required to disclose interests that could conflict with the performance of the functions of office, it does not prevent a member from being involved in dealing with an issue once they obtain consent of the other APRA members.

Subordinate to Government Interests

In the APRA Act, the relationship between APRA and the Minister for Financial Services provides the government greater leverage over internal policy. Under the Act, the Minister is empowered to give APRA a written direction with regard to policies it should pursue or the priorities it should follow.

The Chair is provided an opportunity to discuss with the Minister APRAs proposed direction. However this is a far more interventionist approach than initially envisaged when the APRA Act was put forward in the Bill. It puts in place a less stringent reporting process because the Minister must publish the direction of the board in the Gazette within 21 days after the direction is given. This must then to be laid before Parliament within 15 sitting days.

The ASIC Acts 1998 and 2001

The general powers of ASIC and its responsibilities relate to market integrity and consumer protection. It was established following recommendation of the Wallis Inquiry under guiding principles of competition and consistent regulatory treatment in the industry. The intended function of ASIC is to monitor and promote market integrity and consumer protection in the Australian financial systems and payment systems, as well as the operation and compliance of industry standards and codes of practice.

In the area of banking and finance ASIC is intended to supplement APRAs prudential role by considering the impact on consumers when prudential systems are absent or neglected.

ASIC has a broad range of investigative powers to undertake, as its role is essentially whatever’s necessary for or in connection with, or reasonably incidental to, performance of its functions. This includes powers to obtain books and records, examine people and require people to give reasonable assistance to it in connection with an investigation or prosecution.

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

On 12 May 2000, the Australian Bankers Association appointed Richard Viney to conduct a review of Code (1996). The ABA Chairman was Mr Frank Cicutto, Chief Executive, National Australia Bank.

In undertaking the review, Viney was asked to take account of changes in the market for banking services and the changing behaviours of bank customers. The ABA, in all likelihood, believed banks adopting Code (2003) would lead to banks and individual and small business customers benefiting from responsible self-regulated banking.

The newly appointed ABA Chief Executive, David Bell was confident this second generation Code would be an effective demonstration to Government’s policies and demonstrate self-regulation works. He is reported to have said this is a real alternative to the heavy hand of legislation, a dubious statement as it later turned out

There were submissions to the Viney review from government agencies, consumer groups and banks. Richard Viney’s Issues Paper with interim recommendations was published and once the Issues Paper submissions were received, he published the Final Report.

There were differing views about appropriate monitoring, and the powers the Code Compliance Monitors would possess, and sanctions they could impose. Richard Viney’s final recommendations ended up being in line with those taken from the bank CEOs organisation, the ABA.

The Richard Viney recommendations, detailed below were:

1. inclusion of small business
2. principles of fairness
3. monitoring of sanctions
4. dispute resolution; and
5. periodic review and a forum for regular exchange.

The first three recommendations are dealt with in this section.

Inclusion of Small Businesses

The Code (1996) applied only to individuals. However, in light of the extension of coverage of the FOS, to cover small businesses, the review considered extending the coverage of the Code to small businesses.

ASIC favoured the extension to include small businesses out of recognition of small business customers being disadvantaged in their bargaining position when dealing with mega-banking organisations. The NSW Government, in its presentation to the Joint Consumers Submission, also favoured extending the Code protection to small business customers.

The ABA did not object to the extension. Richard Viney finally recommended Code (2003) cover all small businesses. Code (2003) defined small businesses as having fewer than 100 full-time people or their equivalent, if the business is or includes manufacture of goods, or, in any other case, fewer than 20 full-time people.

Principle of Fairness

The Code (1996) did not contain a provision on fairness. Actually, for Code (2003) the ABA sought to exclude fairness. It resisted including the provision on the grounds that it was a subjective concept and will vary from circumstance to circumstance.

However, the ABA eventually withdrew its objection to the fairness provision and Mr Viney recommended a subdued provision in Code (2003). The new clause stated banks will act ‘fairly and reasonably towards customers in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us’.

Monitoring and Sanctions

The importance of monitoring and sanctions were the most controversial issues in the review process. During the period monitoring was carried out through the Australian Payments System Council, it involved an annual self-assessment by banks, which was followed by an ASIC report on the results of the self-assessment process.

In the Joint Consumers Submission, the Australian Consumers Association, ASIC and the NSW Government objected to lack of transparency and independence of monitoring in Code (1996). For their part, the ABA acknowledged the need for change while avoiding inefficiency and disproportionate cost.

ASIC noted the importance of external monitoring to complement the self-assessment process. The Joint Consumer submission’s continued to argue that the inadequacy of self-assessment of compliance monitoring called for validation of results to be carried out by an independent external body.

The Consumers Association promoted the need for compliance monitoring to be adequately resourced. The NSW Government’s submission stated:

It is important that monitoring and reporting on the Banking Code of Practice is carried out by an organisation with experience in consumer banking issues, and which is seen to be independent of the banks. The Australian Securities and Investment Commission is one such agency. Compliance with the Code should be able to be independently double checked, and not rely entirely on a bank’s self-assessment.

It was suggested that some parties were dissatisfied with lack of a provision in the Code for the imposition of sanctions for breaches. ASIC, for one, cited other industry codes such as the ‘General Insurance Code of Practice’, which established a regime for investigating alleged breaches and for imposing sanctions. This regime complemented both internal and external dispute-resolution procedures for resolving bank/ customer disputes. ASIC stated:

this review should consider establishing an independent regime for investigating alleged contraventions and imposing appropriate sanctions;

the code should detail who can make complaints about non-compliance, this should include consumers, consumer advocates, regulators and government agencies and dispute resolution schemes;

the process for making complaints; the decision-maker(s) and the decision-making process; and

available sanctions including a range of effective sanctions should be available so a flexible approach can be taken.

The Consumers Association cited the December 2000 Taskforce on Industry Self-Regulation’s report, which argued for sanctions underpinned by regulatory mechanisms that it regarded was essential for Code credibility. The Australian Consumers Association stated:

The lack of sanctions in the banking code presents a fundamental weakness and raises doubts about the credibility of the code for industry participants and consumers. For example, there are no sanctions for breaches such as refusing to tell a customer about dispute mechanisms, not providing information on a request or not following customers instructions in relation to account cancellation. A range of sanctions, underpinned by regulatory mechanisms, is essential for code credibility.

The Joint Consumer submission also argued for including sanctions, citing comparable codes, such as the AAMI Customer Charter, which had penalty provisions. The Joint Consumer submission stated:

For a complaints process to be effective consumers must use it. However, unless they can establish a loss which opens the way for compensation, the consumers will generally not have any, or a sufficient incentive to report breaches of the code to the (proposed) administration body.

One way of addressing this issue, and in doing so providing industry with a cheap compliance-monitoring mechanism, would be to include in the code a penalty provision under which the subscriber would agree to pay a small sum to any customer whose complaint that a code provision had been breached was established. This sum would be paid irrespective of whether the customer suffered any loss or damage in consequence of the breach. The AAMI Customer Charter provides a possible model for a penalty provision of the kind proposed.

Richard Viney agreed. Without an independent regime for investigating complaints of Code contraventions, and without a capacity to impose appropriate sanctions, the banks commitment to the Code appeared to be perfunctory.

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

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

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

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

Directors Guarantee to Comply with New Code (2003)

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

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

Adelaide Bank Limited – 12 August 2003

Australian and New Zealand Banking Group – 12 August 2003

Bank of South Australia – 12 August 2003

Commonwealth Bank of Australia – 12 August 2003

St George Bank Limited – 12 August 2003

National Australia Bank Limited – 29 August 2003

Bank of Queensland Limited – 7 October 2003

ING Bank (Australia) Limited – 3 November 2003

Bank of Western Australia – 19 January 2004

Citibank Australia – 5 April 2004

HSBC Bank Australia – 10 May 2004

Champions of New Code (2003)

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

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

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

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

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

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

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

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

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

New Code (2003) Declarations

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

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

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

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

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

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

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

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

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

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

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

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

Modified Code (2004) Declarations

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

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

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

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

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

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

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

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

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

It required that directors of deposit taking institutions have:

appropriate skills, experience and knowledge,

and to act with honesty and integrity,

and to be fit and proper, and

to have appropriate governance standards.

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

John McFarlene – ANZ Bank Limited

Gail Kelly – St George Bank Limited

David Murray – Commonwealth Bank of Australia Limited

Barry Fitzpatrick – Adelaide Bank Limited

David Liddy – Bank of Queensland Limited

Daniel McArthur – Bank of Western Australia Limited

Robert Hunt – Bendigo Bank Limited

Leslie Matheson – Citibank Australia Limited

Stuart Davis – HSBC Australia Limited

John Stewart – National Australia Bank Limited

John Mulcahy – Suncorp Metway Limited

David Morgan – Westpac Bank Limited

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

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

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

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

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

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

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

In an effort to expand market share in the 1980’s following deregulation, banks commenced a period of mergers and acquisitions. The major banks became mega- corporations. This meant customers unfairly dealt by the giant corporations would have little prospect of funding any action in the courts to resolve differences or disputes.

Former Governor General and Justice of the High Court of Australia, Sir Ninian Stephen, supported this position. His famous quote was: ‘the Chief Justice of a State said to me just the other day that on his salary he could not possibly afford to litigate in his own court.’

The move to improve competition and reduce regulation in the 1980’s changed the structure of the industry. This caused the government to commission a report into deregulation, and its success in the banking and finance sector. The Parliamentary report was intended to address any community dissatisfaction and lack of confidence in the banking system.

The Martin Committee’s Review (1991)

The Martin Committee’s intentions for its report were:

• • to go forward learning from experiences of the 1980s and building on that experience to ensure the 1990s and beyond reflected the very valuable knowledge that has been obtained, and to ensure the people of Australia that the government has their particular interests in terms of not only secure but a strong financial system guaranteed.

On 28 November 1991, the House of Representatives Standing Committee on Finance and Public Administration completed its report titled ‘A Pocket Full of Change: Report on Banking and Deregulation’.

Stephen Martin was the Committee Chair; Paul Keating was Prime Minister.

The Martin Committee report recommended documenting and adopting a Code of Banking Practice. The report reflected on the intentions behind the adoption of the Code and made recommendations, many not making there way into the first 1993 Code. This Code was ground breaking and not published and adopted by subscribing banks until 1996.

Fairness, an Overarching Principle

The idea of fairness in the bank/ customer contract struck a chord with members of the Martin Committee and formed an overarching principle to its recommendations. According to Martin Committee, introduction of a Code of Banking Practice was ‘a way of remedying many of the unfair practices prevalent in banking.’

Specifically, transparency would be fostered as a ‘Code would provide a single source of information for a customer to refer to, and more significantly a Code would include provisions designed to ensure customers are adequately informed of the full details of the financial products they were about to use.

Also, ‘negotiating of a Code between the banking industry, government and consumer organisations would provide an opportunity to ensure all provisions are fair.’

Before the Parliament, on 27 November 1991, Stephen Martin presented the report with minutes of proceedings and evidence received by the Committee. He explained the importance of fairer banking providing ‘the Code as an alternative to a raft of legislation.’ A Code that would offer transparency and better disclosure of terms and conditions underlying the banking relationship would foster a fairer relationship between the parties.

In a radio interview two days later, Stephen Martin talked about paying attention to the ‘ordinary man and woman in the street’ who want a basic banking service and to be given ‘a report card on whether or not deregulation of the Australian financial services industry is, in fact, working and whether consumers were benefiting.’ Martin stated, ‘not for a minute are we suggesting banks shouldn’t be making profits but I think what we are suggesting to them is that, yes, sure, on the way to making profits they’ve got to make sure they look after the ordinary man and woman in the street that wants a basic banking service; and I think they’re trying to provide that.’

High Cost of Litigation – Delaying Tactics – Abuse of Process

The Martin Committee expressed concern for individuals and small businesses, giving particular attention to issues relating to the adequacy of means of redress available to customers in cases of dispute with their bank. It emphasised significant power imbalances between customers and banks, in these ways:

banks control nearly all relevant information and documentation; and

• • banks have access to specialist advice and legal assistance, and the resources to pursue disputes to the end, whereas customers, particularly poorer customers, do not; and
  • banks have inherent faith in internal operating systems and bankers may be reluctant to admit failures in those systems; and
  • in many cases banks interests resisting claims outweigh that of an individual customer in pressing it, as banks are protecting a system whereas the customer is seeking redress on a one-off basis; and
  • in terms of will and financial resources, there is often little incentive for banks to settle a dispute, even if the bank would be likely to lose any eventual case because banks know they can outlast most customers; and
  • in matters that are litigated, the bank, as a repeat player, is in a position to select a particular matter to run to a hearing in order to obtain a favourable precedent.

The Martin Committee examined the principal remedy of court litigation and its inherent difficulties such as high-cost of litigation, the powerful position of banks in the litigation process, unnecessarily protracted proceedings, an inability to continue legal actions and failure to ensure adequate discovery or belated discovery.

They recommended the ‘Australian Law Reform Commission examine powers of the courts to deal with abuse of processes – this requires consideration to be given to the need for legislation to assist courts to deal with abuse of process’ – the Senate Committee on Legal and Constitutional Affairs, as part of its inquiry into the cost of justice, should investigate the issue of the cost of justice in cases between banks and customers.’

Delays in court proceedings were a concern. The trial and appeal process can mean years of waiting. Superior resources a bank could use to delay a case for years placed great financial strain on an individual or small business litigant.

The Martin Committee report expressed the ‘need for cheap, speedy, fair and accessible alternatives to the traditional court system if customers are to receive justice in their dealings with the banks.’ This reinforced its recommendation for documenting key banking principles in the Code of Banking Practice.

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