Review of the Code of Banking Practice Final Report · Review of the Code of Banking Practice Final...

Review

of the

Code of

Banking Practice

Final Report

October 2001

Richard Viney RTV Consulting Pty Ltd

Review of the Code of Banking Practice Final Report, October 2001

TABLE OF CONTENTS

ABBREVIATIONS AND DEFINITIONS.............................................................1

SUMMARY OF FINAL RECOMMENDATIONS.................................................3

CHAPTER 1 - INTRODUCTION .....................................................................17

Appointment of the Review..........................................................................17 Terms of Reference .....................................................................................17 The existing Code of Banking Practice........................................................17 The Review Process....................................................................................17 Acknowledgements......................................................................................18 Structure of this Report................................................................................18

CHAPTER 2 – UNCOMPLETED MATTERS ..................................................21

CHAPTER 3 - GENERAL ISSUES..................................................................23

Objectives and Principles ............................................................................23 Fairness.......................................................................................................24 Prudential Principle......................................................................................25 Scope of the Code .......................................................................................26

Definition of “Banking Service”.......................................................................... 26 Definition of “Customer” .................................................................................... 26

Code monitoring and Administration............................................................27 Educating Code Members (and their staff and agents) About the Code .....30 Promoting the Code to Consumers, Consumer Advisors and the Public Generally .....................................................................................................31 Monitoring External Developments including Legislative Changes .............32 Arranging Regular Reviews of the Code .....................................................32 Implementing Changes................................................................................33 Access to Banking Services ........................................................................33 Access to Banking Services for People Unable or Reluctant to Use Atms, Telephone Banking or Internet Banking ......................................................35 Low Cost Accounts for Banking Services ....................................................35

CHAPTER 4 – DISCLOSURE REQUIREMENTS ...........................................37

Introduction..................................................................................................37 “Fleshing Out” the Necessary Detail for PDS ..............................................38 Timing Differences Affecting Notification of Changes .................................39 Which Disclosure Requirements Contained in Existing Clauses Should Remain in the Code? ...................................................................................40 Other Gaps ..................................................................................................43 Statements of Account for Credit Products..................................................43 Statements of Account for Non Credit Products ..........................................44 Shadow Ledgers..........................................................................................45 Staff Training ...............................................................................................46 Copies of Documents...................................................................................46 Customers in Financial Difficulties...............................................................47

Review of the Code of Banking Practice Final Report, October 2001

Debt Recovery............................................................................................. 48 Privacy and Confidentiality.......................................................................... 49 Credit Assessment ...................................................................................... 49 Implementing Family Court Decisions and Family Law Settlements........... 51 Direct Debits from Accounts Other Than Credit Card Accounts ................. 52 Direct Debits from Credit Card Accounts .................................................... 55 Application of Code to Guarantors .............................................................. 56 Provision of Information to Guarantors ....................................................... 57

(i) Consent of principal debtor to provision of information ............................. 57 (ii) Obligations to provide information ......................................................... 58 (iii) Financial Information ............................................................................. 58 (iv) Advice about the operation of the guarantee......................................... 59

Form of Guarantee (Limitations) ................................................................. 61 Right to Cap Liability ................................................................................... 61 Right to Withdraw........................................................................................ 62 Enforcement ................................................................................................ 62 Joint Borrowers ........................................................................................... 63 Subsidiary Cards......................................................................................... 64 Mutuality and Set Off................................................................................... 64 Dispute Resolution...................................................................................... 65 Electronic Communication........................................................................... 67

SCHEDULE 1 - LIST OF SUBMISSIONS....................................................... 69

SCHEDULE 2 - ABA FINAL RESPONSE TO ISSUES PAPER ..................... 71

Review of the Code of Banking Practice Final Report, October 2001 1

ABBREVIATIONS AND DEFINITIONS

ABA Australian Bankers’ Association

ABA Final Response ABA’s annexure to its final response to the Issues Paper submitted in August 2001. (See Schedule 2)

ABIO Australian Banking Industry Ombudsman

ACA Australian Consumers’ Association

ACCC Australian Competition & Consumer Commission

APCA Australian Payments Clearing Association

ASIC Australian Securities & Investments Commission

Code Code of Banking Practice

DDR Direct Debit Request

EFT Code Electronic Funds Transfer Code of Conduct

FSR (the) Financial Services Reform Bill or Act, as the case requires

Hawker Report Hawker Committee Report entitled “Regional Banking Services: Money too far away”

JCS The submission to the review made jointly by:

• Consumer Credit Legal Centre (NSW) Inc

• Consumer Credit Legal Service (Vic) Inc

• Consumer Credit Legal Service (WA) Inc

• Consumer Law Centre Victoria Inc

• Care Inc Financial Counselling Service (ACT)

• Financial Services Consumer Policy Centre Inc

Ledger FI (the) customer’s bank

PDS Product Disclosure Statement(s)

UCCC (the)(Uniform) Consumer Credit Code


SUMMARY OF FINAL RECOMMENDATIONS

1. In lieu of Objectives 1 and 2, the Code should articulate the following:

“Key Commitments

We promise that we will

• work towards continuously improving the standards of practice and service in the banking industry;

• promote better informed decisions about our products and services including:

by providing effective disclosure of information;

by providing advice on bank services to customers on request, whether through bank staff authorised to give such advice or by referring customers to appropriate external sources of advice; and

by explaining to customers, when asked, the contents of brochures and other written information about bank services;

• provide information about your rights and obligations in relation to banking services; and

• ensure that all information we provide to customers and prospective customers will be in plain language.”

2. The Code should incorporate a principle of “fairness” in terms to the following effect:

“We promise that we will act fairly and reasonably towards you (our customers) in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.”

3. A prudential principle should be retained in the Code in terms to the following effect:

“In meeting our key commitments we will have regard to our prudential obligations.”


4. The Code should define banking service to mean any financial service provided by a bank to a customer in terms which make it clear that the definition:

• includes any financial service or product provided by a bank whether supplied to a customer directly or through an intermediary; and

• in the case of a financial service or product provided by another party but distributed by a bank, does not extend to that product or service but extends to the bank’s distribution or supply of the service or product to a customer.

5. The Code should define customer as meaning an individual or a small business.

6. The Code should define a small business to mean a business employing:

• less than 100 people if the business is or includes the manufacture of goods; or

• in any other case, less than 20 people.

7. The Code should provide for a monitoring mechanism and sanctions having the criteria detailed in the proposal set out in ABA’s Final Response, subject to it being made clear that:

• complaints about breaches of the Code will be received from consumer organisations and state regulatory agencies;

• the ABIO may refer to the code monitoring body, breaches of the Code detected by ABIO in the course of its dispute resolution function; and

• nothing in these proposals will in any way limit or affect the ABIO’s existing jurisdiction or function.

8. The Code should oblige banks to ensure all relevant staff and agents have an adequate knowledge of its provisions.

9. The Code should require the Code administration body to promote the Code among bank customers, consumer advisors and the public generally.

10. Banks should be obliged to display the Code, and have copies available on request by any person, at all branches.


11. Banks which do not have branches and banks which offer internet banking must refer to the Code on their websites and provide copies of the Code on request by mail or electronically.

12. Banks should monitor external developments relating to banking codes of practice and related issues.

13. The Code should provide that an independent review of the Code is conducted every three years under a process which ensures:

• adequate consultation with banks, consumer organisations, ABA and other interested industry associations, relevant regulatory bodies and other stakeholders;

• interested parties have adequate time to present views; and

• the process is transparent.

14. The Code should provide for the establishment of a forum for the regular exchange of views between banks and consumer advisors on banking issues.

15. The Code should require ABA to:

• promptly publish the final report and recommendations of any review; and

• publish on ABA’s website, progress reports on implementation of a review’s recommendations until the implementation process is complete.

16. The Code should incorporate the branch closure protocols set out in recommendations 20.1 to 20.4 of the Hawker Report.

17. The Code should provide that banks take all reasonable measures to enhance access to banking services for older people and people with disabilities.

18. The Code should require banks to provide details of their accounts which are most suitable to low income or disadvantaged persons who are prospective customers and also to existing customers whose present facilities may not be optimal.


19. Significant overlap between Code provisions and other laws, particularly UCCC and FSR, is undesirable and overlapping provisions should, except where there are special reasons to the contrary, be deleted from the Code.

20. At or near the commencement of the Code, there should be included a statement to the following effect:

“Customers are advised that in addition to their rights under this Code they may have rights under Federal laws, especially the Trade Practices Act and the Financial Services Reform Act and under State and Territory laws, especially the Consumer Credit Code and Fair Trading Acts.”

21. The Code should contain a provision to the following effect:

“We will comply with all relevant laws relating to banking services, including those concerning:

• consumer credit products;

• other financial products and services;

• privacy; and

• discrimination.”

22. The Code is not the appropriate medium for fleshing out the necessary detail of PDS for the purposes of FSR.

23. UCCC and not the Code should specify the notice requirements for changes to UCCC regulated products.

24. FSR and not the Code should specify the notice requirements for changes relating to fees and charges.

25. The existing Code notice requirements should be retained for all other changes.

26. A revised Code should deal with existing disclosure provisions contained in clauses 2 to 9, 11, 13 and 19, in the following way:


Current Code provision

Recommended action

2.1 Retain, subject to –

• deleting 2.1 (iv) as a consequence of the last item in Final Recommendation 1; and

• adding at the end of 2.1 (vi) “unless that information is not relevant to the particular banking service”.

2.2 Retain

2.3 Retain, subject to the following modifications:

• in 2.3 (i) delete the words “nature of all”; and

• in 2.3 (vii) add after “Customer” the words “which is not regulated by the Consumer Credit Code”.

3.1 Retain

4.1 Retain, but modify so that the clause only applies to a banking service in the nature of a provision of credit which is unregulated by UCCC.

5.1 Omit


• in 6.1 (ii) delete all words after the word “Customer”; and

• delete 6.1 (iv) as a consequence of Final Recommendation 57.

6.2 Retain

7.1 Delete, as this sub-clause will be incorporated into a new clause pursuant to Final Recommendation 27.

7.2 Retain

7.3 Retain, but limit the operation of the sub-clause to such of the services presently mentioned as are not covered by FSR.

8.1 Retain



Recommended action

9.1 Retain, but modify so as to add after the words “Banking Service” the words “not being a Banking Service regulated by UCCC or FSR”.

9.2 Retain

9.3 Retain, but modify so as to -

• add after the words “Banking Service” the words “not being a Banking Service regulated by UCCC”; and

• ensure that there is an exclusion where, because the interest rate is linked to money market rates or another reference rate, changes cannot be advised in advance.

11.1 Retain but qualify to recognise that some counterparty charges may not be known to the Australian bank.

11.2 Retain

13.1 Retain, but modify to make the sub-clause mandatory.

13.2 Retain

13.3 Retain

19.1 Retain, but substitute the words “Banking Service” for the words “financial service”.

27. A revised Code should also contain the following new disclosure provision:

“INFORMATION TO BE PROVIDED ON REQUEST

A Bank shall provide expeditiously to any person on request:

• the terms and conditions of any banking service the Bank provides;

• full particulars of fees and charges that are or may become payable for any banking service we provide;

• particulars of the interest rates applicable to any banking service we provide regardless of whether that service relates to a deposit or credit product.”


28. There should be retained in the Code those existing Code disclosure obligations which are not replicated in or superseded by disclosure requirements arising under FSR or UCCC.

29. The Code should apply the substance of the UCCC requirements in sections 31 to 34 (inclusive) to small business statements of account and related information. However, the relevant Code provision should recognise that there are some credit products used by small business to which those UCCC requirements cannot in practice be applied.

30. Code clause 14.1 should require a statement of account at least each three months.

31. Existing 14.1 (i) should contain a further exception relating to accounts where the bank and the customer have agreed that conventional statements of account are not necessary.

32. The existing exception in clause 14.1 (ii) should be replaced with a new exception applicable where no amount has been debited or credited to the account during the statement period (other than debits for government charges or duties on receipts or withdrawals).

33. A further exception should be added relating to cases where the bank is unable, after taking reasonable steps, to locate the customer.

34. The Code should contain a provision informing customers that they can request more frequent statements of account from their bank.

35. The Code should provide that banks will:

• automatically provide customers in default with statements of account as if the accounts were not in default; or

• where it is not possible to comply with the above, ensure that statements of account are provided in a timely manner to customers on request and ensure that customers are fully informed about the availability of statements and the method of requesting them.


36. The Code should require banks to ensure that staff are competent to discharge their functions efficiently.

37. The Code should:

• require banks to supply on request, copies of contracts, account statements, notices and other relevant documents to customers, guarantors and persons acting for them, subject to the usual confidentiality and privacy requirements being satisfied;

• provide that the times within which copies are to be provided be modelled on UCCC section 163(2); and

• provide for an exception modelled on UCCC section 163(4).


“With your agreement, we will try and help you overcome your financial difficulties with us, for example, with your co-operation, developing a plan with you for dealing with your difficulties with us and telling you in writing what we have agreed. If the Consumer Credit Code applies to your credit facility with us we will explain the hardship variation provisions of that Code to you.”

39. The Code should require banks to:

• comply with the guideline published in July 1999 by ACCC for debt collection activities; and

• ensure that their agents comply and require their representatives to comply, with the guideline.

40. Clause 12.1 in the existing Code should be retained in the revised Code.

41. In lieu of Clause 15.1, the Code should contain a provision to the following effect:

“Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in assessing whether we think you will be able to repay it.”


42. The Code should provide that a bank shall, no later than 1 July 2002, publish guidelines setting out the manner in which the bank will:

• deal with applications for transfer of mortgages and consents to transfer of title pursuant to a Family Court determination or approval; and

• otherwise enforce debts affected by a family law property settlement.

43. The Code should contain a clause which provides that:

• a bank will accept forthwith a customer’s instruction to cancel a Direct Debit Request and will not direct or suggest that the customer should first seek to cancel the Request by contacting the debit user;

• a bank will accept and proceed to process forthwith in accordance with the BECS regulations and procedures a customer’s complaint that a debit which has occurred was unauthorised or otherwise irregular and will not direct or suggest that the customer should first seek to resolve or raise the complaint directly with the debit user;

• neither of the above rules is intended to prevent a bank which has accepted the customer’s instruction to cancel or customer’s complaint from suggesting that the customer should then also contact the debit user; and

• banks will take all reasonable steps to facilitate the amendment of the APCA rules by no later than 1 July 2002 to provide for a direct debit guarantee with the principal features of the UK guarantee, but subject to such limitations and conditions as are prudentially necessary.

44. On the assumption that MasterCard and Visa rules do not specifically prohibit Australian banks from including in their terms and conditions for credit cards, provisions which permit a customer to cancel a credit direct debit authorization through their bank, the Code should contain a provision which requires banks to include in their terms and conditions a clear right for customers to cancel such authorisations.

45. The Code should require a bank to ensure that the terms and conditions of use of any credit card:

• include general information on the existence and operation of chargeback rights;


• specify prominently an appropriate time frame for reporting a disputed transaction, being a time frame which would allow the bank to request a chargeback but would not unnecessarily shorten the reporting time; and

• warn the cardholder that the ability to dispute the transaction may, but need not necessarily, be lost if they do not report in time.

46. The Code provisions relating to guarantees should apply to all guarantees given by individuals in respect of facilities or accommodation provided by a bank to an individual or to small business whether incorporated or not. For these purposes “small business” shall be defined to have the same meaning as that proposed in Final Recommendation 6.

47. A bank shall not enter into a contract of guarantee with a guarantor unless the guarantor has first been provided with a copy of the contract and such other information as is required by this Code to be given to the guarantor.

48. The Code should require a bank to provide a prospective guarantor with all relevant information about the principal debtor and the transaction or facility to be guaranteed which:

• is in the possession of the bank; and

• a prospective guarantor would reasonably require in order to decide whether or not to enter the guarantee.

For this purpose, information includes representations with respect to a future matter, and also includes information provided by the principal debtor to the bank and any credit reporting agency reports and other expert reports obtained by the bank. It would not include the bank’s own internal opinions.

49. The Code should require a bank to advise guarantors to seek financial advice.

50. The Code should contain provisions which require:

• a bank to advise the guarantor that the guarantor can refuse to enter into the guarantee, that there are financial risks involved and that the guarantor should obtain independent legal advice;

• a warning notice similar to the UCCC notice to appear directly above the signature of the guarantor to reinforce


the verbal warning on any guarantee not regulated by UCCC;

• a bank to ensure that unless it is demonstrably impracticable to do so, the guarantor must sign the guarantee in the absence of the principal debtor;

• a guarantor to be given information and advice at least one day before signing the guarantee unless the guarantor has received independent legal advice; and

• a bank to provide a guarantor on request with full statements of the guaranteed account or accounts and copies of any applicable facility documents, securities, guarantees, credit related insurance products and any notices previously given to the principal debtor and the times within which any such document is to be provided shall be modelled on UCCC section 163(2).

51. The Code should provide that a bank shall not accept an all accounts or all monies mortgage unless the mortgage contains a provision that it does not extend to any future contract or facility unless the mortgagor signs an extension of the mortgage after being provided with a copy of the new contract or facility.


• require that the guarantor be given a contractual right to vary the guarantee by reducing the cap on liability or limiting the amount or nature of the liabilities guaranteed, subject to appropriate qualifications to protect the bank’s financial position; and

• adopt the requirements set out in UCCC section 54 in relation to the extension of a guarantee to any future contract between the bank and the principal debtor.

53. The Code should confer rights on guarantors to withdraw from a guarantee as set out in UCCC section 53 as in force in all States other than Western Australia.

54. The UCCC rules relating to the enforcement of guarantees should be applied by the Code to all guarantees in respect of all debtors other than small business debtors.


55. The Code should provide that:

• a bank should not sign up a party as a co-borrower where, on the facts known to the bank, the party will receive no direct benefit under the contract;

• a bank shall, before signing up co-borrowers, take all reasonable steps to ensure that each borrower understands the full extent of his/her liability;

• a bank shall ensure that under any contract it enters into, where each party is jointly and severally liable, either party should be able to terminate that liability unilaterally in respect of future advances or financial accommodation by written notice to the bank. Qualifications may be necessary to protect the bank’s legitimate interests in relation to further advances it is obliged to make and in respect of contingent liabilities which may accrue in the future.

56. The Code should provide that where a primary cardholder advises the issuing bank that it wants a subsidiary card cancelled, the primary cardholder shall not be liable for continuing use of the card, provided the primary cardholder takes all reasonable steps to procure the return of the subsidiary card to the issuing bank.


• a bank, when opening a new account for a customer who already has an account(s) with the bank, shall state in writing whether the account will be segregated from the other account(s) and what the consequences are if the account is not segregated; and

• the statement in writing shall be specific to the customer and the customer’s accounts.

58. Internal Complaint Handling

A bank will have an internal process for handling complaints with its customers. This process will:

• be free of charge;

• be consistent with Australian Standard AS 4269-95 or any other industry dispute resolution standard or guidelines which ASIC declares to apply;

• ensure that customers are notified of the name and contact number of a person who is investigating their complaint;


• specify time frames in line with those specified in clauses 10.5, 10.6 and 10.8 of the revised EFT Code for the completion of investigations and the reporting to complainants in exceptional cases; and

• require the bank to provide written reasons for its decision in respect of a complaint [subject to any Code provisions on election for electronic communications].

The internal process will be available for all complaints other than those that are resolved to the customer’s satisfaction immediately they are drawn to the attention of the bank.

59. External Dispute Resolution

A bank will have available to its customers an external and impartial process for resolving disputes. This process will be free of charge and will be consistent with the regulatory guidelines for the approval of external complaints resolution schemes.

60. Publicising and notifying customers of complaints and dispute resolution processes:

A bank will prominently publicise the availability and accessibility of both its internal and external processes for resolving complaints and disputes.

As a minimum, information about internal and external processes will be readily accessible and on display in bank branches and be accessible through bank Internet sites and bank telephone banking services.

In addition, a bank will provide a customer with written information [subject to any Code provisions on election for electronic communications] about:

• the internal process, at the time that a customer makes a complaint that is not immediately resolved to the satisfaction of both the customer and the bank; and

• the external process, at the same time as a customer is informed of the internal process and again at the time that a customer is advised of the final outcome of the internal process if that outcome does not wholly satisfy the customer’s claim.

61. The Code should contain rules which permit banks to provide by electronic means, information required by this Code to be given in writing to a customer, in terms that are consistent with clauses 22.1, 22.2 and 22.3 of the EFT Code.


CHAPTER 1 - INTRODUCTION

APPOINTMENT OF THE REVIEW

On 12 May 2000, I was appointed by the Australian Bankers’ Association (ABA) to conduct a review of the Code of Banking Practice (Code). The establishment of the review was publicised in press advertisements and by letters sent by ABA to banks, consumer representatives, state ministries of fair trading and consumer affairs, members of parliament and other interested persons and organisations.

TERMS OF REFERENCE

The terms of reference are reproduced in full in Appendix 1 of the Issues Paper.

THE EXISTING CODE OF BANKING PRACTICE

The history of the development of the Code is set out briefly in the Issues Paper. This is the first review of the Code which was adopted by banks in November 1993 but did not become fully operative until November 1996. The existing Code is set out in Appendix 2 of the Issues Paper.

THE REVIEW PROCESS

The review was established on 12 May 2000 and proceeded in the following way:

• The initial five week period allowed for parties to make submissions proved to be inadequate and a series of extensions were granted. In excess of 70 submissions were received and a list of the parties who made submissions is set out in Schedule 1 to this report.

• Extensive negotiations were conducted with various stakeholders, as noted in the Issues Paper.

• A Code review website (www.reviewbankcode.com) was established and the major submissions were published on that website in the interests of enhancing the efficiency and transparency of the review process.

• After receiving the views of a number of stakeholders, I agreed that at the conclusion of receiving and considering submissions, I would publish an Issues Paper indicating my preliminary views on the issues raised.

• The Issues Paper was published at the commencement of March 2001 and final responses were invited with a closing date of 5 June 2001. For various reasons a number of major stakeholders were unable to make that deadline


with the result that it was not until August that all responses had been received.

In the Issues Paper I noted1 that at least to that stage the participation in the review by banks generally, had been rather limited. It is clear from the Final Response from ABA on behalf of banks (which is set out in Schedule 2 to this report) and responses from some individual banks, that since the publication of the Issues Paper, banks have responded to the process in a responsible and open manner. Banks also entered into fruitful discussions with consumer representatives, which was particularly pleasing having regard to the enormous effort originally put into the process by the consumer representatives.

Banks, through ABA have also indicated that the actual drafting of a revised Code to implement the recommendations already accepted by the banks in their August 2001 response will be conducted in a process which will involve consumer and regulator input.

The great majority of the interim recommendations in the Issues Paper have been fully or substantially accepted by the banks. There are some issues where the responses from ABA and banks have convinced me that the relevant interim recommendation was simply not correct or that an alternative proposal is superior or at least as acceptable. Finally, there are a small number of issues where I regard the banks’ response as disappointing and in respect of which I have maintained the original recommendations. I simply ask that banks reconsider their position on those few issues.

This final report is not the end of the whole process. It will remain for banks to take the necessary steps to arrange for the drafting of a new or revised Code of Practice to give effect to the agreed recommendations. I look forward to the speedy implementation of the recommendations in the form of a redrafted Code.

ACKNOWLEDGEMENTS

The success or otherwise of any review of this nature is ultimately dependent upon the extent to which stakeholders choose to contribute to the process. As is obvious from the Issues Paper, and the submissions posted on the Code review website, very substantial contributions were made by consumer representatives, especially the Legal Centres and other contributors to the Joint Consumer Submission (JCS) and ACA, and by ASIC and ABIO. The process was also assisted by the many submissions from individuals, organisations and State ministers and agencies, listed in Schedule 1. I must also acknowledge the substantial effort made by banks in the latter stages of the review and last but not least, the contribution made by the Australian Bankers’ Association, both in presenting views and in providing administrative and like support in ways which were effective yet respected the independence of the review.

STRUCTURE OF THIS REPORT

This report is intended to be read in conjunction with the Issues Paper. For convenience, the Issues Paper is reprinted with this report so that interested 1 Issues Paper, p.2


parties will have easy access to it and the source material set out in its various Appendices.


CHAPTER 2 – UNCOMPLETED MATTERS

There are a number of issues which were raised in the course of the review which it has not been possible to finalise.

Some are of a technical or relatively minor nature which are likely to be resolved in the Code drafting process.

However there are some unresolved issues which should, in my opinion, be the subject of further investigation:

• Whether banks should be obliged to financially compensate customers (possibly through the payment of a flat sum per instance) for shortfalls at ATMs and for direct debiting errors.

• Where a bank normally charges a fee if an entry on a statement disputed by a customer is proved to be correct, whether a sum equivalent to the fee should be credited to a customer’s account if an entry on a statement disputed by the customer is found to be incorrect.

• Whether the Code should require banks to comply with other relevant Codes.

• Whether notification through the media alone of changes to terms or conditions is an effective way of communicating the changes to customers.

• How the needs of consumers with low literacy levels might be met through improved disclosure and other documents.

• Whether customers should be offered the option of being able to place a stop on credit card accounts in certain circumstances.

• Whether a bank in its advertising and point of sale promotion of certain types of accounts should be required to include specific reference to the institution’s contractual right to unilaterally change the terms and conditions.

A recommendation is made in this report2 that the Code should provide for the establishment of a forum for the regular exchange of views between banks and consumer advisors on banking issues. In its Final Response and in subsequent discussions, ABA has indicated that the unresolved matters listed above should not delay the completion of the review and that it supports these matters being referred to that forum for resolution.

2 Final Recommendation 14


CHAPTER 3 - GENERAL ISSUES

OBJECTIVES AND PRINCIPLES

The Issues Paper sets out at some length3 the criticisms that consumer representatives make of the existing Code and the banks’ views on what should be the objectives and principles of a modernised Code of Banking Practice in Australia. After reviewing those matters and specific submissions on objectives and principles from consumer representatives, the Issues Paper made the following interim recommendations:4

• in lieu of Objective 1, the Code should articulate a commitment to continuous improvement in the standards of practice and service in the banking industry; and

• in lieu of Objective 2, the Code should articulate a commitment to promoting better informed decision making by all means available, including providing effective disclosure and providing appropriate advice.

In broad terms, the ABA Final Response has expressed agreement with that recommendation but in a modified form, as follows:

“Key Commitments



• promote better informed decisions about our products and services including by providing effective disclosure of information; and

• provide information about your rights and obligations in relation to banking services.”

As the Note to this proposal in the ABA response5 indicates, banks have a concern about the consequences under FSR of providing financial product advice. While I can understand that concern, I suspect there has been a misunderstanding of the interim recommendation that banks commit to “promoting better informed decisions about bank products by….providing appropriate advice” (emphasis added).

It was not the intention that banks should ensure that each staff member likely to deal with the public must be trained so as to be capable of advising any customer on any bank product. Rather, the term “providing appropriate advice” was intended to mean providing advice, on request, through a person

3 Issues Paper pp 8-11

4 Issues Paper, p.15

5 Schedule 2, p.2


whose training and knowledge is adequate for the purpose, whether that person is a bank employee whose normal duties include giving advice about the relevant product or some external person to whom the customer is referred by the bank. The original recommendation also had in mind the provision by appropriate bank staff of explanations of banks’ promotional and product disclosure documents to their customers. The final recommendation is in terms which are intended to clarify these matters.

Consumer representatives have also suggested that a fourth key commitment be added to ensure that all information provided by banks to customers and prospective customers will be in plain language.

Final Recommendation

1. In lieu of Objectives 1 and 2, the Code should articulate the following:

“Key Commitments



• promote better informed decisions about our products and services including:

by providing effective disclosure of information;

by providing advice on bank services to customers on request, whether through bank staff authorised to give such advice or by referring customers to appropriate external sources of advice; and

by explaining to customers, when asked, the contents of brochures and other written information about bank services;

• provide information about your rights and obligations in relation to banking services; and

• ensure that all information we provide to customers and prospective customers will be in plain language.”

FAIRNESS

The Issues Paper contained a recommendation6 that the revised Code should incorporate an undertaking by banks to act fairly in their dealings with customers. The proposal was to incorporate a slightly modified form of the commitment to fairness contained in the New Zealand Banking Code.

6 Issues Paper p.17


In its Final Response to the Issues Paper7, ABA proposed to incorporate into the Code a provision committing banks to act fairly in their dealings with customers, but with a somewhat different form of drafting. Some banks which made final responses to the Issues Paper also expressed support for incorporating the principle of fairness. It should be borne in mind in dealing with the matter of fairness, that the Code as revised, will be contractually binding on banks with the result that the obligation will be a serious one.

The terms of the suggestion proposed in the ABA Final Response is as follows:

“We promise that we will act fairly and reasonably towards you (our customers) in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us”.

In my view, the ABA proposal has the advantage of being simpler and more succinct than the one proposed in the Issues Paper and will represent, when implemented, a considerable advance in bank customers’ rights.


2. The Code should incorporate a principle of “fairness” in terms to the following effect:

“We promise that we will act fairly and reasonably towards you (our customers) in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.”

PRUDENTIAL PRINCIPLE

The Issues Paper recommended8 that the existing Code provision in the preamble under the heading “Principles” should be retained. Consumer representatives have withdrawn any objections they had to the retention of this principle. Accordingly, I believe the concept should be retained in the Code although I see merit in ABA’s suggestion that the drafting be simplified.


3. A prudential principle should be retained in the Code in terms to the following effect:

“In meeting our key commitments we will have regard to our prudential obligations.”

7 Schedule 2, p.2



SCOPE OF THE CODE

Definition of “Banking Service” The Issues Paper recommended9 that the term “banking service” be defined to mean any service provided by a bank. ABA agreed with that recommendation. The only issues that remain with respect to this definition are:

• whether the definition makes it sufficiently clear that the intended policy is that a bank should have responsibility for any banking service or product of its own which is supplied to a customer either directly or through an intermediary; and

• whether it is also clear that while a bank does not have a responsibility under the Code to stand behind someone else’s product which the bank sells or distributes as an agent, it nonetheless is responsible for any loss caused by shortcomings in the selling process.


4. The Code should define banking service to mean any financial service provided by a bank to a customer in terms which make it clear that the definition:

• includes any financial service or product provided by a bank whether supplied to a customer directly or through an intermediary; and

• in the case of a financial service or product provided by another party but distributed by a bank, does not extend to that product or service but extends to the bank’s distribution or supply of the service or product to a customer.

Definition of “Customer” After reviewing at some length the existing limitations on what the term “customer” should mean in a revised Code, the Issues Paper made a number of recommendations10:

• The Code should apply to any banking service provided to an individual, whether alone or jointly with another individual.

• The operation of the Code should be extended to small businesses.

• The Code should define “small business” in the same terms as FSR defines “retail client”.

ABA has proposed what I regard is the simplest and most effective definition. ABA proposes:


10 Issues Paper, p.19 and p.22


“Customer means an individual or small business”.11

Moreover, the note to the relevant recommendation in the ABA Final Response makes it plain that this approach is a more progressive solution than that advocated in the Issues Paper in that it simply proposes that a majority of the provisions of the Code could apply equally to a small business as to any other customer. However, it also suggests that there will need to be some modifications of the Code where the small business situation is necessarily different. Examples of where the Code would need modification to apply satisfactorily to small business are confidentiality and privacy and access to low cost accounts.

In my view, this is a most satisfactory solution and far preferable to the proposal in the Issues Paper that the existing voluntary Small Business Principles should be reviewed and as reviewed incorporated into the Code. Although neither FSR nor UCCC will apply so as to require the provision of disclosure in any credit contract for a small business, the existing requirements of Code clause 2.3 (as proposed to be modified) will provide for disclosure of fees and charges, interest charges and methods of calculation and repayment details.

Finally, the ABA response12 proposes that the term “small business” be defined consistently with the definition of that term in FSR.

Final Recommendations

5. The Code should define customer as meaning an individual or a small business.

6. The Code should define a small business to mean a business employing:

• less than 100 people if the business is or includes the manufacture of goods; or

• in any other case, less than 20 people.

CODE MONITORING AND ADMINISTRATION

The proposals for monitoring compliance with the Code and the imposition of sanctions for non-compliance have been the most controversial aspect of the review.

The submissions received from consumer representatives and ASIC all argued for an independent, well resourced Code monitoring agency with a capacity to impose a range of effective sanctions for Code breaches, including breaches which do not cause financial loss to customers.

11

Schedule 2, p.4 12

Schedule 2, p.5


The way in which this issue is ultimately resolved by the banks will go to the very heart of the efficacy of any revised Code. If the Code is to achieve credibility as an instrument of self-regulation, there must be demonstrable reasons for having confidence that Code subscribers will comply with the Code and will be subject to appropriate sanctions when they do not. It is the absence of any effective monitoring and sanctions under the existing Code which has led to the widespread view, referred to in the Issues Paper, that the present Code lacks credibility and indeed relevance.

In response to those submissions the Issues Paper made the following recommendation:13

“The Code should:

• entitle consumers, consumer advocates, regulatory agencies and dispute resolution schemes to make complaints about non-compliance with the Code;

• detail complaint making investigation and decision-making processes;

• ensure the investigation and decision-making processes are impartial, fair, efficient and accountable;

• provide an adequate range of sanctions;

• provide that the oversight of these processes should rest with the Code monitoring agency.”

In view of the importance of this topic it is convenient to set out in full the text of the relevant part of ABA’s Final Response, as follows:

“5. Monitoring compliance with the Code

All ABA member retail banks are committed to establishing an independent, transparent and efficient process for monitoring banks’ compliance with this Code. Banks see this mechanism as fundamental to an effective Code and have closely examined a range of possible models to achieve this. Set out below are the key criteria of an agreed model14:

1. A committee, the Code Compliance Monitoring Committee, would be set up within the Australian Banking Industry Ombudsman scheme. Agreement of the ABIO to do this would be necessary.

2. The function, powers and composition of the CCMC would be spelt out in the Code. These could change if the Code were changed.

3. The CCMC would operate quite separately from the Ombudsman’s dispute resolution function so as not to adversely affect that function.

13

Issues Paper p.27 14

ABA’s internal Code review working group has held many discussions over possible approaches to monitoring of compliance and have reached a majority consensus on this model. As Commonwealth Bank has submitted in its submission to the Reviewer, it recognises the importance of having independent compliance monitoring. CBA does not necessarily oppose the model proposed by ABA. It however regards as necessary that further analysis, evaluation and consultation take place on the various options to ensure the most effective mechanism is adopted.


4. The CCMC would be a committee of three:

• One person having had relevant experience at a senior level in retail banking, appointed by the Code subscribing banks;

• One person having relevant experience and knowledge as the representative of the general body of bank customers, appointed by the ABIO.

• One person having had experience in industry, commerce, public administration or government service, appointed jointly by the ABIO and the Code subscribing banks.

5. The CCMC would employ a small secretariat to service the CCMC.

6. All decisions about banks’ compliance with the Code would be the responsibility of the CCMC.

7. To ensure CCMC operated diligently, within power, efficiently and effectively, the CCMC would be required to commission an independent annual audit of its activities and for that audit report to be lodged with ASIC for publication. Agreement of ASIC to perform this role would be required.

8. Banks would continue to prepare their own annual compliance reports and to lodge them with the CCMC.

9. CCMC’s functions and powers would be to:

• Monitor Code compliance by comparing banks’ annual reporting of compliance with CCMC’s own experience gained through “shadow shopping” and the incidence of complaints from customers about banks’ non-compliance.

• Receive complaints about breaches of the Code and refer them to the banks concerned for response and remedial action where necessary.

• Report annually on the level of compliance.

• Report in its annual report un-remedied, serious and systemic breaches by a bank with discretionary power to name the non-complying bank.

6. Sanctions

Sanctions against banks for breaches of the Code irrespective of whether financial loss is incurred by the customer is an issue closely tied to the compliance monitoring function. Disputes where the customer incurs a financial loss are already covered by the Banking Industry Ombudsman Scheme. The proposed compliance monitoring model above also contains proposals for handling serious systemic Code breaches and imposition of a naming sanction for repeat offenders.”

The model proposed in ABA’s Final Response falls short of what was proposed in the interim recommendations, particularly with respect to the sanctions.


Under the ABA proposal the only sanction contemplated is a public naming of “repeat offenders” by the monitoring body.

It nonetheless has to be conceded that the proposals in the ABA Final Response are a substantial advance on the present position. In all the circumstances it may be acceptable to give those proposals a chance to operate and review the position after a couple of years experience with them. However, if this is done, it would be useful to clarify firstly, that complaints about breaches of the Code will be able to be received from consumer organisations and State regulatory agencies and secondly, that the ABIO could refer to the monitoring body, breaches of the Code detected by it in the course of ABIO’s dispute resolution function.

Nothing in these proposals should in any way affect the ABIO’s existing jurisdiction and complaint resolution functions.


7. The Code should provide for a monitoring mechanism and sanctions having the criteria detailed in the proposal set out in ABA’s Final Response, subject to it being made clear that:

• complaints about breaches of the Code will be received from consumer organisations and state regulatory agencies;

• the ABIO may refer to the code monitoring body, breaches of the Code detected by ABIO in the course of its dispute resolution function; and

• nothing in these proposals will in any way limit or affect the ABIO’s existing jurisdiction or function.

EDUCATING CODE MEMBERS (AND THEIR STAFF AND AGENTS) ABOUT THE CODE

The Issues Paper recommendation15 was that “the Code oblige banks to ensure all relevant staff and agents have an adequate knowledge of its provisions.”

The ABA Final Response16 is in the following terms:

“we will ensure that our staff and agents receive training and documentation so that they are competent to provide the Banking Services they are authorised to provide and that they have an adequate knowledge of the provisions of this Code.”

On analysis, this proposal deals with two separate issues, namely, the provision of training and documentation so that staff are competent and secondly ensuring that staff have an adequate knowledge of the provisions of the Code.

15

Issues Paper, p.28 16

Schedule 2, p.7


In my view these are two very different issues and thus it is preferable to deal with them quite separately as was done in the Issues Paper. Accordingly, I would prefer to leave the recommendation of the Issues Paper on educating staff about the Code unchanged and deal elsewhere with the broader issue of competency.


8. The Code should oblige banks to ensure all relevant staff and agents have an adequate knowledge of its provisions.

PROMOTING THE CODE TO CONSUMERS, CONSUMER ADVISORS

AND THE PUBLIC GENERALLY

The Issues Paper recommendation17 was as follows:

• The Code should require the Code administration body to promote the Code among bank customers, consumer advisors and the public generally.

• Banks should be obliged to display the Code, and have copies available on request by any person at all branches.

The proposal in the ABA’s response18 is quite different:

“ABA will promote the Code including which banks subscribe to it and how to obtain access to the Code.”

The difficulties with the ABA suggestion are firstly that ABA is not bound by the Code and secondly, it implicitly means that banks are not to have any responsibility, at least under the Code, for promoting it and making it available to the customers. In the note to its proposal, ABA draws attention to the fact that some banks do not have branches. While that might be, I believe it is important that copies of the Code be available from bank branches. However, I agree that other means of access should be provided, particularly for banks without branches and as a matter of convenience to customers by receiving requests by telephone or electronically.


9. The Code should require the Code administration body to promote the Code among bank customers, consumer advisors and the public generally.

10. Banks should be obliged to display the Code, and have copies available on request by any person, at all branches.

17


Schedule 2, p.7


11. Banks which do not have branches and banks which offer internet banking must refer to the Code on their websites and provide copies of the Code on request by mail or electronically.

MONITORING EXTERNAL DEVELOPMENTS INCLUDING LEGISLATIVE CHANGES

The Issues Paper recommended19 that this function be done by the Code monitoring body. ABA agrees20 that monitoring is necessary but believes that banks do this already as a matter of course and the Code could therefore, as an alternative, require subscribing banks to monitor external developments and legislative changes. This appears to be a satisfactory alternative.


12. Banks should monitor external developments relating to banking codes of practice and related issues.

ARRANGING REGULAR REVIEWS OF THE CODE

The Issues Paper recommendation21 was to the following effect:

At the minimum, the Code should provide that the review process will ensure:

• Adequate consultation with interested parties;

• Interested parties to have adequate time to present views;

• The review process is transparent.

The Code should establish a forum for regular exchange of views between banks and consumer advisors on banking issues.

The ABA Final Response22 supports the concept of the independent reviews every three years in consultation with a range of stakeholders. In addition, work is already progressing on the establishment by ABA of a consultative forum.


13. The Code should provide that an independent review of the Code is conducted every three years under a process which ensures:

19


Schedule 2, p.7 21


Schedule 2, p.7


• adequate consultation with banks, consumer organisations, ABA and other interested industry associations, relevant regulatory bodies and other stakeholders;

• interested parties have adequate time to present views; and

• the process is transparent.

14. The Code should provide for the establishment of a forum for the regular exchange of views between banks and consumer advisors on banking issues.

IMPLEMENTING CHANGES

The Issues Paper recommended23 that the Code should require ABA to promptly publish the final report and recommendations of any review and to publish regular reports on the progress of implementation.

ABA’s Final Response24 accepts that proposal.


15. The Code should require ABA to:

• promptly publish the final report and recommendations of any review; and

• publish on ABA’s website, progress reports on implementation of a review’s recommendations until the implementation process is complete.

ACCESS TO BANKING SERVICES

The Issues Paper noted25 the large number of concerns raised by a range of organisations and individuals, including state governments, municipal councils and chambers of commerce, about branch closures, particularly in regional and rural Australia. It noted that branch closure protocols have been dealt with in the Hawker Report which made a number of recommendations.

Recommendation 20 of the Hawker Report read in part as follows:

“The Committee recommends that the industry adopts a branch closure protocol which incorporates the following:

23


Schedule 2, p.8 25

Issues Paper, pp. 31-33


1. Banks will give three months notice to customers and relevant community organisations such as Local Councils, of their intention to close a branch.

2. Banks will consult with local communities about trends in the delivery of banking services and, in particular, about developments that have the potential to affect the delivery of services in that region. Included in this will be a genuine desire to use community goodwill to improve the viability of the branch. In the event of a decision to close a branch, banks will consult with the community about preferred options for alternative services and on the training to be provided in using alternative channels.

3. Banks will provide written notice of at least two months before changing the branch that manages an account.

4. In the event of closing or downgrading a branch below agency status, banks will waive any fees or penalties incurred relating to early repayment of loans or closing of accounts.”

The Issues Paper recommended that the Code incorporate the proposals made in recommendations 20.1 to 20.4 of the Hawker Report.

ABA’s response26 to that recommendation is as follows:

“ABA has recently released details of a rural and regional branch closure protocol as part of a more comprehensive set of initiatives to improve access to banking services ………… Banks have agreed that the branch closure protocol should be sign posted through the Code.”

I do not understand that under ABA’s initiative, banks will have (or end up having) an absolute obligation to comply with a branch closure protocol developed under the auspices of ABA and if that is correct, it is questionable what purpose would be served by “sign-posting” the branch closure protocol throughout the Code as suggested.

I remain of the view that the Code should incorporate the proposals made in recommendations from 20.1 to 20.4 of the Hawker Report as a minimum branch closure protocol to be followed by subscriber banks.


16. The Code should incorporate the branch closure protocols set out in recommendations 20.1 to 20.4 of the Hawker Report.

26

Schedule 2, p.8


ACCESS TO BANKING SERVICES FOR PEOPLE UNABLE OR RELUCTANT TO USE ATMS, TELEPHONE BANKING OR INTERNET BANKING

A wide range of submissions were received on the difficulties that advances in technology have brought to people who, for a variety of reasons, are unable or unwilling to use ATMs, telephone banking or internet banking.

This is a topic which does not lend itself, in my view, to the Code mandating specific measures to overcome or alleviate the problem but there is no doubting the seriousness of the problem and the sincerity with which the submissions have been made.

It was for that reason that the Issues Paper recommended that “the Code provide that banks take all reasonable measures to enhance access to banking services for older people and people with disabilities”.

In its response, ABA proposed27 recognising the special needs of elderly and disabled persons to have access to transaction accounts but was somewhat guarded as to the terms in which any commitment should appear in the Code. In part, the submission proposed “we will consider and implement steps we might reasonably take to facilitate access and to educate ……. on the use and benefits of accessing banking services through the new technologies”.

I prefer the original recommendation.


17. The Code should provide that banks take all reasonable measures to enhance access to banking services for older people and people with disabilities.

LOW COST ACCOUNTS FOR BANKING SERVICES

The Issues Paper discussed28 the submissions received from consumer representatives that the Code should provide that any person should be able to open a deposit account with any bank and that this right should not be limited by minimum deposit or opening balance requirements or other conditions. The submissions also argued that all subscriber banks should offer a basic banking account with a specified minimum number of fee-free transactions.

The Issues Paper noted that while the UK Banking Code describes a concept of a basic account, it does not oblige subscribers to offer such accounts but rather, provides that if a bank does offer basic accounts it must give any prospective customer information on its basic accounts if the bank thinks the customer might be interested in such an account. The UK Banking Code does not provide

27

Schedule 2. p.8 28

Issues Paper, pp. 37-38


any detail about the level of account keeping fees or how many fee-free transactions should be features of a basic account.

In my opinion, there is not much point in requiring banks to offer basic or low cost accounts without also specifying detailed minimum features in specific terms. It is for this reason that the interim recommendation29 was that:

The Code require banks to provide details of their accounts which are most suitable to low income or disadvantaged persons who are prospective customers and also to existing customers whose present facilities may not be optimal.

In its Final Response, ABA supports30 the essence of the interim recommendation and added that in March 2001, ABA announced a basic account standard and was proposing an application to ACCC for authorisation for banks to agree to provide accounts that at least meet that standard. In the circumstances I consider that the interim recommendation remains satisfactory.


18. The Code should require banks to provide details of their accounts which are most suitable to low income or disadvantaged persons who are prospective customers and also to existing customers whose present facilities may not be optimal.

29


Schedule 2, p.9


CHAPTER 4 – DISCLOSURE REQUIREMENTS

INTRODUCTION

The Issues Paper discussed at some length the desirability or otherwise of there being substantial overlap between the Code, UCCC and FSR. It made the following interim recommendations:31

• significant overlap between Code provisions and other laws, particularly UCCC and FSR, is undesirable and overlapping Code provisions should be deleted from the Code;

• there should be included in the Code for information purposes only (and not as substantive provisions), material which advises consumers and bank staff of disclosure rights and obligations arising under UCCC and FSR and other relevant laws and which summarises the principal features of those rights and obligations;

• in order to retain the essence of the current position whereby banks are contractually bound to meet their disclosure obligations under the Code, the Code should contain a provision by which banks contractually bind themselves to their customers to meet their disclosure obligations under FSR, UCCC and other relevant laws.

There was substantial support in the responses to the Issues Paper for the first of these recommendations, namely that overlapping was undesirable.

As to the second recommendation, a number of responses, particularly from banks and ABA, questioned the practicality of including in the Code (whether as an Appendix or otherwise) detail of disclosure rights and obligations which arise under other laws, particularly UCCC and FSR. On reflection I am persuaded that it is not practical to signpost for customers and bank staff in detail, disclosure rights and obligations arising under other laws. However, I believe that at or near the commencement of the Code there should be a concise statement that consumers also have rights under other named laws.

The essence of the third recommendation is addressed effectively by paragraph 15 of the ABA Final Response32 which in part reads:

“15 Customer access to information entitlements and contractual rights

We suggest the following drafting:

We will comply with all relevant laws and regulations relating to banking services including those covering:

31


Schedule 2, p.9




• privacy; and

• discrimination”.


19. Significant overlap between Code provisions and other laws, particularly UCCC and FSR, is undesirable and overlapping provisions should, except where there are special reasons to the contrary, be deleted from the Code.

20. At or near the commencement of the Code, there should be included a statement to the following effect:

“Customers are advised that in addition to their rights under this Code they may have rights under Federal laws, especially the Trade Practices Act and the Financial Services Reform Act and under State and Territory laws, especially the Consumer Credit Code and Fair Trading Acts.”


“We will comply with all relevant laws relating to banking services, including those concerning:



• privacy; and

• discrimination.”

“FLESHING OUT” THE NECESSARY DETAIL FOR PDS

Having dealt generally with the issue of overlap the Issues Paper then focused on whether it was desirable to use a revised Code as a mechanism for fleshing out the detail of the disclosure requirements under FSR for banking products and services.

The principal interim recommendation was that “the Code is not the appropriate medium for fleshing out the necessary detail of PDS for the purposes of FSR.”33

However, it is important to bear in mind that the extent of overlap is not perhaps as great in practice as might have been assumed.

33

Issues Paper, p.46


In general terms, the Code requires disclosure of certain things to be achieved by requiring those things to be included in the terms and conditions of a banking service. The Code also requires disclosure of other things to be made to any person, whether an existing customer or not, on request. These requirements serve different purposes than the purposes for which PDS statements are mandated by FSR. In addition, many of the disclosure obligations in the existing Code are of a consumer protection nature in that they warn customers of precautions that should be taken when operating accounts and using various banking services. It may be that some of those warnings might also be required to be described in a PDS as risks associated with the relevant bank product, but the existing provisions of this nature in the Code are succinct and the small amount of overlap is in my view, well justified by the benefit to consumers of retaining the warnings.


22. The Code is not the appropriate medium for fleshing out the necessary detail of PDS for the purposes of FSR.

TIMING DIFFERENCES AFFECTING NOTIFICATION OF CHANGES

The Issues Paper noted that if the overlapping disclosure provisions of the Code are deleted in favour of UCCC and FSR provisions, there will be some consequences on the timing of certain disclosures.

Having analysed the extent of the conflicts between the Code and UCCC with respect to the notification of changes, the Issues paper recommended34 that UCCC and not the Code should specify the notice requirements for changes to UCCC regulated products.

A comparative analysis of the FSR and Code provisions for the notification of changes revealed that while the FSR requirements for changes relating to fees and charges were satisfactory, the FSR requirements relating to other changes were significantly less precise or helpful to customers than are the existing Code provisions. For these reasons, the Issues Paper recommended that35:

• FSR and not the Code should specify the notice requirements for changes relating to fees and charges; and

• the existing Code notice requirements should be retained for all other changes.

In its response to the Issues Paper, ABA appears to submit36 that the FSR notice requirements should apply to all changes, not simply those relating to fees and charges. I do not believe that the ABA response demonstrates a good reason to depart from the interim recommendation. As can be seen from the Issues Paper the FSR rules will significantly weaken some of the disclosure requirements for

34



Schedule 2, p.10


non-credit products that have been in the Code since its inception. Banks are currently (and have for some time been) complying with those more rigorous Code requirements and I am not aware of any general bank criticism of those provisions. I therefore see no reason to change the interim recommendation.


23. UCCC and not the Code should specify the notice requirements for changes to UCCC regulated products.

24. FSR and not the Code should specify the notice requirements for changes relating to fees and charges.

25. The existing Code notice requirements should be retained for all other changes.

Note: The Issues Paper considered a proposal from ABIO that good banking practice requires that written notice should be given to all affected customers 30 days before the change comes into effect of any change in the minimum balance to which an account keeping fee applies or a change in the interest rate tiers applying to a deposit account. The Issues Paper made an interim recommendation to that effect37.

Final Recommendation 24 is based on an assumption that FSR will require 30 days notice of either type of change. If this assumption is incorrect, the Code should provide for such notice.

WHICH DISCLOSURE REQUIREMENTS CONTAINED IN EXISTING CLAUSES SHOULD REMAIN IN THE CODE?

In this context I am referring to existing Code clauses 2 to 9, 11, 13 and 19.

In my view, there should be retained in the Code any existing disclosure provisions which:

• require the disclosure of information in terms and conditions of banking service;

• require disclosure of information to any person on request; or

• have the principal purpose of warning or advising a customer about features of a banking product or the prudent use of the product.

However, in relation to existing Code provisions which deal with the notifications of changes, any such provisions should be retained only if that is also consistent with Final Recommendations 23, 24 and 25.

37

Issues Paper, p.56


Particulars of how, consistently with the above, existing Code clauses 2 to 9, 11, 13 and 19 should be dealt with are set out in the Final Recommendation below.


26. A revised Code should deal with existing disclosure provisions in clauses 2 to 9, 11, 13 and 19, in the following way:


Recommended action

2.1 Retain, subject to –

• deleting 2.1 (iv) as a consequence of the last item in Final Recommendation 1; and

• adding at the end of 2.1 (vi) “unless that information is not relevant to the particular banking service”.

2.2 Retain


• in 2.3 (i) delete the words “nature of all”; and

• in 2.3 (vii) add after “Customer” the words “which is not regulated by the Consumer Credit Code”.

3.1 Retain

4.1 Retain, but modify so that the clause only applies to a banking service in the nature of a provision of credit which is unregulated by UCCC.

5.1 Omit


• in 6.1 (ii) delete all words after the word “Customer”; and

• delete 6.1 (iv) as a consequence of Final Recommendation 57.

6.2 Retain



Recommended action

7.1 Delete, as this sub-clause will be incorporated into a new clause pursuant to Final Recommendation 27.

7.2 Retain

7.3 Retain, but limit the operation of the sub-clause to such of the services presently mentioned as are not covered by FSR.

8.1 Retain

9.1 Retain, but modify so as to add after the words “Banking Service” the words “not being a Banking Service regulated by UCCC or FSR”.

9.2 Retain

9.3 Retain, but modify so as to -

• add after the words “Banking Service” the words “not being a Banking Service regulated by UCCC”; and

• ensure that there is an exclusion where, because the interest rate is linked to money market rates or another reference rate, changes cannot be advised in advance.

11.1 Retain but qualify to recognise that some counterparty charges may not be known to the Australian bank.

11.2 Retain

13.1 Retain, but modify to make the sub-clause mandatory.

13.2 Retain

13.3 Retain

19.1 Retain, but substitute the words “Banking Service” for the words “financial service”.

27. A revised Code should also contain the following new disclosure provision:

“INFORMATION TO BE PROVIDED ON REQUEST38

38

This proposed clause was recommended in the ABA Final Response. See Schedule 2, p.10


A Bank shall provide expeditiously to any person on request:

• the terms and conditions of any banking service the Bank provides;

• full particulars of fees and charges that are or may become payable for any banking service we provide;

• particulars of the interest rates applicable to any banking service we provide regardless of whether that service relates to a deposit or credit product.”

OTHER GAPS

The Issues Paper noted39 that the exact extent of disclosure overlap between the existing Code and FSR will not be ascertainable until the total FSR package is finalised. At the time of writing this report this is still the position. Accordingly, the interim recommendation made in relation to this issue should be unchanged.


28. There should be retained in the Code those existing Code disclosure obligations which are not replicated in or superseded by disclosure requirements arising under FSR or UCCC.

STATEMENTS OF ACCOUNT FOR CREDIT PRODUCTS

The Issues Paper recommended that “the Code apply the substance of the UCCC requirements in sections 31 to 34 (inclusive) to small business statements of account and related information”.40

A number of parties have submitted in response that certain types of credit facilities used by small business are of such a nature that statements of account are not applicable (for example bank bills) or alternatively are of a nature that the strict application of the UCCC requirements would be impractical. To the extent that with particular types of facilities these arguments are valid, it is obvious that the revised Code should make the appropriate modifications.


29. The Code should apply the substance of the UCCC requirements in sections 31 to 34 (inclusive) to small business statements of account and related information. However, the relevant Code provision should recognise that there are some

39


Issues Paper, p.51


credit products used by small business to which those UCCC requirements cannot in practice be applied.

STATEMENTS OF ACCOUNT FOR NON CREDIT PRODUCTS

The Issues Paper recommended41 that:

• Code clause 14.1 require a statement of account at least once each three months;

• the existing exclusion in Code clause 14.1 (ii) be replaced with a new exclusion confined to the occasion where no amount has been debited or credited to the account during the statement period; and

• clause 14.1 (iii) be deleted.

ABA42 and certain of the banks have opposed the first of these recommendations which would have increased the minimum frequency of statements of account from six monthly to three monthly. Some banks specifically advanced costs involved in such a change as the justification. In my opinion this is a disappointing response.

It is common ground that customers are expected to carefully check the accuracy of their statements of account and promptly notify their bank of any apparent errors. In cases where customers have numerous transactions on their accounts, it seems unreasonable that the customer is expected to check the accuracy of transactions going back up to six months. This is a particularly acute issue where the customer has given direct debit authorizations because the customer does not give a specific or separate authorization for each debit transaction. For these reasons I recommend that the minimum frequency should be three monthly rather than six monthly.

As to 14.1(i) ABA has also proposed that this sub-clause should be retained but modified so that it excludes as well as passbook accounts, other accounts where the customer and the bank have agreed the conventional statements of account are not necessary. Internet banking arrangements are an example of such arrangements.

As to 14.1(ii) ABA has submitted that debits for government charges or duties on receipts or withdrawals should be disregarded and ABA further proposes that there should be exclusion from the obligation to give statements of account where the bank cannot, after taking reasonable steps, locate the consumer. I think those proposed modifications to 14.1(i) and (ii) are reasonable.

In discussions, ASIC suggested that the Code should also contain a provision informing the customers that they can request more frequent statements from their banks.

41


Schedule 2, p.11



30. Code clause 14.1 should require a statement of account at least each three months.

31. Existing 14.1 (i) should contain a further exception relating to accounts where the bank and the customer have agreed that conventional statements of account are not necessary.

32. The existing exception in clause 14.1 (ii) should be replaced with a new exception applicable where no amount has been debited or credited to the account during the statement period (other than debits for government charges or duties on receipts or withdrawals).

33. A further exception should be added relating to cases where the bank is unable, after taking reasonable steps, to locate the customer.

34. The Code should contain a provision informing customers that they can request more frequent statements of account from their bank.

SHADOW LEDGERS

In response to submissions from a number of parties including ACCC, the Issues Paper recommended43 that “banks automatically provide customers in default with statements of account as if the accounts were not in default”.

This interim recommendation incorporated only one of the two proposals advocated by ACCC, the other being that in the alternative (that is, where statements cannot be issued automatically) customers should be supplied with accurate statements of account on request and customers should be fully informed about the availability of statements and the method of requesting them. The second alternative was not included in the interim recommendation because of a misunderstanding. It appears that at least one bank cannot, until some future time, generate automatic statements of account for accounts in default and therefore the second alternative should be provided for.


35. The Code should provide that banks will:

43

Issues Paper, p.54


• automatically provide customers in default with statements of account as if the accounts were not in default; or

• where it is not possible to comply with the above, ensure that statements of account are provided in a timely manner to customers on request and ensure that customers are fully informed about the availability of statements and the method of requesting them.

STAFF TRAINING

In Chapter 2 of the Issues Paper44 a recommendation is made concerning educating Code members and their staff and agents about the Code. The Issues Paper also dealt with the broader issue of training and staff competency in all areas relevant to their duties and made an interim recommendation that the Code require banks to ensure that staff are competent to discharge their functions efficiently.

In its Final Response, ABA has essentially agreed that there should be a Code responsibility to ensure the staff are competent in relevant areas.

I believe that the interim recommendation is satisfactory.


36. The Code should require banks to ensure that staff are competent to discharge their functions efficiently.

COPIES OF DOCUMENTS

The Issues Paper made recommendations45 that:

• the Code should require banks to supply on request, copies of contracts, account statements, notices and other relevant documents to customers, guarantors and persons acting for them, subject to the usual confidentiality and privacy requirements being satisfied; and

• the times within which copies are to be provided should be modelled on UCCC section 163 (2).

The ABA Final Response46 generally agrees with the recommendations but proposes two additional exceptions to the obligation to provide copies which are not contained in UCCC section 163 (2). The exceptions would apply:

• where two years has elapsed after the discharge or termination of the original contract unless the document is still in use or it is reasonably foreseeable that it will be put in use; and

44



Schedule 2, p.12


• if a copy of the same document has been given within the preceding three months.

The first of the ABA exceptions is modelled on UCCC section 163(4) and should be included in the Code.

However, it seems to me that there is a real risk that adding the second additional exception, which does not appear in UCCC section 163, will lead to confusion. Banks will be in breach if their staff mistakenly believe that exception relieves them of the obligation to provide a copy of a document which relates to a UCCC regulated contract, mortgage or guarantee. If it is the case that the additional exception sought is essential as a matter of practice, any satisfactory solution also entails amending UCCC.



• require banks to supply on request, copies of contracts, account statements, notices and other relevant documents to customers, guarantors and persons acting for them, subject to the usual confidentiality and privacy requirements being satisfied;

• provide that the times within which copies are to be provided be modelled on UCCC section 163 (2); and

• provide for an exception modelled on UCCC section 163(4).

CUSTOMERS IN FINANCIAL DIFFICULTIES

The Issues Paper dealt at some length47 with the topic of customers in financial difficulties, as extensive submissions had been received from the representatives of leading consumer organisations.

Prior to the completion of the Issues Paper I had the opportunity to raise with banks the possibility of including in the Code a provision similar to that in the UK Banking Code.48 Banks raised two particular concerns about the UK provision:

• a concern that the bank needs “to avoid becoming the advisor to the customer, as there are clear conflicts of interest involved”; and

• a provision like the UK provision could “create unrealistic expectations by customers about the extent that the banks should legitimately go to assist them. This type of provision could lead to otherwise avoidable and unnecessary disputes.”

In the Issues Paper I said in relation to the first concern that I believed bank staff in their day to day dealings with customers regularly provide advice on

47

Issues Paper, pp.60-63 48

Issues Paper, Appendix 4, p.18


issues where there is an actual or theoretical conflict of interest, such as recommending which bank product best suits a customer’s needs.

As to the second concern, I said in the Issues Paper that I found it difficult to accept that a set of promises made after due deliberation by the UK banking industry would, if translated to Australia, create such problems as to make fulfilling the promises unmanageable for banks.

It is pleasing to note that the proposal now advanced in the ABA Final Response49 is much more outgoing and does commit banks to assisting their customers. I believe it is an acceptable alternative to the Issues Paper recommendation.



“With your agreement, we will try and help you overcome your financial difficulties with us, for example, with your co-operation, developing a plan with you for dealing with your difficulties with us and telling you in writing what we have agreed. If the Consumer Credit Code applies to your credit facility with us we will explain the hardship variation provisions of that Code to you.”

DEBT RECOVERY

The Issues Paper recommended50 that with respect to debt recovery and collection, banks should be required to:


• ensure that their agents also comply with the guideline.

In its Final Response, ABA51 has agreed with the recommendation.


39. The Code should require banks to:


• ensure that their agents comply and require their representatives to comply, with the guideline.

49

Schedule 2, p.13 50


Schedule 2, p.13


PRIVACY AND CONFIDENTIALITY

The Issues Paper contains recommendations52 that:

• until the Privacy Amendment (Private Sector) Act becomes fully operative, banks should comply with the National Privacy Principles; and

• once that Act is fully operative, banks should comply with the Act.

In its Final Response, ABA has not raised any issue with those recommendations. It is noted that the amendments to the Privacy Act 1988 made by the Privacy Amendment (Private Sector) Act 2000 will come into operation on 21 December 2001. It now seems unnecessary for this report to deal with any interim period before those amendments take effect.

Final Recommendation 21 will, if adopted, oblige banks to “comply with all relevant laws relating to banking services, including those concerning privacy”.

Accordingly, there is no need to make any further recommendation with respect to banks’ compliance with the Privacy Act.

However, ABIO has pointed out that clause 12 of the existing Code draws attention to a bank’s common law duty of confidentiality towards the customer which is not entirely subsumed into the new privacy legislation for the private sector. Accordingly, there is a need to retain in the Code the traditional duty of confidentiality owed by a bank to a customer.


40. Clause 12.1 in the existing Code should be retained in the revised Code.

CREDIT ASSESSMENT

During the review process three major submissions raised concerns about responsible credit extension and credit assessment. Among caseworkers in the consumer credit area there is a high level of concern over the perceived failure by banks to assess customers’ future ability to repay before inviting them to apply for a higher limits on their credit cards and over the offering of pre-approved limit increases for credit cards.

The existing provisions of clause 15 of the Code are so drafted that they fail to impose any precise or objectively measurable obligations on what banks shall take into account in making credit decisions.

The Issues Paper noted that by contrast a much more modern Code of Practice, the Mortgage Industry Association of Australia (MIAA) Code of Practice, provides in the following terms:

52

Issues Paper, p.66


“A member will always make such enquiries as are necessary to determine an applicant’s capacity to repay the proposed loan.”

Ultimately, the Issues Paper made the following recommendation:53

The Code should contain a provision, in lieu of existing clause 15.1, that could be drafted on the following lines:

“A bank will use the care and skill of a diligent and prudent banker in assessing the level of credit or loan funds it agrees to lend to a customer in order to satisfy itself that the level of credit or the loan funds are suited to the customer’s stated financial needs and within the customer’s capacity to repay.”

ABA’s Final Response to the interim recommendation54 was to offer an alternative in the following terms:

“Before we offer or give you a credit facility (or increase an existing credit facility), we will assess based on our information about you whether we think you will be able to repay it. In doing so we will exercise the care and skill of a diligent and prudent banker.”

There are two significant differences between the ABA proposal and the interim recommendation.

The ABA proposal deletes any reference to the requirement to be satisfied that the level of credit or the loan funds are suited to the customer’s stated financial needs. My understanding is that the interim recommendation by referring to the “customer’s stated financial needs” would probably prohibit the practice of making unsolicited offers to increase credit limits.

There has for some time, been a public debate about whether that practice actually results in significant numbers of consumers getting into financial difficulty. Banks argue that their statistics on percentages of cardholders falling into arrears after accepting unsolicited offers of credit limit increases, do not support an argument that the behavioural scoring employed in this practice causes more customers to fall into difficulty than other credit assessment methods. Consumer representatives and some State regulators have reservations about the validity of the conclusions drawn from those statistics and argue that further research and analysis is required.

There is another consideration. It is not as if there are no existing legislative provisions having a bearing on this issue. In my view UCCC section 70 (2) (l) already enables a debtor to apply for the re-opening of a contract on the ground that if proper enquiries had been made by the bank at the time the credit increase was made, those enquiries would have revealed likely future hardship in repayment. In light of these considerations I believe that more research and investigation is required to justify a prohibition on unsolicited credit limit increase offers and that accordingly it is appropriate to delete the reference to stated financial needs.

The other significant difference is that the ABA proposal appears to confine the criteria to be taken into account in determining capacity to pay, to “our 53


Schedule 2, p.14


information about you”. In my opinion such a limitation on the scope of the enquiry is not without risk to customers. Taken literally, it would mean that if a bank consciously set out to obtain the maximum freedom in offering unsolicited credit limit increases, it could achieve that purpose by minimising the information it obtained or retained about the customer. This is not as far fetched as it may appear. Asset based lending (where no investigation is made of the customer’s ability to repay and the only consideration is the adequacy of the security) is not unknown in this country.

I believe that the phrase “based on our information about you” should be deleted from the ABA proposal.


41. In lieu of Clause 15.1, the Code should contain a provision to the following effect:

“Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in assessing whether we think you will be able to repay it.”

IMPLEMENTING FAMILY COURT DECISIONS AND FAMILY LAW SETTLEMENTS

In response to submissions from the New South Wales Government and ASIC, the Issues Paper recommendationed55 that:

That the Code should provide that a bank shall, no later than 1 July 2002, publish guidelines setting out the manner in which the bank will:


• otherwise enforce debts affected by a family property law settlement.

The ABA Final Response generally agrees with this proposal.56


42. The Code should provide that a bank shall, no later than 1 July 2002, publish guidelines setting out the manner in which the bank will:

55


Schedule 2, p.14



• otherwise enforce debts affected by a family law property settlement.

DIRECT DEBITS FROM ACCOUNTS OTHER THAN CREDIT CARD ACCOUNTS

The Issues Paper examined at considerable length, the various submissions received from consumer representatives and from ASIC about the operation of the direct debit scheme for accounts other than credit card accounts. It also examined the position in the United Kingdom where a direct debit guarantee scheme operates.

After reviewing the relevant material, I concluded in the Issues Paper that there were serious flaws from a customer’s perspective in the direct debit scheme which need addressing. In particular I found57 that:

• The present scheme is not user friendly.

• It exposes customers to risk of loss to fraudulent or inefficient debit users as Ledger FI.s process debit requests in good faith without checking the authenticity of the request, leaving it to the customer to detect and challenge unauthorised debits.

• The customer risk is exacerbated if statements are received at three monthly or longer intervals.

• The majority of banks do not, in the first instance, attempt to assist the customer to cancel; rather the customer is directed to start with the debit user.58

• The majority of banks discourage customers from initiating a dispute process at the bank and encourage the customer to try first with the debit user. This is despite the fact that once the process has been initiated with the bank, the customer is guaranteed an outcome within seven business days.

• There is evidence that bank staff are confused about cancellation and dispute procedures, thus prejudicing customers.

• Finally, there is evidence that banks do not always automatically compensate customers for interest losses and fees and charges incurred as a consequence of direct debiting errors, even when these are apparent at the time the incorrect debit is recognised.

Nothing has occurred since the publication of the Issues Paper to suggest that any of the above conclusions was incorrect or in any way overstated the

57


It is important to acknowledge that, effective from 20 July 2001, the APCA rules were amended to ensure that Ledger FI.s (including banks) would accept customers’ instructions to cancel.


seriousness of the position. Rather, the One.Tel episode, which occurred several months after the release of the Issues Paper, brought home just how poorly the existing system serves customers.

On reflection, what has happened under the new direct debiting system is that banks minimised their levels of service to their customers. They routinely declined to accept their customers’ instructions to cancel debits and deflected those customers off to the debit user, sometimes in circumstances where it would have been apparent that the customer would have difficulty dealing with the debit user. Similarly, banks denied immediate access by their customers to what appears to be an efficient dispute resolution process under the rules by deflecting customers off to the debit user. In these circumstances, in lieu of having a guaranteed outcome within seven business days, the customer has been at the whim of the debit user with respect to how quickly and responsibly the debit user might entertain the dispute.

After the publication of the Issues Paper, I received a number of submissions from customers which contained graphic illustrations of the poor treatment they received from both their banks and the debit users. In some cases, the customers provided me with copies of letters they received from their bank in which the bank asserted that under the new rules adopted by APCA and approved by ACCC, banks no longer had any responsibilities for the conduct of the debit users.

In the aftermath of the One.Tel experience, ASIC showed commendable leadership and convened a round table meeting on direct debits on 26 July 2001. The meeting was attended by representatives from ASIC, APCA, ABA, banks, building societies, credit unions, consumer law centres and other consumer representatives, the MasterCard and Visa organisations, New South Wales Department of Fair Trading, two major debit users, the Reserve Bank, ABIO and myself.

The ASIC round table meeting focused principally on the following issues:

• direct debit usage trends

• the UK direct debit guarantee system

• the issue of the desirability of having caps to any direct debit guarantee

• the new APCA rule which had been made prior to ASIC round table under which banks must process any customer’s direction to cancel a direct debit authorisation

• consumer issues and concerns under the present system

• the need to have a much better dispute resolution procedure with time limits and for the customers to be informed how to make a complaint

• the need for consumer representatives to have input when amendments to the BECS regulations and procedures are proposed

• the need for there to be a process for identifying systemic issues in the usage of direct debits

• certain particular practices with special consumer detriment currently in use.


The round table meeting was successful and allowed participants to get a more broadly based understanding of the nature and extent of the problems and to discuss possible solutions.

ABIO, supported by other speakers, expressed a view that there was a clear need for customers to get an enforceable right to have their bank accept their instructions to cancel a direct debit authority and for customers to have their disputes about the regularity of debits which have occurred, handled by an effective process with clear time lines. ABIO made the point that this could be achieved only by including those rights in the Banking Code of Practice as banks are contractually bound under any contract for the provision of a banking service, to comply with obligations under the Code. I agree with that view.

The question of how the Code of Practice might deal with the establishment of a direct debit guarantee system after the style of the United Kingdom is not so easy. There are some obvious difficulties:

• any direct debit guarantee scheme must be prudentially responsible and accordingly, suitable limitations and exclusions will need to be devised if the scheme is to be feasible;

• a reviewer of the Code is simply not placed to investigate or recommend what might be suitable limitations and exclusions;

• it is possible that the rules for any feasible direct debit guarantee scheme may be somewhat complex and not be a good fit in the Code;

• banks are not the only institutions involved in direct debits and ideally, all the rules for a direct debit scheme should be in a single set of rules and not be found in the Banking Code of Practice and in the codes of practice for building societies and credit unions.

However, there was substantial support at the round table for the proposition that a direct debit guarantee is a highly desirable feature for the direct debit system in Australia and that until one is incorporated into the system customers will remain risk averse to giving direct debit authorities. The consequence of this is that until a satisfactory guarantee is incorporated into the Australian system, the relative usage of direct debits in Australia will remain a mere fraction of that in the UK and France.

In all the circumstances I believe that it is necessary, as a matter of urgency, for the Code to contain provisions which entrench in the Code the customer’s right to cancel a direct debit authority and to have the customer’s dispute about the regularity of a debit processed under the BECS regulations and procedures and that the Code expressly prohibit banks from attempting to deflect customers off to the debit user in either of those circumstances.

If these two key steps are taken the main problems which are discussed above will be overcome. For reasons outlined above, I do not believe it is appropriate that the Code should attempt to establish a direct debit guarantee but it could usefully contain a commitment by banks to facilitate the provision of such a guarantee within a reasonable time.



43. The Code should contain a clause which provides that:

• a bank will accept forthwith a customer’s instruction to cancel a Direct Debit Request and will not direct or suggest that the customer should first seek to cancel the Request by contacting the debit user;

• a bank will accept and proceed to process forthwith in accordance with the BECS regulations and procedures a customer’s complaint that a debit which has occurred was unauthorised or otherwise irregular and will not direct or suggest that the customer should first seek to resolve or raise the complaint directly with the debit user;

• neither of the above rules is intended to prevent a bank which has accepted the customer’s instruction to cancel or customer’s complaint from suggesting that the customer should then also contact the debit user; and

• banks will take all reasonable steps to facilitate the amendment of the APCA rules by no later than 1 July 2002 to provide for a direct debit guarantee with the principal features of the UK guarantee, but subject to such limitations and conditions as are prudentially necessary.

DIRECT DEBITS FROM CREDIT CARD ACCOUNTS

Direct debits from credit card accounts are technically described as “Credit Card Telephone or Mail Order Authorisations” but for convenience they are referred to here as credit card direct debits.

As the Issues Paper noted, one consumer issue is the cardholder’s capacity to cancel a direct debit being, or to be, processed through the system. Another is the extent of consumer information about cardholders’ rights to chargeback transactions.

Consumer difficulties with the cancellation of credit card direct debit authorisations and the exercise of chargeback rights were also discussed at the round table meeting convened by ASIC on 26 July 2001.

At that meeting one of the international card scheme representatives expressed a view that there was nothing to prevent the Code from addressing the issue of the capacity of consumers to cancel direct debits involving credit cards since the card scheme rules will accommodate local laws and codes. ABIO made the point that consumers generally speaking do not understand that there may be differences between rights to cancel debit card direct debit authorities on the one hand and credit card direct debit authorities on the other and that it was therefore important that the Code attempt to provide similar outcomes in each case.


On the question of chargebacks, the Issues Paper noted the serious concerns which ABIO have as to customers’ knowledge and understanding of their rights to ask their bank to charge back to the merchant’s bank a transaction which has gone wrong in one way or another. In my view, information which came to light from the international card organisations at the round table meeting strongly re-enforced the validity of the ABIO case that there should be much more transparency about chargebacks in order that bank customers are in a position to exercise their rights where required.


44. On the assumption that MasterCard and Visa rules do not specifically prohibit Australian banks from including in their terms and conditions for credit cards, provisions which permit a customer to cancel a credit direct debit authorization through their bank, the Code should contain a provision which requires banks to include in their terms and conditions a clear right for customers to cancel such authorisations.

45. The Code should require a bank to ensure that the terms and conditions of use of any credit card:

• include general information on the existence and operation of chargeback rights;

• specify prominently an appropriate time frame for reporting a disputed transaction, being a time frame which would allow the bank to request a chargeback but would not unnecessarily shorten the reporting time; and

• warn the cardholder that the ability to dispute the transaction may, but need not necessarily, be lost if they do not report in time.

APPLICATION OF CODE TO GUARANTORS

There appears to be widespread support for the recommendation that the Code provisions apply to all guarantees by individuals of individuals or small business.


46. The Code provisions relating to guarantees should apply to all guarantees given by individuals in respect of facilities or accommodation provided by a bank to an individual or to small business whether incorporated or not. For these purposes “small business” shall be defined to have the same meaning as that proposed in Final Recommendation 6.


PROVISION OF INFORMATION TO GUARANTORS

(i) Consent of principal debtor to provision of information The Issues Paper contained an interim recommendation59 that “the obligations imposed by the Code in respect of disclosure of information be absolute and not conditional on the consent of the principal debtor.” This recommendation was strongly supported by Dept. of Consumer Affairs Vic. The NSW Young Lawyers Business Committee suggested that the consent of the debtor be made a condition of the loan and this is the course the ANZ proposes to take.

However, it appears in hindsight that the terms of the interim recommendation may have been somewhat cryptic and as a result there may be some confusion among stakeholders as to exactly what the interim recommendation was intended to achieve.

It was never the intention to recommend that a bank should be obliged to provide to the guarantor a copy of the loan contract and other information concerning the debtor where the debtor has refused to consent to the provision of such information. I am in total agreement with submissions from ABA and banks that it would be absolutely inappropriate to provide in the Code that banks should defy their privacy obligations, particularly after 21 December 2001, by providing information about debtors to guarantors without the consent of the debtors.

Rather, the main question is, should a bank be able to proceed to take a guarantee where:

• the debtor has refused consent; and

• accordingly, the guarantor has not received the information,

but the guarantor is still prepared to sign the guarantee? The ABA Final Response does not deal with this question.

In my view the answer to this question is that, in those circumstances, the bank must not take the guarantee. In principle this is very similar to the requirements of s51 of UCCC which effectively prevent a credit provider from proceeding with a guarantee unless the credit provider has first been able to give the prospective guarantor a copy of the credit contract or the proposed credit contract.

Whether in practice banks choose to implement this by making it a condition of the loan contract that the borrower consent to the bank providing the information to the guarantor is a matter of choice for banks as there are obviously other procedures which could be put in place to prevent guarantors being asked to sign guarantees without having been provided with the information required to be given to guarantors by this Code.

In the circumstances it is appropriate to re-phrase the recommendation.

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Issues Paper, p.85



47. A bank shall not enter into a contract of guarantee with a guarantor unless the guarantor has first been provided with a copy of the contract and such other information as is required by this Code to be given to the guarantor.

(ii) Obligations to provide information As the Issues Paper noted,60 there are two types of information or advice relevant to the guarantor’s decision to enter into a guarantee. The first is information about the principal debtor, the liabilities to be guaranteed and the financial risks involved in giving the guarantee. The second is information or advice about the legal nature and the effect of the guarantee. It is convenient to treat these two types of information separately.

(iii) Financial Information After discussing the principal submissions received, the Issues Paper recommended61 that the Code require a bank to provide a prospective guarantor with all relevant information about the principal debtor and the transactional facility to be guaranteed which is in the possession of the bank and which a prospective guarantor would reasonably require in order to decide whether or not to enter a guarantee.

There appears to be widespread agreement with this recommendation. The ABA submission and the CBA submission both make the point that the information to be supplied ought to be material to the decision to enter into the guarantee.


48. The Code should require a bank to provide a prospective guarantor with all relevant information about the principal debtor and the transaction or facility to be guaranteed which:

• is in the possession of the bank; and

• a prospective guarantor would reasonably require in order to decide whether or not to enter the guarantee.

For this purpose, information includes representations with respect to a future matter, and also includes information provided by the principal debtor to the bank and any credit reporting agency reports and other expert reports obtained by the bank. It would not include the bank’s own internal opinions.

60


Issues Paper, p.87


There also appears to be consensus that the bank should recommend that the guarantor obtain independent financial advice. Indeed the Victorian Department of Consumer Affairs say that the Code should require banks to ensure that financial advice is obtained. In my view this goes too far because there will obviously be occasions where the prospective guarantor is extremely familiar with the financial state of the borrower and thus with the financial risks involved in giving the guarantee.


49. The Code should require a bank to advise guarantors to seek financial advice.

(iv) Advice about the operation of the guarantee As the National Bank submission notes, this seems to be the most contentious aspect of the recommendations.

The principal recommendation in the Issues Paper62 on this subject, recommended that a bank be obliged to ensure the guarantor is informed of the legal effect of the guarantee either by the guarantor receiving independent legal advice or by being advised by the bank itself. In its Final Response,63 ABA argued that banks see themselves as having a conflict of interest in advising the prospective guarantor about the guarantee although they will “encourage” the prospective guarantor to seek advice. Banks also appear to be troubled even by a qualified obligation to advise a prospective guarantor to obtain legal advice as they have argued “some mechanism that relieves the bank from this contractual obligation where legal advice is obviously unnecessary is needed, citing as an example the case where the prospective guarantor is the sole director of the borrowing company.” Banks also cite the refusal of legal practitioners to certify that they have provided legal advice to a prospective guarantor.

Recent cases in Australia and the United Kingdom contemplate that banks may give advice about the legal effect of the guarantee (NAB v Garcia, Yerkey v Jones, Barclays plc v O’Brien). However, the Australian cases do not spell out in detail the scope of the advice. When they have examined the issue in the context of solicitors’ advice, the case law is inconsistent. Some of it requires a serious and extended individual advice. It is true that in South Australia solicitors have been advised by their Law Society not to give advice. In NSW they may not give certificates. There appear to be problems with placing a fiduciary duty on banks which could arise if personalised legal advice were given.

Having weighed the competing considerations, I believe that banks should be able to form their own policies about whether or not to insist that guarantors obtain independent legal advice about the legal effect of the guarantee, (including advice that the guarantor can refuse to enter into the guarantee). I

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Schedule 2, p.16


believe that there is no practical way of identifying in the Code the circumstances where no good purpose would be served by recommending that a guarantor seek legal advice and accordingly, that aspect of ABA’s proposal could not be given effect to without weakening the requirement to advise that legal advice be obtained generally. They should, however, be obliged to recommend that independent legal advice be obtained in all cases and any advice or recommendation should be made direct to the guarantor and not transmitted through the principal debtor.

It should be recognised that if other recommendations outlined above are accepted, the protection afforded to guarantors by the Code will be widened in scope and significant further information will be given to guarantors. Until statutory initiatives are taken or the case law becomes more definitive, it is not appropriate to insist that banks themselves give legal advice. However, those banks which provide standardised advice or information (particularly in various languages) about the nature and effect of guarantees are commended and banks are strongly encouraged to continue with or adopt this course. Further, it is proposed to retain other of the interim recommendations in the Issues Paper concerning warning notices, the signing of guarantees in the absence of principal debtors, a minimum one day cooling off period and the provision to a guarantor on request of statements of account and other information after the guarantee has been entered into.


50. The Code should contain provisions which require:

• a bank to advise the guarantor that the guarantor can refuse to enter into the guarantee, that there are financial risks involved and that the guarantor should obtain independent legal advice;

• a warning notice similar to the UCCC notice to appear directly above the signature of the guarantor to reinforce the verbal warning on any guarantee not regulated by UCCC;

• a bank to ensure that unless it is demonstrably impracticable to do so, the guarantor must sign the guarantee in the absence of the principal debtor;

• a guarantor to be given information and advice at least one day before signing the guarantee unless the guarantor has received independent legal advice; and

• a bank to provide a guarantor on request with full statements of the guaranteed account or accounts and copies of any applicable facility documents, securities, guarantees, credit related insurance products and any notices previously given to the principal debtor and the times within which any such document is to be provided shall be modelled on UCCC section 163(2).


FORM OF GUARANTEE (LIMITATIONS)

The Issues Paper recommended64 that the Code provide that where a guarantee mortgage is expressed to secure credit provided under a future contract or facility, the guarantee mortgage will not in fact be enforceable in relation to any future contract or facility unless the guarantor signs an extension of the guarantee for that purpose. This proposal, which is based on UCCC section 43, is supported in the ABA Final Response.65


51. The Code should provide that a bank shall not accept an all accounts or all monies mortgage unless the mortgage contains a provision that it does not extend to any future contract or facility unless the mortgagor signs an extension of the mortgage after being provided with a copy of the new contract or facility.

RIGHT TO CAP LIABILITY

The Issues Paper recommended66 that guarantors be given rights in certain circumstances to vary the guarantee by reducing a cap on liability or limiting the amount or nature of the liabilities guaranteed and secondly, that the Code should adopt the requirements of UCCC section 54 relating to the extension of a guarantee to future contracts.

In its Final Response,67 the ABA supports those recommendations.



• require that the guarantor be given a contractual right to vary the guarantee by reducing the cap on liability or limiting the amount or nature of the liabilities guaranteed, subject to appropriate qualifications to protect the bank’s financial position; and

• adopt the requirements set out in UCCC section 54 in relation to the extension of a guarantee to any future contract between the bank and the principal debtor.

64


Schedule 2, p.17 66


Schedule 2, pp.17-18


RIGHT TO WITHDRAW

The Issues Paper discussed the question whether the Code should confer rights on guarantors to withdraw from a guarantee in the circumstances set out in UCCC section 53 as in force in all States except Western Australia. It noted that the Code as in force in Western Australia contains a more limited right to withdraw and sought further views on how this question might be resolved.

ABA has proposed in its Final Response68 that the Code should follow UCCC section 53 as in force in all States other than Western Australia.


53. The Code should confer rights on guarantors to withdraw from a guarantee as set out in UCCC section 53 as in force in all States other than Western Australia.

ENFORCEMENT

The Issues Paper recommended,69 in essence, that the rules in UCCC section 82 should be applied to the enforcement of all guarantees given in respect of all debtors other than small business debtors. These rules provide that generally, a lender must attempt to enforce a judgment against the debtor before enforcing the judgment against the guarantor.

There appears to be substantial support for the recommendation although the ABA Final Response70 proposed that banks should be able to enforce a judgment against a guarantor in circumstances not allowed by UCCC section 82, namely, where “we have reasonably determined that the costs of obtaining judgment against the debtor (will) exceed the likely ability of the debtor to satisfy the judgment.” I believe it would be unwise to adopt the ABA proposal on the grounds that it is likely to cause confusion in practice with the UCCC rules.

One submission refers to the UCCC applying to individual guarantors even if the lending itself is not regulated. Whilst there is some uncertainty about the scope of the Consumer Credit Code provisions, the better view is that they do not apply to individual guarantors where the credit contract itself is not regulated (see Duggan and Lanyon, Consumer Credit Law, para. [6.3.15].

In these circumstances it seems that the interim recommendation should be proceeded with.

68

Schedule 2, p.18 69


Schedule 2, p.18



54. The UCCC rules relating to the enforcement of guarantees should be applied by the Code to all guarantees in respect of all debtors other than small business debtors.

JOINT BORROWERS

The Issues Paper recommended71 that banks should not sign up a party as a co-borrower where on the facts known to the bank the party will receive no direct benefit under the contract. The ABA Final Response supports this recommendation.

The Issues Paper also recommended72 that the Code should require a bank prior to signing up a co-borrower, to take all reasonable steps to ensure that each borrower understands the full extent of his/her liability. As the Issues Paper noted, there is ample evidence that joint borrowers frequently fail to understand (until it is too late) that each is liable for the whole debt where the contract provides that liability under it is joint and several. The ABA Final Response does not deal with this issue and I am not aware of any significant criticism of the recommendation.

The third recommendation73 was designed so that, in the interests of protecting individuals who are parties to joint credit facilities, the Code should require a bank to cease further advances on a joint credit facility at the request of any one of the joint account holders.

In its response,74 ABA has generally supported this last recommendation. Of the three submissions received in response to the Issues Paper from individual banks, one was silent on this point, another stated in effect that its existing policies were consistent with the recommendation but the third appeared to argue that the right to terminate liability should not apply unless the bank can terminate any obligation for the provision of further credit under the same contract. As it is extremely common for bank contracts to reserve the right to terminate any obligation for the provision of further credit, this particular qualification should not in practice cause real difficulties.



• a bank should not sign up a party as a co-borrower where, on the facts known to the bank, the party will receive no direct benefit under the contract;

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Schedule 2, p.19


• a bank shall, before signing up co-borrowers, take all reasonable steps to ensure that each borrower understands the full extent of his/her liability;

• a bank shall ensure that under any contract it enters into, where each party is jointly and severally liable, either party should be able to terminate that liability unilaterally in respect of future advances or financial accommodation by written notice to the bank. Qualifications may be necessary to protect the bank’s legitimate interests in relation to further advances it is obliged to make and in respect of contingent liabilities which may accrue in the future.

SUBSIDIARY CARDS

The Issues Paper reviewed submissions from consumer representatives and the New South Wales Government that existing practices relating to the ability of a primary cardholder to cancel a subsidiary card are unnecessarily strict and in some circumstances unfair. It recommended75 that where a primary cardholder advises the bank that he/she wants a subsidiary card cancelled, the primary cardholder will not be liable for continuing use of the card so long as he/she takes all reasonable steps to secure the return of the subsidiary card to the bank. There was substantial support for this recommendation from ABA76 and two of the three banks which made submissions in response to the Issues Paper.


56. The Code should provide that where a primary cardholder advises the issuing bank that it wants a subsidiary card cancelled, the primary cardholder shall not be liable for continuing use of the card, provided the primary cardholder takes all reasonable steps to procure the return of the subsidiary card to the issuing bank.

MUTUALITY AND SET OFF

The Issues Paper examined the submissions received with respect to the banker’s right to set off. It noted that the law relating to set off is complex and further, that as it has become increasingly common for customers to have a number of accounts (rather than only two – a deposit account and a loan account), it is now more difficult to generalise about the application of the law to any particular case.

75


Schedule 2, p.19


The Issues Paper recommended77 that when a bank is opening a new account for a customer who already has an account(s) with the bank, the bank must state in writing whether the new account will be segregated from other account(s) and what the consequences are if the account is not segregated.

The response from banks has been mixed. Two of the three banks who made individual responses to the Issues Paper agreed with the recommendation in unqualified terms. However, the Final Response from ABA78 does not accept the recommendation and proposes in lieu

“when we open a new account for you, and you already have an account with us, we will provide you with information about mutuality and set off between accounts and their consequences.”

The note to the proposal is in the following terms:

“it is intended that the customer would be informed by a generic pamphlet or other explanatory document to ensure consistency of message and remove possible mistaken confusion if counter staff were to undertake this task orally.”

The ABA response does not, in my view, accord enough weight to the very real confusion and difficulty likely to be experienced by customers who do not appreciate the effect of mutuality and set off and the impact this may have on their rights and liabilities in the future. If this cannot be explicitly explained to customers, it is hard to see how they could be expected to understand it themselves. Further, it is my view strongly arguable that the FSR section 1013(D) will require that this information be specifically provided to a customer in a product disclosure statement before the account is opened. In any event, the recommendation is in accord with the tenor of the FSR and its underlying policy.



• a bank, when opening a new account for a customer who already has an account(s) with the bank, shall state in writing whether the account will be segregated from the other account(s) and what the consequences are if the account is not segregated; and

• the statement in writing shall be specific to the customer and the customer’s accounts.

DISPUTE RESOLUTION

Clause 20 of the existing Code deals with both internal dispute resolution (IDR) and external (or alternative) dispute resolution (ADR). The Issues Paper

77


Schedule 2, p.9


reviews the substantial submissions received from consumer representatives and a submission from ASIC which proposed a model for dispute resolution for inclusion in a revised Code. That model had been developed after taking into account, amongst other things, a substantial number of criticisms of existing internal dispute resolution practices that had been made by financial services case workers who had participated in a survey of case worker opinion about such schemes.

The interim recommendation in the Issues Paper recommended79 the adopting of the model proposed by ASIC with minor modifications. The ABA Final Response supports that recommendation.80

In its response to the Issues Paper, ASIC has made a small number of further suggestions. The Issues Paper recommended that internal dispute resolution processes be consistent with Australian Standard AS 4269-95. ASIC now suggests that recommendation be modified so as to specify that internal processes be consistent with AS 4269-95 or any other industry dispute resolution standard or guidelines which ASIC declares to apply to the relevant clause. ASIC also suggests that the Code include provisions along the lines of clauses 10.5, 10.6 and 10.8 of the revised EFT Code, which clauses lay down more detailed time periods for the completion of investigations and more detailed requirements for keeping complainants informed where disputes cannot be resolved within the standard deadlines.

Both these suggestions are supported.


58. Internal Complaint Handling

A bank will have an internal process for handling complaints with its customers. This process will:

• be free of charge;

• be consistent with Australian Standard AS 4269-95 or any other industry dispute resolution standard or guidelines which ASIC declares to apply;

• ensure that customers are notified of the name and contact number of a person who is investigating their complaint;

• specify time frames in line with those specified in clauses 10.5, 10.6 and 10.8 of the revised EFT Code for the completion of investigations and the reporting to complainants in exceptional cases; and

• require the bank to provide written reasons for its decision in respect of a complaint [subject to any Code provisions on election for electronic communications].

79


Schedule 2, pp.19-20


The internal process will be available for all complaints other than those that are resolved to the customer’s satisfaction immediately they are drawn to the attention of the bank.

59. External Dispute Resolution

A bank will have available to its customers an external and impartial process for resolving disputes. This process will be free of charge and will be consistent with the regulatory guidelines for the approval of external complaints resolution schemes.

60. Publicising and notifying customers of complaints and dispute resolution processes

A bank will prominently publicise the availability and accessibility of both its internal and external processes for resolving complaints and disputes.

As a minimum, information about internal and external processes will be readily accessible and on display in bank branches and be accessible through bank Internet sites and bank telephone banking services.

In addition, a bank will provide a customer with written information [subject to any Code provisions on election for electronic communications] about:

• the internal process, at the time that a customer makes a complaint that is not immediately resolved to the satisfaction of both the customer and the bank; and

• the external process, at the same time as a customer is informed of the internal process and again at the time that a customer is advised of the final outcome of the internal process if that outcome does not wholly satisfy the customer’s claim.

ELECTRONIC COMMUNICATION

The Issues Paper made a number of recommendations81 as to how obligations to provide information to customers in writing can be complied with by providing some or all of the information electronically.

The Issues Paper recommendations were drawn from provisions dealing with this issue in a draft version of the revised EFT Code.

The revised EFT Code has now been finalised and it appears appropriate that both this Code and the EFT Code should deal with this matter in the same terms. 81

Issues Paper, p.104



61. The Code should contain rules which permit banks to provide by electronic means, information required by this Code to be given in writing to a customer, in terms that are consistent with clauses 22.1, 22.2 and 22.3 of the EFT Code.

Review of the Code of Banking Practice Final Report, October 2001 – Schedule 1 69

SCHEDULE 1 - LIST OF SUBMISSIONS

Australian Competition and Consumer Commission Adelaide Bank Allen, Geoffrey AMP Bank ANZ Bank ASIC Attorney-General, Tasmania Australian Banking Industry Ombudsman Australian Consumers’ Association Australian Payments Clearing Association Beard, P.N. & N.E. Brodie, Ian M Brown, Gillian Business Ethics Centre Cato, Norma Clarkson, J Commonwealth Bank Commonwealth Consumer Affairs Advisory Council Consumer Credit Legal Centre (NSW) – Joint Submission on behalf of 6 consumer organisations Consumer Credit Legal Service (Vic) and Consumer Law Centre Victoria – Joint Submission Consumers’ Association of WA. Corrie, John Davis, Tom Department of Transport and Regional Services (Cwth) Doyle, Maureen Edwards, Robin Financial Counselling Services, Qld. Financial Counsellors’ Association of NSW Gardiner, Mr. B. E. Horton Mr. M F Houssard, Marie-Antoinette Jackson, Ken Jayawardene, Vicki Ker, Ian


Law Institute of Victoria Lending Solutions Madigan, Bernie Mandurah Council, WA Margate Chamber of Commerce Marshall, Barry Marsland, Warwick and Rita Martin, Tony McNamee, Peter Minister for Consumer Affairs, SA Minister for Consumer and Business Affairs, Vic (including separate response to Issues Paper by Department of Consumer and Business Affairs, Victoria) Minister for Fair Trading NSW National Australia Bank National Farmers’ Federation National Seniors Association NSW Young Lawyers Business Law Committee Nundah District Chamber of Commerce Paul Hobson Prescott, Gil Przybyszewski, Conrad Queensland Office of Fair Trading, Department of Tourism, Racing and Fair Trading Riverine House Home & Family Services (Bairnsdale) Sathye, Milind Smith, Dale St George Bank Suncorp Metway Sutton, Brenton WA. Ministry of Fair Trading WA. Municipal Association Waugh, Ron Westpac Note: Some of the above parties made more than one submission and some

submissions were made anonymously.

Review of the Code of Banking Practice Final Report, October 2001 – Schedule 2 71

SCHEDULE 2 - ABA FINAL RESPONSE TO ISSUES

PAPER

MELBOURNE/0339585.01

Australian Bankers’ AssociationAustralian Bankers’ AssociationAustralian Bankers’ AssociationAustralian Bankers’ Association

Annexure to the Submission to the Issues Paper datedAnnexure to the Submission to the Issues Paper datedAnnexure to the Submission to the Issues Paper datedAnnexure to the Submission to the Issues Paper datedFebruary 2001February 2001February 2001February 2001

For

THE REVIEW OF CODE OF BANKING PRACTICE

The following draft provisions embody most but not all of the Reviewer’s interimrecommendations. Our approach throughout this Annexure has been to draftprovisions that reflect our general intent in responding to the interim recommendations.Our drafts are not intended to constitute the final word on how the Code should beworded. Re-drafting the Code will follow the release of the Final Report of theReviewer, ABA's response to that report and establishing a consultative mechanism toensure that all relevant views on the re-wording of the Code are received and given dueconsideration.

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1. Changes to the Objectives and Principles


“Key Commitments


• work towards continuously improving the standards of practice and service in thebanking industry;

• promote better informed decisions about our products and services including byproviding effective disclosure of information and

• provide information about your rights and obligations in relation to bankingservices”

[NOTE: We have drawn on the “key commitments” and “we promise” approach in theBritish Banking Association’s Banking Code (“UK Code”) Member banks arecommitted to promoting better informed decision making by customers about financialproducts. This can be done for example by explaining the features of their products andservices and by providing other types of factual information. Banks are not supportiveof a broadly based general commitment to provide financial product advice. Under theFinancial Services Reform Bill 2001, banks will have to ensure that their staff whoprovide financial product advice are suitably trained for this purpose. The Bill draws aclear distinction between advice constituted by a recommendation or statement ofopinion that could be taken as intended to influence a person to take up a particularproduct and conduct that is done in the ordinary course of a work of a kind ordinarilydone by clerks or cashiers that is not tantamount to advice. Banks agree that anyperson seeking or needing financial advice would be referred to an appropriate adviser,not necessarily an adviser employed by the bank.]

Fairness

We suggest the following drafting to cover succinctly the matter of fairness:

“We promise that we will act fairly and reasonably towards you (our customers) in aconsistent and ethical manner. In doing so, we will consider your conduct, our conductand the contract between us.”

[NOTE: The Reviewer has proposed a slightly modified version based on the“fairness” provision in the New Zealand Code which provides:

“1.7.2 In order to achieve these objectives, we will:

(iv) act fairly and reasonably towards you, our customers, in aconsistent and ethical manner.

1.7.3 What may be fair and reasonable in any case must depend on all thecircumstances of the particular case, but we will take into account,among other things:

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(i) Our conduct and yours, having regard to the fact that therelationship between banks and their customers is contractual,with mutual rights and obligations;

(i) The steps taken by us to ascertain your needs in order to enableyou to make the choice that best meets your needs; and

(ii) Compliance with this Code of Banking Practice.”

The Reviewer suggested, however, that the following should be substituted forsection 1.7.3(i) of the NZ Code:

“(i) our conduct and yours and whether the circumstances of thecase might justify not applying the strict terms of the contract.”

With respect, banks believe this approach does not place enough emphasis onthe contractual relationship between the parties. As the Reviewer points out inhis Issues Paper, statute and case law have substantially eroded the notion ofcontractual certainty. We believe that introducing the notion of “fairness” is afurther but acceptable erosion provided there is some guidance on how“fairness” is to be judged.

Prudential principle

We suggest the following Re-drafting:

“In meeting our key commitments we will have regard to our prudential obligations”.

[NOTE: The definition of “prudential matters” in the Banking Act 1959 (“BankingAct”) is expressed:

“prudential matters”, in relation to a body corporate that is an AD1 or aNOHC, means matters relating to the conduct by the body corporate of any ofits affairs:

(a) in such a way as:

(i) to keep itself in a sound financial position; and

(ii) not to cause or promote instability in the Australianfinancial system; and

(b) with integrity, prudence and professional skill.”

Under s.11AF of the Banking Act APRA has the power to determine thestandards in relation to prudential matters with which ADIs must comply]

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2. Definition of “Banking Service”

We suggest the following approach:

“Banking Service” means any financial service provided by a bank to acustomer”

[ NOTE: The above drafting is intended to reflect the recommendation made by theReviewer. It is intended to cover a bank product or service that a bank provides in itsown right as principal either directly itself or through an agent and a product or serviceprovided by a bank acting as an agent for another person, eg where a bank employeepromotes an insurance product offered by a related body corporate of the bank. Theperformance of that product would be the responsibility of the general insurer with thebank being responsible for its conduct in selling that product. The key aspect here isthat all bank products and services provided by a bank in connection with its own orthird party (related entity or otherwise) products would be covered. The definition is notintended to extend to the performance or functionality of non-bank products. Althoughthe FSR will hold licensees accountable for the conduct of their representatives, theexpanded definition of “banking services” in the Code would render the bank whenacting as an agent primarily accountable to the customer for its conduct.]

3. Definition of “Customer”

This definition has to be drafted in plain terms. A shorthand version or illustration is:

“Customer” means an individual or a small business.”

[NOTE: The above drafting is intended to cover both individuals and small businesses.If this approach is adopted then provisions of the new CBP which apply to a“Customer” (i.e. “you”) would also apply to a small business (subject to modificationswhere the small business situation is necessarily different). For example, provisionsdealing with the following issues could apply to a small business equally with any otherCustomer:

• disclosure of terms and conditions, fees and charges and interest rates;

• dispute resolution processes (both internal and external);

• the contractual obligation to comply with applicable legislation (including theFSR Bill (once enacted) and privacy and discrimination laws but not, of courseUCCC);

• notification of changes;

• statements of account for non-credit products;

• shadow ledgers;

• debtor harassment (although the ACCC Guidelines on Debtor Harassment maynot be applicable to small businesses in their entirety);

5

• credit assessment;

• chargebacks (on small business credit cards);

• guarantees (the new guarantee provisions should apply to any financialaccommodation facility provided to a small business (as well as an individual));

• mutuality and set-off;

• electronic communications;

• information about banking services, cheques and joint accounts;

• payment instruments;

• advertising; and

• closure of accounts.

4. Small businesses

We agree that small businesses should be covered by the Code and suggest the followingto illustrate the approach:

“small business” means a business employing less than:

(a) if the business is or includes the manufacture of goods – 100 people; or

(b) otherwise – 20 people.

[NOTE: This definition is taken from the Financial Services Reform Bill 2001. Aligningthe Code with this definition will enable banks to provide consistent coverage to bothindividual and small business customers. By extending the Code to cover this class ofsmall business ABA does not propose to review the Small Business Principles documentbecause that Code will, in effect, supersede those Principles. Some draftingmodifications in the Code will be necessary to cater for some situations where smallbusiness requirements differ from those of individual consumers.]

5. Monitoring compliance with the Code

All ABA member retail banks are committed to establishing an independent, transparentand efficient process for monitoring banks’ compliance with this Code. Banks see thismechanism as fundamental to an effective code and have closely examined a range ofpossible models to achieve this. Set out below are the key criteria of an agreed model 1

1 ABA’s internal Code review working group has held many discussions over possible approaches to monitoringof compliance and have reached a majority consensus on this model. As Commonwealth Bank has submitted inits submission to the Reviewer, it recognises the importance of having independent compliance monitoring.CBA does not necessarily oppose the model proposed by ABA. It however regards as necessary that further

6

Proposed Model Structure Outline

1. A committee, the Code Compliance Monitoring Committee, would be set up withinthe Australian Banking Industry Ombudsman scheme. Agreement of the ABIO. to dothis would be necessary.

2. The function, powers and composition of the CCMC would be spelt out in the Code.These could change if the Code were changed.

3. The CCMC would operate quite separately from the Ombudsman’s dispute resolutionfunction so as not to adversely affect that function.

4. The CCMC would be a committee of three:• One person having had relevant experience at a senior level in retail banking,

appointed by the Code subscribing banks;• One person having relevant experience and knowledge as the representative of the

general body of bank customers, appointed by the ABIO.• One person having had experience in industry, commerce, public administration or

government service, appointed jointly by the ABIO and the Code subscribingbanks.

5. The CCMC would employ a small to secretariat to service the CCMC6. All decisions about banks’ compliance with the Code would be the responsibility of

the CCMC.7. To ensure CCMC operated diligently, within power, efficiently and effectively, the

CCMC would be required to commission an independent annual audit of its activitiesand for that audit report to be lodged with ASIC for publication. Agreement of ASICto perform this role would be required.

8. Banks would continue to prepare their own annual compliance reports and to lodgethem with the CCMC.

9. CCMC’s functions and powers would be to:• Monitor Code compliance by comparing banks’ annual reporting of compliance

with CCMC’s own experience gained through “shadow shopping” and theincidence of complaints from customers about banks’ non-compliance.

• Receive complaints about breaches of the Code and refer them to the banksconcerned for response and remedial action where necessary.

• Report annually on the level of compliance• Report in its annual report un-remedied, serious and systemic breaches by a bank

with discretionary power to name the non-complying bank.

6. Sanctions

Sanctions against banks for breaches of the Code irrespective of whether financial loss isincurred by the customer is an issue closely tied to the compliance monitoring function.Disputes where the customer incurs a financial loss are already covered by the BankingIndustry Ombudsman Scheme. The proposed compliance monitoring model above alsocontains proposals for handling serious systemic Code breaches and imposition of anaming sanction for repeat offenders.

analysis, evaluation and consultation take place on the various options to ensure the most effective mechanism isadopted.

7

7. Educating Code Members (and their staff and agents) about the Code


“We will ensure our staff and agents receive training and documentation so thatthey are competent to provide the Banking Services they are authorised to provideand that they have an adequate knowledge of the provisions of this Code ”

[NOTE: The abovementioned drafting is, in broad terms, borrowed from the GeneralInsurance Code of Practice “(GICP”) (see clause 3).

8. Promoting the Code to Consumers, Consumer Advisers and the Public Generally


“ABA will promote the Code including which banks subscribe to it and how toobtain access to the Code”.

[NOTE: Some banks do not have branches. The intent is to give banks flexibility tosend out a copy of the Code by mail from a central location if there is a request for acopy. Such a request might be made in person, by telephone or electronically.]

9. Monitoring external developments including legislative changes

ABA agrees that this monitoring is necessary. We differ with the Reviewer on who bestdoes this. We believe it is not for the Code monitoring mechanism, CCMC, to providethis function. Banks already do this on a routine basis and the Code could provide forsubscribing banks to monitor external developments and legislative changes.

10. Arrange regular reviews of the Code and ensuring ongoing external representationand consultation in critical areas


“We will commission an independent review of the Code every 3 years and soonerif appropriate. The review will be conducted in consultation with:

• member banks;

• consumer organisations;

• the Australian Bankers’ Association and other interested industryassociations;

• relevant regulatory bodies; and

• other interested stakeholders.

8

ABA will establish a forum for the exchange of views on the effectiveness of theCode. These views will be taken into account in the next review of the Code.”

[NOTE: This provision also picks up the Reviewer’s interim recommendation that aforum for regular exchange of views between banks and consumer advisors on bankingissues should be formed. ABA is currently working on this plan with the prospect of anearly consultation with key groups on putting such a forum in place before the end ofthis year.

11. Implementing changes


“The Australian Bankers’ Association will publish on its website therecommendations and report arising from a review of the Code and, at quarterlyintervals, progress reports on implementation of those recommendations, to theextent those recommendations are accepted, until the implementation process iscomplete”.

12. Access to Banking Services

ABA has recently released details of a rural and regional branch closure protocol as partof a more comprehensive set of initiatives to improve access to banking services. Themedia release announcing these initiatives is accessible on the ABA’s website<www.bankers.asn.au> Work is underway for the application to the ACCC forauthorisation in respect of the basic banking account and on implementation of thedisability action plan. Banks have agreed that the branch closure protocol should besignposted through the Code.

13. Access to Banking Services for people unable or reluctant to use ATMs, telephonebanking or Internet banking


“We recognise the special needs of elderly and disabled persons to have access totransaction accounts.

We will consider and implement steps we might reasonably take to facilitateaccess and to educate such persons on the use and benefits of accessing bankingservices through new technologies.”

[NOTE: It is intended that this provision will apply to banks that operate through aphysical branch network as distinct from “direct” banks that operate without branchesor “over the counter” services and only deliver banking services electronically. Theircustomers are not affected by the transition from “over the counter” banking to directbanking.]

http://www.bankers.asn.au/

9

14. Low cost accounts for Banking Services

We suggest the following drafting to reflect the Reviewer’s interim recommendation:

“If you are a low income earner or disadvantaged person we will provide youwith details of our accounts that we think are most suitable to your situation if youare wanting to open an account or ask us for this information”

[NOTE: Although the Reviewer did not recommend that banks offer basic bankingaccounts , it is the wish of certain individual member banks to offer such accounts and,indeed the four large banks have each made announcements for making concessionalaccounts available for disadvantaged and/or elderly people. To achieve broadercoverage according to the basic ABA standard announced in March 2001,authorisation from the ACCC is proposed for banks to agree to provide such accountsthat, at the least, meet this standard. We are finalising an application for authorisationfor lodgment with the ACCC.]

15. Customer access to information entitlements and contractual rights


“We will comply with all relevant laws and regulations relating to bankingservices including those concerning:



• privacy; and

• discrimination

[NOTE: Giving an outline of these laws in the Code could make the Code an unwieldylarge and complex document and could be ineffective. This would have to be updatedevery time the law changed or a court or regulator puts a different slant on whatpreviously was the current understanding of the law. The UCCC provides for certainregulated information brochures to be made available to borrowers. There is also quitea deal of literature available from State fair trading bodies and other governmentagencies such as the Human Rights and Equal Opportunity Commission that explainsrelevant laws. Repeating this information in the Code would be repetitive and aduplication.]

16. “Fleshing out” the necessary detail for PDS.

The Reviewer has recommended that the Code not include the detail for ProductDisclosure Statements. ABA agrees with this interim recommendation.

10

17. Which disclosure requirements should remain in the Code if all overlapping provisionsare removed?


• “We will provide expeditiously to any person on request the terms andconditions of any banking service we provide;

• full particulars of fees and charges that are or may become payable forany banking service we provide;

• particulars of the interest rates applicable to any banking service weprovide regardless of whether that service relates to a deposit or creditproduct.

We will also provide to any person on request the information currently listedunder sections 6.1 and 6.2 of the Code.”

[NOTE: The Reviewer did not mention the inclusion of an equivalent to section 6.2 ofthe Code We support its retention.].

18. Other gaps

We are yet to do the analysis which identifies those Code disclosure obligations which arenot replicated in, or superseded by, the disclosure requirements arising from the CCC orFSR. We will undertake this exercise in the re-drafting of the Code once the final text ofthe FSR is known and the proposed content of the Code is finalised.

19. Timing differences affecting notification of changes

We suggest the following drafting, which would be included by way of a qualification tosection 9 of the existing Code:

“The abovementioned provisions do not apply to changes to products regulated bythe Consumer Credit Code or Chapter 7 of the Corporations Law”.

[NOTE: The “change” provisions in the Code will need to be reviewed in light of theFSR Bill requirements.]

To deal with the EFT Code issue we suggest the following drafting:

“We will comply with the provisions of the Electronic Funds Transfer Code ofConduct relating to notice of changes to the extent they are more onerous than theother requirements of this clause 9”.

[NOTE: Some of the provisions of the new EFT Code are more onerous.]

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20. Statements of account

In relation to the statements of account for non-credit products we suggest the followingdrafting:

“We will give you a statement of all transactions relating to a deposit account atleast every 6 months or as otherwise agreed unless

• you and we have agreed that a passbook or some other method will be used torecord the transactions;

• no amount has been debited or credited to the account during the statementperiod (other than debits for government charges or duties on receipts orwithdrawals); or

• “ unless we cannot, after taking reasonable steps, locate you”.

[NOTE: The timing of statements is a minimum standard of 6 months to align thisprovisions with the EFT Code of Conduct requirement.

We have borrowed the second exception from section 31(3)(b) of the CCC.]

21. Shadow ledgers


“We will provide you with timely and accurate statements of account for loan accounts inaccordance with the terms and conditions of your banking service, even if you are indefault. Where we cannot do this automatically but only on request, we will ensure youare fully informed about the availability of statements and the method of requesting them”

[NOTE: This provision covers both consumer credit and other retail credit accounts.Also, for consumer credit accounts the right to rely on the exceptions in UCCC section31(3) is sought. We note that the exception from giving a statement of account insection 31(3)(c) where a debt is written off only applies where no further amount hasbeen debited or credited to the account during the statement period.]

22. Code clauses 9.1 and 9.3


“9.3 We will give affected customers at least 30 days advance notice of anincrease in the amount of a minimum monthly or other periodical accountbalance which determines whether account keeping or other fees arecharged and, in the case of a deposit account, an increase in the minimumbalance at which interest is payable.”

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23. Notification of changes to the fees for stand alone transactions or service

We suggest the following drafting for 9.1, after “takes effect”:

“9.1 …. except that such notice is not required where you cannot reasonably belocated or you have engaged in the transaction or procured the serviceanonymously.”

24. Notification of changes to interest rates for money market products

We suggest the following drafting to 9.3:

“A Bank … except where the interest rate is linked to money market rates or someother reference rate, changes to which cannot be advised in advance.”

25. Staff training

See the drafting at 7 concerning the education of staff about the Code so that staff must becompetent to perform their assigned duties.

26. Copies of documents


“X.1 We will provide to you on request a copy of:

• any contract for a banking service you have with us and anymortgage or other security document you have given us;

• any statement of account relating to a banking service you havewith us; and

• any notice previously given to you.

X.2 We will give you the copy document:

• within 14 days, if the original came into existence one year or lessbefore the request was made; or

• otherwise within 30 days.

X.3 A copy may be provided in the form of a computer-generated facsimilecontaining the same information as the original or in any other way youand we agree.

X.4 We do not have to give you a document if the request for the document ismade

13

• after two years of the discharge or termination of the originalcontract unless the document is still in use or it is reasonablyforeseeable that it will be put in use; or

• within three months after we have given you a copy of thedocument.

[NOTE: This new provision is broadly based on section 163 of the CCC. It is intendedthat there would be no obligation to provide a copy of a document that is no longer inexistence where, for example, document retention policies and laws permit thedestruction of documents after 7 years.]

27. Customers in financial difficulties

ABA agrees that section 15 of the UK Code is a good approach. The Code shouldincorporate 15 of UK Code but with the second and third sentences of 15.2 replaced alongthe following lines:

“With your agreement, we will try and help you overcome your financial difficulties withus, for example, with your co-operation, developing a plan with you for dealing with yourfinancial difficulties with us and telling you in writing what we have agreed. If theConsumer Credit Code applies to your credit facility with us we will explain the hardshipvariation provisions of that Code to you”

[NOTE: We believe this draft better reflects the intent of the UK Code provisions that itis the customer’s financial difficulties with the bank and not the customer’s financialdifficulties at large that are the objective. Also, it seems that such assistance from thebank should be available provided the customer agrees to receive help. In renderingthis assistance to the customer in difficulty, banks do not intend their assistance toinclude financial advice. Our members wish to draw a clear line between helpingcustomers with their financial difficulty with the bank and acting as their adviser.]

28. Debt recovery


“We and our collection agents will comply with the ACCC guidelines on debtorharassment when collecting amounts due to us and we will require that ourrepresentatives do likewise.”

29. Privacy and confidentiality

ABA is developing a code for privacy to enable privacy disputes to be referred to theBanking Industry Ombudsman for resolution. Whether, logistically, that privacy codewill be included in the Code will depend on the Privacy Commissioner’s opinion and thepotential for consumer confusion if parties to the privacy code are not also signatories tothe Code.

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30. Credit assessment


“Before we offer or give you a credit facility (or increase an existing creditfacility), we will assess based on our information about you whether we think youwill be able to repay it. In doing so we will exercise the care and skill of adiligent and prudent banker.”

[NOTE: The Reviewer has recommended that any offer of credit should be suited to thecustomer’s “stated financial needs”. This is designed to end current credit practicescalled generally “pre-approved” offers of credit. This is a matter currently underexamination by the Ministerial Council on Consumer Affairs and was raised in a paperon credit card overcommitment tabled at the July 13 meeting of MCCA. Furtherdiscussions are to take place with industry and consumers on this matter. A recentresearch report by KPMG “Credit Cards in Australia” provides a detailed analysis ofthe credit card market. Significantly, default rates on credit cards are at an historicallow with those who have “pre-approved” credit limit increases showing default ratesabout half those for cardholders generally. ABA does not accept that a case has beenmade out for regulatory intervention either by legislation or through the Code. ABAwill continue to liaise with government, regulatory and consumer bodies on this issue.Apart from this issue, the proposed recommendation has advisory implications forbanks. In ensuring that a particular credit facility meets a customer’s stated financialneeds suggests that the bank, as credit provider, should take on the role of credit adviserto the customer. We do not support this role for banks. Such advice is moreappropriately provided by independent advisers which, in the case of small businesslending, are accountants or other professionals.]

31. Implementing Family Court decisions and Family Law settlements

ABA will develop a standard protocol based on member bank practices and procedures.This will be done in time for commencement of the reviewed Code.

32. Direct debits

ABA agrees that uncertainties in the practices of banks when a customer seeks to cancel adirect debit request (DDR) are undesirable and should be avoided. Participating banks inthe Australian Paper Clearing Association (APCA) have recently moved through achange to APCA’s rules to secure clarification of a ledger and sponsor bank’s obligationswhen a ledger bank customer seeks to cancel a DDR. A letter dated July 2001 fromAPCA to the Reviewer sets out these arrangements that took effect on 20 July 2001.

A recent roundtable convened by ASIC to discuss cancellation of DDRs and other directdebit issues provided a forum for a very informed discussion of these issues. APCA hasagreed to submit to its board at an early date proposals for a direct debit guarantee basedon the UK Direct Debit Guarantee model mentioned in the Issues Paper. Credit cardschemes, Visa and Mastercard, have agreed that they will examine the issue of

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cancellation of DDRs operating on credit card facilities. Chargebacks of unauthoriseddebits to credit cards have been available to customers for some time.

ABA will work with government, regulators, consumer and industry bodies and theReviewer to develop appropriate solutions to these DDR issues.

33. Chargebacks


“We will include in the terms and conditions for our credit cards:

• general information on chargeback rights with examples;

• a prominent statement about how soon you should report a disputedtransaction (so we can reasonably ask for a chargeback); and

• a warning that you may not be able to dispute a transaction if it is notreported in time.

We will:

• claim a chargeback right where one exists and the transaction is disputedwithin the required timeframe;

• claim the chargeback for the most appropriate reason;

• not accept a refusal of a chargeback by a merchant’s bank unless it isconsistent with the relevant card scheme rules; and

• include general information about chargebacks with statements at leastonce every twelve months.”

34. Guarantees

We mention again the opening note to this Annexure. In suggesting the followingdrafting we believe some additional modifications to the wording could be necessaryto take account of guarantees applying to small business lending facilities.


“This section of the Code applies to every guarantee and indemnity (togethercalled a “guarantee”) obtained from an individual (called “the guarantor”) forthe purpose of securing any financial accommodation or facility provided by us toindividuals or a small business.”

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“X.1 We will provide a prospective guarantor with any information we havewhich relates to the potential debtor and the transaction or facility to beguaranteed which a prospective guarantor would reasonably considermaterial in order to decide whether to give the guarantee. Thisinformation will include:

• any representation about a future matter;

• information given by the debtor to us;

• any credit reporting agency and other expert report we have.

However, we reserve the right to keep confidential our own internalopinions and will only be able to provide the above information to theextent permitted by applicable laws, especially those relating to privacy.

[NOTE: We have described the test of disclosure as what “ a prospective guarantorwould reasonably consider material”. We believe that it is the non-disclosure ofinformation that is material to the guarantee risk rather than non-disclosure of minoror inconsequential matters that the recommendation targets. We have suggested wordsto indicate that intent recognising that the words may need further work to achieve thisand to make it clear what information banks have to provide to a prospective guarantor.Also, this test should be applied objectively as the bank will not be in a position to knowall of the personal and financial circumstances of the prospective guarantor.]

X.2 When dealing with a potential guarantor we will also:

• encourage the guarantor to seek independent legal and financialadvice including on the legal effect of the guarantee;

[NOTE: Banks see themselves as having a conflict of interest in their advising theprospective guarantor about the guarantee. They will “encourage” the prospectiveguarantor to seek advice. Also, not all situations call for independent advice to be givene.g. the sole director of a company who is asked to give a guarantee. Some mechanismthat relieves the bank from this contractual obligation where legal advice is obviouslyunnecessary is needed. A further issue is the refusal of legal practitioners in severalStates from certifying that they have provided legal advice to a prospective guarantor.Their refusal prevents a bank from ensuring that such advice has been received.].

• make the guarantor aware they can refuse to enter into theguarantee and that there are financial risks involved;

• provide the prospective guarantor (and after the guaranteehas been given, on request) with a copy of

⇒ any related credit contract or security contract;

⇒ any related credit related insurance contract in ourpossession;

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⇒ any statement of account relating to the guaranteefacilities; and

⇒ any notice previously given to the debtor in relation to theguaranteed facility;

• recommend that the guarantor signs the guarantee in the absenceof the principal debtor.

X.3 We will provide the documents referred to in [ X.2] within[14 days] ofreceiving your request except that we do not need to do so if we have given youthe requested information within three months before the request

[NOTE: The Reviewer did not suggest a time limit for providing the abovementionedinformation. In the interests of simplicity we have provided for a single time limitwithin which the request must be satisfied. An alternative approach would be as setout in s.34(2) of the CCC. That section requires information about a statement ofaccount to be provided within 14 days of the information request if it relates to aperiod one year or less before the request is given or otherwise within 30 days.Further, s.34(5) provides that a statement relating to a matter which is more thanseven years old does not need to be given unless the relevant amounts are currentlyoverdue and payable. Further, s.163(4) of the Code allows a request for a copy of thecontract document etc to be refused if the request is made more than the two yearsafter a discharge or termination of the relevant contract

Also, we believe it would be appropriate to replicate the provision for providing copiesof documents (see 26 X.4 and Note)) ]

X.5 A mortgage given by a guarantor to secure credit provided under a futurecredit contract of the same debtor or a future related guarantee isunenforceable in relation to that future contract or guarantee unless wehave:

• given the mortgagor a copy of the contract document ofthe credit contract or proposed credit contract or of theguarantee or proposed guarantee; and

• subsequently obtained a written acceptance for theextension of the mortgage from the guarantor

[NOTE: This provision is largely based on s.43 of the CCC]

X.6 A guarantee will be unenforceable in relation to a future credit contractunless we have:

• given the guarantor a copy of the contract document ofthe future credit contract; and

• subsequently obtained a written acceptance of theextension of the guarantee from the guarantor.

X.7 A guarantor may, by written notice to us, limit the guarantee so as to:

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• place a cap on their liability (exclusive of interest andcosts); or

• limit the amount or nature of the liabilities guaranteed

except that we do not have to accept such a cap if:

⇒ the amount of the cap is below the debtor’s liabilityunder the relevant credit contract at the time; or

⇒ the cap would prevent advances the bank is obliged tomake or to secure the present value of an asset whichis security to the loan (for example, a house underconstruction)

X.8 A guarantor can, by written notice to us:

• withdraw from the guarantee any time before the credit isfirst provided under the relevant credit contract; or

• withdraw after credit is first provided if the creditcontract differs in a material respect from the proposedcredit contract given to the guarantor before theguarantee was signed,

and to the extent the guarantee guarantees obligations under thecredit contract.”

X.9 We will not enforce a judgment against a guarantor unless:

• we have entered judgment against the principal debtorwhich has been unsatisfied for 30 days after we havemade written demand for payment of the judgment debt;or

• we have been relieved by a court (or tribunal) from theobligation to obtain a judgement for the debt on thegrounds that recovery from the debtor is unlikely [NOTE:This provision reflects section 82 (b) of CCC and wouldseem to apply only where a CCC regulated contract isinvolved because courts do not have general discretionto require (and therefore to relieve a creditor fromobtaining) a creditor to obtain a prior judgment againsta debtor apart from the CCC ] ; or

• we have made reasonable attempts to locate the debtorwithout success

• the debtor is insolvent; or

• we have reasonably determined that the costs of obtainingjudgment against the debtor exceed the likely ability of thedebtor to satisfy the judgment

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but these rules do not apply where the principal debtor is a smallbusiness.

35. Joint debtors

We submit the following drafting:

“X.1 We will not accept a person as a co-debtor under a credit facility where,it is clear on the facts known to us, that person will not receive any directbenefit under the contract X.2 We will allow a person who is jointly andseverally liable under a credit contract to terminate their liability inrespect of future advances or financial accommodation on giving uswritten notice. This right does not apply unless we can terminate anyobligation we have to provide further credit to any other debtor under thesame credit contract.

36. Subsidiary cards

ABA agrees that if the primary cardholder has taken reasonable steps to recover thesubsidiary card unsuccessfully, he/she should not be liable for further transactions on thecard. The Reviewer’s recommendation is agreed to.

37. Mutuality and set-off


“When we open a new account for you, and you already have an account with us,we will provide you with information about mutuality and set-off betweenaccounts and their consequences.

[NOTE: It is intended that the customer would be informed by a generic pamphlet orother explanatory document to ensure consistency of message and remove possiblemistake and confusion if counter staff were to undertake this task orally]

38. Dispute resolution


“Internal complaints handling

We have an internal process for handling complaints with our customers. Thisprocess:

• is free of charge

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• meets the standards for complaint resolution schemes set out inAustralian Standard AS4269-95 (you can check these standards at theAustralian Standards website

• ensures you are notified of the name and contact number of the personwho is investigating your complaint;

• requires an investigation to be completed within not more than [45] days(unless there are *circumstances such as delays caused by otherinstitutions involved in the dispute); *follows EFT Code.

• ensures that you receive monthly updates of the progress of investigationsif they continue beyond 45 days (except where we are waiting for aresponse from you and you have been advised that we need such aresponse); and

• requires us to provide written reasons for our decision on a complaint(subject to the provisions of this Code dealing with electroniccommunications).

Our complaint resolution process is available for all complaints other than thosethat are resolved to your satisfaction immediately they are drawn to our attention.

External dispute resolution

We will have available to you an external impartial process for resolvingdisputes. This process will be free of charge and will be consistent with ASIC’sregulatory guidelines for the approval of external complaints resolution schemes.

Availability of information about complaint and dispute resolution processes

We will prominently publicise the availability and accessibility of our internal andexternal processes for resolving complaints and disputes.

At a minimum, information about these processes will be readily accessible. Inaddition, we will provide a customer with information (subject to this Code’sprovision for electronic communications) about:

• our internal process for dealing with complaints at the time the customermakes a complaint that is not immediately resolved to the satisfaction ofboth the customer and the bank; and

• the external process, at the same time as the customer is informed of theinternal process and again when the customer is advised of the finaloutcome of the internal process [and that outcome does not wholly satisfythe customer’s complaint].

[NOTE: This drafting is based on the model proposed by the Reviewer.]

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39. Electronic communications

We accept the Reviewer’s recommended wording subject to aligning it with thefinal version in the new EFT Code

40. Supplementary Issues arising from the Issues Paper

1) Incentives to rectify service problems

The Issues Paper raises three issues:

• Shortfalls at ATMs

• Direct debiting errors and

• Account queries

Suggesting there were insufficient incentives on banks to improve their services,and, particularly in respect of the first two matters, account reinstatements.

We believe improved IDR arrangements by banks ought to lift levels of customersatisfaction in these areas. ABA is prepared to engage with relevant stakeholders,including ASIC and the Reviewer, to look further at these issues.

2) Issues on which Further Views are Sought

The Reviewer raises ten additional on which comments are invited. Taking eachof those points in turn as they appear on page xviii of the Issues Paper:

• Imposing an obligation through the Code upon banks to comply with otherrelevant codes would erode the voluntary nature of those codes and would notbe supported by ABA.

• As we have mentioned previously in this response, we agree with theReviewer’s recommendation that “fleshing out” FSR detail in the Code is notappropriate. That said, we would be prepared to discuss with relevantstakeholders and, in particular, ASIC on general areas that a PDS might coverwith a bit more specificity than the current provisions of the FSR contemplate,but stopping short of detailing how those disclosures should be made.

• Using the media to notify changes to terms and conditions has been reserved inthe majority of cases for changes to interest rates (because of their immediacy)and to bank and government fees and charges. We continue to supportsupplementary notification on later statement of account mailings confirmingsuch notifications. ASIC has developed a Good Disclosure Guide for fees andcharges that is supported by banks and which should enhance currentdisclosures.

• One member that currently has no consumer credit facilities but has a largeportfolio of business facilities has said this change would require a majorcomputer system enhancement. On behalf of that member we submit that

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some tolerance should be available to it under the Code to take account of thatsituation. In conjunction with that member we would be prepared to discussthe issues with the Reviewer.

• Our members support and observe Australian discrimination laws. Literacy isprimarily a government function but banks have taken steps to improve theircommunication of key information to disadvantaged groups through plainEnglish documents. We do not believe this is a matter for the Code to dealwith but ABA would be prepared to look at ways that the problem of literacymight be alleviated.

• We agree that drawing customers attention to a bank’s unilateral right to varyterms and conditions is desirable. This could be achieved by banks makingthat type of provision obvious in terms and conditions at point of sale andpossibly in statement mailing once a year. It would be necessary to ensure thatprominence given to such a term did not distract the customer from otherequally or more important terms of the contract. We would expect that forproducts regulated by the FSR this would be a necessary disclosure in thePDS. Advertising the right of unilateral variation removes the disclosure ofthat right too far away from the more important point of sale disclosure and wewould not support that measure. Heightened disclosures under the FSRlegislation and this Code should provide some protection for customers on thisissue.

• We refer to our comments above on incentives to rectify service problems andare prepared to engage with stakeholders to look at these issues.

• Following the direct debit roundtable on 26 July 2001, we would like tocontinue those discussions as they relate to the matter of placing a stop on acredit card account particularly in consultation with the relevant card schemes.

• We believe that our above drafting on guarantees accommodates this matter ofthe guarantor withdrawing before the credit is first advanced.

• Developing appropriate wording for limiting or terminating advances on jointaccount where one of the joint debtors’ wishes to terminate liability for futureadvances is put forward above in paragraph 35 X.2.

On all of these supplementary issues we believe there is advantage for all concerned towork through those issues, amplifying the specific problems, researching the issues wherethis would help and looking at workable solutions. We look to our planned communityforum process mentioned in this submission (paragraph 10) as a way of dealing with thesematters so that the Code review can be finalised soon.

Australian Bankers’ Association

August 2001

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