The Unpleasant Truth About Australian Banking

In the Appendix of the FEMAG Report headed Matters Beyond The Scope Of This Review, it notes:

the constitution constrains the Code Compliance Monitoring Committee from making public statements on their own behalf other than in the Annual Report without prior approval of both the FOS and chairs of the bank CEOs association. This could preclude the Monitors speaking publicly at conferences or forums where they are seeking to raise their profile and improve relationships with the banks or other stakeholders.

Besides constraining the independence of Compliance Monitors, it implies a lack of trust in them. There may well be matters the Compliance Monitors should make public from time to time other than in its Annual Report and the Code does not prevent them from doing so.

It is of paramount public interest the public perceives the Compliance Monitors as both a responsible and accountable independent body regulating the banking industry.

Requiring the Compliance Monitors to obtain approval of the banks that appointed them, the FOS and association Chairs, before they can issue public statements must be seen by stakeholders to severely undermine the perception of impendence. At issue is the timeliness with which information is made publicly available. By requiring prior approval, the banks can silence critics and according to the review ‘it could be some 12 months before a bank found to be in systemic breach could be named’.

The conduct of banks, being fiduciary institutions, is often measured against highest standards of care. It is contrary to public interest a bank in breach of its own Code be afforded protection from the scrutiny of the public eye.

Indemnity and exerting influence over Monitors

FEMAG responds to the need for full indemnity to be provided by the bank CEOs to Compliance Monitors make reciting comments by banks. The bank CEOs will have considered the most appropriate structure when they received the Viney Report in 2001, and preferred an unincorporated body to manage the affairs of the bank CEOs association and the Code Compliance Monitors Committee.

FEMAG commented on the effect of this decision without commenting on motives of the banks and stated:

paragraph 14.1 and 14.2 of the constitution provides for a ‘full indemnity by the Association, or its members, of Code Compliance Monitoring Committee members against liabilities arising out of their actions as members.’ However the bank CEOs association being unincorporated, the status of Compliance Monitors being unclear and doubts about access to liability insurance cover suggest the Compliance Monitors might not be adequately protected in all circumstances.

FEMAG concluded stating ‘consideration be given to establishing the Code Compliance Monitoring Committee as a legal entity in its own right.’ This suggestion diverts attention from the core issues of responsibility and accountability. If the Compliance Monitors are carrying out a public function, there should be a high level of accountability that arises from them should their actions or conduct cause damage.

To indemnify the Monitors against such responsibilities appears to weaken the obligation they have to the public to monitor high standards set out in the Code and to conduct themselves with integrity in regard to their duties.

It needs to be asked what the bank parties motives were when they drafted its constitution in 20 February 2004 limiting the independence and powers of the Monitors. Instead, the banks introduced the opt-out provision that safeguarded bank managers and officers if they act dishonestly or flout the Code.

It is unlikely either the individual and small business customers, or FEMAG, would have suspected the banks failure to incorporate the Code Compliance Monitoring Committee as a limited liability company meant they could justify indemnifying the Compliance Monitors for damages which might flow from their failure to comply with clause 34 of the Code.  Certainly, had that been the case, FEMAG would have raised this in 21 recommendations provided to the Compliance Monitors in their October 2005 report.

Merging parties: CCMC and the FOS

The FEMAG report analysed advantages and disadvantages of forming a single dispute resolution and Code compliance body through amalgamation of the Code Compliance Monitoring Committee with the FOS. It preferred amalgamation, as it concluded it would establish a stronger link and foster cooperation between them.

The issue of the Compliance Monitors autonomy and accountability should have been prioritised before suggesting amalgamation with the industry bodies. Independence is critical to Compliance Monitors in carrying out its role of compliance monitoring and for self-regulation to function effectively.


FEMAG recommendations

FEMAG made recommendations in its 2005 report not dealt with or evaluated by the Compliance Monitors in their 2006 Annual Report. The recommendations included:

(R1) develop its own budget associated with a business plan;

(R2) following the development of a business plan, its resources could be increased to provide for further employment of staff and contracted consultants;

(R3) increase the commitment of the Compliance Monitors for the next two years and thus to increase in their remuneration for that period;

(R4) as result of the above, improvements in procedures should be invited;

(R5) that the Committee give consideration to this;

(R6) email bulletins to member banks each quarter and conduct forums with the bank Code compliance staff on a regular basis;

(R7) email bulletins to financial counsellors and consumer organisations each quarter and conduct forums with them on a regular basis;

(R8) email COSBOA, State/Territory Small Business Commissioners with updated bulletins;

(R9) inform ASIC, ACCC, State and Territory Fair-Trading/ consumer protection agencies of compliance issues, and email quarterly reports inviting them to forums;

(R10) distribute an abridged version of the annual report to parliamentarians and seek to be included in the industry-based ombudsmen’s road shows;

(R11) build its profile amongst stakeholder groups, but do not seek to attain a high profile with the general public;

(R12) seek professional advice in the operation and effectiveness of it’s, the FOS and other appropriate websites and to have links on appropriate websites;

(R13) monitor the level of compliance with paragraph 9 of the Code concerning the display and availability of the Code at bank branches;

(R14) have a brief resume of it’s and the FOSs role, with contact details in Code booklets distributed by banks, and require same in the next version of the Code;

(R15) seek data on how many complaints referred to the FOS involve possible Code breaches and for how many actual breaches were found to exist;

(R16) obtain feedback on survey forms within three months of the receipt of all of the completed survey forms;

(R17) include all of the above techniques in its business plan as Compliance Monitors resources allow;

(R18) discuss this idea further with the FOS;

(R19) share information with the FOS with a view to the FOS developing a mechanism to transfer information about Code breaches to the Code Compliance Monitoring Committee;

(R20) discuss better ways of informing consumers about both bodies and encourage contact with Compliance Monitors in relation to Code issues; and

(R21) develop a business plan for a 3-year period setting out methods of monitoring that the Compliance Monitors will use.

2005 FEMAG report summation

The Code Compliance Monitoring Committee was established as an unincorporated body separate from the Bankers Association and the FOS. The FEMAG report looks to investigate whether the Compliance Monitors are able to effectively and efficiently undertake functions set out in the Code. The report makes the point that this may clearly be constrained by the manner of its establishment.

For the Compliance Monitoring Committee’s functions to be undertaken efficiently and effectively, FEMAG set out conditions that need to be satisfied. They include having:

satisfactory investigative powers; and

adequate resources; and

access and ability to collect compliance information regarding breaches of the code as soon as possible after their occurrence ; and

authority to interpret the code independently or to obtain authoritative interpretations; and

ability to make public statements on code compliance and to publicly name banks and as and when it thinks fit; and

ability to act with confidence as to the professional liability of Committee members.

2005 FEMAG report concludes:

these conditions are largely satisfied, however we think there are some issues that could very usefully be considered when the bank CEOS constitution and the Code are reviewed.


2005 FEMAG report states:

We were told, and we fully agree, that increased general monitoring by the Compliance Monitors would add greatly to the public confidence and through this the public credibility of the self-regulatory approach. It demonstrates commitment by banks to the Code and self-regulatory apparatus designed to deliver outcomes.

A number of stakeholder representatives raised concerns about the Compliance Monitors access to information from the FOS relating to Code breaches. We have recommended the Compliance Monitors require banks to provide information on Code breaches the FOS has raised with them because banks will not see complaints that relate to Code provisions

Other than banks, the BFSO is currently the main potential source of possible instances of code breaches, but potential code breaches also need to come to the Committee. In some cases this will occur because the complainant or, their adviser, sees value to the operation’ of making a parallel complaint to the CCMC.

Complaints that come to the FOS involving loss, and the FOS deals with, are potential instances of Code breaches. The FOS may not pursue a Code breach as to do so may not be in the interest of efficiently. There may well be a significant number of potential instances of Code breaches that do not get attended to.

Even where a complainant raises a potential instance of Code breach simultaneously with the FOS and the Compliance Monitors, the Monitors are currently constrained. Paragraph 8.1(b) of the bank CEOS constitution prevents Compliance Monitors considering a complaint if it is being or may be considered in another forum.

It is difficult to ascertain the extent FEMAG reviewers were constrained from exploring key issues raised in the Appendix. Regardless of these limitations, of greater concern to individuals and small businesses was lack of follow-up by later Code reviewers and banks following the insightful FEMAG report. Nor does it seem the FEMAG report was fully appreciate the banks, preferring to rely on options they held in Paragraph 8.1 of the bank CEOs constitution.

At the very least, substantive issues were raised by FEMAG regarding dubious structures and extraordinary relationships should have been dealt with more carefully by following reviewers. These structures and relationships signalled motives behind the unpublished constitution that should have raised alarm bells.

Bank motives seemed well disguised in a set of ethics and best-practice principles. FEMAG only suggested how banks might later control their Committee members. It seems dubious structures and flawed practices may have been excluded because they were beyond the scope of this review.

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