The Unpleasant Truth About Australian Banking

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…


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