The Unpleasant Truth About Australian Banking

The 1996 Code of Banking Practice sought to create greater commercial certainty and better business practices by fostering good relations between banks and customers. It was intended to set standards of bank conduct, rather than encouraging a litigious culture and creating the need for more legislation.

It was intended to be a legally binding contract between banks and customers and would set standards of good practice by the banks. It would protect individual and small business customers of signatory banks by setting out banking standards and contractual obligations.

The dependence on the Code by customers belies a fundamental flaw in its design and implementation. It was the Code’s initial incongruity with the Martin Committee’s recommendations, and the ineffectiveness as a regulatory regime, which kept it and the later 2003 Code unsuitable for the protection of banking clients.

Institutional Integrity

The integrity of 1996 Code was based on the following principles:

(i) Having regard to the paramount requirement of banks to act in accordance with prudential standards necessary to preserve the stability and integrity of the Australian banking system; and

(ii) To preserve certainty of contract between a bank and its customer, consistent with current law; and

(iii) To allow flexibility in banks’ products and services, and in competitive pricing.

The 1996 Code was therefore intended to:

describe standards of good banking practice and service;

promote disclosure of information relevant and useful to customers;

require banks to have procedures for resolution of disputes between banks and customers; and, if this is achieved,

promote informed and effective relationships between banks and customers;

Having set principles and objectives, the 1996 Code was divided into three parts:

Part A: Disclosures. This part describes information a bank will provide to a customer in respect of the banking services banks offer.

Part B: Principles of Conduct. This part describes principles of conduct banks will follow in dealing with their customers.

Part C: Resolution of Disputes. This part required the banks to have dispute handling procedures.

When banks adopt the Code, they would bind themselves to obligations imposed in their contractual relationship with customers. This clause remains today.

The Code imposed terms and conditions in regard to disclosure:

Clause 2.1: A bank shall provide to a customer in writing any Terms and Conditions applying to an ongoing banking service provided by banks to customers. The terms and conditions shall be:

(i) distinguishable from marketing or promotional material;

(ii) in English and any other language the bank considers appropriate;

(iii) consistent with this Code; and

(iv) clearly expressed;

Foundations for the Code (2003)

The 1996 Code of Banking Practice was an 11-page document, not reflecting the Martin Committee’s sophisticated 572-page report. Not only did the substance of the Code fall short of the Martin Committee’s recommendations, the process of drafting and adoption deviated from what the Committee believed to be fitting.

The Martin Committee members deemed it highly inappropriate for banks to have ‘exclusive responsibility for setting standards of [good] banking practice.’ While a government task force drafted the first Code in consultation with banks, consumer groups and government agencies, the final draft was ‘one whose carriage had been undertaken by ABA itself.’

The repercussions of this failure advantaged the banks rather than protecting their customers, as was intended.

Complaints and Dispute Resolution

Mindful of variations of relevant standards among banks, the Martin Committee recommended observance of minimum standards for internal dispute-resolution procedures, such as:

keeping records of the dispute; and

a clear point of entry into the use of the mechanism; and

clear steps that are readily accessible; and

defined lines of responsibility; and

speedy and timeliness; and

giving of reasons for the decision, and

relevant documentation provided throughout.

The Committee also recommended an increase in monetary threshold of the FOS scheme. While this FOS provided a free dispute resolution service, it operated on the basis of ‘fairness and good banking practice in all the circumstances’ rather than exclusively legal criteria. However, the FOS had limited its jurisdiction and would only hear complaints and disputes by imposing a low financial benchmark. This severely restricted its capacity to resolve many differences.

The attention provided by banks to customer complaints and dispute resolution in the Code was, however far less than the Martin Committee recommended. It reflected neither an intention to rationalise an industry-based resolution scheme, nor an intention to establish comprehensive procedures of dispute resolution. The banks stipulated an internal process for resolving disputes, with external ‘impartial’ processes for resolving them.

The 1996 Code contained no standards for Internal Dispute Resolution other than information on procedures. There was a promise to respond promptly, information on the IDR, reasons for the outcome of the internal process and possible further action that could be taken by customer if banks failed to resolve the issue. The Code stated:

Clause 20.2: A bank shall have available in its branches, descriptive information on:

(i) procedures for handling such a dispute; and

(ii) time within which a dispute will normally be dealt with by the bank; and

(iii) the fact that the dispute will be dealt with by an officer of the bank with appropriate powers to resolve the dispute.

Clause 20.3: Where a request for resolution of the dispute is made in writing or a customer requests a response from the bank in writing, the bank shall promptly inform the customer in writing of the outcome and, if the dispute is not resolved in a manner acceptable to the customer, it would provide:

(i) the reasons for the outcome; and

(ii) further action the customer can take, such as the process for resolution of disputes referred to in section 20.4 of the Code.

Clause 20.4: A bank shall have available for customers, free of charge, an external and ‘impartial’ process (not being arbitration), having jurisdiction similar to that which applies to the Australian Banking Industry Ombudsman Scheme (the FOS), for the resolution of a dispute that comes within that jurisdiction and is not resolved in a manner acceptable to the customer by internal process referred to in section 20.1 of the Code.

Clause 20.5: The external and impartial process shall apply the law, and may take into account what is fair to both the customer and bank.

There were customers who did not desire this arrangement: Those unable to expend resources litigating complaints or disputes were restricted to appealing to the goodwill or good-practice of the banks, against which they had reason to complain. This was because the Code required customers initially to resolve a dispute using the banks own Internal Dispute Resolution process.

Through this process, the banks could choose which complaints to resolve and which not to resolve. This meant that if banks failed to apply the published Internal Dispute Resolution practices provided for under the Code, complainants were severely restricted.

The responsibility of monitoring compliance with the Code was given to the Australian Payments System Council.

Public Disclosure

Although the Code embodied principles of disclosure by banks on their terms and conditions, it did not recognise any right to information beyond that. With a view to protecting public access and awareness of banks conduct towards customers, the Martin Committee recommended ongoing dialogue between the Reserve Bank, Trade Practices Commission and consumer representatives.

However, the Code was silent on ongoing dialogue the parties should continue to carry out. Consumer representatives argued banks, as public institutions, were bound by a social contract through their licenses to operate services ‘on fair and equitable terms’. The banks and consumer representatives held divergent views, with the final authoritative party being the bank CEOs through the ABA.

The ABA regarded variations as culminating in a ‘return to regulation’ and asserted social justice aims be satisfied through government subsidies. They argued the government should provide support for vulnerable members of society, rather than through a return to banking regulation.

Weak Regulatory Model

The 1996 Code departed significantly from the Martin Committee recommendations. In carrying out research for this paper, recommendations the Committee sought that should have found their way into Code (1996) but did not, were:

development of a Code as a result of consultation; and

consideration for banks small business customers; and

monitoring by an appropriate Commonwealth authority; and

disclosure and customers rights to obtain information; and

adequate dispute resolution and complaint handling procedures; and

a need for ongoing dialogue and review of the Code.

Despite divergences following the Martin Committee’s report, ABA member banks adopted the first Code in 1996. The House of Representative’s Standing Committee on Banking, Finance and Public Administration initiated a review of the Code that was published in the Reserve Bank’s 1992-93 Annual Report. When conducting the review the Committee recognised the Code, initiated in 1993, was a major step forward in improving the bank/ customer relationship.

However, the Committee acknowledged the Code was limited, being too narrow in application.

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

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