The Unpleasant Truth About Australian Banking

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…

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