The Unpleasant Truth About Australian Banking

The first Code of Banking Practice was published in 1996, and later the ABA published its revised Code (2003). From inception, the Code (2003) was designed to provide banks with an opportunity to conceal dishonest and unethical banking practices.

It worked like this:

A subscribing bank receives a complaint alleging misconduct by a director or one of its senior executives, or any matter it does not want investigated, and the bank simply denies everything. The complainant then refers the bank to its duties set out in clause 35.7 of the Code, requiring it investigate all complaints other than those resolved to the customers satisfaction.

The bank, by failing to investigate the complaint, acknowledges there is a dispute and refers the complainant to the definition of dispute in clause 40. This states a dispute is only investigated if it fits in a very narrow definition:

    • dispute means a complaint in relation to a banking service, and
    • banking service means any financial service provided by our bank.

This was not intended in 1996 when the banks drafted their first code based on the Martin Committee’s report under the supervision of the parliament. The Code was intended to provide affordable remedies to bank customers without the resources of mega-banks, and required the bank investigate all complaints and to resolve bank/ customer disputes outside the courts.

This chapter looks at banking conduct and the banks use of their resources and the legal system allowing problematic issues to continue, unchecked.

Ambiguous Language in Code (2003)

Clauses 34 and 35 of the Code refer to Internal Dispute Resolution procedures used by banks to investigate customer complaints. The researchers found the subscribing banks had no intention of complying with Codes (2003). Whilst the Code required banks to have Internal Dispute Resolution procedures, they were ineffective for a number of reasons, one being there was no definition of a complaint.

This was one of the principles required of banks when self-regulation was being considered by the government and later introduced. Another, not unrelated, was the banks placing no importance on their commitment to ‘continuously work towards improving the standards of practice and service in the banking industry’ and relying on the Code Compliance Monitors to act as agents, and concealing bank misconduct (clause 2.1(a)).

Code Subscribing Bank statements

The researchers found subscribing banks had dismantled Internal Dispute Resolution practices required under Code (2003), whilst stating the banks:

    • have a Code of Ethics, setting out expectations of directors and staff in their business dealings with customers. It requires high standards of personal integrity and honesty in all dealings, and avoidance of conflicts of interests and observance of the law (published 30 September 2004).
    • expect actions of staff to reflect the ethical statements of the bank. Members of staff should not take any action which they know or should have known violates any reasonable law or regulation. The bank encourages staff to report in good faith suspected unlawful/unethical behaviour (published 30 October 2006).
    • have to comply with the Code of Banking Practice, developed by the Australian Bankers Association. The Code aims to improve bank/customer relationships through commitment to standards of behaviour and conduct and improved open disclosure.  We have specialists to provide information on how to manage your loans and accounts, both now and in the future.
    • Fit and Proper Policies developed and implemented based on APRAs fit and proper prudential standards. These set out procedures adopted by the banks to determine the fitness and propriety of individuals in responsible persons positions. These are required by APRA to be applied to such position holders by authorised deposit taking institutions (published 23 May 2009).

Applying Subscribing Bank strategies

The restrictions imposed on and agreed by the Code Compliance Monitors provided banks with an opportunity to introduce secondary issues. Relying on the Compliance Monitors as their mouthpiece, banks assert they have a right to disregard 250 clauses in the Code, declaring most customer complaints are really disputes.

The researchers found the Compliance Monitors repeatedly made similar responses when required to investigate complaints alleging a bank breached the Code. The Code Compliance Monitors would state:

    • In relation to your allegation the bank breached clause 35.7 of the Code of Banking Practice, on our initial assessment it appears the allegations you have made in relation to breaches of clause 35 will not be supported, based on the following:
    • Clause 35 relates to the obligation by banks that they have an Internal Dispute Resolution Process to resolve disputes;
    • Disputes are complaints that relate to a Banking Service provided by the bank to you (refer to the definition section in the Code);
    • A Banking Service relates to a financial service or product supplied by the bank to you (refer to the definition section in the Code).
    • The initial assessment of your complaint identifies you have made allegations to the bank regarding a matter that is not a Banking Service and therefore not considered a (dispute) (parenthesis inserted by Compliance Monitors) for the purpose of an internal resolution process required under the Code.
    • The bank is not bound by Code requirements in dealing with complaints you have made (Code Compliance Monitors, published 25 March 2010).

Code Compliance Monitors statement

If complainants are not satisfied with the Compliance Monitors initial findings they can be referred back to the Code Monitors for further investigation. In the above case, the Code Compliance Monitors replied, stating:

    • The Code Monitors note complaints you have raised in recent correspondence regarding alleged breaches of the Code. The complaints you have forwarded to us for consideration relate to a banking service.
    •  The Compliance Monitors do not have jurisdiction to consider matters that do not relate to a banking service. Accordingly, we will not be investigating your complaints and this decision will not change (signed Brian Givin, Chairman, Code Compliance Monitoring Committee, dated 9 July 2010).

This statement places the Code Compliance Monitors in the unenviable position of not being able to act in good faith and investigate any complaint by any person, as set out under clause 34(b)(ii) of the Code. This a paradox with the Code requiring banks investigate all complaints alleging breaches of the 250 clauses in the Code, while the Compliance Monitors allege they can hardly investigate any.

The ambiguous wording in Code (2003) provides banks an opportunity to silence the Code Monitors. However all fault cannot be levelled at the banks. The Code Monitors agreed with or were aware of limitations imposed on them by the banks, having been briefed on their duties prior to being appointed.

Likewise, the directors of the ABA and the FOS must accept some blame having appointed the Code Monitors, and having been briefed on the ambiguous wording in Code (2003) beforehand.  With ambiguous language, all the bank parties would have known the banks had a duty to investigate all complaints and the Code Compliance Monitors would be working with them to redirect all bank/ customer complaints and disputes to the courts. This was, of course, contrary to the wording and intention of the Code, and contrary to the Martin Committee principles in 1991.

Constrained Investigatory Powers

Clause 34(b) empowers the Code Compliance Monitors to investigate and to make a determination on any allegation from any person a bank breached the Code, but the Monitors will not resolve, or make any determination on, any other matter.

Clause 34(f) notes banks are required to comply with all reasonable requests of the Code Monitors in pursuance of their functions. Hence, the Compliance Monitors could not address dual-contract problems raised in submissions presented to the Code reviewer Jan McClelland in 2008.

Subject to paragraph 8.1 of the constitution, the Code Monitors are evidently not at liberty to investigate complaints being considered by the FOS until finalised, and then to accept the bank funded FOSs findings. This creates a hurdle for bank customers in their endeavours to have Code breaches investigated due to the conflict of interest that exists between banks and bank funded Compliance Monitors and the FOS.

The bank CEOs constitution evidently vests discretion with the Compliance Monitors conducting inquiries of their own, so long as the sole purpose of the inquiry is the monitoring of subscribing banks Code compliance. Banks process 4 billion transactions per year, and there is evidence they collectively receive several hundreds of thousands of complaints yearly, yet the monitors investigate about 25 transactions annually.

One Million Complaints, One Breach

In 2008, the Code Monitors stated they named one bank since 2003 ‘in connection with a Code breach’. This was despite the ANZ Banks publication stating it received 40,000 complaints per year which, by simple calculation, means 14 banks received a million complaints over five years since publishing Code (2003).

The limited number of alleged code breaches should have been investigated by the ACCC. In its 9 April 2008 submission to the Code reviewer, ACCC raised concerns about the language used in the Code that did not fulfil its own requirement in clause 2.1(d) ‘requiring information to be provided in plain language:

    • language used in the Code should be simplified. Wherever possible, it should be consumer friendly so the consumers have a clear understanding of their rights, and the banks’ obligations under the Code.

The ACCC also had access to the 2005 FEMAG code review, which referred to the bank CEOs constitution. This concern had not been addressed when the ACCC made further 2008 submissions to Ms McClelland. The ACCC commented on the Codes audience in 2005, stating they were nearly all non-legally trained customers, with a need to understand the wording in the bank/ customer contract without having to obtain expensive legal advice.

Since 2003, the Government regulators and Code Reviewers have failed to effectively deal with ambiguous words in the Code.

Restricted Powers to Sanction

Sections 34 of the Code sets out the consequences when banks are guilty of serious or systemic non-compliance; ignore the monitors request to remedy a breach or fail to do so in reasonable time, breach undertakings given to the monitors or not taken steps to prevent the breach reoccurring.

Paragraph 10.7 of the constitution prohibits the monitors making a public statement, except in their Annual Report, without approval of the FOS and ABA. By 2008, the only sanction the Code Monitors had imposed on a subscribing bank was the public naming of one bank in their 2008 Annual Report.

Lack of independence and transparency

Clause 34(h) of the Code limits the independence of Compliance Monitors by including further controls, with the banks requiring the monitors to carry out their functions, and set out its operating procedures ‘first having regard to the operating procedures of the FOS and then consulting with the FOS and ABA’.

Although it is difficult to determine what’s precisely meant by the phrase ‘first having regard to operating procedures of the FOS,’ the intention appears to limit the powers of the monitors to contradict, conflict with or impinge on the jurisdiction of the FOS, nor damage the banks.

The FOS made a submission to Code reviewer Jan McClelland on 4 August 2008, which appears self-serving. It was silent on the bad faith arrangement surrounding the constitution and the monitors limited powers, whilst purporting to seek clarification of the relationship between the FOS and Compliance Monitors. The FOS suggested:

    • A single entry point to raise alleged breaches of the Code would make the operation of the Code more streamlined and easier for customers ‘ that is, customers would be able to lodge their complaint with the FOS and have it referred to the appropriate organisation without having to navigate the complexities of which organisation is more appropriate having regard to the individual circumstances of their matter.

The FOS seems more concerned with structural issues surrounding the Code than the bank/ customer relationship. Rather than seeking to undo the FOS/ constitution relationship limiting the monitors dispute resolution powers, which differ from the monitors’ Code duties. At the moment, the FOS activities do not exclude them finding there have been Code breaches.

The FOS also has a duty to investigate their role working with the banks as it appointed the Code Compliance Monitors with limited powers. This should pose a greater concern to the FOS if its governance practices and duties are flawed.

Compromised Review Process

The transparency and efficacy of the Code managed by Code Compliance Monitors with limited independence and powers, requires an investigation, with real answers. Clause 5 of the Code requires the ABA to commission an independent and transparent code review every three years, in consultation with banks, consumer organisations, industry associates and relevant regulatory bodies.

The bank/ customer contract, while voluntary, notes banks must carryout a review of the code every three years. Given apparent lack of independence and rigor, the banks might be relying on ASIC’s position that it does not need to approve the banks self-regulated voluntary code.

The ABA is an industry body made up of bank CEO’s as representatives of banking and financial institutions and, with this, there is a real need for an independent review. However, no previous review has adequately addressed the banks involvement in the monitoring and constitution, nor serious conflicts of interest that exist.

Ms Jan McClelland in 2008 overlooked independence and transparency and remained silent on the need to address potential ‘conflicts of interest’ between banks, the FOS and Compliance Monitors, and the flawed application of the banks Internal Dispute Resolution clauses. These reviews also failed to address the application of reviews, the Code practices and the need to investigate Code breached and complaints outside the courts.

In 2012 legislators, regulators, banks and small business advocates should address the need for an independent Code review dealing with the constitution and the IDR process.

McClelland failed to adequately deal with these ‘Key Issues’ prior to handing her December 2008 Final Report to the ABA and subscribing banks. Stakeholders might assert McClelland failed to give equal weight to consumer opinions that was reluctant to deal with substantive issues, favouring potentially biased bank submissions that did not address the bank/ customer relationship.

The Code Compliance Monitors, acting as whistleblowers in their 11 March 2008 and 29 July 2008 submissions to McClelland, raised concerns by people who were in-the-know regarding lack of customer protection. No reviewer should have overlooked the problematic relationship between the code and constitution, which has been swept aside by reviewers and regulators.

Consumer advocacy groups might have expected ‘conflict of interest’ and relationship concerns to be effectively dealt with by Officers of subscribing banks following Ms Jan McClelland’s Final Report in 2008.

This paper questions the bank practices, suggesting they acted deceptively, intending to take away the rights of customers. Later sections in the paper discusses applications of banking codes in developed economies world-wide with no evidence of corrupt banking other than in Australia with self-regulated banking.

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



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