The Unpleasant Truth About Australian Banking

The level of detail completed by the Martin Committee was impressive. It was a cookbook of advice for parties to understand their role in the proposed change process. Unlike many Government manuscripts, this one was not intended to sit on a shelf as a forgotten dream.

For the report to achieve successful implementation, it required widespread support from the community and a complete change in direction by banks. The Committee was drawn to the idea of a Code of Banking Practice, which should be enforceable as a contract on account of the retention by the courts of their authority to enforce implied contractual terms.

The Committee’s report noted the importance of fairer terms for bank customers. This was out of fear that ‘the contractual terms of the banking relationship raised issues of public policy, not effectively dealt with by negotiation between substantially unequal parties.’

Minimum Terms and Conditions

The Martin Committee cited Lord Scarman, who had stated in a related decision of the House of Lords that ‘the business of banking is the business not of the customer, but of the bank.’

In a detailed analysis of banking law and practice, it was recommended the Australian Law Reform Commission be requested to set minimum terms and conditions of the banker-customer relationship, with the terms of reference specifying the need to:

    • distribute rights, responsibilities and the risk of loss in the banking relationship with fairness and equity; and
    • take into account the need for a workable and efficient payments system; and
    • encourage product development; and
    • encourage fair market competition; and
    • ensure bank customers are aware of their rights and responsibilities; and
    • ensure that banking contracts are not one-sided.

Disclosure Requirements

The Martin Committee’s recommendations embodied principles of disclosure and information as a right of individuals in line with the Freedom of Information Act 1982 (Cth). The concerns referred to how banks went about disclosing information ‘when it suits and denying access when it does not.’

It obtained evidence of this at Dubbo, NSW. It observed how a bank applied double standards as it selectively withheld and disclosed information at its convenience.

The Martin Committee cited the principle of access to information in the Freedom of Information Act 1982 (Cth) and invoked its object ‘to extend as far as possible the right of the community to access to information in the possession of the Government of the Commonwealth’ including ‘access to personal information as a right.’

Martin took the opportunity to share information on the United Kingdom’s Draft Code of Banking Conduct. ‘Through the UK Data Protection Act 1984, it provided for personal information to be made available.’

It was recommended a Code, contractually enforceable by banks customers and subject to ongoing monitoring by the Trade Practices Commission be developed.

To this end, there was a need for a process of consultation between the banking industry, consumer organisations, Commonwealth regulatory agencies and relevant State Government authorities.

The key bankers representative was the ABA, which was an advocate for the industry and formed many years earlier in an effort by banks to oppose a government proposal to nationalise the banking system.

The consultative process during the Martin Committee review took effect under the auspices of the Trade Practices Commission in which monitoring should have regard to the degree of compliance with the Code and, in the light of changing circumstances, to the ongoing appropriateness of the provisions in the Code.

Dispute Resolution

To avoid costs involved in litigation, the Martin report argued there was a need for the rationalisation of an industry-based dispute resolution procedure in the area of consumer financial services. To this end, the Committee sought speedy implementation by banks of effective complaint-handling schemes. Supporting this, it proposed banks promote the existence of their complaints departments, advising customers with brochures in bank branches and annual reports.

A number of comprehensive procedures for dispute resolution were recommended. As part of a more complete dispute resolution process, Martin observed banks were moving towards the ‘establishment of their own internal complaint-handling divisions, the commencement of the collection of detailed data arising from consumer complaints and the feeding of that data into their long-term planning.’

The ineffectiveness of internal dispute resolution procedures became evident with the Financial Ombudsman Service showing most customer complainants went directly to them, without previously being dealt with internally by the banks. The FOS believed the banks internal systems were inadequate, or that consumers lacked confidence in using them.

External: The Financial Ombudsman Service

The Martin Committee acknowledged the special focus on dispute resolution. Despite the development of the FOS, many submissions expressed the difficulties consumers and small businesses experienced in seeking to contest a banks action, decision or calculation.

The Martin Committee stated the Code ‘could not support the extension of the Ombudsman’s service to cover small business generally’. The Committee further stated the ‘size and complexity of many small business operations would swamp the Ombudsman’s office at the expense of small consumers.’

The Martin report stated many disputes arise because customers are unaware of their rights and obligations under their banking contracts. The Committee agreed with the Ombudsman’s recommendation that ‘improving communications between banks and customers will help to avoid potential disputes.’

This also furthered the argument for contracts to be written in plain language.

The National Australia Bank stated banking practices should be codified on a national basis. It further stated there should be a self-regulated Code and that the Ombudsman ‘is probably the one that first comes to mind as a possibility for ensuring adherence to a voluntary Code’.

Need for Independent Mediators

The Martin Committee recommended independent mediators, similar to the ones relied on by banks and foreign currency borrowers, be appointed to mediate cases that remain in dispute. The determinants of the mediator will not be binding on either party. The mediator should operate under conditions that:

    • mediation would not be possible where cases have already proceeded through all stages of appeal so the court processes are recognised; and
    • would not be possible where out of court settlements have been reached; and can be sought where cases are still in court without final decision, or pending, and any determinations of the mediator will be non-binding on both parties so both have the option of pursuing court action; and

both parties pay proportionally for their usage of the mediator.

Monitoring: Reserve Bank – Trade Practices Commission and Australian Payments System Council

The Martin Committee believed once a Code of Banking Practice was implemented it ought to be monitored by an appropriate Commonwealth regulatory authority. It noted ‘the value in having one agency at Commonwealth level with primary responsibility in relation to consumer banking issues.’ Independence from banks would be an important feature an agency at Commonwealth level would enjoy, which was the same independence the US Federal Reserve enjoyed.

The Martin Committee examined the US Federal Reserve’s responsibilities in regulation and monitoring of consumer financial services in America. However, the RBA expressed no desire to take on a similar role here, explaining the circumstances prevailing in the US, such as the difficulty of achieving consistency across many States and the large number of financial institutions was not relevant in Australian. The report expressed concern about the possible impact of additional duties on its overall efficiency.

The Trade Practices Commission was the committee’s choice for the monitoring body. Although the TPC did not have channels of communication with banks to the same degree as the RBA, it was experienced in Code development and monitoring, and had contact with the consumer movement. It possessed relevant powers and responsibilities under the Trade Practices Act 1974.

The Martin Committee thus recommended the ‘Trade Practices Commission be given formal responsibility for overseeing consumer banking issues at the Commonwealth level including the monitoring of the recommended Code of Banking Practice.’

The TPC was not, however, asked to monitor compliance with the 1993 Code. That position went to the Australian Payment System Council, a non-statutory government agency chaired by the Reserve Bank.

The authority of the Payment Council under the 1993 Code was limited to obtaining information from the Reserve Bank based on reports the banks provided. With this information, the Payment Council would submit to the Treasurer its reports on bank compliance with the Code.

The 1996 Code however provided no indication the banks would not comply with the pre-condition of the Attorney General’s Department that the Code be very vigorously administered.

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


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