5 March 2001

REVIEW OF

THE CODE OF BANKINGPRACTICE

ISSUES PAPER

RICHARD VINEY MELBOURNE

RTV CONSULTING PTY LTD FEBRUARY 2001

5 March 2001

Responses are invited to the InterimRecommendations and on other mattersraised in this Issues Paper.

Responses should be submitted to RichardViney by Monday 4 June 2001 at

Code of Banking Practice ReviewPO Box 2045Parkdale, Victoria 3195Email: codereview@bigpond.com

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TABLE OF CONTENTS

TABLE OF CONTENTS...................................................................................... I

ABBREVIATIONS & DEFINITIONS ..................................................................V

SUMMARY OF INTERIM RECOMMENDATIONS AND ISSUES ON WHICHFURTHER VIEWS ARE SOUGHT...................................................................VII

Interim Recommendations ...........................................................................................vii

Issues on which further views sought.......................................................................xviii

CHAPTER 1.INTRODUCTION .......................................................................... 1

Appointment of the Review............................................................................................1

The Existing Code of Banking Practice ........................................................................1

Terms of Reference .........................................................................................................1

The Review Process to date ............................................................................................2

The Review Process from here.......................................................................................3

CHAPTER 2.THE CHANGING ENVIRONMENT............................................... 4

Introduction.....................................................................................................................4

Legislative Changes.........................................................................................................4

Prospective Legislative Changes....................................................................................4

Other Developments........................................................................................................5

Changes to the Terms of Reference of ABIO ...............................................................5

Other codes of banking practice ....................................................................................5

Assumptions in the issues paper ....................................................................................7

CHAPTER 3.GENERAL ISSUES ...................................................................... 8

Overview ..........................................................................................................................8

Bank Views ....................................................................................................................10

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Objectives and Principles ............................................................................................. 12Consumer Views ......................................................................................................... 12A Threshold Question ................................................................................................. 13Changes to the Objectives and Principles ................................................................... 15Fairness ....................................................................................................................... 16Prudential Principle..................................................................................................... 18

Scope of the Code .......................................................................................................... 18Definition of “Banking Service”................................................................................. 18Definition of “Customer”............................................................................................ 19Small Business ............................................................................................................ 20

Code Monitoring and Administration......................................................................... 25Monitoring Compliance .............................................................................................. 26Sanctions ..................................................................................................................... 27Educating Code Members (and their staff and agents) about the Code...................... 29Promoting the Code to Consumers, Consumer Advisors and the Public Generally... 30Monitoring External Developments including Legislative Changes .......................... 30Arranging for Regular Reviews of the Code and Ensuring Ongoing ExternalRepresentation and Consultation in Critical Areas ..................................................... 30Implementing Changes ............................................................................................... 31

Cross Functional Codes ................................................................................................ 32

Access to Banking Services........................................................................................... 33

Access to Banking Services for People unable or reluctant to use ATMs, telephonebanking or Internet banking........................................................................................ 37

Low Cost Accounts for Banking Services ................................................................... 40

CHAPTER 4.DISCLOSURE REQUIREMENTS .............................................. 42

Introduction................................................................................................................... 42

The Changing Legislative Environment ..................................................................... 42

Choices of approach...................................................................................................... 43

Overlap between the Banking Code and Legislation................................................. 44

Customer Access to Information Entitlements and Contractual Rights ................. 44

“Fleshing out” the necessary detail for PDS............................................................... 46ASIC’s views .............................................................................................................. 46Practical issues if the Code is to flesh out detail......................................................... 47The possible fourth option .......................................................................................... 48

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Which Disclosure Requirements should remain in the Code if all OverlappingProvisions are removed.................................................................................................49

Information to persons who are not customers ...........................................................49Other gaps ...................................................................................................................51Timing differences affecting notification of changes .................................................52Electronic Notification of Changes.............................................................................53

Statements of Account ..................................................................................................53Statements of Account for Credit Products.................................................................53Statements of Account for Non-Credit Products ........................................................54Shadow Ledgers ..........................................................................................................55

Code Clauses 9.1 and 9.3 ..............................................................................................58ABIO Approach ..........................................................................................................58Suggested Clarification in Code..................................................................................59

Comprehension of Disclosure Documents ..................................................................59

Disclosures of Fees and Charges – Current Developments.......................................60

Notification of changes to the fees for stand alone transactions or services ............60

Notification of changes to interest rates for money market products ......................61

Clarifying that terms and conditions can be unilaterally changed ..........................61

CHAPTER 5.MISCELLANEOUS ISSUES....................................................... 62

Staff Training ................................................................................................................62

Copies of Documents.....................................................................................................63

Customers in Financial Difficulties .............................................................................63

Debt Recovery................................................................................................................67

Privacy and Confidentiality .........................................................................................68

Credit Assessment .........................................................................................................70

Implementing Family Court Decisions and Family Law Settlements......................73

Direct Debits ..................................................................................................................74Direct debits from accounts other than credit card accounts ......................................75Adjustment of Customer’s Account............................................................................78Comparisons with the UK Banking Code’s “Direct Debit Guarantee”. .....................79Debits from Credit Card Accounts..............................................................................82

Chargebacks ..................................................................................................................83

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Incentives to rectify service problems ......................................................................... 87

Placing a Stop on an account ....................................................................................... 87

Guarantees and Indemnities ........................................................................................ 88Application of Code to guarantors .............................................................................. 88Provision of information to guarantors ....................................................................... 90Form of guarantee (limitations) .................................................................................. 95Right to cap liability.................................................................................................... 96Right to withdraw........................................................................................................ 97Enforcement ................................................................................................................ 98

Joint borrowers ............................................................................................................. 98Signing up guarantors as co-borrowers....................................................................... 98Extent of a co-borrower’s liability .............................................................................. 99Termination of liability for future advances ............................................................... 99

Subsidiary Cards......................................................................................................... 100

Legal Status of Code of Banking Practice ................................................................ 102

Mutuality and set off................................................................................................... 103

Dispute Resolution ...................................................................................................... 105

Electronic Communication......................................................................................... 108

Miscellaneous issues.................................................................................................... 110

APPENDIX 1. TERMS OF REFERENCE .................................................... 1

APPENDIX 2. CODE OF BANKING PRACTICE ........................................ 1

APPENDIX 3. A SET OF PRINCIPLES....................................................... 1

APPENDIX 4. UK CODE ............................................................................. 1

APPENDIX 5. ABA SUBMISSION ON FUTURE ROLE OF CODE ............ 1

APPENDIX 6. CODE MONITORING AND ADMINISTRATION .................. 1

Extract from the ASIC Submission............................................................................... 1

Extract from Joint Consumer Submission ................................................................... 6

Extract from ACA Submission .................................................................................... 10

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Abbreviations & DefinitionsABA Australian Bankers’ Association

ABIO Australian Banking Industry Ombudsman

ACA Australian Consumers’ Association

ACCC Australian Competition & Consumer Commission

ANZ Australian and New Zealand Banking Group Ltd

ASIC Australian Securities & Investments Commission

Caseworker Report The report of the Financial Services CaseworkerConsultation prepared in conjunction with the JCS

CBA Commonwealth Bank of Australia

Code Code of Banking Practice

CCLS Consumer Credit Legal Service (Victoria) Inc

CCLC Consumer Credit Legal Centre (NSW) Inc

DDR Direct Debit Request

EFT Code Electronic Funds Transfer Code of Conduct

FCSQ Financial Counselling Services (Qld) Inc

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

HREOC Human Rights and Equal Opportunity Commission

Hawker Report Hawker Committee Report entitled “Regional BankingServices: 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

NAB National Australia Bank Ltd

NSA National Seniors Association

PDS Product Disclosure Statement(s)

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PJSC Parliamentary Joint Statutory Committee onCorporations and Securities

Sponsor FI (the) debit user’s (or merchant’s) bank

TPA (the) Trade Practices Act, 1974

UCCC (the)(Uniform) Consumer Credit Code

WPAC Westpac Banking Corporation

WAMA Western Australian Municipal Association

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Summary of Interim Recommendations andissues on which further views are sought

Interim Recommendations

Changes to the Objectives and Principles

That:

• in lieu of Objective 1, the Code articulate a commitment to continuousimprovement in the standards of practice and service in the bankingindustry; and

• in lieu of Objective 2, the Code articulate a commitment to promotingbetter informed decision making by bank customers by all meansavailable, including providing effective disclosure of information andproviding appropriate advice.

Fairness

That the Code incorporate a principle of “fairness” in terms of the New ZealandCode, subject to substituting the following for Section 1.7.3 (i):

“(i) Our conduct and yours and whether the circumstances of the casemight justify not applying the strict terms of the contract”.

Prudential Principle

That the prudential principle be retained in the Code.

Scope of the Code

Definition of “Banking Service”

That the Code define “banking service” to mean any service provided by a bankto a customer.

Definition of “Customer”

That the Code apply to any banking service provided to an individual, whetheralone or jointly with another individual.

Small Business

That the operation of the Code be extended to small businesses.

That the Code define “small business” in the same terms as FSR defines “retailclient”.

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That:

• the Small Business Principles be reviewed to ensure they are in the mostappropriate terms for codification in the Code;

• the Small Business Principles as so reviewed be incorporated into theCode;

• the disclosure provisions of the Small Business Principles be expressed toapply only to credit products.

Monitoring Compliance

That:

• the Code provide specifically for the organisation which will administer theCode and monitor and report on compliance with the Code by subscribingbanks;

• the organisation have experience in consumer banking issues and havesufficient independence from banks;

• the ABIO Council and ASIC be among the organisations considered forthe role;

• irrespective of what organisation monitors compliance with the revisedCode, some independent compliance monitoring (including by “phantomshopping”) will be utilised.

Sanctions

That the Code:

• entitle consumers, consumer advocates, regulatory agencies and disputeresolution schemes to make complaints about non-compliance with theCode;

• detail complaint making, investigation and decision making processes;

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

• provide an adequate range of sanctions.

That the oversight of these processes rest with the Code monitoring agency.

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

That the Code oblige banks to ensure all relevant staff and agents have anadequate knowledge of its provisions.

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Promoting the Code to Consumers, Consumer Advisors and the PublicGenerally

That:

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

• banks be obliged to display the Code, and have copies available onrequest by any person, at all branches.

Monitoring External Developments including Legislative Changes

That the Code require the Code administration body to oversee and keep Codesubscribers informed of legislative and other developments.

Arranging for Regular Reviews of the Code and Ensuring OngoingExternal Representation and Consultation in Critical Areas

That at the minimum, the Code provides that the review process will ensure:

• adequate consultation with interested parties;

• interested parties have adequate time to present views;

• the review process is transparent.

That the Code establish a forum for regular exchange of views between banksand consumer advisors on banking issues.

Implementing Changes

That the Code require ABA:

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

• to publish on ABA’s website, at quarterly intervals, progress reports onimplementation of a review’s recommendations until the implementationprocess is complete.

Access to Banking Services

That the Code incorporate the proposals made in Recommendations 20.1 to20.4 of the Hawker Report.

Access to Banking Services for People unable or reluctant to use ATMs,telephone banking or Internet banking

That the Code provide that banks take all reasonable measures to enhanceaccess to banking services for older people and people with disabilities.

Low Cost Accounts for Banking Services

That the Code require banks to provide details of their accounts which are mostsuitable to low income or disadvantaged persons who are prospective

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customers and also to existing customers whose present facilities may not beoptimal.

Customer Access to Information Entitlements and Contractual Rights

That:

• significant overlap between Code provisions and other laws, particularlyUCCC and FSR, is undesirable and that overlapping Code provisions bedeleted from the Code;

• there be included in the Code for information purposes only (and not assubstantive provisions), material which advises consumers and bank staffof disclosure rights and obligations arising under UCCC and FSR andother relevant laws and which summarises the principal features of thoserights and obligations;

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

“Fleshing out” the necessary detail for PDS

That the Code is not the appropriate medium for fleshing out the necessarydetail of PDS for the purposes of FSR. However, this does not preclude usingthe Code to signpost where the fleshing out is actually done.

Which Disclosure Requirements should remain in the Code if allOverlapping Provisions are removed

That the Code require banks to provide to any person on request:

• terms and conditions of any banking service,

• full particulars of fees and charges that are or may become payable inrespect of any banking service

• particulars of the interest rates applicable to any banking service; and

• the material currently listed under Code 6.1.

That the Code also require banks to have the above material readily availableso that requests can be met expeditiously.

Other gaps

That there be retained in the Code those existing Code disclosure obligationswhich are not replicated in, or superseded by, disclosure requirements arisingfrom FSR or UCCC.

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Timing differences affecting notification of changes

That:

• UCCC and not the Code should specify the notice requirements forchanges to UCCC regulated products;

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

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

Statements of Account

Statements of Account for Credit Products

That the Code apply the substance of UCCC requirements in sections 31 to 34(inclusive) to small business statements of account and related information.

Statements of Account for Non-Credit Products

That:

• Code clause 14.1 require a statement of account at least each threemonths;

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

• Code clause 14.1 (iii) be deleted.

Shadow Ledgers

That banks automatically provide customers in default with statements ofaccount as if the accounts were not in default.

Code Clauses 9.1 and 9.3

Suggested Clarification in Code

That unless FSR already so requires, the Code require all affected customers tobe given 30 days’ advance notice in writing of a change in the minimum balanceto which an account keeping fee exemption or relief provision applies or achange in the interest rate tiers applying to a deposit account.

Notification of changes to the fees for stand alone transactions or services

That Clause 9.1 of the Code be amended so that notification is not requiredwhere it is not possible to identify the affected customers.

Notification of changes to interest rates for money market products

That clause 9.3 of the Code be amended to ensure that it reflects currentaccepted market practices.

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Staff Training

That the Code require banks to ensure that staff are competent to dischargetheir functions efficiently.

Copies of Documents

That:

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

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

Customers in Financial Difficulties

That the Code contain a provision closely modelled on clause 15 of the UKBanking Code, but with an additional obligation on banks to advise customers inhardship of their rights under UCCC where the contract or guarantee isregulated.

Debt Recovery

That the Code require banks to:

• comply with the Guideline; and

• ensure that their agents also comply with the Guideline.

Privacy and Confidentiality

That:

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

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

Credit Assessment

That the Code contain a provision, in lieu of existing clause 15.1, that could bedrafted along the following lines:

“A bank will exercise the care and skill of a diligent and prudent banker inassessing the level of credit or loan funds it agrees to lend to a customerin order to satisfy itself that the level of credit or the loan funds are suitedto the customer’s stated financial needs and within the customer's capacityto repay.”

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Implementing Family Court Decisions and Family Law Settlements

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

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

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

Direct Debits

That the Code provide for:

• a Direct Debit Guarantee with the features of the UK guarantee;

• an absolute obligation on Ledger FI.s to automatically reinstate lossesincurred in the nature of lost interest, additional fees and charges and anyother costs as a result of an incorrect direct debit which are reasonablyascertainable by the Ledger FI when the direct debiting error isrecognised; and

• an obligation on the Ledger FI to provide other compensation for otherlosses as described in the ABIO guidelines.

Chargebacks

That the Code require a bank to ensure that the terms and conditions of use ofany credit card:

• include general information on the existence and operation of chargebackrights;

• specify prominently an appropriate time frame for reporting a disputedtransaction, being a timeframe which would allow the bank to request achargeback but does not unnecessarily shorten the reporting time; and

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

That the Code require a bank to:

• process all disputed transactions as chargebacks where a chargebackright exists;

• use its best efforts to use the most appropriate reason code for thechargeback;

• not accept a rejection by the acquirer bank unless it is satisfied therejection is reasonable; and

• include general information about chargebacks in or with statements ofaccount at least once every twelve months.

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Guarantees and Indemnities

Application of Code to guarantors

That Code provisions relating to guarantees apply to all guarantees given byindividuals in respect of facilities or accommodation provided by a bank toindividuals or small business whether incorporated or not. For these purposes“small business” shall have the same meaning as “retail client” in FSR.

Provision of information to guarantors

(i) Consent of principal debtor to provision of information

That the obligations imposed by the Code in respect of disclosure of informationbe absolute and not conditional on the consent of the principal debtor.

(iii) Financial information

That the Code require a bank to provide a prospective guarantor with allrelevant information about the principal debtor and the transaction or facility tobe guaranteed which:

(a) is in the possession of the bank; and

(b) a prospective guarantor would reasonably require in order to decidewhether or not to enter the guarantee.

That for this purpose, information includes representations with respect to afuture matter, and also includes information provided by the principal debtor tothe bank and any credit reporting agency reports and other expert reportsobtained by the bank. It would not include the bank’s own internal opinions.

That banks be obliged to advise guarantors to seek financial advice.

(iv) Advice about the operation of the guarantee

That:

• a bank be obliged to ensure the guarantor is informed of the legal effect ofthe guarantee, (including advice that the guarantor can refuse to enter intothe guarantee and that there are financial risks involved) either by theguarantor receiving independent legal advice or by being advised by thebank itself. Where the bank itself provides the advice, it must recommendto the guarantor that the guarantor obtain independent legal advice. Thisshould be done in a face-to-face interview in the absence of the principaldebtor. It is not intended that the bank or the legal adviser give financialadvice;

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

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• a bank shall ensure that the guarantor signs the guarantee in the absenceof the principal debtor;

• a guarantor shall be given information and advice at least one day beforesigning the guarantee unless the guarantor has received independentlegal advice;

• a bank shall provide a guarantor on request with full statements of theguaranteed account or accounts and copies of any applicable facilitydocuments, securities, guarantees, credit related insurance products andany notices previously given to the principal debtor.

Form of guarantee (limitations)

That the Code provide that a bank shall not accept an all accounts or allmoneys guarantee mortgage unless the mortgage contains a provision that itdoes not extend to any future contract or facility unless the mortgagor signs anextension of the mortgage after being provided with a copy of the new contractor facility.

Right to cap liability

That the guarantor be given a contractual right to vary the guarantee byreducing the cap on liability or limiting the amount or nature of the liabilitiesguaranteed, subject to appropriate qualifications to protect the bank’s financialposition.

That the Code adopt the requirements set out in UCCC Section 54 in relation tothe extension of a guarantee to any future contract between the bank and theprincipal debtor.

Enforcement

That the UCCC rules relating to the enforcement of guarantees be applied bythe Code to all guarantees given in respect of all debtors other than smallbusiness debtors.

Joint borrowers

Signing up guarantors as co-borrowers

That the Code provide that a bank should not sign up a party as a co-borrowerwhere, on the facts known to the bank, the party will receive no direct benefitunder the contract.

Extent of a co-borrowers liability

That the Code require a bank, before signing up co-borrowers, to take allreasonable steps to ensure that each borrower understands the full extent ofhis/her liability.

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Termination of liability for future advances

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

Subsidiary Cards

That where a primary cardholder advises the issuing bank that it wants asubsidiary card cancelled, the primary cardholder shall not be liable forcontinuing use of the card, provided the primary cardholder takes all reasonablesteps to procure the return of the subsidiary card to the issuing bank.

Mutuality and set off

That the Code require a bank, when opening a new account for a customer whoalready has an account(s) with the bank, to state in writing whether the accountwill be segregated from the other account(s) and what the consequences are ifthe account is not segregated.

Dispute Resolution

Internal complaint handling

That a bank will have an internal process for handling complaints with itscustomers. This process will:

• be free of charge;

• be consistent with Australian Standard AS 4269-95;

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

• specify time frames (of not more than 45 days) within which aninvestigation must be completed (unless there are exceptionalcircumstances);

[Note: Exceptional circumstances may include delays caused by otherinstitutions involved in resolving the dispute.]

• provide monthly updates on the progress of investigations that continuebeyond 45 days (except in cases where the bank is waiting for a responsefrom the Customer and the Customer has been advised that the bankrequires such a response); and

• require the bank to provide written reasons for its decision in respect of acomplaint [subject to any Code provisions on election for electroniccommunications].

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That the internal process will be available for all complaints other than thosethat are resolved to the consumer’s satisfaction immediately they are drawn tothe attention of the bank.

External dispute resolution

That a bank will have available to its customers an external and impartialprocess for resolving disputes. This process will be free of charge and will beconsistent with the regulatory guidelines for the approval of external complaintsresolution schemes.

Publicising and notifying Customers of complaints and dispute resolutionprocesses

That a bank will prominently publicise the availability and accessibility of both itsinternal and external processes for resolving complaints and disputes.

That, as a minimum, information about internal and external processes will bereadily accessible and on display in bank branches and through bank Internetsites and bank telephone banking services.

That, in addition, a bank will provide a Customer with written information[subject to any provision for electronic communication] about:

(i) the internal process, at the time that a Customer makes a complaint that isnot immediately resolved to the satisfaction of both the Customer and the bank;and

(ii) the external process, at the time that a Customer is advised of the finaloutcome of the internal process and that outcome does not wholly satisfy theCustomer’s claim.

Electronic Communication

That the Code provide for Electronic Communications in something like thefollowing terms:

“Electronic communications:

(1) A customer may agree that a bank can provide by electroniccommunication to the customer’s device, electronic equipment or electronicaddress nominated by the customer any information which this Code requiresthe bank to provide (by writing or other means). The customer’s agreementmust be by a specific positive election after receiving an explanation of theimplications of making such an election. The customer may by notice to thebank vary the customer’s nominated device, electronic equipment or electronicaddress or terminate the agreement to receive electronic communication fromthe bank and the bank must inform the customer of those rights.

(2) (i) Subject to (ii), making information available at a bank’s electronicaddress (eg web site) does not satisfy any requirement of this Code thatthe information be provided to a customer.

(ii) Where a customer has viewed information available at a bank’selectronic address (eg a web site), and has been given the opportunity to

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retain that information for subsequent reference (eg by saving or printingit) and has specifically acknowledged having seen that information andhaving been given that opportunity, the bank is to be treated as havingprovided that information to the customer at the time the customer gavethe specific acknowledgement.

(iii) A specific positive election by the customer under (1) is not requiredin the circumstances described in (2)(ii).

(3) Where a bank has provided or is treated as having provided information toa customer by electronic communication under (1) or (2) the bank shall providea paper copy to the customer if the customer so requests within 6 months of thereceipt of the electronic communication.”

Issues on which further views soughtThe reviewer is seeking further views on a number of issues. These are:

• the efficacy or otherwise of requiring banks to comply with other relevantcodes

• options for fleshing out the detail of PDS for the purposes of complyingwith FSR

• the effectiveness or otherwise of notification of changes to terms andconditions through the media alone

• any technical barriers or limitations to implementing the recommendationthat the Code apply the substance of UCCC requirements (sections 31 –34 inclusive) to small business statements of account and relatedinformation

• how the needs of consumers with low literacy levels might be met throughimproved disclosure and other documents

• the suggestion that the payments systems code require advertising andpoint of sale promotion of certain types of accounts to include specificreference to the institution’s contractual right to unilaterally change termsand conditions

• the efficacy or otherwise of introducing incentives to rectify serviceproblems

• the efficacy or otherwise of the suggestion that customers be offered theoption of being able to place a stop on credit card accounts in certaincircumstances

• whether the UCCC approach, which offers guarantors the right to withdrawfrom a guarantee before credit is extended to the borrower, is anappropriate and practical one to adopt in the Code

• the appropriate wording of such qualifications, as may be seen to beneeded, to protect the bank’s interest in relation to further advances,where either party, in the case whether a contract exists where each party

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is jointly and severally liable, is able to terminate the liability in respect offuture advances unilaterally.

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CHAPTER 1. INTRODUCTION

Appointment of the ReviewOn 12 May 2000, I was appointed by the Australian Bankers’ Association (ABA)to conduct a review of the Code of Banking Practice (Code). The establishmentof the review was publicised by advertisements in The Australian and TheAustralian Financial Review. Letters announcing the commencement of thereview and inviting submissions were sent by ABA to banks, consumerrepresentatives, state ministries of fair trading and consumer affairs, membersof Parliament and other persons and organisations thought likely to have aninterest in the review.

The Existing Code of Banking PracticeThe history of the development of the Code is described in some detail byWeaver & Craigie1. In brief, a task force made up of representatives of theTreasury, the Reserve Bank, the Trade Practices Commission and the AttorneyGeneral’s Department was established in June 1992 to prepare a Code ofBanking Practice. In November 1992 an initial draft of a proposed code wascirculated by the task force to interested parties. A revised draft was issued inJune 1993 but the Code finally adopted by ABA in November 1993 was not aversion prepared by the task force but rather one whose carriage had beenundertaken by ABA itself.

Member banks agreed to implement all the provisions of the Code by the end of1994 other than those sections which appeared likely to be significantly affectedby the Uniform Consumer Credit Code (UCCC). When UCCC ultimately cameinto effect on 1 November 1996 all member banks of ABA with significant retailbanking activities adopted the code in its entirety. The Code contained its ownprovisions for review and provided that it shall be reviewed at least every 3years. This is the first review to be conducted.

Terms of ReferenceThe Terms of Reference are reproduced in full in Appendix 1. However, theprincipal directions in the Terms of Reference, found in paragraphs 5 and 6,read as follows:

“The relevance and operation of CBP and its provisions will be reviewed inaccordance with the Objectives and Principles stated above having regardto:

the views of interested parties;

government policies; 1 See Weaver & Craigee “Banker and Customer” (Law Book Co. 1990 as updated), pp 2519 – 2521

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changes which have occurred in the legal and regulatory environment(including self-regulation)

changes which have occurred in the banking services market and inthe needs and behaviours of consumers as a whole;

consistency with relevant self-regulatory and regulatory measures; and

anticipated changes in the banking services market in the next 3 years.

The independent person appointed to oversee and direct the review is toreport findings and recommendations to ABA as close as practicable to 31August 2000. ABA will publish the report.”

The Review Process to dateAs mentioned the Review was established on 12 May 2000. Initially, a 5-weekperiod was provided for interested parties to make submissions. Most partieswere unable to provide submissions within that time frame and severalextensions of the closing time for submissions were granted.

During the period when submissions were being prepared, I conductedextensive consultations with interested parties. I conferred with consumerrepresentatives in all states other than South Australia and with relevantregulators in all states. There have been numerous discussions with relevantCommonwealth regulators. Finally, I have had a number of meetings withindividual banks and one meeting with a group of representatives of variousbanks.

All of the major submissions received during the review have been published infull on the Code Review website (www.reviewbankcode.com). This hasenhanced the transparency of the review process and made discussions withinterested parties more efficient.

A number of interested parties indicated at an early stage of the review that theyhad a strong preference that I release a draft report or an issues paper prior tothe preparation of my final report. I agreed to release an issues paper whichwould outline the principal arguments made in the submissions and, whereappropriate, indicate my preliminary views on such issues. In agreeing to thisprocess, I assumed that I would ultimately receive substantial submissions fromall key stakeholders. In the event that did not occur. While I received verysubstantial and far ranging submissions from consumer representatives andfrom ASIC, only the four major banks made formal submissions to be posted onthe website for public inspection. Those submissions are not extensive and inthe aggregate amount to less than 40 pages.

The limited response by banks has not assisted the review. There are manykey issues on which no detailed submission (or no submission at all) has beenmade by individual banks.

In an attempt to get more balance into the process, I sought the assistance ofABA officers in convening a meeting of bank representatives to discuss anumber of key issues. A meeting with bank representatives occurred on 10

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October 2000. At the conclusion of that meeting an understanding was reachedthat I would receive written views from banks on most of the issues discussed atthat meeting. The response ultimately provided to me in mid December by ABAon behalf of the banks is set out in Appendix 4. While the response hasassisted the review process, the position nonetheless remains that on manyissues the review lacks detailed input from banks.

I do however wish to acknowledge the valuable assistance given by ABA andby individual banks in providing information on current practices and standards,particularly in areas such as internal complaint handling and dispute resolutionprocedures, direct debiting procedures and certain aspects of disclosure.

The Review Process from hereIt is proposed to invite final submissions to be provided within three months ofthe release of this issues paper. During that period I will be available forconsultation with interested parties. Ultimately, after I have reviewed the finalsubmissions and other relevant material I will deliver a final report with myfindings and recommendations to ABA. ABA has committed in its Terms ofReference to making the report public.

The question arises whether my final report should simply specify the substanceof the changes that I recommend be made to the Code or whether it should alsocontain draft amendments to, or a redrafted, Code. My preference is for theformer. I do not think it is useful for debate on individual recommendations tobe bogged down with argument about the meaning of any particular redraftedprovision or amendment to the Code itself.

5 March 20014

CHAPTER 2. THE CHANGINGENVIRONMENT

IntroductionIn conducting the Review it is essential that regard be had to:

• the legislative changes which have occurred since November 1993;

• current developments which may lead to further legislative change;

• other developments (such as the deliberations of task forces andparliamentary committees) which may lead to changes in industrypractices, whether on a mandated or voluntary basis;

• changes to the jurisdiction or operations of ABIO;

• other Codes of banking practice.

Legislative ChangesUCCC took effect throughout Australia on 1 November 1996. UCCC containsextensive disclosure requirements and effectively renders obsolete most of thedisclosure provisions of the Code to the extent that they relate to consumercredit.

In December 2000, the Privacy Amendment (Private Sector) Bill was passed bythe Federal Parliament. When fully operative, it will impose extensiveobligations on private sector organisations, including banks, with respect to thecollection, handling, storage and usage of information concerning individuals.These obligations will be far more extensive than those currently set out in thePrivacy and Confidentiality clause of the Code.

Prospective Legislative ChangesBy far the most important development that is still underway is the proposedFinancial Services Reform Bill (FSR), which was released for public commentearly in 2000. That Bill will, amongst other things, require financial servicesproviders (including banks) to meet standards of disclosure set out in the Bill.To a very considerable extent these will overlap the existing disclosureprovisions of the Code in so far as they relate to “non-lending” products andservices. The significance of the impact of the proposed FSR is discussed inmore length in the chapter dealing with Disclosure.

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Other DevelopmentsThere are a number of task forces, reviews and enquiries currently underwaywhich deal with matters relevant to the Code. It is possible that any of theseinitiatives will lead to actions or recommendations which affect issuesconsidered in the course of this review.

Changes to the Terms of Reference of ABIOIn July 2000, the Chairman of the Australian Banking Industry OmbudsmanScheme announced important changes to that Scheme. Three of the keyimprovements announced were:

• “Rights to raise privacy complaints for both personal and small businesscustomers will match the proposed national legislation.

• Customers with a complaint about any retail activity across the BankingGroup, including its subsidiaries and its agents, can have their complaintheard by a third party. For example, complaints relating to bank ownedfinance companies will now be able to be heard by the Ombudsman.

• The Small Business definition has been expanded and previous costsharing arrangements for hearing complaints from these customersremoved.”2

These extensions of the dispute resolution jurisdiction of ABIO raise matters forconsideration in the context of this review.

Other codes of banking practiceSince the Code was adopted in 1993, codes of banking practice have beenadopted in the United Kingdom, New Zealand and South Africa. The provisionsof the UK code and, to a lesser extent, the New Zealand code are of someinterest, particularly as the UK Code is very recent, taking effect on 1 January2001.

It appears, however, that even the latest UK Code may not be regarded asadequate. On 8 November 2000, the UK Economic Secretary announced areview of all industry codes of practice in the banking and financial servicessectors. The broad scope of the new review is conveniently set out in thefollowing announcement made on 18 December 2000:

“SEVEN KEY QUESTIONS ABOUT BANK SERVICE

Banks, building societies and their customers were today asked seven keyquestions about consumer choice and satisfaction with banking services,such as current account, credit cards, and personal loans.

2 Media Release – Australian Banking Ombudsman Ltd, 3 July 2000

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The questions are part of a public consultation on the effectiveness of theBanking and Mortgage Codes launched by DeAnne Julius, Chairman of theBanking Services Consumer Codes Review Group.

Dr Julius said:

‘Despite long experience with Banking Codes, the Cruickshank Reportfound that many customers are concerned about the level of service they getfrom banks and building societies.

‘They are confused about what is on offer and they sometimes findcomplaints are not followed up.

‘We need to see whether the voluntary codes are doing enough to helpconsumers and consider the scope for improvements.

‘The CRG would be grateful for views on seven key issues concerning thecodes:

is the consultation process of drawing them up satisfactory?

do they cover all issues that they should?

are they fully complied with by the industry?

are they monitored and enforced effectively?

do they offer adequate redress for legitimate grievances?

could consumers be better informed about what their rights are?

do customers need more information or more clearly presentedinformation?

‘The CRG has a wide collective experience of banking services, but wewould very much welcome views from banking service users about how theservice can be improved. That includes examples of good practice that canbe shared as well as the areas where poor standards are found.

‘We also welcome the views of the industry itself and other interestedparties. We look forward to receiving well argued contributions which willhelp us to find effective ways to raise standards for users.’

After preliminary considerations, the CRG has established the main issues itneeds to focus on, and how it will collect evidence. The CRG plans to holdmeetings with key bodies in January and February, and will be organising aseminar for February. It felt that it would also be useful to invite viewsfrom the general public and that this should begin as early as possible.

As the Competition Commission is already looking into the supply ofbanking services by clearing banks to small and medium sized enterprises,the CRG decided to focus predominantly on customer codes for personalretail consumers, although the views of small businesses would also bewelcome.

Views on the seven key issues should be sent to:

5 March 20017

David FairbrotherSecretaryBanking Services Consumer Codes Review Group”

All seven key issues to be considered in the latest UK review also arise forconsideration in this review.

Assumptions in the issues paperThe terms of Reference direct me to take into account “consistency withrelevant self-regulatory and regulatory measures”. During the variousconsultations I have had with interested parties, the problems posed by theuncertainty of outcome with FSR have been debated. My current view is that inthis issues paper I should attempt to explain the issues and where appropriateto indicate a preferred view on the assumption that in areas relevant to thisreview, the final form of FSR will be substantially similar to the form in which itwas released in early 2000, but subject to changes foreshadowed by theMinister in late 2000.

5 March 20018

CHAPTER 3. GENERAL ISSUES

OverviewThe Code is not highly regarded by consumer advocates. The submission fromFinancial Counselling Services (QLD) Inc (FCSQ) argues:

“…. the Code is unnecessary, as it is limited, lacks both force andflexibility, is superseded and faces unrealistic expectations from allstakeholders.

“…. While the Code purports to describe standards of good conduct andservice, in our view it has had little, if any effect, on the policies andpractices of financial institutions. While its introduction was politicallyexpedient, the main issues it was meant to address still remain significantfactors in the casework experience of this service. Even the AustralianBanking Industry Ombudsman commented on the increase in complaintsabout service issues in his 1998-99 Annual Report. It appears the Code hasbeen more about form than substance.”3

Similar views are expressed by the Australian Consumers’ Association (ACA)which offers the following criticisms:

“The Banking Industry Code of Practice fails banking consumers. Itsprovisions are not well known, and provide limited coverage or guidelinesfor standard banking activities. Despite widespread consumerdissatisfaction with banks, the Code makes no attempt to promote consumerprotection, service outcomes or industry best practice.

Key consumer concerns – such as allocation of liability in disputedtransactions, disclosure, privacy, and fair and fast complaints hearings – areinadequately dealt with. Others are not canvassed at all – such as directdebit and cheque clearing, debt collection, and community undertakings inaccess and fairness. Provisions on privacy are manifestly inadequate.Requirements for complaints handling are limited and unsatisfactory. Thereis no administration body to monitor compliance or sanction members forbreaches, or Code review process to engage with consumer concerns.

In many respects the Code reflects a narrow and self-defensive stance thatruns contrary to the industry’s stated commitment to customer service. Theweaknesses of the Code are evident when compared to other industry Codesof Practice as well as the more extensive requirements of legislation and theEFT Code (and draft Code revision). Banks themselves have movedbeyond the Code’s limited provisions in some in-house practices. Clearly,there is enormous scope for improvement in the Code.”4

The ACA submission also comments:

3 FCSQ Submission, p 14 ACA Submission, p 3

5 March 20019

“The Code represents a missed opportunity for promoting best practice inthe banking sector. The review offers a chance for the Code to promoteleadership and innovation, a responsive approach to consumer protectionand concerns, and fairness for customers.

The ACA has reservations about the effectiveness of self-regulation infinancial services. However, this paper will not debate the benefits oflegislative/regulatory models of consumer protection over industry codes ofpractice, except to emphasise the need for co-regulation and strong supportfor minimum standards of consumer protection which should accompanyand underpin any industry code – even more importantly in an area ofessential service such as banking.

The inadequacy of the Code, fragmentation and gaps in financial servicesregulatory coverage and confusion in oversight and monitoring contribute tounsatisfactory protection for banking consumers. The increasingcomplexity of the financial services market – and the increasedresponsibility on consumers – highlights the importance of thorough andclear consumer protection measures in banking. Given these importantissues, and the role that the Code has in areas where other regulation doesnot exist, it is essential that the Code be revised with a consumer-friendlyand responsive focus.

In assessing the current Code, it is useful to examine the Ministerial Councilon Consumer Affairs (MCCA) Guide: Fair Trading Codes of Conduct: Whyhave them, how to prepare them? Similarly, the draft report of theTaskforce on Industry Self Regulation has highlighted good practiceelements for Industry Codes of Practice. There are a number of importantelements that are lacking in the Banking Code.” 5

During the consultative process many consumer representatives drew attentionto the contrast between what they regard as the defensive approach of theexisting Code and the outgoing, positive approach of the United Kingdom Codeof Banking Practice which took affect on 1 January 2001. In particular theypoint to the “Key Commitments clause” of the UK Code which is in the followingterms:

“Our key commitments to you

2.1 We promise that we will:

a act fairly and reasonably in all our dealings with you;

b make sure that all the products and services we offer meet thiscode, even if they have their own terms and conditions;

c give you information about our products and services in plainlanguage, and offer help if there is anything you do notunderstand;

5 ACA Submission, p4

5 March 200110

d help you to understand the financial implications of our productsand services, how they work, and help you to choose the one thatmeets your needs;

e have secure and reliable banking and payment systems;

f make sure that the procedures our staff follow reflect thecommitments set out in this code;

g consider cases of financial difficulty sympathetically andpositively;

h if things go wrong, correct mistakes, tell you how to make acomplaint, and handle your complaints quickly;

i make sure that all products and services meet relevant laws andregulations including those relating to discrimination; and

j tell you if we offer products and services in more than one way(for example, on the internet, over the phone, or in branches andso on) and tell you how to find out more.”

Bank ViewsFour banks only presented formal submissions to the review and it is interestingto examine their views on the basic issue of what should be the objectives andprinciples of a modernised Code of Banking Practice for Australia.

In its submission summary Westpac Banking Corporation (WPAC) argues:

“CBP contents should only deal with significant issues. A ‘significantissue’ is one which addresses a concern or problem commonly experiencedby retail customers across most member banks.”6

The submission by the Commonwealth Bank of Australia (CBA) submissioncommences with the following statement:

“The Bank believes that the Code has worked well as a statement explainingthe relationship between banks and their customers and embodying goodbanking practice. Given this, the Objectives and Principles set out in theCode’s Preamble which guide its implementation remain relevant andshould continue to be the basis of the Code’s operation.7”

Later in its submission CBA argued:

“Although the various regulatory developments outlined above will assumesome of the ground previously covered by the Code, the Bank still sees theCode as playing a valuable role in the relationship between the Bank and theCustomer.

The Code’s value lies in it being a relatively straightforward and easy tounderstand account of the relationship between banks and customers.

6 WPAC Submission, p 17 CBA Submission, p 2

5 March 200111

Caution must be exercised to ensure that these benefits are not sacrificed bymaking the Code overly detailed and prescriptive.

We suggest that the Code would best fit into the new regulatory regime as abrief and concise statement of principles of bank conduct, supported by theexisting dispute resolution mechanism (and perhaps incorporating anindustry privacy code). The statement could signpost other forms ofindustry and statutory regulation where appropriate…”8

National Australia Bank (NAB) appears to question whether the existing Codeserves any significant purpose after regard is had to changes in the structure ofthe industry, the advent of new technologies and regulatory overlaps of variouskinds. The Bank commented:

“Since the Code's initial development, the structure and competitiveness ofthe industry has changed significantly. The advent of new technologies andthe extension of existing ones have altered the relationship between banksand their customers. Customers have been provided with greater choice ofproduct and access, while the banks have sought to ensure that efficienciesinherent in new delivery and access mechanisms are captured by the banks,their customers and shareholders.9

…………

“Further overlaps exist between the Code and the provisions of the EFTCode of Conduct (in both its current and proposed forms). In particular, theprovisions concerning disclosure of terms and conditions and privacy arenot consistent.

“It is arguable therefore that the existing Code has become all but irrelevant,given the wide range of legislation and other codes that already exist or areproposed. At a minimum, given the uncertainties arising from the raft ofdraft or proposed legislation in Parliaments that affect customer relations,the National considers that any final decisions on the Code or its contentshould be made in the full knowledge of new legislation on the industry.”10

However it should be noted that the submission also proceeded to makespecific recommendations for changes to individual clauses of the existingCode.11

The submission from the Australian and New Zealand banking Group (ANZ)commences with the point that:

“ANZ believes that the redrafted Code, or Code Mk II, should be acomparatively concise document of principles and benchmarks, whichincludes internal and external dispute resolution.”12

8 CBA Submission, p 49 NAB Submission, p. 110 NAB Submission, p. 211 NAB Submission, pp 4-612 ANZ Submission, 10 November 2000, p. 1

5 March 200112

However the ANZ submission also makes a number of significant proposals forchange.

Objectives and Principles

Consumer ViewsThe most detailed criticism and assessment of the adequacy of the Objectivesand Principles of the present Code is made in the Joint Consumer Submission(JCS). In commenting on the objectives and principles issue, the JCS argues:

“In our view, the CBP is unduly narrowly conceived. This narrowness isreflected, among other manifestations, in the way its Objectives andPrinciples are formulated. We would suggest the following extensions:

• the CBP should articulate a commitment to continuous improvementin standards of practice and service in the banking industry. It is notenough for the Objectives to state merely that the CBP is intended to"describe standards" [see Objective (i)]. This formulation does notacknowledge either that banking industry practices and standards are,or ought to be, constantly evolving; or that the Code is, or ought to be,instrumental in producing better standards. The same lack of focus onthe CBP as an active instrument of regulation is seen in the absence ofprovision for administrative infrastructure for the Code: see CodeAdministration and related matters below;

• the CBP should adopt the stated Objective of promoting betterinformed decision-making by Bank Customers. Disclosure ofinformation, as per the current Objective (ii), is merely one means ofachieving this end (the provision of advice being another);

• consideration should be given to the inclusion of further Objectives,including an Objective of facilitating the education of consumersabout their rights and obligations in respect of Banking Services; andan Objective of providing representation for consumer views in theadministration and development of the Code;

• the CBP should also contain an explicit commitment to the promotionof accessible and affordable banking services for all consumers: seediscussion of Access to Banking Services below;

• apart from a reference in the external dispute resolution provisions[see 20.5], the CBP fails to articulate a commitment to "fairness" as aprinciple that should inform the dealings between Subscriber Banksand their Customers. In this respect the Code is at odds with what isnow a generally accepted standard for industry Codes. We note, inthis context, that the Principles statement at (ii) qualifies the statedObjectives of the Code by prescribing that they must be achieved "soas to preserve certainty of contract between a Bank and its Customer".This phrasing is defensive and backward looking, in our view. It

5 March 200113

represents an implicit refusal to recognise developments in the area ofgeneral law and statutory unconscionable conduct in the past twentyyears or more, developments that have limited the operation ofdoctrines associated with the rhetoric of 'certainty of contract' in theinterests of avoiding unfair (or 'unjust' or 'unconscionable') outcomesfor consumers in particular cases. In our view, the 'certainty ofcontract' phrasing should be removed from the Preamble; and, thePreamble should include an explicit reference to fairness as aprinciple which informs the dealings between Code Subscribers andtheir Customers; and

• the reference to achieving the Objectives of the Code having regard toprudential considerations [see Principles at (ii)] seems irrelevant andinappropriate. We submit that it should also be removed.” 13

The NSW Government submission draws attention to the need to ensurecustomers receive fair treatment. It argues:

“In this environment, it is essential that banks are governed by a quiteextensive set of standards, in order to ensure consumers receive fairtreatment. If these standards are not in legislation, they should be includedin a code of practice. It cannot be left up to banks to unilaterally determinewhat they consider "fair conduct".

The vast majority of clauses in the current Code relate to issues ofdisclosure. While disclosure is important, the fairness of the contract andon-going relationship between the bank and customer is also important.Some specific suggestions are made later in this submission.14”

ANZ submitted:

“The objective should be to set aspirational benchmarks for good bankingpractice. Deposit Taking Institutions may then compete within that broadframework to provide outstanding products and services to theircustomers”15.

A Threshold QuestionParagraph 5 of my terms of reference commences:

“The relevance and operation of CBP and its provisions will be reviewed inaccordance with the Objectives and Principles stated above havingregard to..”

It should be noted that the highlighted phrase is a verbatim extract from theReview section of the Preamble to the Code and perhaps ABA assumed itshould follow the wording of the Review section exactly. However the phrasedoes raise the question, at least on one view, whether I must regard the

13 JCS, pp 4 – 514 NSW Government Submission, p. 115 ANZ Submission, 10 November 2000, p. 1

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Objectives and Principles set out in the current Code as set in stone andbeyond review.

Such a limitation would obviously limit the scope and effectiveness of thereview. It would be directly contrary to the recommendations made jointly bythe Commonwealth, State and Territory Consumer Affairs agencies in thepublication “Fair Trading Codes of Conduct – Why have them and how toprepare them” (1998). That publication sets out guidelines for all aspects ofself-regulatory codes. In dealing with monitoring, reviewing and amendingcodes the publication states that codes should be reviewed at specifiedintervals and that a code should require that any review consider at least astipulated list of matters. The first matter listed is “Are the code principles, ……appropriate?”

Any limitation which precluded reviewing the Code’s Objectives and Principleswould be difficult to apply. Take for example Principle (ii), which requires theCode’s Objectives to be achieved “consistently with current law and so as topreserve certainty of contract between and Bank and its Customer”. Does thisPrinciple prevent the Review from considering the incorporation into the Code ofa principle of “Fairness”, on the grounds that fairness and certainty of contractare conflicting concepts?

It is not simple to define what the phrase “to preserve certainty of contract”means in a code adopted in 1993. The law then in force contained equitableprinciples and statutory provisions which derogate from any principle ofcertainty of contract. Equity has long provided relief against unconscionablecontracts. The Contracts Review Act 1980 of NSW enables unjust contracts tobe varied or set aside. The Trade Practices Act as in force when the Code wasadopted also provided in Section 87 for orders rendering void or varying thewhole or part of a contract in any relevant circumstances.

The Credit Acts of 1984 (NSW, VIC, WA and ACT) and of 1987 (QLD) were allin force in 1993 and made extensive provision for the reopening of contracts ormortgages which are unjust and specified a considerable number of matterswhich the Court or Tribunal must have regard to (to the extent to which they arerelevant in the circumstances) in determining whether a contract or mortgage isunjust. In an appropriate case the Court or Tribunal is empowered to re-openthe transaction that gave rise to the contract and thereafter to grant relief.

UCCC, which was enacted in 1994 and thus after CBP was adopted, providesfor the reopening of unjust contracts and the granting of relief in the termswhich, though differently worded, are, in effect very similar to the provision ofthe Credit Acts refer to above.

Thus it is clear that when the Code was adopted there were equitable andstatutory legal rules which significantly modified the so-called certainty ofcontract. Further, the statutory changes referred to above, demonstrate thatmodern standards of commercial ethics and consumer protection recognise thenecessity to modify or negate contracts where unconscionability is encountered.In other words the law has recognised that in the public interest, certainty ofcontract must be tempered by wider considerations of equity and fairness.

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Finally, one might observe that banks, by routinely reserving in consumer creditcontracts a right to make any variations they wish, are removing any vestige ofcertainty of contract from the consumer perspective. It is understood that theuncertainty which this can produce has been the subject of complaints to ABIO,including a complaint that the provision enabling variations to be made was initself unconscionable.

In my opinion the extracts from the JCS cited above make a strong case that incertain respects the Code’s Objectives and Principles provisions are limited andoutdated. ACA in its submission makes the following point:

“In many respects the Code reflects a narrow and self-defensive stance thatruns contrary to the industry’s stated commitment to customer service. Theweaknesses of the Code are evident when compared to other industry Codesof Practice as well as the more extensive requirements of legislation and theEFT Code (and draft Code revision). Banks themselves have movedbeyond the Code’s limited provisions in some in-house practices. Clearly,there is enormous scope for improvement in the Code.”16

The comment that banks themselves have moved beyond the Code’sprovisions appears particularly relevant in this context.

Accordingly my view is that it is futile to attempt to review the Code in light oftoday’s expectations and standards if one has to accept literally the terms of theexisting Objectives and Principles Provisions in the Preamble. This isparticularly so to the extent that the Objectives and Principles are in termswhich do not accurately reflect the law and accepted norms of conductprevailing when the Code was adopted.

Accordingly, I consider that it is appropriate that this review consider proposalsfor change to the Objectives and Principles of the Code. It is convenient now toproceed to examine the details of the comments made about the terms of theexisting Objectives and Principles.

Changes to the Objectives and PrinciplesIn my opinion the extracts from the JCS cited above make a prima facie casefor the proposals made for:

• changes to Objectives (i) and (ii); and

• the inclusion of a further Objective concerning the education of consumersabout their rights and obligations in respect of banking services.

16 ACA Submission, p. 3

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Interim Recommendations:

That:

• in lieu of Objective 1, the Code articulate a commitment to continuousimprovement in the standards of practice and service in the bankingindustry; and

• in lieu of Objective 2, the Code articulate a commitment to promotingbetter informed decision making by bank customers by all meansavailable, including providing effective disclosure of information andproviding appropriate advice.

FairnessThe issue of incorporating the principle of “Fairness” was one of the issuescommented on by banks in their December 2000 response document.17 As Iread it the response is equivocal. The response:

• argues that “Fairness” is a subjective concept that will vary fromcircumstance to circumstance

• notes that “Fairness” appears in the New Zealand banking code but isheavily qualified – see Section 1.7, the governing principles and objectivesof the Code which in part 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:

(i) Our conduct and yours, having regard to the fact that therelationship between banks and their customers is contractual, withmutual 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”

In my view the ultimate effect of the NZ provision is unclear in a case where thebank’s conduct is unconscionable but is clearly authorised by the contract. Itmay be that the provision will result in unconscionable conduct being regardedas not being fair and reasonable if the conduct is not expressly authorised bythe contract, but not otherwise. Such an outcome is, in my view, unsatisfactoryand indeed more restrictive in some circumstances than the current law.

17 See Appendix 5

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The ANZ Submission supported incorporating a Principle of Fairness into theCode:

“Principle of Fairness

The Australian Banking Industry Ombudsman scheme operates within theguidelines of the National Benchmarks for Industry Based ComplaintsSchemes. A fundamental principle of the Benchmarks is the need forfairness defined as follows:

the scheme produces decisions which are fair and seen to be fair byobserving the principles of procedural fairness, by making decisions on theinformation before it and by having specific criteria upon which itsdecisions are based.

It seems appropriate, in terms of consistency between the Code and theTerms of Reference for the ABIO, for the Code to promise that Banks willact fairly.

Additionally, the UK and South African Banking Codes both undertake thatmember Banks will "act fairly and reasonably" in all dealings.” 18

It is also interesting to note that while the banks’ response document argues fora version of “Fairness” along the lines of the New Zealand Code which appearsto subjugate the application of the notion to certainty of contract, it nonethelessmakes no criticism of the terms of the ABIO guideline which provide that theombudsman may make a decision which:

• takes into account the specific circumstances of a case which may justifynot applying the law rigidly;

• allows for a balancing or weighting of the information available;

• recognises the possibility of a higher standard of care being placed on abank by the requirements of good banking practice in certaincircumstances;

• may excuse one or both of the parties for minor breaches which mightotherwise lead to harsh results in the circumstances; and

• takes account of any uncertainty in the facts, the law or good bankingpractice as they apply to a particular case.

Interim Recommendation:

That the Code incorporate a principle of “fairness” in terms of the NewZealand Code, subject to substituting the following for Section 1.7.3 (i):

“(i) Our conduct and yours and whether the circumstances of the casemight justify not applying the strict terms of the contract”.

18 ANZ Submission, 10 November 2000, p 2

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Prudential PrincipleThe JCS suggested:

“the reference to achieving the Objectives of the Code having regard toprudential considerations [see Principles at (ii)] seems irrelevant andinappropriate. We submit it should also be removed.”19

The Submission asserts that having regard to prudential considerations itseems “irrelevant and inappropriate” and does not advance any furtherargument. While I tend to think that the Code rarely ventures into areas whichraise prudential issues, I am not persuaded that the principle should beremoved.

Interim Recommendation:

That the prudential principle be retained in the Code.

Scope of the Code

Definition of “Banking Service”Banking service is defined in the Code as follows:

“’Banking Service’ means a deposit, loan or other banking facility providedby a Bank to a Customer, but does not include a service in relation to a billof exchange, a variation of a term or condition of a facility or a debt to aBank that arises as a result of a withdrawal of more than the amount bywhich an Account is in credit without the approval of the Bank.”20

The JCS points out that the definition contains a number of exclusions not foundin the definition of the same term in the ABIO Terms of Reference.

It may not be appropriate to harmonise the Code definition with the ABIOdefinition. Firstly, as mentioned earlier, the ABIO’s jurisdiction is to beexpanded to cover any dispute about any retail activity across a banking group.This will require changes to the ABIO Terms of Reference and may indeedrender the existing definition redundant.

Secondly, the JCS and most of the stakeholders with whom I have discussedthis issue, do not support the Code being applied to activities outside banks.For these reasons I think a simple, unqualified definition is appropriate.

Interim Recommendation:

That the Code define “banking service” to mean any service provided by abank to a customer.

19 JCS, p. 520 See Appendix 2

5 March 200119

Definition of “Customer”Currently the Code applies to any “Banking Service” (as defined in Clause 1.1)which is provided to a “Customer” (also as defined in Clause 1.1). Thedefinition of “Customer” is as follows:

“Customer” means an individual, when that individual, whether alone orjointly with another individual, acquires a Banking Service which is whollyand exclusively for his or her private or domestic use, but in any event doesnot include an individual who makes a written statement to the Bank, inrelation to a Banking Service, that the Banking Service will not be acquiredwholly and exclusively for that use.”

The question arises whether the definition of “Customer” is too narrow. Anumber of parties including ABIO, ACA, CJS and NSW Government haveargued that at the least the definition of “Customer” should be brought into linewith Section 6 of UCCC which applies the provisions of that law to creditcontracts entered into by an individual where the credit is provided “wholly orpredominantly for personal, domestic or household purposes”.

As a consequence of the changes to the Terms of Reference of ABIOannounced in July 2000 any individual who has a complaint about a bankingservice will be able to refer that dispute to ABIO irrespective of the purpose forwhich the banking service was acquired or is used. In my view, a seriousanomaly will arise if the definition of “Customer” in the Code is not extended.

The ABIO Scheme is, in my view, the critical element of consumer protection forbank customers. Few consumers can afford to litigate a dispute with a financialservices provider. It is only through the ABIO that the typical consumer indispute with a bank can secure an independent and professional resolution ofthe dispute. Without the existence of a scheme like the ABIO Scheme,consumer protection laws and Codes of Practice would be of little practicalassistance or relevance to consumers.

From this I believe it follows that there is a strong case for harmonising andrationalising any elements of the Code that do not accord with the ambit oroperations of the ABIO Scheme. I believe it would be anomalous if theprotections of the Code do not extend to a banking service because of thepurpose for which the account is acquired or used but yet the customer has aclear right to refer any dispute about the service to ABIO.

Accordingly it is my present view that the definition of “Customer” is too narrowand further that rather than merely to harmonise it with the UCCC definition itwould be preferable to remove any limitation, based on purpose or intendeduse, to the range of banking services acquired by an individual that will becovered by Code.

Interim Recommendation:

That the Code apply to any banking service provided to an individual, whetheralone or jointly with another individual.

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While this recommendation extends further than some of the submissions whichsupport harmonisation with UCCC, it should be pointed out that the preferredsolution does achieve the same result as is sought by those submissions,namely that any credit contract entered into with a bank which is regulatedunder UCCC will also be a banking service falling under the Code.

Small BusinessIn July 1998 the jurisdiction of the ABIO was extended to incorporate smallbusinesses. Simultaneously ABA promulgated a set of principles entitled“Banks and Small Business Working Together” to which banks could voluntarilysubscribe (either wholly or in part). The principles, which appear in full inAppendix 3, set out a series of promises which subscribing banks undertake tomeet in their dealings with small business customers. The promises deal, interalia, with the following:

• availability and disclosure of terms and conditions of banking services

• the giving of notice of variations to terms and conditions

• customers rights to privacy and confidentiality

• credit assessment

• procedure

• taking guarantees

The issue whether the Code should be amended so that it includes smallbusiness customers was raised in a number of the submissions. The ASICsubmission supports such an extension and canvasses the options for effectingsuch an extension:

“The benefits of the Code are currently only applicable to bank customersacting in their personal, and non-business capacity. The Code is thereforenot applicable to transactions and products offered to businesses, includingsmall business.

However, in recent years, there has been a recognition that small businessesare often in a disadvantaged bargaining position when it comes to dealingwith large organisations, particularly large financial organisations. In somecases, this has resulted in traditional consumer protection provisions beingextended to protect small businesses. For example, an unconscionableconduct provision for small business has been incorporated into the TradePractices Act, and the proposed definition of ‘retail client’ in the FSR willinclude small businesses.

We note that similar extensions have occurred in the banking sector. Inparticular, small businesses can now access the Banking Ombudsmanscheme, and the ABA has released a set of principles for working with smallbusiness (‘the small business principles’). These principles cover similarground to many of the provisions in the Banking Code, although they areless specific.

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In our recent submission to the review of the Credit Union Code of Practice,we suggested that the Credit Union Code be extended to cover smallbusinesses, and that the definition of small business should be the same asthat used in the FSRB. In the absence of the small business principles, wewould suggest a similar approach to the coverage of small businesses in theBanking Code.

However, it could be argued that the existence of the small businessprinciples reduces the need to extend the application of the Banking Code.While we are pleased to see banks take a proactive approach to theirrelationships with small businesses, we do have some concerns that:

• adoption of the small business principles is voluntary, and in factbanks can choose to adopt the principles in whole or in part;

• there is no obligation on banks to advise of their adoption of theprinciples; and

• there is no process for reviewing compliance with the principles bythe banks who choose to adopt them.

In principle, we do not object to the suggestion that there may need to bedifferent ‘consumer protection’ standards for small businesses than there arefor traditional consumers. However, we consider that there is a need forimproved transparency and compliance monitoring in respect of theprinciples.

One option might be to codify the small business principles in the BankingCode itself. The Code could then contain distinct sections applying toconsumers and to small businesses, and the monitoring and administrationprovisions in the Code could apply to both sections.

Another approach might in fact be to expand the application of the Code tosmall businesses. This is the approach we have suggested in relation to theCredit Union Code of Practice.

We also note that the small business principles are due to be reviewedduring this year, and we would like to participate in this review.”21

The JCS also argues for the extension of the Code to small business, asfollows:

“We would also strongly contend that the CBP should be amended so that itextends to small business customers.

The case for such an extension is unarguable, in our view. The unequalbargaining position of small business borrowers and account holders hasbeen recognised in several major reports. It is also regularly testified to bymedia reports, such as those in relation to the current controversy betweenthe Commonwealth Bank and a number of farmers. Further, governmentpolicy is firmly in favour of the extension of consumer protection regimes tosmall business. This is reflected, for instance, by:

21 ASIC Submission, pp 48 – 49

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• the extension of the unconscionable conduct regime of the TradePractices Act to small business with the adoption in 1998 of s. 51ACUnconscionable conduct in business transactions; and

• the adoption in the current Financial Services Reform Bill [FSRB] ofa definition of “retail client” which encompasses “small business”(defined as a manufacturing business employing fewer than 100people or other business employing fewer than 20 people).

Finally, the shift to encompassing small business within the ambit ofconsumer protection regulation can also be seen in the self-regulatorycontext. Most pertinently, since July 1998, the ABIO Terms of Referencehave allowed the ABIO to deal with complaints by “business applicants” (asdefined by para. 19A).”22

The NSW Government simply suggested that the Code should extend to smallbusiness but did not specify any particular method by which this might beachieved.23

ABA’s December response document advanced a number of views on whetherand if so how, small business should be incorporated into the Code.24

“Ultimately, ABIO will entertain disputes between banks and small businesscustomers as they will be defined under the FSR Act once it has becomelaw. The ABIO scheme already has been extended to cover someincorporated small business complaints.

ABA acknowledges there are community expectations that small businessesshould enjoy some of the protections that a range of service providers,including banks, already provide to individual consumers. The SBPs coversmall business issues, particularly credit. The ABIO is able to take accountof the SBPs in determining disputes concerning small businesses that thescheme currently is able to entertain under its terms of reference.

If the SBPs were incorporated in to the Code they would be confined tosmall businesses. They would presumably have to stand in the Codeseparately from some personal banking provisions. Incorporating themwould be to adopt a compendium approach to the Code. If this were donethere would be a preference for them to be incorporated in a separate part orchapter to reflect the different nature of small business banking. As analternative, the Code could be simply a “signpost” to the SBPs. Forbusiness borrowers, there are parts of Principle 1 and all of Principles 5, 6,8, 9 and 10 that deal with borrowing. There are some of them that do notreally apply in a purely individual personal banking relationship, forexample the ongoing provision of financial statements and facility reviewprovisions.

22 JCS, pp 11 – 1223 NSW Government Submission, p. 224 See Appendix 4

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The Reviewer has acknowledged that, in the case of credit, the Code shouldnot introduce, through its terms, a regime comparable to UCCC to coversmall business.

If the Reviewer decides that no distinction should be drawn betweenpersonal and small business banking, presumably, once the range ofcustomers covered by the Code is defined, there would be no longer anyneed to differentiate the types of transaction they undertake i.e.personal/private, business, investment and so on. They would all becovered because of the type of customer. It is perhaps neater to have theCode “signpost” the SBPs for small businesses and “signpost” the non-business borrower to UCCC.

ABA suggests that if small business is to be covered under the Code, thereshould be a provision in the Code, similar to one in the UCCC that the pointin time for determining the customer’s status as a small business should bethe time when the contract is made. We understand the FSRB is to take asimilar approach. Otherwise, if unknown to the bank, the status of thecustomer changed during the course of the contract the bank could find itselfunwittingly in breach of the Code.

If small business were to be defined under the Code, ABA would be keen tosee the definition as consistent as possible across relevant codes andlegislation. The preferred position would be to adopt whatever the FSRdefines to be a “retail client”. This is consistent with what the ABIO is todo. Over time, it can be expected that other codes and so on will move toadopt this single definition.

Small business customers tend to require a greater degree of flexibility inproduct design and application. Whilst some of the protections afforded tonon-business customers could apply equally to small business customers,we mention that the SBPs were written in recognition of the need topreserve this flexibility.”

My view is that the present situation under which banks’ subscription to theSmall Business Principles is optional is unsatisfactory for the reasons putforward by both ASIC and the JCS.

Interim Recommendation:

That the operation of the Code be extended to small businesses.

If the Code is to extend to small business, further issues arise as the aboveextracts from the submissions indicate. In particular:

• how should small business be defined; and

• should the application of the Code be extended directly to smallbusinesses or should the existing small business principles be codified inthe Code.

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As to the definition of small business, my present view is that it would bepreferable to adopt as a definition whatever FSR defines to be a “retail client”.This is understood to be what the ABIO Terms of Reference would also provide.ABA supports this approach.

Interim Recommendation:

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

The second issue is more complex.

If the Code were simply extended to cover small business and if, asrecommended elsewhere, almost all credit disclosure requirements wereremoved from the Code to avoid overlap with UCCC, there would be nodisclosure requirements in the Code or elsewhere for credit products acquiredby small business since such products are not covered by either UCCC or FSR.

One solution to this might be to simply incorporate into the Code the existingdisclosure provisions of the small business principles but confine their operationto credit products acquired by small business. A different solution (favoured bythe JCS) is to require in the Code, UCCC type disclosure, in particular Sections14 and 15 of UCCC, for credit products acquired by small businesses.

In my opinion there are some advantages in using an incremental approach tothe inclusion of small business in the Code. I am reluctant to support theincorporation of UCCC Section 14 and 15 disclosure requirements into theCode for credit products acquired by small business until a thoroughinvestigation has been undertaken as to the practicality of that step. I ammindful that when UCCC itself was being developed, considerable work wasrequired by the various stakeholders to ensure that Section 14 and 15requirements were suitable for the range of consumer credit products then onthe market or in contemplation.

I am also mindful that the Small Business Principles were due for review lastyear and that accordingly if the Principles are to be considered for incorporationinto the Code it would be highly desirable if not essential that they be reviewedin an open consultative process prior to incorporation into the Code.

Interim Recommendations:

That:

• the Small Business Principles be reviewed to ensure they are in themost appropriate terms for codification in the Code;

• the Small Business Principles as so reviewed be incorporated into theCode;

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• the disclosure provisions of the Small Business Principles be expressedto apply only to credit products.

However, there are some provisions recommended later in this paper, forretention or inclusion in a revised Code, which should also expressly apply tosmall businesses.

The JCS expresses concern about the lack of any provisions requiring banks tohave readily available terms and conditions of products of interest to smallbusiness to be accessible before any negotiations occur. This problem wouldbe resolved if the recommendations in Chapter 4 for disclosure to persons whoare not customers were also applied to small businesses.

I also consider that the recommendations made in Chapter 4 for the retention ofexisting Code disclosure requirements for certain variations for non-creditproducts should also apply to small businesses.

Code Monitoring and AdministrationThe JCS submission and the submissions received from ASIC, ACA and theNSW Government are highly critical of the lack of provisions in the Code foreffective monitoring and administration.

The monitoring provisions of the Code appear in the preamble.25. Theseprovisions have become outdated as a result of the recent changes to thesystem of financial regulation in Australia. The present position is that the Codeis monitored by ASIC. Banks annually self assess their compliance against apre-determined questionnaire and ASIC reports on the results of that processannually.

The only provisions which deal in any way with administration are the provisionrequiring the Code to be reviewed once in every three years and the provisionrequiring a bank to “endeavour to ensure” that its staff are aware of theprovisions of the Code relevant to their duties and of the procedures forhandling disputes.

The JCS and the submissions from ASIC and ACA examine a large number ofissues in considerable detail which cannot usefully be summarised. Accordinglythe relevant parts of those three submissions are set out in Appendix 6.

Modern codes of practice contain provisions for carrying out the followingfunctions:

• monitoring compliance with the code and administering sanctions for noncompliance;

• educating code members (and their staff and agents) about the code;

• promoting the code to consumers, consumer advisors and the publicgeneral;

25 See Appendix 2

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• monitoring external developments including legislative changes;

• arranging for regular reviews of the code;

• implementing changes to the code after reviews are conducted or whenotherwise required;

• ensuring external representation and consultation in critical areas.

It is necessary to review whether and to what extent each of these functions isadequately provided for in the Code.

Monitoring ComplianceThe major flaw with the Code in this regard is that the monitoring function, suchas it is, is dependent upon the self-assessment carried out by the banksindividually with no external oversight. The JCS, ASIC, ACA and the NSWGovernment all criticise the lack of transparency and independence of theexisting monitoring process. It is encouraging that in its response document,ABA acknowledges that change is required:

“There is no single view among our members on the best model formonitoring and administering the Code. Our members do agree that thereneeds to be greater transparency achieved through some external scrutiny ofthe self-assessment process but avoiding inefficiency and disproportionatecost. This external scrutiny would extend beyond just complianceassessment on the basis of complaints or disputes and extend to compliancegenerally irrespective of whether a complaint has been made. We believethat the “how” should be able to be sorted out through a consultative processwith relevant stakeholders at a later time.”26

The submissions indicate that there are a number of models or options by whichsatisfactory monitoring of compliance can be effected. At the meeting with bankrepresentatives on 10 October I indicated that at that time, I had no fixed viewon which of the various models was the most appropriate for the Code. ASICindicates in its submission that it plans to review the monitoring processes itcurrently carries out to assess whether the self-assessment process could bemade more effective but adds that it has held off performing that review until theCode review process is completed. ASIC also says that it does not have a firmview on whether the monitoring of banks compliance should continue to beconducted by it or in fact should be conducted or commissioned by a codeadministration or another organisation. ASIC also notes that it is very importantfor any self-assessment process to be complimented by some form of externalmonitoring.

The JCS argues that self assessment by banks alone is manifestly inadequateas a method for monitoring compliance and that before any reliance can beplaced on the results of self assessment, those results should be validated orsupplemented by some other form of compliance monitoring undertaken by anindependent, external body. ACA offers no view on the compliance monitoring

26 See Appendix 4

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model other than that it should be adequately resourced. The NSWGovernment submission states:

“It is important that the monitoring and reporting on the Banking Code ofPractice is carried out by an organisation with experience in consumerbanking issues, and which is seen to be independent of the banks. TheAustralian Securities and Investment Commission is one such agency.Compliance with the Code should be able to be independently double-checked, and not rely entirely on a bank's self assessment.”27

It appears that there is agreement by stakeholders as to the necessity of havingeffective monitoring of banks’ compliance. ABA, however, suggests that theselection of the appropriate body be deferred and resolved later in consultationwith stakeholders. I believe that a revised Code should resolve these issues.

Interim Recommendations:

That:

• the Code provide specifically for the organisation which will administerthe Code and monitor and report on compliance with the Code bysubscribing banks;

• the organisation have experience in consumer banking issues and havesufficient independence from banks;

• the ABIO Council and ASIC be among the organisations considered forthe role;

• irrespective of what organisation monitors compliance with the revisedCode, some independent compliance monitoring (including by“phantom shopping”) will be utilised.

SanctionsThere is no provision in the Code for the imposition of sanctions on subscribingmembers for breaching the Code. ASIC views this as less than satisfactory asthe following extract from the ASIC Submission shows:

“In part, enforcement of the Code provisions occurs through the internal andexternal dispute resolution processes.

However, this is not a completely satisfactory arrangement. The internaland external dispute resolution processes generally work best incircumstances where a dispute involves a direct financial loss, and is a one-off occurrence. They are less effective in cases of Code breaches that do notinvolve a direct financial loss, and where there is evidence of systemicbreaches.

27 NSW Government Submission, p. 11

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An effective code also needs an encompassing process for dealing withallegations of Code contraventions, and for imposing appropriate sanctions.

Other industry codes, such as the General Insurance Code of Practice,establish a regime for investigating allegations of Code breaches, and forimposing sanctions in the event that those allegations are proved. Thisregime complements the internal and external dispute resolution proceduresfor resolving individual disputes.

This review should consider establishing an independent regime forinvestigating alleged contraventions and imposing appropriate sanctions.The Code should detail:

• who can make complaints about non-compliance (this should includeconsumers, consumer advocates, regulators and other governmentagencies, and dispute resolution schemes);

• the process for making complaints;

• the decision maker(s);

• the decision making process; and

• the available sanctions (a range of effective sanctions should beavailable, so that a flexible approach can be taken).

It goes without saying that the process for investigating instances of non-compliance should be impartial, fair, transparent, and accountable.”28

The Taskforce on Industry Self-Regulation Report December 2000, notes theimportance of sanctions. ACA argues that:

“The lack of sanctions in the Banking Code present a fundamentalweakness, and raise doubts about the credibility of the Code for bothindustry participants and consumers. For example, there are no sanctions forbreaches such as refusing to tell a customer about dispute mechanisms, notproviding information on request, or not following customers’ instructionsin relation to account cancellation. A range of sanctions, underpinned byregulatory mechanisms, is essential for Code credibility.”29

The JCS argues:

“As the previous statement indicates, we are strongly of the view that theCBP must include provision for the imposition of sanctions if it is to be acredible instrument of self-regulation. We note that government policy isalso generally supportive of the inclusion of sanctions in industry Codes;and that provision is made for such in other comparable Codes.

For a complaints process to be effective, it must be used by consumers.However, unless they can establish a loss which opens the way forcompensation, consumers will generally not have any, or a sufficient,incentive to report breaches of the Code to the Code administration body.

28 ASIC, pp. 56 – 5729 ACA, p. 5

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One way of addressing this issue - and in doing so of providing industrywith a cheap compliance monitoring mechanism - would be to include in theCode, among other possible sanctions, a penalty provision under which theSubscriber would agree to pay a small sum to any Customer whosecomplaint that a Code provision had been breached was established. Thissum would be paid irrespective of whether the Customer suffered any lossor damage in consequence of the breach. The AAMI Customer Charterprovides a possible model for a penalty provision of the kind proposed.”30

I strongly agree with these views. Unless there is an independent regime forinvestigating complaints of Code contraventions with a capacity to imposeappropriate sanctions, the banks’ commitment to the Code will continue to beseen as perfunctory.

Interim Recommendations:

That the Code:

• entitle consumers, consumer advocates, regulatory agencies anddispute resolution schemes to make complaints about non-compliancewith the Code;

• detail complaint making, investigation and decision making processes;

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

• provide an adequate range of sanctions.

That the oversight of these processes rest with the Code monitoring agency.

Educating Code Members (and their staff and agents) about theCodeThe Code provides only that “a bank shall endeavour to ensure that its staff areaware of the provisions ……”.

“Endeavouring” is not enough and the Code should simply require banks toensure that their staff and agents are familiar with the Code.

Interim Recommendation:

That the Code oblige banks to ensure all relevant staff and agents have anadequate knowledge of its provisions.

30 JCS, p. 8

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Promoting the Code to Consumers, Consumer Advisors andthe Public GenerallyThe Code has no relevant provision. The ACA submission comments:

“Consumer Awareness: The lack of an administrative body and failure ofthe industry to publicise the Code has contributed to a lack of consumerawareness of its existence, provisions and protections. Access andawareness are critical issues for all industry codes, but in this instance evenwell informed consumers would find it difficult to know about the Code’sprovisions and coverage.”31

Interim Recommendations:

That:

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

• banks be obliged to display the Code, and have copies available onrequest by any person, at all branches.

Monitoring External Developments including LegislativeChangesThe Code has no relevant provision. This is an important function. It will addconsiderably to the Code’s utility and status if the Code administering bodyensures that Code subscribers are aware of legislative and other developmentswhich impact on the Code and of the emergence of new problems and issues.

Interim Recommendation:

That the Code require the Code administration body to oversee and keep Codesubscribers informed of legislative and other developments.

Arranging for Regular Reviews of the Code and EnsuringOngoing External Representation and Consultation in CriticalAreasThe Code provides that it shall be reviewed every three years, but gives nodetail as to the mechanics of the review, external representation or relatedissues.

The Code has no provision at all for external representation; as to consultation,the only provision is that the three yearly review is to have regard to “the viewsof interested parties”.

31 ACA, p. 5

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A number of the consumer submissions criticised the failure of this reviewprocess to provide for consumer and other stakeholder representation on thereview body itself.

It is interesting also to note that CCLS submission raised in a broader contextthe lack of any established forum for the discussion of banking issues byconsumer representatives with the industry:

“Lack of Forum for Consumer Groups to Raise Banking Issues

Unlike some other industries, such as insurance at a national level and theenergy industry in Victoria, there is a lack of any forum where consumerrepresentatives can raise issues with the banking industry. None of therelevant regulators, the industry association or ABIO offer such a forum.There is a need for a forum in which the Code and current systemic bankingproblems can be regularly discussed between representatives of consumers,the industry and the ABIO.”32

I believe that the point raised by CCLS is extremely important and that theestablishment or some formalised forum which guarantees regular discussionswould be of great benefit to all concerned. I welcome views on the structure ofsuch a forum.

Interim Recommendations:

That at the minimum, the Code provide that the review process will ensure:

• adequate consultation with interested parties;

• interested parties have adequate time to present views;

• the review process is transparent.

That the Code establish a forum for regular exchange of views between banksand consumer advisors on banking issues.

Implementing ChangesThe Code has no relevant provision.

My present view is that it is not possible to prescribe in a Code timelines orprocesses for implementing recommendations made in future reviews. What isreasonable must depend on the amount and nature of the changesrecommended. However, it is reasonable to expect that banks will, through theABA, promptly publish the reviewer’s report and recommendations andthereafter will publicly advise on implementation progress at, say quarterlyintervals.

32 CCLS Submission, p 1

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Interim recommendations:

That the Code require ABA:

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

• to publish on ABA’s website, at quarterly intervals, progress reports onimplementation of a review’s recommendations until the implementationprocess is complete.

Cross Functional CodesThe ASIC submission notes that with the increasing convergence of productsand services in the financial services sector, banks no longer offer just savings,transaction and credit products.

The submission proceeds:

“In some cases, other products, such as insurance or superannuation, may beoffered by a company related to a bank (eg within the same group), and thebank supplies those products as an agent of the issuing company. In othercases the sale will be handled by a person employed by the selling entity butphysically located within the bank, with the difference in roles not readilyapparent to the consumer.

The current Code applies to deposits, loans or other banking facilities. Itdoes not specifically apply to other financial products that might be suppliedby banks as agents, and the issue of whether the Banking Code should coverall retail products and services offered by banks is one that could beconsidered in this review.

There are clearly some benefits in maintaining product-specific codes. Theycan provide a level of detail that may be missed if a code is broadened tocover all products and services offered by an institution group. In addition,the documentation associated with a cross-functional code would be likelyto be long and unwieldy. Finally, a code that contains obligations for non-banking products and services (eg insurance) may result in differentstandards applying for similar products that are sold by different industrysegments.

However, it is important that banks also meet good practice consumerprotection standards when they are supplying other financial products totheir customers. It may therefore be worth considering whether the BankingCode could play a role in encouraging or compelling membership of otherrelevant industry or function codes (for example, the EFT Code of Conduct,General Insurance Code of Practice and others).

One solution might be to include in the Banking Code a provision thatrequires members to comply with other relevant codes. For example, itcould be a requirement in the Banking Code that Code members who supply

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general insurance (either as an agent or principal) must also comply with theGeneral Insurance Code of Practice, to the extent they carry on activitiesregulated by that Code.

Of course, such an approach would not have the effect of mandatingcompliance with the General Insurance Code by the product issuer of ageneral insurance product if that product issuer is not a bank, but a relatedcompany. However, it should go some way to requiring appropriatepractices by bank staff.

There may also be other ways to achieve a similar outcome, whilst alsorecognising that more than one corporate identity may be involved indistributing relevant financial products to bank customers. We think that thegeneral issue of convergence of codes is one that will inevitably requirefurther detailed discussion between all relevant stakeholders.”33

My present view is that ASIC’s proposal to include in the Code a provision thatmembers comply with other relevant codes has considerable merit but I wouldwelcome a wider range of views on this matter before making anyrecommendations.

Access to Banking ServicesThe subject of access to banking services is raised in a number of thesubmissions. The principal issues appear to be:

• branch closures especially in regional and rural Australia;

• access to banking services for people who for various reasons are unableto use or have concerns about using ATMs, telephone or internet banking;and

• low cost accounts for basic banking services.

Branch closures were raised in submissions by NSW Government, the JCS,ACA, the National Seniors Association (NSA), the Western Australian MunicipalAssociation (WAMA), the Tasmanian Attorney General and Margate Chamberof Commerce and in submissions received from individuals.

The question was examined by the House of Representatives StandingCommittee on Economics, Finance and Public Administration (The HawkerCommittee), which conducted an inquiry into regional banking services. TheHawker Committee presented its Report entitled “Regional Banking Services:Money too far away” (The Hawker Report) in which a number ofrecommendations are made which have relevance to this review.Recommendations 3, 17, 19 and 20 deal with the closure of branches and thetransfer of accounts from one branch to another branch without the customerspermission. Those recommendations read as follows:

33 ASIC Submission, pp 32 – 33

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“Recommendation (3)

The Committee recommends that the Code of Banking Practice be amendedto require banks to give customers two months written notice beforetransferring accounts between branches without the permission of thatcustomer. (Paragraph 2.52)

…………

Recommendation (17)

The Committee recommends that in the event of closing a branch, the bankconcerned waive any fees or penalties incurred relating to the earlyrepayment of loans or closing of accounts. (Paragraph 5.39)

…………

Recommendation (19)

The Committee recommends that the Australian Bankers’ Associationdevelop a minimum standard of service delivery as a guideline for banks inthe event of closing regional and remote branches.

Recommendation (20)

The Committee recommends that the industry adopts a branch closureprotocol which incorporates the following:

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

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

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

In the event of closing or downgrading a branch below agency status, bankswill waive any fees or penalties incurred relating to early repayment of loansor closing or accounts.

In the event of closing a branch, banks will be expected to leave behindsome form of over-the-counter service that allows access to cash deposit andwithdrawal facilities for personal and small business customers.

In the event of closing a branch, banks will provide face-to-face educationand training for customers and the community in alternative forms ofbanking.

The first four items should be made mandatory and incorporated into theCode of Banking Practice.”

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The NSW Government submission supports the recommendation that the Codebe amended in the manner suggested by the Committee but thought that sixmonths notice of closure should be given in the case of a branch in a non-metropolitan area which is the last remaining branch.34

The ACA submission drew attention to legislation being developed in Canadawhich would require banks to provide four months notice of branch closures butin rural areas with no other institution within a 10 km radius, six months noticewould be required.35

The JCS argued that branch closures be subject to a notice period requirementas well as to a protocol where by exit fees are waived if the customer choosesto transfer his/her account/s to another Bank.36

The WAMA submission argued for “adequate periods of notice for impendingclosure” and suggested 3 months.37

The submission by the Margate Chamber of Commerce recounts in some detailthe inconvenience and costs imposed on Margate business people as a resultof the closure of the Margate branch but beyond expressing a very clearmessage of discontent and resentment of bank closures, made no specificsuggestions for change.

The National Seniors Association (NSA) contains strong criticism of the impactof branch closures and reduction in staff levels and recommends the banksprovide “reasonable (3 months) notice of pending branch closures ordowngrading or branch services”.38

The Tasmanian Attorney General’s submission refers to the continuing“National controversy” regarding bank closures and suggests that this review ofthe Code “should be seen as an opportunity for the banking sector to review itsperformance and lift its game in the public arena”.39

On 29 June 2000, the Minister for Financial Services & Regulation, the Hon.Joe Hockey MP, tabled the Government’s response to the Hawker Inquiry.

In relation to recommendation 3, the Government’s response is as follows:

“The ABA advised that the notion of accounts being domiciled at aparticular branch is outdated. Accounts are no longer managed by branches,but rather by central processing houses that are responsible for all of theaccounts held with the financial service organisation. On this basis, theABA advised that providing information to customers about whereinformation relating to their account is held is irrelevant to the issue ofbranch closures.”

34 See NSW Government submission, p. 235 See ACA Submission, p. 1036 See JCS, p. 1437 See WAMA submission, p. 238 See NSA submission, p. 639 See Tasmanian Attorney General‘s submission, p. 1

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I do not share the ABA’s view on this matter. While it may be that accounts areno longer managed by branches but rather by central processing houses, thefact remains that certain records vital to customer access to their accounts arestill kept in branches. The obvious record is the account holder’s signaturewithout ready access to which a branch may refuse to process certaintransactions. There are also, I believe, elements in bank fee schedules whichwill differentiate for fee charging purposes between a service provided withinthe home branch and the same service provided at the customer’s request at adifferent branch. Accordingly on the information currently available to me, Ihave a concern that the ABA’s explanation may be incomplete or inaccurate.

In relation to recommendation 17 the Government responded:

“The Government does not believe that financial service providers regularlycharge customers fees for closing accounts other than where necessary torecover the economic costs of breaking fixed deposit or loan contracts. Inany case, the nature of fixed term deposits and loans is such that customersdo not generally need to interact with the financial services providerregularly and, therefore, would not need to close these accounts if a nearbybranch closed.

The Government accepts that as part of the normal commercialarrangements between a financial service organisation and its customer, itmay be necessary to impose fees on customers to recover costs in thesituation where the closing of that account results in a breach of a loancontract.

However, the Government believes it is important for each financial serviceorganisation to make clear to its customers, where customers wish to closetheir accounts following the withdrawal of services from a community,whether the organisation concerned would impose any service fees orpenalties for closing the accounts.”

With respect, the response overlooks common business practices. Take as anexample a customer who has a business overdraft, fixed term deposits and ahousing loan. The response argues that having regard to the nature of fixeddeposit accounts and loan accounts and the limited recurrent dealingscustomers have in relation to these types of facilities, there is no real cause forthe customer to wish to close those accounts and transfer them to anotherinstitution. However if the customer has to close the current overdraft accountand take that to another institution in order to maintain ready access for dailybanking purposes, it is highly likely that the willingness of the transfereeinstitution to provide an equivalent overdraft facility will be dependent on thecustomer also transferring the fixed term deposits and refinancing the housingloan, especially if the customer has considerable equity in the house.

Having said that, it does not appear that the Committee envisaged thatrecommendation 17 should be given effect in the Code of Banking Practice.Indeed I think it may be undesirable to attempt to do so because any workableguidelines about waivers may well need to contain significant flexibility and thusnot lend themselves to incorporation into a Code.

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In relation to recommendations 19 and 20 the Government responded:

“The Government supports the Committee’s recommendation that thefinancial service industry should adopt a branch closure protocol whichprovides a guideline of the minimum standards of service delivery in theevent of closing regional and remote branches. Such a protocol shouldinclude industry providing adequate notice of intended branch closures andconsulting with local communities. This would provide rural communitieswith more certainty about future access to face-to-face services.

Productive discussions have taken place with the banking industry on thismatter. The Minister for Financial Services & Regulation will facilitatefurther discussions with the financial services industry on this matter.

The Government, in particular, wishes to see the financial services industrygive some assurances that an ongoing face-to-face service that provides cashdeposit and cash withdrawal facilities for personal and small businessremains locally available, where viable.”

The Government response to recommendations 19 and 20 appears to generallyfavour the recommendations. The response does not specifically indicatewhether the Government considers that the Code of Banking Practice shouldcontain the recommendations 20.1 to 20.4 as proposed by the Committee but itis noted that recommendations 20.3 and 20.4 are essentially identical torecommendations 3 and 17, which the Government has indicated it does notsupport. On the other hand I note that the Government submission suggeststhat one of the advantages of adopting a branch closure protocol is that it willprovide rural communities with “more certainty about future access to face-to-face services”. It may be that in order to provide the certainty to which theGovernment refers, it would be necessary, at the least, to incorporate theprotocol into the Code. I also note that the Government response indicates that“productive discussions” have taken place with the banking industry on thismatter and that the Minister is to facilitate further discussions.

Interim Recommendation:

That the Code incorporate the proposals made in Recommendations 20.1 to20.4 of the Hawker Report.

Access to Banking Services for People unableor reluctant to use ATMs, telephone banking orInternet bankingThe JCS argues:

“Consumers with difficulties using electronic banking

The last decade has seen a technologically driven revolution in the mannerof delivery of transaction services. While the introduction of EFT

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technology has revolutionised access to those who use the technology, largesegments of the population are disenfranchised by it. Particular groupsaffected include: people with disabilities, people with literacy problems andthe elderly

…………

The Australian Bureau of Statistics estimates that 15.6% of the population isdisabled and 83% of these have a handicap that affects their performance inday to day life; a 1989 survey of adult literacy by the Department ofEmployment, Education and Training found that 10% of respondents (whichequates to over 1 million adult Australians) did not have basic literacy skills.There are approximately 1.3 million aged pensioners in Australia.”40

The National Seniors Association (NSA) submission is strongly critical of theimpact on seniors of self-service banking:

“The push to self-service banking disadvantages seniors who were broughtup in a different era and are intimidated by new technology. While thetransition to EFTPOS, Automatic Teller Machines (ATM) and phone andInternet banking is inevitable, the pace of this change has excluded manyolder people. Banks have defended themselves by saying it is a reflection ofconsumer choice. However NSA believes with the imposition of hefty feesfor over the counter services, banks are dictating change and limitingchoice. A recent survey reveals the average cost of over the countertransactions with a large bank is seven times the cost of phone or Internetbanking. By limiting access to over the counter transactions and financiallypunishing people who choose to use traditional methods, banks are blatantlycontradicting the CBP principle of allowing for “flexibility in products andservices.

Many of NSA’s members have concerns over ATM safety. Seniors areoften discouraged from using this banking method because they dislike thelack of privacy and perceived heightened security risk. Some people are alsoreluctant to persevere with ATMs for fear of losing their card.”41

NSA made a number of recommendations:

1. “To assist in the promotion of new transaction methods, banks couldoffer a readily available program to educate seniors on the use andbenefits of new banking technology.

2. To alleviate confusion amongst seniors, ATMs could be standardized.For example NSA has had feedback that the instruction to “Hit Enter”when there is no Enter key but an OK key on an ATM can beconfusing.

3. Security at ATMs could be addressed further to allay safety fears ofseniors.

40 See JCS, p. 1341 NSA, p. 5

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4. Fees levied on people born before 1940 for over the countertransactions could be reduced as a gesture of goodwill, or on thecondition they undertake a bank sponsored class on self-servicebanking methods.”42

The WAMA submission proposed that banks consider input to communityeducation and training programs (human and financial resources) to helpprepare communities for the electronic banking shift.

The submission by the Mayor of the City of Mandurah, expresses concern at:

“…circumstances developing at several of the City’s banks where longqueues are forming for ‘customer service’ and many older people are feelingpressured to use ATMs when they feel unhappy and insecure about doingso, especially from a personal safety viewpoint if depositing or withdrawingfunds.”

It is clear that there is a depth of feeling about access to banking services byolder customers and customers for whom the use of ATMs, telephone bankingor Internet banking is not a practical option. The JCS strongly suggests that aconsiderable number of people are in these categories. It is also apparent fromthe submissions that many elderly people are reluctant to use ATMs out ofconcerns for their safety.

The Australian Bankers’ Association (ABA) maintains on its website the currentstatus of community projects with which it is involved. One project of particularrelevance is the Community-wide Working Group which ABA describes as a“broadly based working group, including the Federal Government, business andcommunity, to make further progress in improving access for older Australiansand people with a disability”. ABA notes that this working group was formed inresponse to issues raised in the Human Rights and Equal OpportunityCommission’s (HREOC) Report into access to electronic commerce and olderAustralians and people with a disability. The HREOC Report dated 21 March2000, entitled “Accessibility of electronic commerce and new service andinformation technologies for older Australians and people with a disability”.

The HREOC Report examines in considerable detail the many issues involvedand in particular it examines the benefits new technologies offer to older anddisabled people but also the existing barriers to access to such technologiesand makes a large number of recommendations for overcoming those barriersto access.

The banking industry established a pilot program “Self Service Banking andOlder Australians” in 1999. This program is still continuing and details can befound on the ABA website.

I believe that there would be considerable advantage all round if banks were torecognise the special needs of elderly and disabled persons.

42 NSA, pp. 5 – 6

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Interim Recommendation:

That the Code provide that banks take all reasonable measures to enhanceaccess to banking services for older people and people with disabilities.

Low Cost Accounts for Banking ServicesThe JCS argues:

“As transactions by new technology increase, vast amounts of our economicand cultural life will be inaccessible to those who do not have asophisticated transaction account with a financial institution. If low incomeand disadvantaged consumers are not protected by the mandatory provisionof no or low cost basic banking, they may be pushed out of the bankingmarket altogether.”43

The submission says that legislative intervention is probably the only long termsolution to the key problems of access to banking by low income consumers,consumers with difficulty using electronic banking and consumers in rural andremote regions but proposes that certain specific service obligations could beincluded in the Code namely:

“that any consumer have a right under the Code to open a deposit accountwith any Subscriber Bank; and that this right not be limited by a minimumdeposit or opening balance requirement or be subject to other conditions(such as that the consumer be currently employed);

that all Subscriber Banks offer a basic banking account that, apart fromhaving no minimum deposit or opening balance requirement, provides aspecified minimum number of fee-free transactions per month including aspecified minimum number of fee-free counter transactions. (The minimumnumber of fee-free transactions/ counter transactions should be the subjectof further discussion. It would be appropriate to grant Customers who forreasons of age, literacy or disability were not reasonably able to access theiraccounts by electronic means a higher fee-free limit on countertransactions); and …….”44

The ACA submission argues that banking ought to be recognised as anessential service and for the adoption of a regulatory framework whichrecognises and enforces that principal. It, as does the JCS, cites comments bythe Prime Minister in relation to banking services:

“There is more to banking then the bottom line …. Banks have got tounderstand that there are social obligations … Australian Banks are veryprofitable by world standards and they have obligations.”45

43 JCS, p. 1344 JCS, p. 1445 ACA Submission, p. 9

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ACA believes that the Code offers the banking industry the opportunity to takeup the challenge of ensuring all consumers regardless of income, ability orgeographical location have access to the level of banking services that bestmeets their needs through provisions encouraging community investment andaccess to low cost products for consumers.

The UK Banking Code describes its concept of a basic account in the followingterms:

“Basic Account

A basic account has the following features:

• income can be paid by employers directly into the account;

• benefits can be paid by the Government directly into the account;

• cheques and cash can be paid into the account;

• bills can be paid by direct debit, by transferring money to anotheraccount or by a payment to a linked account;

• cash can be withdrawn at cash machines;

• there is no overdraft; and

• the last penny in the account can be withdrawn.”

However it appears that there is no absolute obligation on subscribers to the UKCode to offer basic accounts but if a bank does offer basic accounts it must giveany prospective customer information on its basic accounts if the bank thinksthe customer might be interested in such an account. Nor is there any detailabout monthly or other account keeping fees or how many transactions areallowed per charging period without incurring additional fees.

One apparent difficulty in providing for basic accounts in a code of bankingpractice is that the essential utility of such accounts will ultimately depend ontheir pricing: there is not much advantage in offering an account which has thefeatures listed in the UK Code or the features suggested in the JCS if such anaccount is uncompetitively priced or priced above the means of low incomeconsumers. This is an area where the stakeholders need to be very specific intheir submissions.

However, it is possible for the Code to deal with the criticism that some lowincome or disadvantaged customers have difficulty finding out about accountwhich is best suited to their situation.

Interim Recommendation:

That the Code require banks to provide details of their accounts which aremost suitable to low income or disadvantaged persons who are prospectivecustomers and also to existing customers whose present facilities may not beoptimal.

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CHAPTER 4. DISCLOSURE REQUIREMENTS

IntroductionAlmost all of the Submissions to this Review raised concerns with the disclosureprovisions of the existing Code. Most of these concerns centered on thepractical application of specific disclosure provisions, such as terms andconditions, fees and charges, etc. However, there are broader issues to beconsidered in determining what principles should be followed when revising thedisclosure requirements of the Code.

Since the inception of the Code there have been considerable changes in theregulatory environment in which banks operate, many of which haveimplications for the disclosure provisions under review here. Many of thesechanges raise questions as to the best approach to maintaining the consumerprotection elements embodied in the current Code while at the same time takingaccount of legislative developments which could lead to unnecessaryduplication and legal arguments as to interpretation and precedence.

In these circumstances it seems necessary to examine each of the followingissues:

• the differences between the legislative environment in which the Code wasoriginally developed and the current environment;

• the principal choices of approach;

• whether extensive overlap between the Code and other laws is desirable;

• if extensive overlap is considered undesirable, what should the Codecontain, firstly to retain the essence of the current position that banks arecontractually bound by the disclosure promises made in the existing Codeand secondly, to inform customers (and bank staff) of their rights andobligations under other laws the terms of which are, in practice,inaccessible to them;

• is the Code the most appropriate vehicle for “fleshing out” the necessarydetail concerning the disclosure to be made in Product DisclosureStatements (PDS) required under FSR;

• is there another option by which the fleshing out for PDS might beachieved;

• what disclosure gaps remain to be dealt with by a revised Code?

The Changing Legislative EnvironmentWhen the Code was promulgated in 1993, there were no Federal or State lawsrequiring detailed disclosure of non-credit banking products or services andaccordingly there was no overlap between the Code disclosure requirements for

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non-credit products and other laws. This is still the current position. However, itseems likely that when FSR becomes operative there will be considerableoverlap. On the assumptions set out at the end of Chapter 2, the PDSrequirements of FSR will significantly, but not totally, overlap the existing Codedisclosure requirements. Likely areas of overlap are Code clauses:

• clauses 2.1 and 2.3 (to some extent)

• clause 4.1

• clause 5.1

• clause 6.1(iii) and possibly other subparagraphs in 6.1 and 6.2

• clause 7.2.

However, the full extent of the overlap cannot be determined until the wholeFSR “package” is finalised, including the details of any regulations, ASIC policystatements or other means employed to “flesh out” the detail of FSRrequirements.

The position is simpler with respect to bank credit products. Since 1 November1996 when UCCC became operative, the Code disclosure requirements withrespect to consumer credit products have been very substantially overlapped bythe UCCC requirements.

Choices of approachThe Code as originally promulgated contained a comprehensive statement ofthe disclosure obligations banks were prepared to assume in their dealings withindividual customers’ personal banking services. The Code was contractuallybinding on banks that adopted it. This is still the case. As mentioned above, noissues of overlap with other laws arose with respect to the disclosures to bemade for non-credit bank products.

Basically, there appear now to be two choices:

• for the Code to continue to spell out comprehensively, and in acontractually binding manner, all of the disclosure obligations banks areprepared to assume; or

• to recognise that once FSR becomes operative, much of the disclosurethat the Code now requires banks to make will have to be made in order tocomply with FSR and UCCC and that essentially the Code need retain asdisclosure obligations only those matters not required to be disclosedunder FSR or UCCC together with any new disclosure items thoughtappropriate.

The first choice will result in very considerable overlap between a revised Code,FSR and UCCC. The second choice avoids overlap, but raises the question ofhow consumers and staff can easily access and understand the disclosureobligations in FSR and UCCC. It may also cause consumers to lose the benefitof having a contractual entitlement to receive certain disclosures.

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Overlap between the Banking Code andLegislationThere appear to be some key reasons why significant overlap between theCode and other legislation may not be desirable, irrespective of whether theoverlapping provisions in the Code are expressed in identical or different termsfrom the legislation.

If the overlapping provisions of the Code are identical, or even substantiallyidentical, with a law, the Code is not improving or otherwise changing thecustomer’s rights in any way other than adding a contractual benefit. Moreover,if the law changes there will, at the least, be an immediate problem ofinconsistency, and very possibly a serious misleading of any customer whorelies on the Code provision as a correct statement of his or her rights. While,as a matter of strict law, this problem is to some extent solved by the inclusionof a “reading down” clause (such as clause 1.2 in the existing code), it isdoubtful whether in practical terms such a clause will prevent customers (andbank staff) from being misled.

On the other hand, if the overlapping provisions are expressed in significantlydifferent terms (even if intended to achieve the same result) there are potentiallyserious problems. For example, a Code subscriber bank will be absolutelyobliged to comply with the disclosure requirements of FSR, and may be liablefor severe sanctions if such requirements are breached. But the bank will alsobe contractually bound to comply with the differently worded disclosurerequirements in the Code. The “reading down” clause (Code clause 2.1) maynot rectify this problem, and it has the potential to produce endless argumentabout possible inconsistencies between the law and the Code.

Customer Access to Information Entitlementsand Contractual RightsIt would be possible to “signpost” in the Code the existence of other laws,particularly FSR and UCCC which contain important disclosure obligations infavour of customers. It would also be possible to summarise the principal itemsof disclosure that are required by FSR and UCCC. However if the undesirableconsequences of overlap are to be avoided, this signposted material appearingin a revised Code must appear as merely an informative statement ofcustomers’ entitlements deriving from those other laws and not as separateobligations arising from the Code itself.

If this option were adopted, it would also seem relatively easy to solve theproblem of the Code becoming misleading as a consequence of changes toFSR, UCCC or other relevant laws. Because this material is descriptive anddoes not itself have any legal effect, some simple procedure could be employedto amend the informative material to reflect changes in the relevant laws withoutinvolving the formalities (and expense) of making changes to the Code itself. It

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might also be useful to signpost website addresses to enhance access to therelevant information.

It would also be possible for the Code to provide that subscriber banks arecontractually bound to comply with their disclosure obligations under FSR andUCCC with respect to banking products and services, as well as all otherobligations assumed by banks under the Code itself. This would effectivelyrestore the substance of the extent of banks’ existing contractual liability withrespect to disclosure.

The issue of contractual liability is one of considerable practical importance, asthe following example illustrates:

Let us assume:

• a customer makes as fixed term deposit with a bank;

• the customer is not given the information required by Code clause 2.3(vi)concerning “the nature of any charge or variation to an interest rateresulting from a withdrawal in advance of maturity”;

• the customer in fact withdraws the deposit in advance of maturity and thebank reduces the interest rate payable to the rate that was on offer on thedate of the deposit for a deposit of the same amount for the shortenedterm of the deposit.

If the customer can establish he/she did not know that the interest rate would bevaried upon early withdrawal, the customer is entitled to be compensated for thefinancial loss (interest lost) which arose from the bank’s failure to inform thecustomer of the potential variation of the interest rate. This is because the bankbreached its contractual obligation to comply with the Code.

If, as is likely, FSR requires the customer to be advised of the existence of thiscondition in any term deposit contract and the 2.3(vi) requirement referred towere deleted from the Code, it would appear that the customer may lose theright to recover the lost interest, unless, as suggested, the Code contains aprovision which contractually binds banks to comply with the disclosurerequirements of FSR and UCCC.

However, it does not follow that every breach of an FSR or UCCC requirementwill result in the customer affected being entitled to compensation arising fromthe breach. Experience over some 16 years in the operation of the civil penaltyprovisions of UCCC demonstrates that in practice few disclosure breachesresult in a customer suffering a quantifiable monetary loss. However for the fewcases where a loss does arise I believe it is important the customer retain thebenefit of the bank being contractually bound to comply.

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Interim Recommendations:

That:

• significant overlap between Code provisions and other laws, particularlyUCCC and FSR, is undesirable and that overlapping Code provisions bedeleted from the Code;

• there be included in the Code for information purposes only (and not assubstantive provisions), material which advises consumers and bankstaff of disclosure rights and obligations arising under UCCC and FSRand other relevant laws and which summarises the principal features ofthose rights and obligations;

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

“Fleshing out” the necessary detail for PDS

ASIC’s viewsIn its submission to the review, ASIC draws attention to a statement inTreasury’s Commentary on the Financial Services Reform Bill that:

“The list (of disclosure requirements) is cast in fairly general terms, with thecapacity for the information that must be included under particular heads inrelation to particular products to be fleshed out in a number of ways:

• through a regulation making power (see proposed subsection 983C(2);

• under an industry code of conduct which may be approved by ASIC;and

• through ASIC guidance in the form of policy statements.” 46

There is a fourth option, that is for it to be left to individual businesses to workout for themselves how best to comply or for the issue to be addressed throughother avenues such as industry standards.

In an important contribution to the debate on this topic, Jillian Segal, an ASICMember offered the following comments47:

“As to which of these methods is to be preferred in a particular instance, Isuspect that relevant considerations may include:

46 ASIC submission, p. 1147 “Monitoring the Self Regulatory Landscape” – An Address presented by Jillian Segal to the Financial Services

Consumer Conference 2000 on 9 November 2000, Sydney

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• First, the extent to which either ASIC or Treasury see presentcompliance as an issue and want to set some clear directions.

• Relatedly, the relative priority of the area to Government and ASICsince both regulations and ASIC policy statements require thedevotion of resources. There is already a queue forming for the use ofthese resources in the FSR implementation context.

• Finally, the extent to which the industry wants to pre-emptGovernment and set out its own clarifications in documents such asCodes of Conduct or industry standards. Where industry does this in amanner which satisfies Government’s concerns and where thatdocument enjoys broad based acceptance within the industry the needfor Government action is clearly diminished.

The first three mechanisms – regulations, Codes and ASIC policystatements – should all involve consultation with the full range of interestedparties – consumers, industry and government. The difference is really inwho has the final say in settling the mechanism. In the case of Codes,industry will settle the form (though if they want the code approved byASIC, ASIC will have a stronger say on content). In the case of regulationsit will be the Government, and in the case of ASIC policy statements it willobviously be ASIC. That said, as each of these mechanisms seeks to clarifywhat the law requires, it will, of course, be the courts which, at the end ofthe day, have the final say.

Of course, ASIC does not have a predetermined view about which of thefour mechanisms identified is the most appropriate for clarifying thelegislation. Each case will need to assessed on its own merits.”

………

“At this stage, we are suggesting to the Code reviewers that their issuespaper canvas all areas where they believe disclosure content issues arise andthen seek feedback as to which is the most appropriate vehicle foraddressing particular issues.”

Practical issues if the Code is to flesh out detailThere are some practical issues to be considered if it is proposed to use arevised Code as a mechanism for fleshing out the detail of the disclosurerequirements under FSR for banking products and services.

One matter to be taken into account is the risk that any detailed “fleshing out”contained in a revised Code may be become outdated prior to the next reviewdate. This could come about for a wide range of reasons, particularlytechnological change and innovation and new products in the market place.Alternatively because the original fleshing out material may prove in practice tobe inadequate or excessively onerous or otherwise unsatisfactory.

If Code reviews are likely to be conducted only at three yearly intervals, theredoes seem to be a real question whether detailed material could be brought upto date sufficiently quickly. Indeed, even if Code reviews were conducted more

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frequently or on an “as required” basis, experience suggests that a considerableperiod of time may elapse between the finalisation of a Code review and theimplementation of recommendations.

Another practical issue is the question of uniformity. There are currentlyseparate codes of practice which apply to the three classes of deposit takinginstitutions, namely banks, building societies and credit unions. If the Code is toflesh out FSR disclosure requirements for banks, then the codes of practice forbuilding societies and credit unions will presumably have to be amended to fulfilthe same fleshing out function for those institutions. That raises obvious issuesof timing and poses a risk that the fleshing out cannot be guaranteed to beuniform between the three codes.

For these reasons the Code may not be the appropriate vehicle for fleshing outthe detail of the disclosure requirements under FSR for banking products andservices.

The possible fourth optionAlthough neither the ASIC submission nor the Commentary on the DraftProvisions, Financial Services Reform Bill discussed the possibility that thefleshing out be left to individual institutions to determine on a product-by-productbasis or by industry standards or some like mechanism, it is understood thisoption was raised during the FSR consultative process. It is recognised as anoption in the extract from Jillian Segal’s address, set out above. Its proponentsargue that the option is worth pursuing as a more flexible, market based andless costly alternative at least with respect to banking products and services.

Not surprisingly consumer representatives have expressed some reservationsabout the viability of this option. However it may be possible to devisesafeguards to address the bases for those reservations at least to some extent.

One possible safeguard might be collating and monitoring the information onthe adequacy or otherwise of PDS in actual use which will be gained throughthe investigation of complaints which go to ABIO.

I have not formed a view as to which is the most desirable option for fleshingout the detail of PDS for the purposes of compliance with FSR but I haveformed a tentative view that for the reasons given above the Code is not asatisfactory mechanism for that purpose.

It would be useful if stakeholders could particularly address this issue in anysubmissions they choose to make in response to this paper.

Interim Recommendation:

That the Code is not the appropriate medium for fleshing out the necessarydetail of PDS for the purposes of FSR. However, this does not preclude usingthe Code to signpost where the fleshing out is actually done.

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Which Disclosure Requirements should remainin the Code if all Overlapping Provisions areremoved

Information to persons who are not customersThere are a number of disclosure requirements in the Code which are notduplicated to any extent in FSR or UCCC. Clauses 3.1, 6.1, 7.1 and, arguably4.1 provide for information to be given on request to a person who need not bea customer of the bank - in other words, a person who is “window shopping”.

The JCS asserts that the Caseworker Report carried out in conjunction with thepreparation of that submission indicates a level of non-compliance by banks inthis area:

“During the Caseworker Consultation it was noted that Terms andConditions — as distinct from advertising-cum-information material —were not generally given to people at, or prior to, the time they made theirapplication for a credit card or to establish a deposit account; but onlysubsequently when they received their card (and were probably alreadypsychologically committed). Moreover, a number of caseworkers reportedthat, in their experience, some branches of Banks and other Institutions didnot keep Terms and Conditions booklets on site and, therefore, could notprovide copies, even on request, to prospective customers. Indeed, a recentinformal survey of eight Sydney CBD branches of major Banks by CCLC(NSW) revealed that in no case could Bank staff provide Terms andConditions for their credit card or basic personal loan facilities.”48

ACA makes a number of criticisms of the current Code provisions and arguesfor the adoption of revised disclosure principles in the Code:

“For consumers to make informed decisions about banking services andproducts, disclosure – across a range of areas – is vital. These areas includedisclosure of fees and charges, truth in lending, risks and legal obligations,dispute resolution and rights of redress, and privacy principles andprotection.

The Code adopts a narrow view of disclosure, which requires updating notjust to ensure consistency with regulatory requirements (such as the UCCC)but also to demonstrate the industry’s commitment to its consumers.

The principle of open and fair disclosure is essential for consumers. TheCode’s provisions are inadequate, and summaries of some areas forimprovement are noted below. Rather than focus on existing Codeprovisions, however, ACA recommends that the review adopt revisedprinciples to improve the industry’s approach to disclosure.

These should include:

48 JCS, p. 19

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• making summary and full information available to consumers whenshopping around for banking products – including loans;

• full disclosure of all fees and charges on all product lines, includingfrequency of fees, methods of charging and regular statements of feescharged;

• in credit arrangements, compliance with UCCC guidelines andmandatory disclosure of full costs of credit, loan details, arrangementsfor default and debt collection, and undertakings to provide updatesregularly and on request;

• undertakings to inform consumers of full terms and conditions (andcost implications of these conditions), including dishonour/overdrawcharges, account combination practices, debt obligations, andcollection;

• a commitment to provide information on request about consumeraccounts and services, in a free or low-cost, accessible format.

As examples of current inadequacies ACA notes improvements required inthe Code:

• ”clause 2.1/7.1: information on terms and conditions for consumers –not just customers - when comparing products. This informationshould include provision of contract documents, fees and charges, anddetailed terms on request;

• clause 2.3: provide increased disclosure of all fees and charges (not“standard” fees), for example at point of transaction, in clear andconcise forms;

• clause 2.3/3.1: ensure compliance with UCCC requirements regardingconsumer credit, and extend these disclosure principles to all creditproducts;

• section 6 – operation of accounts: the current range of disclosureprovisions are inadequate and fail to meet consumer expectations onthe form and availability of information about their accounts.Obligations placed on consumers in the Code also appear out ofcontext – the Code is about banks meeting standards of practice;

• section 9: protect consumers from variations in terms and conditionsby increasing notice periods and providing guidelines for changes to“fee free” floors and related (fee attracting) conditions;

• clause 14.1: improve guidelines for information included in andfrequency of account statements, including an obligation on the bankto provide consumers with full details of account records andtransactions upon request;

• establish requirements for disclosure of loan details, banning the useof “shadow ledger” practices to withhold up to date credit/defaultinformation from customers;

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• promote adoption of a comparison rate in advertising credit products;

• seek consistency with the draft Financial Services Reform Bill anddisclosure requirements for consumer credit under the UCCC;

• clause 18: improve provisions relating to advertising, to encourageadoption of truth in lending (via a comparison rate) and promoteaccuracy.”49

In my view it would be of considerable assistance to consolidate these publicinformation requirements into one clause. At present in some cases theobligation is to provide information on request, in others it is to have informationreadily available.

Interim Recommendations:

That the Code require banks to provide to any person on request:

• terms and conditions of any banking service,

• full particulars of fees and charges that are or may become payable inrespect of any banking service

• particulars of the interest rates applicable to any banking service; and

• the material currently listed under Code 6.1.

That the Code also require banks to have the above material readily availableso that requests can be met expeditiously.

Other gapsThe Code should retain as discrete disclosure requirements any of the existingprovisions which are not replicated in, or otherwise superseded by, thedisclosure requirements of UCCC and FSR.

As noted earlier, the exact extent of disclosure overlap between the presentCode and FSR will not be ascertainable until the total FSR package is finalised.This is particularly relevant to Code clauses 2, 6.1 and 6.2.

Interim Recommendation:

That there be retained in the Code those existing Code disclosure obligationswhich are not replicated in, or superseded by, disclosure requirements arisingfrom FSR or UCCC.

49 ACA Submission, pp 6 – 7

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Timing differences affecting notification of changesIf, as proposed, the overlapping disclosure provisions of the Code are deleted infavour of the UCCC and FSR provisions, there will be some consequences onthe timing of certain disclosures. It is convenient to set out separately the keyrequirements of the Code, UCCC and FSR relating to disclosure of variations.

The Code: Currently clause 9.1 requires 30 days advance notice in writing ofany new fee or charge or any variation in the method by which interest iscalculated or the frequency with which it is debited or credited. Any othervariation to fees and charges or interest rate or otherwise to terms andconditions may be notified as late as the day the variation takes affect andnotification may be through media or in writing.

UCCC requires 20 days notice of any new fee or charge or any change to anexisting fee or charge and notification can be given by newspaper. 20 daysnotice is required of the method of calculating interest and this must be notifiedby written notice to the debtor. Changes in interest rates may be notified as lateas the day the change takes affect and may be notified by newspaper.Whenever a variation is notified by newspaper it must be confirmed on the nextstatement of account given to the debtor. No advance notice is required of anychange which reduces the obligations of the debtor but written confirmation ofthe change must be included on the next statement of account.

FSR: 30 days advance notice is required for any change which relates to feesand charges. For any other change, notice is required to be given as soon aspracticable after the change occurs and in any case within three months exceptthat if the person required to notify the changes believes that the change is notadverse to the consumer’s interest notification can be delayed by up to 12months from the time the change occurred.

The conflict between the Code and UCCC is minor. Relying on UCCC alonewould reduce the advance notice of certain changes from 30 days to 20 days.

The conflict between the Code and FSR for notification of changes involvingnon-credit products is not as simple to resolve. The FSR requirements forchanges relating to fees and charges are substantially the same as under theCode; however, the FSR requirements for notification of other changes aresignificantly less precise or helpful to consumers. Put simply, the Codeguarantees that notice will be given of any change at least by the day thechange takes effect, whereas FSR, at its strongest, mandates notice as soon aspracticable after the change occurs, but then suggests three months and even12 months after may suffice in some circumstances.

It must be kept in mind that FSR is not product or banking specific and therepresumably are some financial services products for which notification 3 or even12 months after the event would be acceptable. However, in the context ofbanking services and products, I see no case for lessening the existing Coderequirements.

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Interim recommendations:

That:

• UCCC and not the Code should specify the notice requirements forchanges to UCCC regulated products;

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

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

How Notified

FSR provides that the form of notification must be in writing, electronically or inthe way specified in the regulations. Until the regulations have been made it isnot known whether notification through the media will be permitted and if sowhether direct written notice must be given to each affected consumer when abank sends the next statement of account. It is noted that in its submissionASIC raises the issue of the effectiveness of notification through media alone.Further views are sought on this matter.

Electronic Notification of ChangesThe Code does not appear to contemplate electronic communications whereasas mentioned above FSR does provide for such communications. This matteris discussed later in this paper under the heading “Electronic Communications”.

Statements of AccountIt is convenient to deal with the matter of statements of account for bank creditproducts or other bank products separately.

Statements of Account for Credit ProductsThe Code makes no provision at all with respect to the giving of statements ofaccount in relation to credit products. However UCCC makes provision for thegiving of statements of account for credit contracts which are regulated by thatCode. As I understand the submissions the UCCC provisions are generallyconsidered satisfactory.

If the Code is extended to small businesses in the manner suggested earlier,there is a need to consider whether some further provision should be made withrespect to statements of account. The existing voluntary Principles for smallbusinesses referred to earlier only provide that a small business customer willnormally be given documents which describe “when statements of account willbe provided and the basis on which account information can be accessedoutside of this arrangement”.

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Not withstanding my general view expressed earlier that an incrementalapproach be adopted when extending the Code to small business, I believe thatsome more definite provision needs to be made in respect of statements ofaccount for small businesses.

Interim recommendation:

That the Code apply the substance of the UCCC requirements in sections 31 to34 (inclusive) to small business statements of account and relatedinformation.

I would welcome information on any technical barriers or limitations toimplementing this recommendation.

Statements of Account for Non-Credit ProductsThe Code provides for statements of account in the following terms:

“14.1 At least every six months, a Bank shall provide a Customer with arecord of all transactions relating to a deposit account of the Customer sincethe previous statement unless:

(i) a passbook is provided or it is agreed that other documentation will bethe record of transactions on the deposit account;

(ii) there has been no transaction effected by the Customer on the depositaccount during the past six months; or

(iii) the deposit account can be accessed by the combined use of a PIN andan EFT card (in which case the requirements of the Electronic FundsTransfer Code of Conduct apply).”

Now that a high proportion of “non-passbook” accounts are accessible byelectronic card, the practical effect of retaining existing 14.1(iii) is that the Codewill not apply to the great majority of deposit accounts.

While the general approach of this Code is that it defers to the EFT Code wherethere is an inconsistency (Code clause 1.4), I believe it would be an oddoutcome if such a fundamental obligation as accounting to customers were notto be found in this Code but rather in another specialised code of conduct. Itherefore think that Code clause 14.1(iii) should be deleted and the necessaryconsequential adjustments made to the EFT Code.

The only relevant provision contained in FSR relevant to the frequency ofstatements of account is section 987C, which requires a periodic statement tobe provided at least every twelve months. On analysis the Code providesgenerally for more frequent statements of account but on the other handprovides in 14.1(ii) for an exception that may not be mirrored in FSR.

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The JCS argues that the maximum statement period should be three monthsand that exceptions like 14.1(ii) should not apply if fees or interest chargescontinue to be imposed.50

In my view the JCS proposal that statements should issue at least every 3months has merit, particularly as it is principally by checking statements ofaccount that customers will detect unauthorised or incorrect transactions,especially direct debits. As to the JCS suggestion that the existing exception inCode clause 14.1(ii) should be narrowed, my response is that the suggestionmay not go far enough. I see no reason to depart from the principle reflected inUCCC section 31(3)(b) which limits the operation of the comparable exclusionto cases where “no amount has been debited or credited to the account duringthe statement period…”

Interim recommendations:

That:

• Code clause 14.1 require a statement of account at least each threemonths;

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

• clause 14.1(iii) be deleted.

Shadow LedgersA number of submissions dealt with what has become known as the “shadowledgers” issue.

The issue is well described in the submission received from the Brisbane officeof ACCC. That submission in part reads:

“The Brisbane office of the Australian Competition and ConsumerCommission (ACCC) has received a number of complaints from consumersregarding the practices of banks in maintaining off system accountsdescribed to this office as “shadow ledgers”.

This office understands the issue arises from the above accounting practiceof the major banks. This practice involves writing off on their mainframeaccounting system customer debts which they believe to be irrecoverable sothat they did not show interest continuing to accrue and therefore create atax liability for the bank. The banks maintain separate manual ledgers(shadow ledgers) to show the actual amount that remains due. It is allegedthat once the above accounting treatment has been effected the Bank will nolonger provide the customer with a statement of account. It is also alleged

50 See JCS, p. 23

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that several customers have been inadvertently provided with an accountbalance from the mainframe showing the amount due to be less than is infact the case.

The ACCC has communicated with a major Bank regarding the aboveallegations. The Bank informed the ACCC that it will write-off a debt, orpart thereof, when an assessment is made that it is unlikely to recover thedebt. The borrower’s statement, which is kept on the Bank’s mainframesystem, is then reduced by the written off amount. The Bank does not sendthis statement to the borrower, as it does not reflect their legal obligation topay the full amount of the debt. It is further understood that the Bank willthen keep an account of the debt as well as the interest accruing on it in aseparate off-system account, in the so named ‘shadow ledgers’.

The Bank informed the ACCC that in order to prevent the customer fromreceiving statements reflecting the write-off treatment, the address of thestatement is changed as soon as the write off is effected. The borrowershould never receive notification that their debt has been written off. TheBank advised that any such disclosure would only be the result of a systemmalfunction.

Further, when the Bank writes off a debt, it is usually the final step in a longprocess of negotiation with the defaulting borrower. The Bank advises thatit has almost always commenced enforcement proceedings by the time adebt is written off. The Bank confirmed that it would suspend normalcommunications with the customer, which includes the issue of bankstatements in circumstances where the banker/customer relationship hasentered legal proceedings. Accordingly, the borrower will not receivestatements of the debt as it is recorded in the ‘shadow ledger’.

The Bank stated however, that it would, on request, always provide to acustomer an account of his or her legal obligation under the debt.

The ACCC has received information that consumers are experiencingdifficulty in obtaining statements from Banks. The ACCC is concerned thatthe non-issuance of statements may affect the borrower’s ability to:

• calculate the level of their debt;

• complete tax returns,

• re-finance; and

• budget.”51

In August 2000 the Parliamentary Joint Statutory Committee on Corporationsand Securities (PJSC) conducted a hearing into the matter of shadow ledgersand the provision of bank statements to customers. ACCC and the FinancialServices Consumer Policy Centre, one of the parties to the JCS, madesubmissions to the PJSC inquiry. In its conclusions and recommendations theCommittee stated:

51 ACCC Submission, pp 1 – 2

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“The PJSC believes that all financial institutions which do not already do soshould adopt the announced intention of the (named) bank to provide fullstatements to all customers. Therefore the PJSC recommends that theautomatic issuing of statements of account in all circumstances short oflitigation, be considered for inclusion in the banking code of practice.”52

The recommendations made by the ACCC submission to this review are asfollow:

“… The ACCC is seeking an industry wide solution to the above concernsand to this end has raised the issue with the Banking Industry Ombudsman.Further, the ACCC considers that concerns regarding the issuance of bankstatements may be appropriately addressed by providing in the Code ofBanking Practice that regardless of the status of a customer’s loan Banksshould:

automatically provide consumers with accurate and regular statements ofaccount; or

(a) ensure that accurate statements of account are provided in a timelymanner to customers on request; and

(b) ensure customers are fully informed about the availability ofstatements and the method of requesting them.”53

ABA’s December 2000 response document stated, in relation to shadowledgers:

“The Code provisions should go no further than to require a bank toautomatically provide customers (including borrowers, regardless of thestatus of their loans) with timely, accurate and regular statements ofaccount, with the exceptions that currently appear in clause 14.1 of theCode. This is one of two alternative recommendations made by the ACCC(Brisbane Office) submission to this review.”54

In subsequent discussions on this suggestion, ABA representatives clarified thattheir proposal is effectively that customers will be given the statements ofaccount that would normally be given if the account had been regularlymaintained.

Interim Recommendation:

That banks automatically provide customers in default with statements ofaccount as if the accounts were not in default.

52 Report on Shadow Ledgers and the Provision of Bank Statements to Customers, October 2000, p. 1053 ACCC Submission, p. 254 See Appendix 4

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Code Clauses 9.1 and 9.3The ABIO Submission draws attention to variations that technically are notcovered by the Code and raises the issue of how such variations should bedisclosed. The submission states:

“ABIO principally relies on the Code of Banking Practice in applyingstandards of disclosure in relation to deposit accounts.

Clause 9.1 of the Code states that if the bank introduces a fee or charge orvaries the method by which interest is calculated, the bank shall providewritten notice to all affected customers 30 days before the change comesinto effect.

Clause 9.3 of the Code states that a bank shall notify customers of avariation of standard fees and charges or of an interest rate byadvertisement in the national or local media no later than the day on whichthe variation takes effect.

This office has encountered complaints from customers who say that inrelation to variations to the terms and conditions of deposit accounts, thedisclosure by notice in the national media is inadequate, this is particularlythe case for bank customers living in remote areas.

The types of variation that are not covered by the Code include:

(a) Where there is an increase in the minimum balance to which anaccount keeping fee applies, for example, where the balance belowwhich a monthly account keeping fee applies is increased from $1,000to $2,000 and

(b) Where there is an increase in the balance to which the minimuminterest rate applies, for example where the minimum interest rate of0.3% is changed so that instead of applying to balances below $1,000it is now applied to balances below $2,000.

ABIO ApproachIn determining this issue, the Ombudsman’s office takes into account thefollowing:

The Code does not specifically cover the situation where the minimumbalance to which a fee applies is raised;

The spirit of the Code is to inform customers of changes to the terms andconditions of their accounts so that they can make informed decisions abouttheir financial affairs;

All customers would have been notified in writing that they had to maintaina minimum balance of $500, for example, to avoid the account keeping fee,when the fee was introduced;

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For the group of customers with a balance of between $500 and $1,000, theaccount keeping fee which now applies, is in effect a new fee when therewas not previously a fee; and

Unlike statement account holders, passbook account holders may notbecome aware of the new fee for quite some time if they do not update theirpassbook regularly.

Suggested Clarification in CodeThe Ombudsman’s view is that the spirit of the Code is to provide adequatedisclosure so that bank customers are in a position to change their bankingarrangements so as to avoid fees or to maximise their interest return shouldthey wish to do so. On balance the Ombudsman’s view is that goodbanking practice requires that written notice should be given to all affectedcustomers 30 days before the change comes into effect of the change in theminimum balance to which an account keeping fee applies or a change inthe interest rate tiers applying to a deposit account.”55

Similar views are expressed in consumer submissions.

In my opinion, the Ombudsman’s views on this matter are well founded.However it may be that the terms of section 987B (5) of FSR will require 30days’ advance notification of both these types of changes but if there is any realdoubt about that, a revised Code should contain an appropriate provision toensure that the disclosure recommended by the ABIO is made.

Interim recommendation:

That unless FSR already so requires, the Code require all affected customersto be given 30 days’ advance notice in writing of a change in the minimumbalance to which an account keeping fee exemption or relief provision appliesor a change in the interest rate tiers applying to a deposit account.

Comprehension of Disclosure DocumentsASIC notes that Code clause 2.1(iv) requires that terms and conditions beclearly expressed. ASIC then notes:

“However, there is no encouragement for banks to ensure that the needs ofconsumers with low literacy levels are met. We would strongly supportefforts by this review or by banks generally to consider ways to encouragebetter disclosure documentation, either through the Code or through othermechanisms.”56

I would welcome views on how this matter might be addressed in a revisedCode.

55 ABIO Submission, pp 7 – 956 ASIC Submission, p. 52

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Disclosures of Fees and Charges – CurrentDevelopmentsThe ASIC submission notes that the question whether the current fee disclosureregime is adequate is under consideration by the current Inquiry into Fees onElectronic and Telephone Banking established by the PJSC. It also notes that itis chairing a Transaction Fee Disclosure Working Group.

The PJSC reported recently but the recommendations or proposals from theASIC Working Group are not yet available. It is obviously preferable to examinethe responses to the PJSC Report and the outcome of the ASIC Working Groupbefore attempting to recommend what changes might be desirable in the Codeon this issue.

A supplementary Issues Paper could be prepared to deal with the issue.

Notification of changes to the fees for standalone transactions or servicesThe ASIC Submission raises a number of instances where it is not feasible tocomply with the existing provisions of the Code. It instances difficulties withstand alone transactions such as the issue of bank cheque where it is notpossible to know who the affected customers will be and points out that in thesecircumstances a bank would be unable to comply with the strict terms of 9.1.ASIC commented:

“There may therefore be merit in amending clause 9.1 so that the advancenotification requirement does not apply where it is not possible to identifythe affected customers and the fee is for a stand alone transaction.Disclosure of changes to fees for stand alone transactions can continue to beprovided indirectly to customers under clause 9.3, and fees for stand alonetransactions should continue to be disclosed under clause 4.1.”57

In my view it would be appropriate to amend clause 9.1 as suggested if theCode is to continue to contain the elements of existing clause 9.

Interim Recommendation:

That Clause 9.1 of the Code be amended so that notification is not requiredwhere it is not possible to identify the affected customers.

57 ASIC Submission, p. 54

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Notification of changes to interest rates formoney market productsASIC’s submission raises an issue of the feasibility of complying with Codeclause 9.3 for certain products:

“The Code currently provides (in clause 9.3) that changes in interest ratesmust be notified to customers no later than they day that the changes takeeffect. It has been suggested to us that such notification will not be possiblefor some products where the interest rate is linked to an external figure.One obvious example here is products where the interest rate is linked tomoney market rates.

It may therefore be appropriate to amend Clause 9.3 to ensure that it reflectscurrent market practices.”58

Again I believe it would be appropriate to give effect to ASIC’s suggestion if theCode is to continue to contain the elements of existing clause 9.

Interim Recommendation:

That clause 9.3 of the Code should be amended to ensure that it reflectscurrent accepted market practices.

Clarifying that terms and conditions can beunilaterally changedConcerns were raised in the Caseworker survey that consumers did not fullyappreciate that the terms and conditions of financial institution products can beunilaterally changed, provided the requisite notice is given. They can bedismayed to find that a significant inducement to purchase (eg low or noaccount keeping or administration fees) can be unilaterally varied. This wasparticularly thought to be of concern where the no or low fee feature is heavilypromoted, and where the costs of early termination are high.

In that survey caseworkers suggested that the payments systems code shouldrequire that all advertising and point of sale promotion of fee free accountsshould include specific reference, of equal prominence, to the institution’scontractual right to introduce account keeping and administration fees in thefuture.

Further views are sought on this issue.

58 ASIC Submission, p. 54

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CHAPTER 5. MISCELLANEOUS ISSUES

Staff TrainingThis review deals elsewhere with the issue of ensuring that bank staff have anadequate knowledge of the Code. However, there is a broader issue of staffcompetency in all areas.

The JCS describes the issue in these terms:

“The Caseworker Consultation indicated widespread concern about the leveland adequacy of training of, in particular, counter and call centre staff ofBanks. Awareness of the existence of the CBP, let alone its provisions,appears to be low; as does awareness of other legal and compliancerequirements; for instance, obligations under the Uniform Consumer CreditCode. Most caseworkers interviewed complained about the difficulties theyregularly experienced in getting access to Bank staff who understandrelevant legal and related issues when negotiating on behalf of their clients.There was a widespread perception that the general quality of training ofBank staff had deteriorated in recent years and that this was related to majorstructural changes within Banks including: increased use of part-time andcasual staff; increased dependence on call centre staff to deliver services andanswer queries; and increased dependence on sub-agencies (particularly inrural areas).

In our view, the issue of staff training by Banks needs to be addressed in thecontext of the radical changes in methods of service delivery within theindustry. For instance, a far greater commitment to the training of callcentre staff is clearly needed across the banking sector. An enhancedcommitment to staff training should also be reflected in the CBP. Thus, thePreamble clause relating to this issue should be strengthened so that itcommits Subscribers to:

• ensuring — not just endeavouring to ensure — that their staff areappropriately trained; in other words, trained to a level that allowsthem to competently perform their duties; and, as part of this,

• ensuring that training is ongoing and covers all areas of regulationrelevant to the staff member's work (not just the CBP). For instance,that it covers the EFT Code of Conduct, which most Bank staff appearto have considerable difficulty understanding and/or complying with.

Monitoring of staff training should also form part of the compliancemonitoring regime discussed in the previous section.”59

I believe that the Caseworker Consultation gives rise to serious concerns onthis issue, but I do not think the answer lies in being prescriptive about training,as training does not, of itself, ensure competence. Rather I prefer a simple

59 JCS, p. 10

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unambiguous obligation to ensure staff are competent to efficiently andeffectively perform the functions which they are required to perform.

Interim Recommendation:

That the Code require banks to ensure that staff are competent to dischargetheir functions efficiently.

Copies of DocumentsBoth ASIC and the JCS point out that the Code does not oblige banks to supplycopies of contracts, account statements, notices and other relevant documentson request to a customer or a guarantor or their authorised representatives.

The JCS contrasts this position with that under UCCC where debtors,mortgagors and guarantors have a right to obtain upon written request copies ofcontractual documents, certain insurance contracts and notices previouslygiven. There is also a right to obtain a statement of full account details. UCCCalso imposes time limits on the supply of copies and other information.

During the consultations consumer representatives actively engaged in actingfor debtors in disputes with banks asserted that it routinely took certaininstitutions two months or more to provide copies of contractual documents andstatements of account. Both submissions accepted that banks should be ableto impose reasonable fees for the provision of copies.

Interim Recommendations:

That:

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

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

Customers in Financial DifficultiesThere is clearly a level of concern about the conduct of banks with respect tocustomers experiencing financial difficulty.

The JCS points out that under UCCC the debtor is entitled to seek a variation ofrepayment obligations under certain circumstances and where the creditprovider does not agree the debtor may make an application to a court ortribunal to vary the repayment. The submission correctly notes that there is no

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obligation on a credit provider to alert a consumer of these rights. Thesubmission then comments on caseworker experience in this area:

“It is a common experience of caseworkers that Bank and other Institutionstaff do not always raise the possibility of a repayment variation withunassisted Customers who contact them when they are in financialdifficulties. Rather, quite frequently, early notification that the Customer isin financial difficulty — something the CBP encourages: see 6.1(vi) —serves merely to prompt the initiation of debt collection activity. Bycontrast, when a caseworker becomes involved, the variation option isconsidered (because the caseworker has raised it) and, frequently, newrepayment arrangements are readily agreed. Often, indeed, essentially thesame arrangements are agreed as the Customer had been seeking prior to theinvolvement of the caseworker.

This kind of situation is clearly unsatisfactory. For one thing, it addsunnecessarily to the pressure placed on scarce community and welfaresector resources.

We recommend that the Review consider measures that might be adoptedunder the CBP to enhance the possibility of Bank Customers being able tonegotiate loan variation arrangements without assistance. A positiveobligation on the Subscriber to alert a Customer experiencing financialdifficulties to any right they may have to seek a variation under the creditlegislation should be considered in this context.”60

In a slightly broader context the FCSQ submission remarks:

“An area that has been completely ignored by banks in promoting effectiverelationships has been the area of debt recovery. Inflexibility by financialinstitutions in accepting realistic repayment options when personalcircumstances change encourages consumers to seek the protection of theBankruptcy Act. More reasonable and realistic repayment options that caterfor individual circumstances would lessen this potential. Self-interest ofindividual banks is often counter to the collective good.

A distinction needs to be drawn here between debt collection practices anddebt recovery policy. ASIC has developed Guidelines on section 60 of theTrade Practices Act to cover debt collection practices. While collectionpractices of some banks still fall below the standard set by this guideline, itis the underlying debt recovery policies of banks that need improvement.

Banks need to remember that many people in financial crisis are alsosuffering a major personal crisis such as unemployment, relationshipbreakdown or business failure. Relying on the letter of the law for recoveryin such circumstances is unrealistic and results in undesirable outcomes.

Inflexible attitudes and requirements lead to a perception amongstconsumers and financial counsellors that some creditors prefer debtors to

60 JCS, p. 26

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lodge their petitions for bankruptcy. The debt collection practices of somebanks would indicate this.

Should the Code be amended, we recommend that debt collection policyand practices be included under the objective of fostering effectiverelationships, given that “effective” should be a two way street with bothparties deriving benefit. The following matters should be included:

• Industry commitment to work co-operatively to resolve problemsarising from financial hardship (rather than the self interest thatcurrently exists)

• Development of realistic, and publicly known, debt collection policiesand practices

• Increased flexibility in repayment options

• Commitment to use of Part IX Agreements where no other equitablesolutions exists”61

The UK Banking Code takes a more direct approach and includes a section onassisting customers in financial difficulties:

“15.1 We will consider cases of financial difficulty sympathetically andpositively. Our first step will be to try to contact you to discuss thematter.

15.2 If you find yourself in financial difficulties, you should let us know assoon as possible. We will do all we can to help you to overcome yourdifficulties. With your cooperation, we will develop a plan with youfor dealing with your financial difficulties and we will tell you, inwriting, what we have agreed.

15.3 The sooner we discuss your problems, the easier it will be for both ofus to find a solution. The more you tell us about your full financialcircumstances, the more we may be able to help.

15.4 If you are in difficulties you can also get help and advice from debtcounselling organisations. We will tell you where you can get freemoney advice. If you ask us to, we will work with debt counsellingorganisations, such as Citizen’s Advice Bureaux, money advicecentres or The Consumer Credit Counselling Service. Their phonenumbers are at the back of this code.”62

In the course of the review I invited comments from banks on aspects of the UKBanking Code and received the following response:

“Clause 15 Financial Difficulties: There is a similar provision in the SmallBusiness Principles that ABA members do support. In clause 15.2 of theUK Code we take the words “We will do all we can to help you overcomeyour difficulties” leaves the bank’s commercial judgment intact in the sensethat if the bank believes that, for example, a borrower’s business is not

61 FCSQ Submission, p. 662 See Appendix 4

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viable or the business will never be able to service the debt, there is nothingin reality the bank can do but explore ways of reducing the liability orliquidating it through enforcement. “Help” to the borrower may in fact bethe appointment of an administrator particularly where there is the realprospect that the borrower may be trading whilst insolvent. In other casesthe bank may undertake a “workout” to the extent that is feasible. We areconcerned about the need to avoid the bank becoming the adviser to thecustomer, as there are clear conflicts of interest involved. We assume this isthe intent of the provision i.e. that the bank will not arbitrarily orcapriciously rule out exploring with the customer in difficulty possiblealternative measures and in this sense the provision would be supported.

Also, the U.K. provision, through imprecise drafting, could createunrealistic expectations by customers about the extent that the bank shouldlegitimately go to assist them. This type of provision could lead tootherwise avoidable and unnecessary disputes.”63

In my view, the contents of the Caseworker Report and the submissions madeby various consumer legal centres and financial counselling agencies are astrong indication of inadequate response by banks to the needs of theircustomers in financial difficulty. The apparent reluctance of banks to do morethan merely agreeing not to “arbitrarily or capriciously” rule out exploring optionswith the customer will do little to allay existing widespread concerns aboutbanks’ attitudes in this area. A more positive commitment is required.

I note two concerns expressed by ABA concerning the UK provision:

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

• a concern that the UK provision could create unrealistic expectations and“to otherwise avoidable and unnecessary disputes”.

With respect to the first concern (the conflict of interest) may I simply commentthat bank staff in their day to day dealings with consumers, constantly provideadvice on issues where there is an actual or theoretical conflict of interest, suchas recommending which bank product best suits a customer’s needs.

As to the second concern (the unrealistic expectations and the avoidable andunnecessary disputes) I find it difficult to accept that a set of promises made,after due deliberation, by the UK banking industry would, if translated toAustralia, create such problems as to make fulfilling the promisesunmanageable for banks.

In my opinion, the problem of debtors in hardship needs a positive responsefrom banks.

63 See Appendix 5

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Interim Recommendation:

That the Code contain a provision closely modelled on clause 15 of the UKBanking Code, but with an additional obligation on banks to advise customersin hardship of their rights under UCCC where the contract or guarantee isregulated.

Debt RecoveryThe Code does not deal at all with the responsibilities of banks or their agents inrelation to debt recovery. Submissions raising concerns about debt recoverypractices of banks and their agents were received from ASIC, CCLC, ConsumerCredit Legal Service Victoria (CCLS) and FCSQ.

The ACCC has certain national responsibilities in this area as the principalagency responsible for administration of Trades Practices Act 1974 (TPA).Section 60 of TPA provides:

“A corporation shall not use physical force or undue harassment or coercionin connection with the supply or possible supply of goods or services to aconsumer or the payment for goods or services by a consumer.”

In June 1998 the ACCC launched a project to look at debt collection inAustralia. The project led to the publication in July 1999 by ACCC of guidelinesfor debt collection activities.

In its submission ACCC discusses the issue of whether and if so how theguidelines might be incorporated into or referred to in industry codes of practice:

“Consumer caseworkers, in the ASIC survey, expressed the view thatindustry codes should set out appropriate practices along the lines of theACCC guidelines. The Commission has not formed a view as to whetherthese should be spelt out in the code, or whether the Code should refer to theACCC guidelines. As mentioned above, the guidelines were negotiated infull consultation with all stakeholders which adds a greater legitimacy, butthere may be industry specific considerations that could be spelt out in theCode. For example in the banking industry, debt collection services may beprovided through a mix of in-house and outsourced activity. The Codeneeds to specify conduct to ensure that the debtor is not contactedexcessively or receive conflicting advice from two different sources, bothacting on behalf of the bank. Similarly, banks need to be accountable forthe actions of their agents.”64

The JCS and the CCLS and FCSQ submissions all recommend theincorporation into the Code of a provision requiring subscribers to adhere to theACCC Guideline. The JCS comments:

“We strongly recommend that the CBP deal with debt collection issues. Inour view, this would probably be best effected by the incorporation within

64 ACCC, p. 4

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the Code of a provision requiring Subscribers to adhere to the ACCCGuideline on s60. We note that the Guideline was developed after extensiveconsultation with all relevant stakeholders and that the standards it sets werearrived at after a considerable amount of negotiation and compromise. Theyare not standards with which mainstream financial institutions like Banksshould have any difficulty complying.”65

The CCLS submission supports that proposal but adds:

“The Code must also be clear about a bank’s responsibility for its agents.Given the impact that this conduct has on consumers, and the difficulty theywould have in proving damages in Court, we believe that the Code shouldcontain provisions which allow the ABIO to financially compensateconsumers where a breach of the Code occurs in relation to debtorharassment.”66

My present view is that there would be considerable advantage if the Codewere to require banks to comply with the Guideline and to ensure that theiragents also comply. As to the suggestion that the Code should allow the ABIOto award compensation, it is my understanding that the ABIO considers italready can award compensation for stress etc arising from a breach of TPAsection 60. Presumably this would extend to a breach of the Guideline if theCode required compliance with the Guideline.

Interim Recommendation:

That the Code require banks to:

• comply with the Guideline; and

• ensure that their agents also comply with the Guideline.

Privacy and ConfidentialityThe existing provisions of clause 12 of the Code attracted a deal of criticism inthe submissions. There is particular criticism of the exemption clause 12.2(b)which allows a bank to disclose information to a related entity of the bank, anexemption which according to the JCS:

“actually erodes common law rights established in Bank of Tokyo Ltd vKaroon [1987] AC 45.”67

However as the JCS also notes, these criticisms of the existing code have beenovertaken by events, namely the promulgation of National Principles For theFair Handling of Personal Information (“The National Principles”) and the recent

65 JCS, p. 2766 CCLS, p. 167 JCS p. 28

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passing in the Federal Parliament of the Privacy Amendment (Private Sector)Bill 2000.

That Act gives statutory recognition to the National Principles and provides inconsiderable detail for compliance with the Principles by most private sectororganisations. The Act will certainly apply to all banks. Importantly, the Actgives corporations a choice. They can choose to comply with the NationalPrinciples as enshrined in the Act or they may choose to subscribe to a privatecode approved by the Privacy Commissioner. Essentially the concept of aprivate code is of a code which modifies the National Principles (in a wayapproved by the Privacy Commissioner) so that the private code might dealbetter with the privacy issues in the context of a particular industry (such as thebanking industry). It should be noted that the Privacy Commissioner may onlyapprove a private code if it gives at least the same level of protection as theNational Principles.

There is one further option. A private code may (but need not) containprovisions for the resolution of complaints of breaches of the privacy principles.Again the approval of the Privacy Commissioner is required for a private code tohave such a complaint resolution function. If an approved private code does nothave a complaint resolution function, complaints are dealt with directly by thePrivacy Commissioner.

In summary:

• there is no obligation on banks to seek approval for a private code forprivacy complaints within the banking industry;

• even if the Privacy Commissioner does approve a special privacy code forbanks individual banks will not be obliged by the Privacy legislation tobecome subscribers;

• a privacy code for the banking industry may with the approval of thePrivacy Commissioner, but need not, provide a facility for the resolution ofcomplaints for breaches of the Privacy Principles.

With these choices available under the new privacy legislation it may not beappropriate to provide in the Code that each bank must subscribe to anapproved Privacy Code for banks.

Interim recommendations:

That:

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

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

It is not practically feasible to comply instantly with the National PrivacyPrinciples. For example the principles require a corporation to adviseindividuals of various matters when or before it collects information and to

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publicise its policies on the management of personal information. Theseobligations may entail redrafting and reprinting a range of documents. If arevised Code took effect considerably before 21 December 2001, (being thecommencement date for the Privacy Amendment (Private Sector) Act) sometransitional provisions may be necessary to make initial compliance feasible.

The ACA submission stated in relation to the hearing of privacy complaints thatthe:

“proposed amendments to the ABIO scheme relating to the hearing ofprivacy disputes should be incorporated into the Code. The Code shouldrequire members to ensure consumers are informed of their rights in relationto privacy, and the opportunity for dispute resolution through the ABIOscheme and the Privacy Commissioner should be advertised toconsumers.”68

I agree with what I believe is the spirit of this suggestion, namely that the Codeshould, in one way or another, inform consumers of their right to refer privacydisputes associated with banking to ABIO or to the Privacy Commissioner.

There are two further matters. The JCS submits that:

• the Privacy Principles should appear as text in the Code, either as asection or as an appendix; and

• an additional principle should be included to require further disclosureabout related entities where a subscriber intends to rely on the relatedentities exemption to disclose customer information.

I have considerable reservation about the first suggestion. The NationalPrinciples are almost as long as the existing Code and are simplyincomprehensible to the average consumer. For example principle 2.1occupies 65 lines of print in a single sentence.

As to the second suggestion, there have been developments since the JCSsubmission was received in September 2000. Shortly before the PrivacyAmendment (Public Sector) Bill was passed by the Parliament in December2000, an amendment was made narrowing the scope of the original provisionsin the Bill exempting disclosure to related entities. In addition it is understoodthat the Privacy Commissioner intends to prepare guidelines on this matter andit may be that the essence of the proposal put forward by the JCS will bereflected in the combination of the privacy legislation and the guidelines.

Credit AssessmentThree submissions, namely the JCS and the submissions by the NSWGovernment and by ASIC raise the matter of responsible credit extension andcredit assessment. The submissions and the material provided by caseworkersestablish that the issue of the responsible extension credit is one of deep andwide spread concern, especially for financial counsellors and other agencies

68 ACA, p. 12

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who are constantly attempting to assist debtors in financial hardship as a resultof inappropriate credit extension.

The JCS notes that a high percentage of caseworkers who are in a position tocomment had concerns about credit assessment practices and proceeded

“The main area raised in relation to credit assessment concerned credit cardsaccounts; with caseworkers being highly critical of what were seen asinadequate procedures for assessing capacity to repay before cards wereissued and, particularly, before credit availability limits were increased. Inthis last context, caseworkers were especially critical of the practice ofsending cardholders pre-approved limit increases (requiring only that thecardholder sign and return the approval form). Concern was also expressedabout the difficulty of finding space on the loan application forms of someFinancial Institutions to include all existing financial commitments.

………….

In our view, neither the failure to assess capacity to repay before a loan isgranted or credit limit increased, nor reliance on the realisation of a securityas the primary source of repayment, are consistent with good bankingpractice. Unfortunately, however, Clause 15 of the CBP (Provision ofcredit) — which might have been expected to articulate standards of goodpractice or appropriate conduct in this area — does not set any specificstandards at all. (As currently worded, the language of the clause is more orless wholly discretionary. At best, it can be said to require that some formof assessment be undertaken before credit is provided; however, the form ofassessment is left entirely to the Subscriber.)

In our view, Clause 15, CBP, should be strengthened to impose somespecific obligations on Subscribers directed at mandating good bankingpractice in relation to lending. More particularly, the CBP should include:

• a positive obligation on the part of subscribing Banks to make suchenquiries as are reasonably necessary in order to determine theCustomer's capacity to repay any proposed loan or any proposedincrease in available credit; as well as a statement that "reasonablynecessary" enquiries would normally include, in the case of consumerloans, enquires as to the customer's: current income and expenditure;other current repayment commitments; current assets and liabilities;and credit repayment history;

• a requirement that the Subscriber would not lend or increase availablecredit to a Customer unless the Customer's capacity to repay, withoutundue hardship, was established on the basis of the above-mentionedenquiries; and

• a requirement that the Subscriber would not rely on the realisation ofassets held as security as the primary source of repayment.

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Further guidance to the development of substantive provisions relating tocredit assessment might be obtained from the ABIO Guideline onMaladministration in Lending.” 69

The ABIO Guideline referred to may not be of much assistance in relation toincreases in credit card limits as the Guidelines appear to have been devisedonly with housing and investment loans and small business loans in mind.

ASIC made brief comments on this topic noting the high incidence of caseworker concern about:

• failure to assess a consumer’s future ability to repay before inviting themto apply for a higher limit on their credit card; and

• the use of pre-approved limit increases for credit cards,

and suggested that the issue could be partly addressed by amending Codeclause 15.1 to clarify that the clause applies to increases in credit limits.However ASIC also suggested that it might be an issue more appropriatelyaddressed in UCCC which already contains a provision (UCCC s.70(2)(l))aimed at discouraging the extension of credit without reasonable enquiry as tothe capacity to pay.

The NSW Government submission notes:

“In December 1999 the Department of Fair Trading and the Department forWomen convened a roundtable seminar to discuss issues faced by women asconsumers of financial services, especially relationship debt, and to developstrategies to address these issues. The Finances Working for Womenseminar involved representatives from industry, government and communitysectors, and the Australian Banking Industry Ombudsman. The report onthe seminar, Report on Outcomes and Action Required, was launched inJune 2000.

One of the issues raised at the Finances Working for Women seminar wasinconsistent and inadequate credit assessment.

High-risk borrowers who are rejected by one lender can apply and receive aloan from another because of the different rules of individual lenders.However, in a competitive market, lenders are under pressure to maximisethe number of new customers, including some high-risk borrowers.

A uniform code of practice for all lenders with provisions for creditassessment criteria would help overcome inconsistencies in lendingpractices. The industry’s acceptance of this and its effectiveness as astrategy need further investigation.

The seminar recommended that the value of a uniform code of practice forall lenders with provisions for credit assessment criteria be investigated. Ifadopted, such a code could be incorporated in the Banking Code of Practice.”70

69 JCS, pp 24 – 2670 NSW Government submission, p. 5

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The submission adopts the seminar’s recommendation.

I do not understand that the submission is proposing that the investigation of thefeasibility and value of the Code of Practice dealing with credit assessmentcriteria should be conducted as part of my review. However if that were theproposal, I would simply not be placed to examine the anti-competitive issuesthat such a proposal raises.

There is undoubtedly considerable community concern about perceiveddeficiencies in bank credit assessment practices, particularly the practice ofmaking unsolicited offers of increases in cardholders’ credit limits.

The submissions and the Caseworker Report instance cases where such offershave been made to customers already in financial difficulty.

The existing Code provision (clause 15.1) on credit assessment fails to set anyobjective standards and, in my view, compares poorly with the recentlyapproved Mortgage Industry Association of Australia (MIAA) Code of Practicewhich provides:

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

However, the MIAA provision is, understandably, limited to loans. In my view amore generic provision is required.

Interim Recommendation:

That the Code contain a provision, in lieu of existing clause 15.1, that could bedrafted along the following lines:

“A bank will exercise the care and skill of a diligent and prudent banker inassessing the level of credit or loan funds it agrees to lend to a customer inorder to satisfy itself that the level of credit or the loan funds are suited tothe customer’s stated financial needs and within the customer's capacity torepay.”

Implementing Family Court Decisions andFamily Law SettlementsBoth the NSW Government and the ASIC submissions raise the difficultiesencountered in implementing a settlement or family court ruling as it relates tojoint debts. The NSW Government submission comments:

“The most common situation is where, as part of a Family Court endorsedsettlement, it is agreed that ownership of the family home (and theassociated mortgage) should be transferred from joint ownership to oneparty. The bank holding the mortgage is not a party to the proceedings, andso is not bound by the Court's decision. Legal Aid solicitors have reportedcases where the bank has refused to transfer the mortgage to one name only,

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even where the property is adequate security for the debt and mortgagepayments are up to date. The only option left for the parties is to completelydischarge the mortgage by re-financing elsewhere. This can be anexpensive exercise, due to the bank fees, legal fees and government charges.

Recommendation 6

Where a Family Court ruling or settlement involves the removal of oneparty from a joint mortgage, the Code should require a bank to effect themortgage transfer and consent to any related transfer of title.“71

ASIC’s views on the resolution of this problem are somewhat different:

“We are not convinced that this issue is best addressed through an industrycode. However, we would certainly encourage banks to develop guidelinesabout the manner in which they will enforce debts that are the subject of afamily law property settlement.”72

Interim Recommendation:

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

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

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

Direct DebitsASIC and the JCS both raised concerns about problems associated with directdebit facilities. The Financial Services Case Worker Consultation Reportcommissioned by CCLC to support the JCS lists the following issues of concernto case workers:

• “the prevalence of Institutional error (eg double debits, early debitsetc);

• failure to refund overdraw fees automatically when the Institution wasin error. In other words, the client (or their adviser) had to request arefund before it was given. In some cases cited, refunds were refusedeven following a request;

• undue delay in re-crediting funds which had been erroneouslydeducted;

71 NSW Government submission, p. 672 ASIC p. 64

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• excessive overdraw fees when account goes into overdraft because ofthe operation of direct debit arrangements;

• consumer (and adviser) confusion about the procedure for cancellingdirect debits; in particular, lack of understanding of the need to cancelthe authority in writing with the merchant;

• a failure on the part of Institution staff to properly advise customers ofthe procedure for cancelling direct debits; including confusion aboutthe issue on the part of staff;

• a failure on the part of Institution staff to properly advise customersthat, by closing an account, they do not thereby automatically canceldirect debit arrangements linked to the account; including confusionabout the issue on the part of staff; and

• the inefficiency of the procedure for stopping unauthorised billing bymerchants after the customer has cancelled the merchant’s mandate; inparticular, the fact that, under the credit card system rules, theInstitution cannot simply deny any further requests for payment onceit has been advised by the customer that the merchant’s mandate hasbeen withdrawn.“73

The ASIC submission listed many of the same issues.74

There are two different schemes in Australia, one for direct debiting of accountsother than credit card accounts and the other for direct debiting credit cardaccounts.

Direct debits from accounts other than credit card accountsUnder the scheme operating for non-credit card accounts, the customer signs aDirect Debit Request (DDR) form addressed to the merchant (called the “debituser”) authorising the debiting of the customer’s bank account. The DDR mayrelate to a series of known future payments to the debit user (eg for insurancepremiums or loan instalments) or for unascertained amounts falling due in thefuture (eg local authority or utility charges).

Important features of the scheme are:

• the debit user retains the DDR but must produce it to the debit user’s bank(Sponsor FI) on request;

• the debit user sends the relevant debit instructions to Sponsor FI, which inturn delivers these instructions to the customer’s bank (Ledger FI);

• Ledger FI processes the instructions in good faith, debits the customer’saccount and the funds are transmitted to Sponsor FI for credit to the debituser;

73 Caseworker Report, p. 4674 ASIC, p. 67

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• a debit user is required to adhere to a claims and disputes process withcertain minimum specifications. A customer's claim or dispute must beresponded to within a specified period (normally 7 business days) orSponsor FI will be liable to refund amounts to Ledger FI for the account ofthe customer.

While the regulations governing the scheme (the BECS regulations andprocedures) do not require it, a DDR signed by the customer will normallycontain a clause by which the customer undertakes not to alter the direct debitarrangements (including by closing or changing the customer's present account)without giving notice (eg 10 business days) before the next debit due date.

It is believed that some DDRs also contain an express statement by thecustomer authorising the debit user to instruct the Ledger FI to debit thecustomer’s account on the customer’s behalf. Possibly this is an attempt tomake the debit user the customer’s agent, thus endeavouring to get around thedifficult issue of whether the customer has ever effectively instructed the LedgerFI to debit the customer’s account. This is an issue raised explicitly by ABIO inBulletin No. 24 – March 2000.

In the Bulletin, the ABIO, having noted that DDR forms signed by customers areaddressed to the debit user and not to Ledger FI, then commented:

“In the absence of appropriate terms and conditions, it is, in the view of thisoffice, an open question as to whether the bank is entitled to debit acustomer’s account solely on the assertion, made by a third party, that theyhave authority to debit a customer’s account.”

In my opinion, it is far from clear that a bank is entitled to debit the customer’saccount in these circumstances. It is also, in my view, doubtful that theauthorisation by the customer (in the signed DDR) of the debit user to instructLedger FI on the customer’s behalf, is effective to overcome the problem raisedby ABIO, unless and until that authorisation is given to the Ledger FI.

It is now appropriate to examine the chief criticisms made about the operation ofthe direct debit scheme.

Cancellation procedures

Consumers criticise the cancellation procedures. It appears that most banksask the customers to cancel directly with the debit user. In a sense this isjustified as all or most DDRs contain a clause requiring a customer wishing tocancel to do so by giving notice of cancellation to the debit user. However, itappears that all banks will assist in facilitating a cancellation where thecustomer has unsuccessfully attempted to cancel through the debit user.

The initial refusal of some banks to accept the customer’s direction not toprocess any further direct debits in favour of the particular debit user is criticisedas another example of poor service by banks. It is seen as contrary to one ofthe fundamental principles of the banker/customer relationship that so long asthe customer is not in breach of contract a bank is obliged to accept any lawfuldirection as to what payments are, and are not, to be made from the account.

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This is essentially a service issue. One major Australian bank’s policy is thatbranches are to assist the customer to cancel and not require the customer todirectly contact the debit user.

The UK practice is very similar. In response to enquiries made to the UKFinancial Ombudsman Service I was advised:

“If the payer wishes to terminate the agreement the paying bank will takethe instruction and advise the originator of the cancellation in writing, theywill normally suggest that the payer also contact the originator.”

My present view is that the Code should require all banks to adopt the samepractice as the UK banks and assist the customers, by taking the customer’sinstruction and advising the debit user in writing. This would effectivelyovercome the problems listed in the JCS relating to cancellations of debitauthorities.

Claims and disputes

As explained above, Ledger FI.s are in no position to check the authenticity ofdirect debit requests as and when received. It is essentially left to the customerto challenge a debit which the customer believes is unauthorised. The ABIOBulletin No 24 referred to earlier usefully lists a range of circumstances in whichthe ABIO would regard a debit as not being authorised:

“The circumstances in which this office would regard a debit as beingunauthorised include the following:

• the third party making the debit request did not hold a current directdebit authority;

• an existing direct debit authority had been rendered ineffective byoperation of law;

• the amount debited exceeded the amount authorised by the customerin writing to be debited or was debited in breach of a condition of theauthority (such as that a billing advice or notification of debit be sentfirst);

• the third party debit user had purported unilaterally to increase theamount or frequency of the debit without the express agreement inwriting of the customer. To this extent, provisions in serviceagreements purporting to allow the debit user to change the authoritysimply by giving notice to the customer, but without the signature ofthe customer being obtained to the variation, may not be enforceable;

• the third party debit user was not legally entitled to the amountdebited; and

• the customer had countermanded the authority in its entirety orstopped the particular debit whether by notice to the third party debituser or notice to the bank.”

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An issue which arises in relation to claims and disputes is whether Ledger FIshould accept the customer’s complaint and process it or should it be able toinsist that the customer first sort the matter out directly with the debit user.

The ABIO guidelines set out in ABIO Bulletin No. 24 are quite clear on thisissue:

“Customers should not be told that any dispute is a matter between them andthe debit user. While customers may be requested to try to resolve a disputewith the debit user first, they should not be discouraged from claimingagainst their bank. The inter-bank claims procedure established under theBECS rules includes a requirement that the debit user, through its sponsorbank, provide proof of authority within 7 days of notice of a claim. Thismay well provide a relatively fast means of establishing whether the debituser in fact held authority and if not, rectifying the error.

This office will encourage complainants to first seek to resolve any disputeby completing a claim form under the BECS rules at their bank and usingthe claims procedure provided for in the rules. Banks in turn should ensurethat customers are advised of their right to make a complaint to this officeshould they not be satisfied with the outcome of any claim or should theynot wish to continue with a claim made under BECS rules.”

I have some concerns about banks’ compliance with these guidelines. I amaware of the practice of some Sponsor banks requiring their sponsored debitusers to issue a service agreement to each customer who signs a DDR. Theservice agreement instructs customers to approach the debit user direct toattempt to settle the dispute before approaching Ledger FI.

As the ABIO Bulletin infers, it is not easy to see what advantage a customer willgain by first approaching the direct debit user in circumstances where the useris under no obligation to respond speedily (or at all) when, by comparison, thecustomer is guaranteed a resolution within 7 days when the customer insists onthe Ledger FI handling the matter.

Adjustment of Customer’s AccountThere is clear evidence of failures by banks to automatically adjust customers’accounts so as to fully compensate for financial loss arising from irregularprocessing of debits.

ABIO Bulletin No. 24 sets out the ABIO’s view of the extent of Ledger FI’sliability to its customer:

“If, in fact, the debit is unauthorised then the bank will be liable to itscustomer for loss suffered as a result of the breach of contract by the bank,irrespective of any right of indemnity it has under the new arrangements.The loss could include:

• lost interest;

• dishonour fees – if other transactions are dishonoured because theaccount balance has been reduced;

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• consequential losses such as opportunity costs;

• expenditure incurred because of lack of access to funds; and/or

• non-financial loss such as stress and inconvenience.

In other words, the loss could be greater than the amount actually debited,depending on:

• the circumstances;

• the length of time taken to reverse the debit; and

• the length of time before the customer discovers the error, (which willin part be influenced by the statement cycle for the particular account);

• the length of time taken to reverse the debit; and

• the nature of any transaction on the account in the meantime.

The BECS rules do not limit any claim under those rules to the amount ofthe debit.”

Plainly some of these categories of loss are such that Ledger FI would not beaware of the loss or able to quantify it until the matter is raised by the customer,but the first two categories would normally be readily identifiable andascertainable.

Having regard to the evidence of failures to fully reinstate reported to me insubmissions, including the Caseworker Report, and during the consultations,my present view is that a revised Code should:

• oblige banks to fully compensate customers for all losses incurred as aconsequence of an incorrectly processed debit; and

• oblige the bank to take all reasonable steps to identify the customer’s lossand compensate it automatically.

Under present arrangements, Ledger FI.s would be required to compensate forlosses incurred through debiting irregularities of which they had no knowledgeat the time the incorrect debiting occurred. This matter can be addressed byindemnity arrangements between Sponsor FI.s and Ledger FI.s, and LedgerFI.s and debit users.

Proposals to create incentives for banks to improve efficiencies and giveappropriate priorities to reinstating customers’ accounts are dealt with later inthis paper.

Comparisons with the UK Banking Code’s “Direct DebitGuarantee”.The UK Banking Code provides for what is termed a “Direct Debit Guarantee”.This concept is defined in the glossary to the Code in the following terms:

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“The Direct Debit Guarantee

“This protects the customer if a direct debit which they have not authorisedis taken from their account. For example, if too much is taken, it is takentoo early, it is taken after the customer has cancelled, or if the customer hasnot been given enough notice of a change to a direct debit which can vary.If any money is wrongly taken from a customer’s account under a directdebit then, as soon as the bank or building society is told about it, they willrefund the customer’s account.”

In the course of the consultations, I asked banks to comment on some aspectsof the UK Code. The ABA response was, relevantly, in the following terms:

“The direct debit guarantee under the UK Code casts upon the processor ofthe debit (the bank) a reinstatement obligation if an amount has beenwrongly taken from the account and the bank is told about it. It is not quiteclear whether the reinstatement obligation arises on the mere allegation thata wrongful debit has occurred or once the fact that it was wrongful has beenestablished.”

In light of this response I asked the UK Financial Ombudsman Service forclarification particularly as to “the extent (if any) to which verification is requiredthat the debit was in fact wrongly taken before a refund is made to thecustomer’s account.”

The response was unequivocal:

“If the paying bank is to make a refund to the payer, under the terms of thedirect debit guarantee the paying bank will accept the word of the payer,credit their account and raise an indemnity claim, which is sent to theoriginator.

The originator must settle the claim within 14 days. If the originatordisagrees as to the validity of the claim they must pursue the matter directlywith the payer. In some circumstances the originator can counterclaim butthey must settle on the indemnity and counterclaim within 14 days. If after3 months the originator fails to settle, the paying bank may claim from theoriginator bank (the sponsor).

If the paying bank has made a payment in error it can send a refund requestto the originator who may settle at its own discretion.”

The consumer appears far better treated in the UK than here.

I am aware of reports that financial institutions and other industry participantsare concerned that the acceptance by Australian consumers of the direct debitsystem is low by comparison with the UK and other countries. I have been verysurprised at the number of financially sophisticated persons I have encounteredduring the review who refuse absolutely to give direct debit authorities or givethem very sparingly to a narrow range of institutions. Having now explored thesystem in the course of this review I am not at all surprised at the reported lowerlevel of take up in Australia.

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Conclusions

1. There are reasons for concern about the legitimacy of the scheme in so faras there are doubts (as expressed by ABIO) that the Ledger FI isauthorised to debit the customer’s account.

2. The present system is not user friendly.

3. It exposes customers to risk of loss to fraudulent or inefficient debit users.Ledger FI.s process debit requests in good faith without checking theauthenticity of the request, leaving to the customer to detect and challengeunauthorised debits. The potential for debit user fraud is obvious.

4. The customer risk is exacerbated if statements are received at 3 monthlyor longer intervals.

5. The majority of banks do not, in the first instance, attempt to assist thecustomer to cancel; rather the customer is directed to start with the debituser.

6. Some banks discourage customers from initiating the dispute process atthe bank and encourage the customer to try first with the debit user. Thisis despite the fact that once the process is initiated with the bank, thecustomer is guaranteed an outcome within 7 business days.

7. There is evidence that bank staff are confused about cancellation anddispute procedures, thus prejudicing customers.

8. There is evidence that banks do not always automatically compensatecustomers for interest losses and fees and charges incurred as aconsequence of direct debiting errors, even when these are apparent atthe time the incorrect debit is recognised.

In my view, these are serious flaws from the customers’ perspective which needaddressing. In devising the scheme the priorities appear to have been“efficiencies” from the viewpoint of all parties except the consumers. It seemsto me to be staggering that a new system could be adopted by which theLedger FI.s meet debit requests without any attempt (or facility) to detectunauthorised transactions yet without counter-balancing measures to assistcustomers to protect themselves better by easier, quicker cancellationprocedures and an automatic refund procedure upon complaint as in the UK.

Interim recommendations:

That the Code provide for:

• a Direct Debit Guarantee with the features of the UK guarantee;

• an absolute obligation on Ledger FI.s to automatically reinstate lossesincurred in the nature of lost interest, additional fees and charges andany other costs as a result of an incorrect direct debit which arereasonably ascertainable by the Ledger FI when the direct debiting erroris recognised; and

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• an obligation on the Ledger FI to provide other compensation for otherlosses as described in the ABIO guidelines.

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

One consumer issue is the cardholder’s capacity to cancel a direct debit beingprocessed through the system.

One major Australian bank specifically provides in all its credit cards terms andconditions as follows:

“Use of a card is an unchangeable order by the cardholder to the Bank toprocess the transaction. A cardholder may not request the Bank to alter orstop payment on the transaction. A cardholder may only cancel periodicaldebits authorised to be made to your account by direction to the merchant.”

The conditions further proceed to inform the cardholder that no facility exists forstopping a transaction prior to its presentation for processing and gives thecardholder some information about disputing a transaction that has beenprocessed.

The credit card terms and conditions of other major Australian banks are eithersilent or less explicit on the cardholder’s right to cancel an unprocessed debit orother transaction, but in practice none appear to have any capacity within theircard systems to “block” a transaction from being processed. When asked whythey cannot accept cancellation requests, their response is that “the rules”prohibit this; “the rules” are the Mastercard and Visa rules, which are notavailable to cardholders.

I enquired of the UK Financial Ombudsman Service:

• whether the Direct Debit Guarantees applies to debits made to a creditcard account;

• whether it is possible for a UK credit cardholder to stop a transaction frombeing processed and debited to the cardholder’s account;

• whether there are any differences, from the customer’s perspectives, inthe rights and procedures relating to cancellation of a direct debit authoritybetween a credit card account and a savings/debit account; and

• if consumers’ rights to cancel a direct debit authority linked to a credit cardaccount in the UK are affected by Visa, Mastercard or like rules, whetherthese rules are accessible by the public.

The response was as follows:

“Direct debits (DD) from a credit card are known as continuous authoritytransactions (CAT) or reoccurring payment agreements. The direct debitguarantee does not apply to these debits.

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From a cardholder’s perspective CAT and DD are very similar, thedifference between them being that CATs can be set up anywhere in theworld and generally speaking, the cardholder’s bank is not aware of them.It is a written agreement between the originator or merchant and thecardholder.

The cardholder can terminate the agreement by writing to the originator.The cardholder’s bank cannot cancel the agreement, unless they havewritten proof that the cardholder has terminated the agreement then a chargeback can be undertaken.

If the cardholder’s bank is trying to recover funds from the cardholder, theywill normally accept the CAT debit, the bank will then advise the merchantthat the account is closed and will look to charge back any further debits.

CAT debits are governed by Visa, Mastercard rules, which are not availableto the public. The only terms and conditions, which are available to thecardholder, are those on the original agreement form, which they completedwith the originator and should hold a copy of”.

It thus appears that in Australia and the UK, the cardholder’s bank cannotcancel a customer’s direct debit arrangement with a merchant. However, if adirect debit is paid after the customer has formally cancelled the agreement withthe merchant, the bank will charge back the debit.

My investigations so far indicate that Australian banks have no facility forstopping direct debit requests even after the banks are on notice of cancellationof the arrangement with the merchant and the only solution is to charge backuntil the merchant stops debiting. This may be a matter which the nationalregulators could raise with the Visa and Mastercard organizations.

There is one further issue concerning the cancellation of direct debitarrangements under credit card contracts. As noted above, some banks’ termsand conditions do not preclude a customer from instructing the bank to cancel atransaction. One may question how in the circumstances, such banks canlegally refuse to accept a customer’s instructions, irrespective of what otherrules or contractual arrangements (to which the customer is not a party) mightprovide.

ChargebacksThe ABIO submission makes a number of key points about chargebacks.

“DISPUTED CREDIT CARD TRANSACTIONS

Contractual relationships

The Ombudsman recognises that credit card schemes such as Visa card andMasterCard comprise several separate contractual relationships betweenseveral parties.

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Nature of Contract with Cardholder

The contractual relationship between a cardholder and the bank is governedby the credit card conditions of use. The contract between the cardholderand the bank is essentially to the effect that the cardholder will be liable forthe transactions he/she authorises by using the card.

Generally the conditions of use provide that the bank accepts no liability forthe failure of a merchant to deliver goods paid for by credit card. Theconditions of use also generally alert the cardholder to the need to report tothe bank any irregularity or complaints about charges to the credit cardwithin a specified time.

Banks’ contractual rights to chargeback

A separate arrangement exists between banks which issue credit cards andbanks which have arrangements with merchants to honour credit cardtransactions. This relationship allows the cardholder’s bank to makecharge- backs to a merchant’s bank in certain circumstances. Thesecircumstances are outlined in international operating guidelines.

Card scheme’s operating guidelines

Under the operating guidelines, card issuers are able to attempt tochargeback disputed transactions to the merchant’s bank. The grounds forchargeback are detailed in the operating guidelines.

In response to a request for chargeback, the merchant’s bank can reject thechargeback in accordance with the requirements of the operating guidelines.

Relevance of operating guidelines to cardholders

The operating guidelines have a high impact on the operation of theagreement between the cardholder and his/her bank, when a transaction isdisputed because they identify:

• the grounds;

• the information required; and

• the time limits

for any attempt by the cardholder’s bank to chargeback the transaction to themerchant.

The option to chargeback a disputed transaction is critical to consumersbecause:

• it is free;

• it overcomes some of the difficulties posed for consumers by nationaland international credit card use; and

• it avoids the double burden of the disputed debt and the legal cost ofpursuing a merchant in respect of the error.

Notwithstanding the importance of access to the chargeback system for acardholder, no information about these options or procedures is available to

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the cardholder because the cardholder is not a party to the card schemecontract.

Further, it appears likely that as between the bank and the cardholder, nocontractual obligation exists at law to require a bank to take any action toattempt to chargeback a disputed transaction on behalf of its customer.

Good banking practice

Notwithstanding this absence of a contractual obligation on banks to attemptto chargeback disputed transactions on behalf of a customer, theOmbudsman’s experience is that member banks will attempt to chargebackdisputed transactions where they can.

As a result of this industry practice, the Ombudsman’s view is that theobjectives of the Code to:

• describe standards of good practice and service;

• promote disclosure of information relevant and useful to customers;and

• promote informed and effective relationships between banks andcustomers,

would be well served by including in any new draft of the Code provisionsreflecting good banking practice in relation to disputed credit cardtransactions.

As a related matter, it is advisable in the view of the Ombudsman to retainthe current clause 1.4 of the Code which provides that the Code of BankingPractice is to be read subject to the Electronic Funds Transfer Code ofConduct (EFT Code) with appropriate amendments to reflect any change inthe coverage of the EFT Code.

Expansion of Code

The Ombudsman suggests that the Code could be expanded to articulate andformalise practices, which are already widely adopted by member banks inrelation to disputed credit card transactions.

The Ombudsman suggests the relevant criteria to consider for inclusion inthe Code are that:

• an appropriate time frame for reporting a disputed transaction, shouldbe appropriately identified and, preferably, highlighted, in theconditions of use for credit cards. The time frame should be as closeas practicable to the actual time available to the bank to request theparticular chargeback - in other words it should not be unreasonablyshort;

• the conditions of use should explain to the cardholder that the abilityof the bank to dispute the transaction under the operating guidelinesmay be lost if they delay;

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• banks should process all disputed transactions as chargebacks where achargeback right exists;

• banks should use their best efforts, based on the information suppliedby the cardholder, to use the most appropriate reason code for thecharge back, so that the cardholder’s reasons for disputing thetransaction are properly represented;

• banks should not accept a rejection of chargeback by the acquirer bankunless it is an appropriate response to the situation.”75

I support the essence of the ABIO submission. It is contrary to currentstandards of disclosure that cardholders should not be adequately informed ofthe chargeback procedures and how they can utilise them. It is equallyimportant that banks use the chargeback provisions so as to secure theoptimum lawful outcome for their cardholders, even in situations when the card-issuing bank is also the merchant’s bank.

Interim Recommendations:

That the Code require a bank to ensure that the terms and conditions of use ofany credit card:

• include general information on the existence and operation ofchargeback rights;

• specify prominently an appropriate time frame for reporting a disputedtransaction, being a timeframe which would allow the bank to request achargeback but does not unnecessarily shorten the reporting time; and

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

That the Code require a bank to:

• process all disputed transactions as chargebacks where a chargebackright exists;

• use its best efforts to use the most appropriate reason code for thechargeback;

• not accept a rejection by the acquirer bank unless it is satisfied therejection is reasonable; and

• include general information about chargebacks in or with statements ofaccount at least once every twelve months.

75 ABIO pp. 3 – 5

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Incentives to rectify service problemsDuring the consultation processes, three service issues were raised forconsideration. Two of the issues, shortfalls in ATM cash withdrawals and directdebiting errors (particularly double debits), are seen as major problems byconsumers.

Shortfalls at ATMs can cause serious hardship to individuals, principallybecause of the length of time (up to 45 days) taken to investigate the matter andreimburse the customer. For persons with no other funds, the hardship sufferedis very real.

Similar problems can result from an incorrect direct debit, save that it shouldtake a maximum of 7 working days to correct the error from the time thecustomer raises the matter with the bank.

Views were expressed that one aspect of both these problems is the lack offinancial incentive for banks to reduce the incidence of these errors. It is arguedthat until banks have to financially compensate customers for these errors, it isnot sufficiently important for banks to expend resources on systems andprocedures improvements which would reduce such errors to an absoluteminimum.

One suggestion is to draw on the precedent set by AAMI, a national insurer,which undertakes to pay its customers a flat sum ($25.00) for breaches of itscustomer charter, although a view was expressed that this may be aninadequate amount for a case of an ATM cash shortfall which is not reimbursedwithin 14 days.

There is one further matter which has been raised as a service or equity issue.If a customer formally disputes an entry on a statement of account for a creditcard, it is common for the bank to charge the customer a fee if, afterinvestigation, the entry is found to be correct. If however the entry is found tohave been incorrect, no fee is charged but nor is the customer compensated inany way for the inconvenience caused by the customer being obliged to attendat a branch and sign the requisite form in order to dispute the entry.

The suggestion is that a flat sum, at least equal to the bank’s charge, becredited to the customer if the entry proves to be incorrect.

As these proposals were not explicitly raised in the public submissions, theyhave not previously been raised with banks in the course of this review. In thecircumstances it seems preferable to seek a wider range of views, andespecially views from banks, before forming a recommendation.

Placing a Stop on an accountThe ABIO submission also proposes the inclusion in a revised Code of anobligation on banks to place a stop on a cardholder’s account in certaincircumstances:

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“Placing a Stop on an account

An issue, which has also arisen in the context of these cases, is whether abank should place a stop on a credit card account when:

• A customer has disputed the transactions debited by a merchant;

• The credit limit of the card may have been exceeded; and

• That merchant is continuing to debit the account periodically.

The Ombudsman takes the view that it would improve and clarify thebanker/customer relationship if the Code could be expanded to identify, asgood banking practice, that in situations such as this, a customer would beoffered the option of placing a stop on the account, if the bank's systemallows it, similar to the stop effected when a card is reported lost or stolen.”76

I would appreciate views on this suggestion before reaching a final view.

Guarantees and Indemnities

Application of Code to guarantorsThe application of the Code to guarantees in clause 17 is narrow. Although thenature of the borrowing or facility is not confined to personal, domestic orhousehold purposes and the borrower may be a corporation, the limitation isachieved by a broad range of exceptions. Guarantees excepted are those of apublic corporation within the meaning of section 9 of the Corporations Law, acorporation (or related entity) of which the guarantor is a member, director orsecretary, a trustee of a trust of which the guarantor is a beneficiary and apartner, co-owner, agent, consultant or associate of the guarantor.

The New South Wales Government Submission77 argued that the exclusions inthe Code are far broader than are justified for policy reasons. It points out thatresearch on relationship debt shows that many guarantors have littleunderstanding of the commercial arrangements being guaranteed despite thoseguarantors being

“token or minor players in a family business, company or trust”. 78

Other submissions also supported this position.79 The ASIC submission notesthat one reason for including the exemptions is that the guarantor would expectto receive actual benefits from the transaction.80 However, it argues that inpractice the guarantor would not necessarily have access to relevantinformation about the nature and extent of the risk of the guarantee or of theborrower’s credit history. Other reviews and research have also indicated that,

76 ABIO p. 677 NSW Government submission, p. 778 New South Wales Government submission, p. 779 See eg ASIC submission p. 55; JCS p. 3580 ASIC submission, p. 58.

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for example, family members may be involved in a business without activelyengaging in its management. Further, nominal ownership may not translate intoactual control of the assets.81 Government policy also supports the view thatsmall business can be vulnerable to pressure and information imbalance in thesame ways as individuals acting in their own domestic context can be.

These arguments are persuasive and it appears that the scope of the Codeprovisions relating to guarantees should be broadened. Two submissionsargued that the Code should apply to all guarantees except those of publiccorporations.82 Other submissions suggested or implied that the Code shouldapply to guarantees of individuals or small business.83 However, applying theCode to guarantees of all private companies regardless of size would requirethe obligations referred to below to be subject to qualifications and exceptionsthat may make them unworkable. Therefore it is preferable that the Codeshould apply where the guaranteed facility or accommodation is provided to anindividual or to a small business.

ASIC in its submission canvassed the idea of drawing a distinction between“participating” and “non-participating” directors.84 As a preliminary view, basedon the research and relevant case law, it would appear to be difficult andimpractical to expect banks to draw distinctions between participating and non-participating directors for these purposes. Also, the Corporations Law imposesduties on directors irrespective of whether they participate or not. Thereforecurrent statute and case law do not support the distinction.

ASIC also tentatively suggested that banks assess the credit worthiness of theguarantor before proceeding to take the guarantee.85. In some cases,guarantors may assume the responsibilities of the borrower to make paymentsas they fall due. However, the usual case is that when the guarantee is calledup, the guarantor must meet the entire debt. In those circumstances, mostguarantors will not have the resources to pay without selling up assets. A creditworthiness check will not protect the guarantor or the bank.

Interim Recommendation:

That Code provisions relating to guarantees apply to all guarantees given byindividuals in respect of facilities or accommodation provided by a bank toindividuals or small business whether incorporated or not. For thesepurposes “small business” shall have the same meaning as “retail client” inFSR.

81 NSW Law Reform Commission, “Guaranteeing Someone Else’s debt – Issues paper 17”, April 2000; B Fehlberg,

“Women in “Family” Companies: English and Australian Experiences” (1997) 15 Company and Securities LawJournal 348-365.

82 JCS p. 35; New South Wales Government submission, recommendation 7.83 See eg ASIC submission, p. 5884 ASIC submission, p. 5985 ASIC submission; p. 59

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Provision of information to guarantors

(i) Consent of principal debtor to provision of information

Several submissions made to the Review argued that it is essential thatguarantors be provided with information which is adequate in all respects toallow the guarantor to make a fully informed decision about whether or not toenter into the guarantee and the consequences of doing so.86 It wasacknowledged that banks will be subject to the provisions of the privacylegislation and must observe duties of confidentiality to borrowers.Nevertheless it was contended that as a matter of principle, banks shouldassume an absolute obligation to provide information to guarantors.87

Alternatively the New South Wales Government Submission recommended thatthe borrower’s consent should be sought but the guarantee should not proceedif consent is refused.88

The Code currently provides that before accepting a guarantee a bank mustprovide the guarantor with a copy or summary of the contract evidencing theobligations to be guaranteed provided the borrower consents. If the borrowerdoes not consent, the guarantor must be told but the guarantee can stillproceed with the guarantor’s express consent.

In light of the importance of the guarantor making a fully informed decision,banks should assume an absolute obligation to provide guarantors with relevantinformation. In practice this will mean that banks will have to ensure that theyobtain the consent of the borrower to the provision of information required bythe Code so as to meet their other legal obligations.

Interim Recommendation:

That the obligations imposed by the Code in respect of disclosure ofinformation be absolute and not conditional on the consent of the principaldebtor.

(ii) Obligations to provide information

There are two types of information or advice relevant to the guarantor’s decisionto enter into a guarantee. The first is information about the principal debtor, theliabilities to be guaranteed and the financial risks involved in giving theguarantee. The second is information or advice about the legal nature andeffect of the guarantee. It is convenient to treat these two types of informationseparately.

86 See JCS p. 36; ACA submission p. 13.87 See ACA submission p. 13.88 New South Wales Government submission, Recommendation 9.

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(iii) Financial information

Currently under Code clause 17.4, banks have to provide to the prospectiveguarantor a copy or summary of the contract evidencing the obligations to beguaranteed. A number of submissions argued that this is inadequate.89 TheASIC submission90 commented that consumers do not always appreciate therisk involved in giving a guarantee. ASIC suggested the adoption of theformulation set out in “Good Relations, High Risks” the Report of the ExpertGroup on Family /Financial Vulnerability, (February 1996)

The Expert Group’s suggestions are helpful. It is recommended that SubscriberBanks provide prospective guarantors with all relevant information about theprincipal debtor and the transaction or facility to be guaranteed which:

(a) is in the possession of the Bank; and

(b) a reasonable prospective guarantor would reasonably require in order todecide whether or not to enter the guarantee.

Information includes representations with respect to a future matter, and alsoincludes information provided by the borrower to the Bank and any creditreporting agency reports and other expert reports obtained by the Bank. Itwould not include the Bank’s own internal opinions.91 Other submissionsargued that relevant information should include the borrower’s purpose.92 In sofar as the purpose is disclosed as part of the loan application or required as partof loan approval, that disclosure falls within the scope of the principles set outabove. If it does not, then it seems appropriate for the guarantor to seek out theborrower’s intentions direct from the borrower.

The New South Wales Government Submission argued that there may be acase for differentiating between guarantees of new indebtedness andguarantees of existing indebtedness.93 The submission refers to allegationsthat banks have sought guarantees of existing loans where the risk of default isincreasing in order to shift that risk to the guarantor. In this situation it is all themore necessary that the guarantor should be fully informed before entering intothe guarantee. The Submission argues that in this case the onus should be onthe bank to prove that appropriate information was given to the guarantor. Thebank’s responsibility in this situation should be to ensure the guarantor is fullyinformed and freely consents. However, it is not clear how any reversal of onuscould be achieved by way of provisions in the Code.

89 See eg JCS p 3690 ASIC submission p. 5691 See Expert Group Report p. 43; ASIC submission p. 5692 ACA submission p 13; JCS p. 3693 New South Wales Government submission, p. 8

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Interim Recommendation:

That the Code require a bank to provide a prospective guarantor with allrelevant information about the principal debtor and the transaction or facilityto be guaranteed which:

(a) is in the possession of the bank; and

(b) a prospective guarantor would reasonably require in order to decide whetheror not to enter the guarantee.

That for this purpose, information includes representations with respect to afuture matter, and also includes information provided by the principal debtorto the bank and any credit reporting agency reports and other expert reportsobtained by the bank. It would not include the bank’s own internal opinions.

Two submissions suggested that the Bank provide summary of reasons why aguarantee is sought and why the principal debtor is a credit risk.94 ASIC alsosuggested informing the guarantor of the likely risk of the transaction. However,ASIC also noted that it will not always be appropriate for banks to share their fullreasons for seeking a guarantee. They suggested that a simple statement ofreasons might be effective in bringing home the risk to the prospectiveguarantor. Another submission recommended that the bank provide theguarantor with all the relevant information and advise the guarantor directly toseek independent financial advice.95 The ACA Submission went further. Iturged that banks should bear the onus of ensuring that guarantors actuallyreceive professional advice on the financial implications of guarantees.96

It is arguable that a simplistic statement or summary could be misleadingbecause of its brevity or damaging to the principal debtor. On the other hand,requiring a guarantor to obtain full financial advice may be inappropriate wherethe guarantor is actively involved in the business of the borrower. However, it isundesirable to limit the scope of the guarantee provisions of the Code byreference to participation in the business as explained above. The bettercourse of action is that banks advise guarantors to seek financial advice.

Interim Recommendation:

That a bank be obliged to advise guarantors to seek financial advice.

(iv) Advice about the operation of the guarantee

The Code requires banks to give prospective guarantors a written warningabout them becoming liable instead of or as well as the borrower. The ACAargued in its Submission that this principle should be extended so that banks 94 ABIO submission p. 7; ASIC p 5695 JCS p. 37.96 At p. 13.

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are obliged to ensure the guarantor is informed of the consequences of enteringinto guarantees through independent advice or full disclosure. 97

Recent case law has confirmed that a lender cannot rely on a wife’s guaranteeof her husband’s debts:

(a) if her consent was obtained by undue influence unless the wife receivesindependent advice; or

(b) if she fails to understand the effect of the guarantee unless the lendertakes steps to inform her of these matters.98

The assessment of whether a guarantor wife requires independent advice orcan be advised by the bank itself will differ from case to case. Some banksrequire all guarantor wives to obtain legal advice. Some extend this to allguarantors.

The practice has developed of banks insisting on certificates from legalpractitioners in relevant cases. Concerns have been expressed that this hasthe effect of shifting risk of loss from banks to lawyers. In response, some Statelegal professional bodies have prohibited lawyers from giving certificates.There are on-going discussions between the Law Council of Australia and theAustralian Bankers’ Association as to this issue.99

In the circumstances, banks should to be able to form their own policies aboutwhether or not to insist that guarantors obtain independent legal advice aboutthe legal effect of the guarantee, (including advice that the guarantor can refuseto enter into the guarantee) or give advice themselves. They should however,be obliged to recommend that independent legal advice be obtained in all casesand any advice or recommendation should be made direct to the guarantor nottransmitted through the principal debtor.

The recommendation of the Expert Group is helpful in this regard.100 Wherethe guarantor does not follow the recommendation to obtain independentadvice, the Bank should be obliged to take all reasonable steps to advise theprospective guarantor about the legal effect of the guarantee and that there areor may be financial risks involved. This should be done in a face-to-faceinterview in the absence of the principal debtor. The ASIC Submissionsuggested that guarantors be told that they can refuse to enter into theguarantee or they can ask a second guarantor to share the risk.101 The firstpoint is persuasive. However, there are difficulties in relation to the second. Itis for the bank to decide who should be asked for guarantees and problems offamily pressure may be simply repeated between guarantors. On balance, thissecond point should not be required by the Code.

97 At p. 13.98 Garcia v National Australia Bank [1998] HCA 48 applying Yerkey v Jones (1936) 63 CLR 649.99 See generally Lanyon, E V “Aspects of Third Party Guarantees and Solicitors’ Certificates”, Australian Business

Law Review, forthcoming.100 See ASIC p. 70.101 At p. 57

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Several submissions argued that guarantors should sign the guarantee in theabsence of the principal debtor..102 It is recommended that this principle shouldbe adopted as a matter of practice in recognition that many guarantors arevulnerable to pressure from other family members.

It is recommended that a warning notice, perhaps a modified version of thatrequired under UCCC, should appear directly above the signature of theguarantor to reinforce the verbal warning. The JCS argued that the Codeshould prescribe the content of the written warning.103 ASIC also suggestedthat the bank might provide general descriptive material and a checklist orstatement of rights.104 However, ASIC also pointed out the danger ofoverloading the guarantor with information and also the inefficiencies ofduplicating existing requirements.105 On balance, the problem of informationoverload outweighs the efficacy of further information. UCCC prescribes thecontent of an information statement to be given to guarantors. In the case ofbusiness lending, the nature of the guaranteed obligations and any cap onliability in the guarantee may differ from case to case. It is appropriate to leaveit to banks to settle the form of any written information or educational literaturesupplied to guarantors. However, banks will be expected to take seriously theirobligation to inform guarantors, including the production of material inlanguages other than English.

One submission suggested the provision of information to guarantors on debtorharassment and IDR/ADR mechanisms.106 It is obviously important thatguarantors receive key information. As pointed out above, however, there is agreat danger of information overload. Further, this information is likely to bemost relevant at the default stage rather than in the transacting process.

It was suggested that guarantors be given information and advice at least oneday before signing the guarantee. While it is recognised that there are no suchtime limitations in UCCC, provision of information without adequate time forreflection is undesirable. Further, circumstances surrounding the provision ofguarantees, which raise the likelihood of pressure, outweigh considerations ofexpediting transactions in the interests of debtors. For this reason it isrecommended that the suggestion be adopted with one qualification. Where theguarantor has sought and received independent legal advice, the formalinterview with the solicitor in itself affords the guarantor an opportunity forreflection and signals the significance of the transaction.

The Code requires banks to give guarantors copies of statements of accountand notices of demand with the borrower’s permission. Several submissionsargued that this obligation should be an absolute one. For the reasons givenabove in relation to pre-contractual information, this argument is persuasive.The JCS also argued that guarantors should be able to obtain full statements ofthe account, not just the latest relevant statement, and also copies of facility 102 JCS p. 37; see also ASIC p. 58103 At p. 36104 At pp. 56 - 57, referring to the ABIO Bulletin.105 At p. 57106 ACA p 13.

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documents, securities, guarantees, credit related insurance products andnotices previously given.107 A charge could be made. There seems to be noreason in principle why guarantors should not be able to obtain this informationwhich is directly relevant to their liability under the guarantee. Any costsassociated with this could be recouped by making a charge for the copy.

Interim Recommendations:

That:

• a bank be obliged to ensure the guarantor is informed of the legal effectof the guarantee, (including advice that the guarantor can refuse to enterinto the guarantee and that there are financial risks involved) either bythe guarantor receiving independent legal advice or by being advised bythe bank itself. Where the bank itself provides the advice, it mustrecommend to the guarantor that the guarantor obtain independent legaladvice. This should be done in a face-to-face interview in the absence ofthe principal debtor. It is not intended that the bank or the legal advisergive financial advice;

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

• a bank shall ensure that the guarantor signs the guarantee in theabsence of the principal debtor;

• a guarantor shall be given information and advice at least one daybefore signing the guarantee unless the guarantor has receivedindependent legal advice; and

• a bank shall provide a guarantor on request with full statements of theguaranteed account or accounts and copies of any applicable facilitydocuments, securities, guarantees, credit related insurance productsand any notices previously given to the principal debtor.

Form of guarantee (limitations)Some submissions noted that UCCC section 43 imposes a different limitationon guarantees regulated by it. The JCS argued that all guarantee mortgagesshould no longer be all accounts or all moneys.108

In my view it would be appropriate to adopt the same limitation on guaranteesas in UCCC. This will mean that where a guarantee mortgage is expressed tosecure credit provided under a future contract or facility, the guaranteemortgage will not in fact be enforceable in relation to any future contract or 107 JCS pp 24, 37108 At p. 38; see also ACA p. 13.

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facility unless the guarantor signs an extension of the guarantee for thatpurpose.

Interim recommendation:

That the Code provide that a bank shall not accept an all accounts or allmoneys guarantee mortgage unless the mortgage contains a provision that itdoes not extend to any future contract or facility unless the mortgagor signsan extension of the mortgage after being provided with a copy of the newcontract or facility.

The New South Wales Government Submission recommended that banksshould be required to revise all current guarantees with an all moneys clause.109

It suggested that if the clause was not revised then the liability should be limitedto the borrower’s liability at the end of the grace period. However, it is probablynot feasible to require formal amendments to guarantees which depend on theconsent of both parties. In addition, the Code could not achieve a cap onliability effective in law. The recommendation could only be achieved bylegislation.

Right to cap liabilityAt present under clause 17.7 a guarantor can extinguish liability but cannot capliability or refuse to guarantee further advances.

The New South Wales Government Submission points out that circumstancesmay change, for example the financial situation of either the borrower orguarantor may deteriorate or their relationship may change. In thiscircumstance the guarantor should have the right unilaterally to vary the amountof the guarantee i.e. refuse to guarantee further advances subject to certainqualifications:

“However the bank should have the right to reject a reduction to the extentthat it would:

• be below the borrower’s liability under the relevant accounts at thetime; or

• prevent advances necessary to secure the present value of an assetwhich is security to the loan (eg a house under construction).” 110

This appears in part to be the current law in equity relating to guarantees111 butit would be useful to state the principle in the Code. If a guarantee is acontinuing guarantee and the consideration of the guarantee is divisible, theguarantee is revocable in respect of liability to accrue in the future, for examplein respect of future advances. Although various explanations for this right havebeen offered, the better view is that the right rests on general equitable 109 Recommendation 8.110 Recommendation 11.111 See O’Donovan, James and Phillips, John, The Modern Contract of Guarantee, Third Ed 1996, LBC pp 436-439.

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grounds. Thus it applies whether or not the guarantee is under hand or underseal and irrespective of the way in which the consideration has been described.It is however, subject to the express agreement of the parties, which isconstrued against the financier contra proferentum. It is useful to entrench inthe Code the right to refuse to guarantee future liabilities. However, the natureof the qualifications may need to be refined bearing in mind that the bank maybe contractually obliged to make further advances (for example in the case of abuilding loan with progress payments). Bill facilities raise further issues forconsideration because it may be argued that a first mortgagee loses priority to asecond mortgagee in respect of bills drawn by way of rollover. Thequalifications suggested by the New South Wales Government submissionsuggest a different approach and further submissions are invited on this issue.

UCCC Section 54 deals with the extension of a guarantee and requires theguarantor’s informed consent to extension to a future credit contract. Thereseems to be no reason why this approach should not be adopted in the Code.

Interim Recommendation:

That the guarantor be given a contractual right to vary the guarantee byreducing the cap on liability or limiting the amount or nature of the liabilitiesguaranteed, subject to appropriate qualifications to protect the bank’sfinancial position.

That the Code adopt the requirements set out in UCCC Section 54 in relationto the extension of a guarantee to any future contract between the bank andthe principal debtor.

Right to withdrawThe JCS argued that all guarantors should have the right to withdraw from aguarantee before credit is extended to the borrower, on the same terms assection 53 of UCCC.112 UCCC provides that the guarantor should be able towithdraw before credit is first provided or subsequently if the proposed facilitydiffers in some material respect from that proposed before the guarantee issigned. The Western Australian version of UCCC restricts this right ofwithdrawal.113 These restrictions have been subject to criticism by consumeradvocates. The commercial context obviously raises different considerationsand further comment is sought whether UCCC approach (without the WArestrictions) is an appropriate and practical one to include in the Code.

112 At p. 38.113 The WA Consumer Credit Code provides that the debtor must also cancel the loan contract under s19 and the

debtor must not have entered into a contract with a third party. Section 53 is also subject to s 56 which providesfor variations of the loan contract.

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EnforcementSeveral submissions argued that the banks should not be able to enforce ajudgment against the guarantor until an attempt has been made to enforceagainst the borrower.114 This is the position (with some limited exceptions) toguarantees regulated by UCCC.

However, in the case of small business debtors, there may be legitimatereasons why a bank may want to enforce a guarantee before enforcing againsta borrower, including the existence of preferential creditors of a corporateborrower. It does not appear to be appropriate to fetter banks in the case ofcommercial lending.

Interim Recommendation:

That the UCCC rules relating to the enforcement of guarantees be applied bythe Code to all guarantees given in respect of all debtors other than smallbusiness debtors.

Joint borrowers

Signing up guarantors as co-borrowersAnecdotal evidence suggests that sometimes financiers insist that a third partyenter into the transaction as a co-borrower rather than as a guarantor. It is alsolikely that if as suggested the Code requires the provision of additionalprotection for guarantors, this may produce a countervailing incentive forfinanciers to sign up co-borrowers in inappropriate circumstances.

The law will treat the co-borrower as a surety on the basis that it is thesubstance of the arrangements rather than their form which is determinative. 115

As between the financier and the third party the question is whether thefinancier knows that the third party will receive no benefit but is joined solely forthe purpose of being made liable. However, this outcome depends on the co-borrower being in a position to have their rights adjudicated.

Parties should not be signed up as co-borrowers in circumstances where, to theknowledge of the financier, it is more appropriate for that party to sign aguarantee. The Code should impose an obligation on Subscriber Banks not toinclude a party as a co-borrower where all the facts known to the Bank suggestthat the party will obtain no direct benefit from the contract. In particular, wherethe contract involves a refinancing of a contract entered into by a borrower, itwould be usually inappropriate for another party to be joined as co-borrower. Inthis regard, the Code would do no more than restate the position which pertainsunder the general law.

114 CCLC p. 39; ACA p. 13; ASIC p. 58.115 The following is drawn from Duggan and Lanyon, Consumer Credit Law (Butterworths, 1999), para 6.3.5. See

Permanent Trustee Co of NSW Ltd v Hinks (1934) 34 SR (NSW) 130.

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Interim Recommendation:

That the Code provide that a bank should not sign up a party as a co-borrowerwhere, on the facts known to the bank, the party will receive no direct benefitunder the contract.

Extent of a co-borrower’s liabilityThere is ample evidence that many joint borrowers fail to understand, untildefault occurs, that each is liable for the whole debt where, as is normal inconsumer contracts, the contract provides liability is joint and several. I amsatisfied from my own experiences and from the consultations with financialcounsellors and other assisting consumer debtors that the problem is endemic.

Although the misconception that each is only liable for half the debt is common,and although Code clause 16.1(iii) currently requires a bank to provide tocustomers opening a joint account general descriptive information on “thenature of liability for indebtedness on joint account”, I have not encountered anyview that in the case of bank customers the misconception is due tomisrepresentation of the nature of the liability.

Nonetheless the misconception appears to be very common. It follows that thecurrent Code requirement is not achieving its objective. In my view the solutionis to go beyond a mere obligation to provide general descriptive information andin lieu to require banks to take all reasonable steps to ensure that prospectivejoint borrowers understand the true extent of their potential liability before theysign.

In the light of the serious consequences of any misapprehension, the mereprovision of a written warning may not be sufficient to ensure that a co-borrowerhas the requisite level of understanding. This is particularly so if one co-borrower undertakes to obtain the signature of the other.

Interim Recommendation:

That the Code require a bank, before signing up co-borrowers, to take allreasonable steps to ensure that each borrower understands the full extent ofhis/her liability.

Termination of liability for future advancesA number of parties have raised the problem of the vulnerability of a joint debtorwhen circumstances change.

The New South Wales Government submission instances typical situationssuch as relationship breakdown or one party discovering that the other has agambling or drug addiction problem and suggests that the Code should require

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a bank to cease further advances on a joint credit facility at the request of anyone of the joint account holders.116

In my view this is a sensible proposal although it obviously can cause someconsumers inconvenience.

Interim Recommendation:

That a bank shall ensure that under any contract it enters into where eachparty is jointly and severally liable, either party should be able to terminatethat liability unilaterally in respect of future advances or financialaccommodation by adequate written notice to the bank. Qualifications may benecessary to protect the bank’s legitimate interests in relation to furtheradvances it is obliged to make and in respect of contingent liabilities whichmay accrue in the future.

Further submissions are sought as to the appropriate wording of thesequalifications.

Subsidiary CardsSimilar issues to those discussed in connection with joint accounts arise inrelation to subsidiary cards.

The main issue is explained, and proposals for change are outlined, in the JCS:

“We believe that the CBP should be amended to protect the position of theaccount holder Customer in the situation where the Customer seeks tocancel the subsidiary cardholder’s right to access his/her account but isunable to return their card. As the Consultant will be aware, it is the generalpractice of Banks (and other card-issuing Institutions) to impose a conditionto the effect that the Customer must both notify the Bank and return thesubsidiary card before the card will be cancelled. However, the experienceof our services, confirmed by the Caseworker Consultation, is that, inrelationship breakdown situations, as well as in some situations whereparents have given a subsidiary card to a child, the Customer may well notbe able to return the card or otherwise stop the subsidiary card holder fromcontinuing to use it to access his/her account.

Clearly, in these cases a Subscriber Bank has a de minimis obligation toensure that all reasonable steps are taken to limit potential losses to theCustomer from continuing unauthorised use of a subsidiary card. Indeed,this view is consistent with general Bank practice, as we understand it.Thus, even if the subsidiary card is not returned, Banks, upon notification bythe Customer, will normally put a stop on all electronically-authenticatedtransactions and all non-electronic transactions requiring pre-approval (egwhere the transaction is above the merchant 'floor limit' or is a cashwithdrawal). Given that this is the general, if not invariable, practice in the

116 NSW Government, p. 10

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industry, there can be no good reason why — as a minimum — the CBPshould not both mandate an obligation to take these steps and relieve theCustomer of liability for any loss subsequent to notification where that lossshould have been prevented by the operation of a stop on further use of thesubsidiary card. We understand that this approach is consistent with theway the ABIO determines complaints involving the question of liability forloss following continued unauthorised use of a subsidiary card afternotification by the Customer / account holder. The Expert Group on FamilyFinancial Vulnerability made similar recommendation in its Good Relations,High Risks Report.

Unfortunately, however, non-electronic merchant transactions below anauthorisation floor limit are still permitted by Banks and other cardInstitutions. Thus, a subsidiary cardholder who has not surrendered his/hercard will still be able to continue to process sub-floor transactions even afterthe Customer has withdrawn their mandate for the card to be used andnotwithstanding any stops placed on use of the card by the Bank. In thesecircumstances, neither the Bank nor the Customer is able to take steps tostop unauthorised transactions (which may continue to be made until thecard reaches its expiry date). This raises the question of who should bearthe liability for unauthorised use in these circumstances.

While liability is currently imposed on the Customer (by the Conditions ofUse for the account), in our view it would be more appropriate if liabilitywere shifted to the Bank in the circumstances in question. A number ofconsiderations, some of which were outlined in the CaseworkerConsultation Report [see pp. 31-33], support this view. These include:

the position of the Customer/ account holder is analogous to that of aguarantor; however, while the account holder is unable to prevent theincursion of further liability under the current CBP, the liability of aguarantor is limited to a specific amount under the Code [see sec. 17.2].Under the UCCC, too, a guarantor cannot be made liable for more than theamount initially guaranteed without his/her express agreement. There islittle justification for putting a principal cardholder in a worse position;

after a credit or debit card is reported lost or stolen, the Customer cardholderwill not normally be liable for any further unauthorised use. The verydifferent treatment of Customers in the analogous subsidiary card situationis anomalous;

Banks could require that all merchant terminals be on line or that merchantsnot on line get authority for all transactions or bear the loss (as against theaccount holder) if the secondary card holder’s mandate has been withdrawn.The fact that Banks choose not to make their systems "full proof" againstunauthorised use by subsidiary cardholders (and others) is a commercialdecision for the Bank. But it is unclear why the Customer should bearlosses resulting from unauthorised use which the Bank was in a position toprevent by having comprehensive authorisation processes in place; and

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it is in the financial interests of Banks to encourage multiple account cardusers (ergo, they should shoulder responsibility in respect of continuing useby unauthorised additional card holders).

Given these considerations, we further recommend that the CBP mandatethat Customers not be liable for continuing use of a subsidiary card after theCustomer has notified the Bank that it wants the subsidiary card cancelled,conditional upon the Customer taking all reasonable steps available to theCustomer to return the subsidiary card.”117

The NSW Government submission makes a similar proposal.118

I note that the JCS suggests that in some circumstances (namely if the card ispresented to a merchant who does not have a facility to process the transactionelectronically), banks may have no way of preventing continued use of asubsidiary card after the account holder has requested its cancellation but isunable to procure the return of the card. However, it is my understanding thatwith such merchants banks require telephone authorisation for above floor limittransactions and prudently set very low floor limits. If this is correct, the JCSsubmission may somewhat overstate the risks inherent in its proposal.

Interim recommendation:

That where a primary cardholder advises the issuing bank that it wants asubsidiary card cancelled, the primary cardholder shall not be liable forcontinuing use of the card, provided the primary cardholder takes allreasonable steps to procure the return of the subsidiary card to the issuingbank.

Legal Status of Code of Banking PracticeDuring the consultation process, a number of parties expressed reservations asto whether banks are contractually bound to comply with the Code.119“The Preamble to the Code states that it applies to Banks that adopt it.Section 2.22 of the Code requires as follows:

“Any written Terms and Conditions referred to in clause 2.1 shall include astatement to the effect that the relevant provisions of this Code apply to theBanking Service…”

The authors of Weaver and Craigie, Banker and Customer (The Law BookCompany Limited), make the comment that:

“While the legal status of the Code to the extent that it rests on nothing morethan the commitment implicit in an adoption announcement, may be open to

117 JCS, pp 33 – 35118 NSW Government submission, p. 10119 The following is drawn from E Wentworth, “Guarantees, the Consumer Credit Code and the Code of Banking

Practice: Issues of Coverage, Risk and Reform” (2000), 11 Journal of Banking & Finance Law & Practice 269.

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doubt, it is conceived that the provisions of the Code will gain contractualstatus by virtue of section 2.2.”

With respect, this view is correct. Where a Bank complies with clause 2.2 andexpressly incorporates the Code into the contract between itself and itscustomer, the code will have contractual force. It is also however, stronglyarguable that if no express incorporation occurs, the Code is incorporatedimpliedly as a matter of accepted banking practice and usage.120

Mutuality and set offSome submissions argued that the Code principles should address the banker’sright to set off. The situation arises where the customer has a number ofaccounts with the bank, some of which are in debit and some of which are incredit. The right to set off may arise in one of three ways:

(a) when the customer seeks to withdraw funds apparently standing in creditin one account when there is a deficit in another account;

(b) when some particular event occurs such as a default by the customer or

(c) on the customer’s insolvency121

In each case, the question is whether a right of set off exists and if so, when itmay be exercised.

McCracken suggests that the checklist for the determination of the availability ofset-off in any given banking transaction would be as follows:122

• “if apparent liabilities arise under two or more accounts, on what basisare those accounts maintained?

• are there two debts which are due and payable?

• are the claims from which the debts arise capable of funding a set-off?

• is there an adequate connection between these claims?

• is there an injustice suffered by the bank?

• is the operation of set-off excluded?

• what is the effect of the exercise of set-off?”

The law relating to set off is complex. In addition, whereas once customersmight only have had two accounts such as a loan account and a depositaccount, it is increasingly common for customers to have a number of accounts

120 The Code Preamble states that the Code formalises “standards of disclosure and conduct which Banks that adopt

the Code agree to observe when dealing with their customers.” Banker practice and sage forms part of theimplied contract between banker and customer: Hare v Henty (1861) 10 CBNS 65; 142 ER 374; Commercial Bankof Australia v Hulls (1884) 10 VLR 110.

121 See McCracken, S, The Banker’s Remedy of Set-Off (2nd ed, 1998, Butterworths), p. 242.122 Ibid.

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with a variety of features. This makes it more difficult to generalise about theapplication of the law in any particular case.

For example, the issue of set-off will not arise at all where despite accountsbeing styled in a particular way, such as “No. 1 account” and “No. 2 account”,those accounts are regarded in law as combined. In that case, debits andcredits would be regarded in law as entries in the single account and the bankcould refuse to accept a withdrawal of $250 despite the No. 1 account having acredit balance of $500 if the No. 2 loan account is in debit of $300.123 As amatter of law, two or more accounts kept by a customer with a bank areconsidered to be combined unless there is express or implied contract tosegregate them. Whilst the case law generally supports the proposition thatthere is an implied agreement to segregate a loan account in debit and acurrent account in credit, at least where the current account is a chequeaccount, the matter will be determined on its facts in other cases.

If in the example above the accounts were segregated, the bank could onlyexercise a right of set-off if both the debts represented by the accounts are dueand payable. The liability of the bank to the customer arises when the customerdemands payment of the $250 cheque. The liability of the customer to the bankunder the No. 2 account depends on the terms of the parties’ agreement. Forexample, an overdraft would ordinarily be payable on demand, a demand whichwould have to be made before the set-off could be applied. Further, on the barefacts, there is probably no injustice suffered by the bank sufficient to raise anequity overriding the customer’s entitlement to payment of funds in the No. 1account.

However, banks can be expected to make it clear to customers whetheraccounts are segregated (and what the consequences are if debit and creditaccounts are not segregated).

The Code could require banks to exclude their rights to common law andequitable set-off in the case above and restrict them to rights of set-off providedfor by contract. However, rights of set-off provide useful and effective remediesin the case of insolvency and default and there would be substantial practicaldifficulties in drafting the Code principles so as to permit set-off in some casesand not others. In addition, there are so many varieties of accounts availableon a variety of terms, it is not practicable for the Code to regulate the existenceor availability of rights of set-off.

Interim Recommendation:

That the Code require a bank, when opening a new account for a customerwho already has an account(s) with the bank, to state in writing whether theaccount will be segregated from the other account(s) and what theconsequences are if the account is not segregated.

123 This example is drawn from McCracken, ibid, p243. See also, Derham, S R, Set-Off (2nd ed, 1997, Clarendon

Press) Ch. 10

5 March 2001105

Dispute ResolutionClause 20 of the Code deals with both internal dispute resolution (IDR) andexternal (or alternative) dispute resolution (ADR).

Both the terms of this clause and the practical operation of bank disputeresolution schemes (especially IDR processes) are the subject of criticalcomment by ASIC, the JCS and ACA. ASIC comments:

“These provisions were developed at a time when IDR and ADR wererelatively new concepts in Australia. However, since that time, the role ofindustry dispute resolution and the characteristics of effective disputeresolution have advanced considerably. In the light of this experience, wetake the view that the current provisions of the Code are inadequate andrequire significant improvement if they are to meet consumers’ needs.”124

ASIC points out that Banks will soon have to take action to improve their disputeresolution processes:

“Under the proposed FSR Bill, all holders of an Australian FinancialServices licence will need to have appropriate internal and externalcomplaints resolution procedures to resolve complaints from retailcustomers.125

Whilst the regulations (still to be drawn up) will confirm how theseprocedures should be approved by ASIC, the Commentary to the Billindicates that:

• internal dispute resolution procedures must comply with AustralianStandard AS 4269-95 (or other recognised Australian standard); and

• external complaints resolution procedures must satisfy the guidelinesset out in the current s 12FA(2) of the ASIC Act.126

ASIC has set out its policy on how it will apply the current s. 12FA(2)guidelines in its Policy Statement 139 (PS 139). This policy may need to berevisited once the FSR Bill and regulations are finalised.

Failure to provide the appropriate dispute resolution procedures will be abreach of a licence condition.”127

The same point is made in the JCS and by ACA. However, ASIC and the JCSboth argue that it will not be sufficient to rely on bank IDR schemes beingcompliant with AS 4269 – 1995. On this point ASIC says:

“In the case of the internal IDR process however, we are concerned that thecurrent AS4269 standard is fairly general, and does not provide detailedguidance for complaint handling in the financial services sector. In thefuture, more detailed guidance may be provided by the legislation or by an

124 ASIC, p. 20125 Proposed s. 883A(g) FSR Bill.

126 Commentary on the draft provisions, ibid, p. 89.127 ASIC, p. 20

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ASIC policy statement. In the meantime, however, it may be appropriatefor the Banking Code to spell out some basic standards for the internalprocess.

We also note that in a recent survey (described later in this submission),financial services caseworkers raised serious concerns about the manner inwhich institutions, including banks, handled consumer complaintsinternally. Three-quarters (76%) of the 65 caseworkers surveyed said thatthey were concerned about some practices of banks in the area of complainthandling, or were concerned about bank industry practices in this areagenerally. Only 9 caseworkers (13%) said that they had generally positiveor favourable experiences with bank practices in complaint handling.

In the context of deposit-taking institutions generally, specific issues raisedby caseworkers included:

• poorly trained call centre and branch staff, who did not understandrelevant issues, did not have the authority to make decisions and werereluctant to refer the matter to a supervisor;

• where more than one type of account is involved, inability to be ableto deal with a single individual or section within the institution, andlack of communication and consistency between different sections;

• lack of consistency in the information provided by institution staff;

• lack of response to enquiries and complaints or undue delay inresponse;

• increased workloads for caseworkers because of the additional workin contacting and re-contacting institutions;

• refusal to compensate, or to adjust accounts, for losses suffered as aresult of institutional error (including reluctance to refund overdrawfees where the overdraw results from institutional error); and

• lack of referral to external ADR in cases where a complaint or disputeis not resolved.”128

The JCS made similar criticisms. Both that submission and ASIC’s point todeficiencies in the definition of a dispute in clause 20 and both raise the issue ofthe lack of time frames for the resolution of disputes at the IDR stage. Theyalso question the level of compliance with clause 20.2 and the resultantdifficulties of access to bank IDR processes.

On the matter of ADR schemes, I noted ASIC’s favourable comments on theABIO scheme. During the consultation process I encountered extremely strongsupport for the scheme. ASIC points out that Code clauses 20.4 and 20.5 donot expressly require an ADR process to apply criteria of fairness and goodindustry practice, although the ABIO Terms of Reference in fact have thesecriteria.

128 ASIC, p. 22 – 3

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My own researches also indicate wide variances in levels of compliance withclause 20.2. Quite clearly there are widely different views between banks onthe extent to which they should seek to ensure customers with a complaint canaccess their IDR processes. Some banks have brochures on display inbranches; others do not. Some banks have prominent entries for complaints inthe White Pages of the telephone directory; others do not. Some banks use theterm “complaints” in their descriptive material; for others the word “complaint”appears to be a proscribed term and euphemisms like “feedback” are used.

ASIC’s submission suggested a model provision for dispute resolution forinclusion in a revised Code. In my view, the model (which is set out below inmy interim recommendations), could overcome the shortcomings identified inthe submissions. I propose two modifications to the modelled provision:

• information about internal and external dispute resolution processesshould not only be readily available in branches (as well as through othermeans), it should also be on open display in branches; and

• it is important to ensure that customers, when first making a complaint, aregiven information about both the internal and the external processes tominimise customers giving up after experiencing a protracted orunsatisfactory IDR process and not becoming aware of the right toproceed to the external process.

The model, as set out below, contains those modifications.

Interim recommendations:

Internal complaint handling

That a bank will have an internal process for handling complaints with itscustomers. This process will:

• be free of charge;

• be consistent with Australian Standard AS 4269-95;

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

• specify time frames (of not more than 45 days) within which aninvestigation must be completed (unless there are exceptionalcircumstances);

[Note: Exceptional circumstances may include delays caused by otherinstitutions involved in resolving the dispute.]

• provide monthly updates on the progress of investigations that continuebeyond 45 days (except in cases where the bank is waiting for a

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response from the Customer and the Customer has been advised thatthe bank requires such a response); and

• require the bank to provide written reasons for its decision in respect ofa complaint [subject to any Code provisions on election for electroniccommunications].

That the internal process will be available for all complaints other than thosethat are resolved to the consumer’s satisfaction immediately they are drawn tothe attention of the bank.

External dispute resolution

That a bank will have available to its customers an external and impartialprocess for resolving disputes. This process will be free of charge and will beconsistent with the regulatory guidelines for the approval of externalcomplaints resolution schemes.

Publicising and notifying Customers of complaints and dispute resolutionprocesses

That a bank will prominently publicise the availability and accessibility of bothits internal and external processes for resolving complaints and disputes.

That, as a minimum, information about internal and external processes will bereadily accessible and on display in bank branches and be accessible throughbank Internet sites and bank telephone banking services.

That, in addition, a bank will provide a Customer with written information[subject to any provision for electronic communication] about:

(i) the internal process, at the time that a Customer makes a complaint that isnot immediately resolved to the satisfaction of both the Customer and thebank; and

(ii) the external process, at the same time as a Customer is informed of theinternal process and again at the time that a Customer is advised of the finaloutcome of the internal process and that outcome does not wholly satisfythe Customer’s claim.

Electronic CommunicationAs the ASIC submission notes129, many provisions of the Code requireinformation to be provided to customers in writing but it may often be moreefficient and effective both for customers and banks to provide some or all ofthis information electronically.

129 ASIC Submission, p. 40

5 March 2001109

ASIC also notes that the same issue is currently being addressed in the reviewof the EFT Code of Conduct. As I understand it the current draft of the revisedEFT Code gives effect to the following principles:

• A customer may elect to receive by electronic communication to anominated electronic address any information which this Code requires thecustomer’s bank to provide.

• The customer may change the nominated address or cancel thearrangement altogether.

• A bank does not satisfy its obligation to notify a customer simply by placinginformation on a web site but if a customer views that information, has anopportunity to down load it or save it and acknowledges having seen theinformation, the bank will be treated as having provided the information atthe time of the customer’s acknowledgement.

• Where a customer received information electronically the customer isentitled for 6 months on request to be given a paper copy.

Interim Recommendation:

That the Code provide for Electronic Communications in something like thefollowing terms:

“Electronic communications:

(1) A customer may agree that a bank can provide by electronic communication to thecustomer’s device, electronic equipment or electronic address nominated by thecustomer any information which this Code requires the bank to provide (by writingor other means). The customer’s agreement must be by a specific positive electionafter receiving an explanation of the implications of making such an election. Thecustomer may by notice to the bank vary the customer’s nominated device,electronic equipment or electronic address or terminate the agreement to receiveelectronic communication from the bank and the bank must inform the customer ofthose rights.

(2) (i) Subject to (ii), making information available at a bank’s electronic address (egweb site) does not satisfy any requirement of this Code that the information beprovided to a customer.

(ii) Where a customer has viewed information available at a bank’s electronicaddress (eg a web site), and has been given the opportunity to retain thatinformation for subsequent reference (eg by saving or printing it) and hasspecifically acknowledged having seen that information and having been giventhat opportunity, the bank is to be treated as having provided that informationto the customer at the time the customer gave the specific acknowledgement.

(iii) A specific positive election by the customer under (1) is not required inthe circumstances described in (2)(ii).

5 March 2001110

(3) Where a bank has provided or is treated as having provided information to acustomer by electronic communication under (1) or (2) the bank shall provide apaper copy to the customer if the customer so requests within 6 months of thereceipt of the electronic communication.”

Miscellaneous issuesThis review has focussed on the main issues raised in the submissions and theconsultation process. There are minor matters and consequential changes tothe Code which are best deferred until I have the benefit of the finalsubmissions.

Appendix 1 0 5 March 2001

APPENDIX 1. TERMS OF REFERENCEThe Code of Banking Practice (CBP) is an instrument of banking self-regulation.CBP was first published in November 1993. With the agreement of the FederalTreasurer, CBP became fully operative from 1 November 1996.

1. CBP is to be reviewed every three years in accordance with the Objectivesand Principles set out in the Preamble to CBP and having regard to theviews of interested parties.

2. The Objectives of CBP.

CBP is intended to

(i) describe standards of good practice and service;

(ii) promote disclosure of information relevant and useful to Customers;

(iii) promote informed and effective relationships between Banks andCustomers; and

(iv) require Banks to have procedures for resolution of disputes betweenBanks and Customers.

3. The Principles of CBP.

The Objectives are to be achieved

(i) having regard to the paramount requirement of Banks to act inaccordance with prudential standards necessary to preserve thestability and integrity of the Australian banking system;

(ii) consistently with the current law and so as to preserve certainty ofcontract between a Bank and its Customer; and

(iii) so as to allow for flexibility in products and services and incompetitive pricing.

4. The relevance and operation of CBP and its provisions will be reviewed inaccordance with the Objectives and Principles stated above having regardto:

• the views of interested parties;

• government policies;

• changes which have occurred in the legal and regulatory environment(including self-regulation);

• changes which have occurred in the banking services market and in theneeds and behaviour of consumers as a whole;

• consistency with relevant self-regulatory and regulatory measures; and

• anticipated changes in the banking services market in the next threeyears.

Appendix 1 0 5 March 2001

5. The independent person appointed to oversee and direct the review is toreport findings and recommendations to ABA as close as practicable to 31August 2000. ABA will publish the report.

Appendix 2 5 March 20011

APPENDIX 2. CODE OF BANKING PRACTICE3 November 1993

PREAMBLE

The Code of Banking Practice (the Code) seeks to foster good relations betweenBanks and their Customers (as defined below) and to promote good bankingpractice by formalising standards of disclosure and conduct which Banks thatadopt the Code agree to observe when dealing with their Customers.

Objectives

The Code is intended to -

(i) describe standards of good practice and service;

(ii) promote disclosure of information relevant and useful to Customers;

(iii) promote informed and effective relationships between Banks andCustomers; and

(iv) require Banks to have procedures for resolution of disputes betweenBanks and Customers.

Principles

These objectives are to be achieved -

(i) having regard to the paramount requirement of Banks to act in accordancewith prudential standards necessary to preserve the stability and integrity ofthe Australian banking system;

(ii) consistently with the current law and so as to preserve certainty of contractbetween a Bank and its Customer; and

(iii) so as to allow for flexibility in products and services and in competitivepricing.

Monitoring

The Australian Payments System Council may obtain from the Reserve Bank ofAustralia consolidated information based on reports and information provided bythe Banks so that the Australian Payments System Council may provide reports tothe Treasurer of the Commonwealth on compliance with the Code and its generaloperation.

The Reserve Bank of Australia will receive each year from each of the Banks:

(i) a report on the operation of the Code; and

(ii) information concerning the number of disputes referred to in sections 20.3 and20.4 of the Code, according to their categories and how each of thesecategories of disputes has been handled.

The information to be provided by the Banks to the Reserve Bank of Australia willbe determined by the Reserve Bank of Australia with the Banks. Before suchdetermination, the Reserve Bank of Australia will consult with the AustralianPayments System Council.

Appendix 2 5 March 20012

Review

The Code shall be reviewed at least every three years in accordance with theObjectives and the Principles set out in this Preamble and having regard to theviews of interested parties.

Staff Training

A Bank shall endeavour to ensure that its staff are aware of the provisions of thisCode relevant to their duties and of the procedures for handling disputes withCustomers of the Bank.

THE CODE

This Code (published on 3 November 1993) is in three parts:

(i) Part A - Disclosures. This part describes the information which a Bankwill provide to a Customer in respect of the Banking Services which theBank offers to the Customer.

(ii) Part B - Principles of Conduct. This part describes certain principles ofconduct which a Bank will follow in dealing with its Customers.

(iii) Part C - Resolution of Disputes. This part requires Banks to have disputehandling procedures.

1.0 DEFINITIONS AND APPLICATION

1.1 In this Code and the Preamble:

"Account" includes, amongst others, a cheque account or an account thatcan be accessed by a cheque.

"Bank" means a corporation authorised by law to carry on the generalbusiness of banking in Australia that has adopted this Code.

"Banking Service" means a deposit, loan or other banking facility providedby a Bank to a Customer, but does not include a service in relation to a billof exchange, a variation of a term or condition of a facility or a debt to aBank that arises as a result of a withdrawal of more than the amount bywhich an Account is in credit without the approval of the Bank.

"Customer" means an individual, when that individual, whether alone orjointly with another individual, acquires a Banking Service which is whollyand exclusively for his or her private or domestic use, but in any eventdoes not include an individual who makes a written statement to the Bank,in relation to a Banking Service, that the Banking Service will not beacquired wholly and exclusively for that use.

"Related Entity" has the meaning set out in Section 9 of the CorporationsLaw.

"Standard Fees and Charges" means fees and charges normally chargedby a Bank to its Customers in respect of a Banking Service at a particulartime.

Appendix 2 5 March 20013

"Terms and Conditions" means those terms and conditions specificallyapplied by a Bank to a Banking Service but does not include any otherterms and conditions that may apply by operation of law.

1.2 This Code is to be read subject to any Commonwealth, State or Territorylegislation.

1.3 From the date on which a bank publicly announces that it adopts thisCode:

(a) that Bank will be bound by this Code in respect of any BankingService that Bank commences to provide to a Customer; and

(b) that Bank will be bound by this Code other than sections 2.1, 2.2,2.3, 7.1, 11.2 and 17.1 to 17.7 inclusive in respect of any BankingService it is then providing to any individual who would have been aCustomer if this Code had applied at the time that individual firstacquired that service.

1.4 To the extent of any inconsistency, this Code is to be read subject to theElectronic Funds Transfer Code of Conduct, which governs transactionson an account initiated through an electronic terminal by the combined useof a card and a personal identification number.

PART A: DISCLOSURES

2.0 DISCLOSURE: TERMS AND CONDITIONS

2.1 A Bank shall provide to a Customer in writing any Terms and Conditionsapplying to an ongoing Banking Service provided by the Bank to theCustomer. Those Terms and Conditions shall:

(i) be distinguishable from marketing or promotional material;

(ii) be in English and any other language the Bank considersappropriate;

(iii) be consistent with this Code;

(iv) be clearly expressed;

(v) be provided at the time of or before the contract for the BankingService is made except where it is impracticable to do so, in whichcase the Terms and Conditions shall be provided as soon aspracticable after the provision of the Banking Service; and

(vi) draw attention to the availability of the general descriptive informationreferred to in sections 6.1 and 6.2.

2.2 Any written Terms and Conditions referred to in section 2.1 shall include astatement to the effect that the relevant provisions of this Code apply tothe Banking Service but need not set out those provisions.

2.3 A Bank shall include (where relevant) the following in its Terms andConditions applying to a Banking Service:

Appendix 2 5 March 20014

(i) the nature of all Standard Fees and Charges that then apply;

(ii) the method by which interest, if any, is calculated and the frequencywith which it will be credited or debited;

(iii) the manner in which the Customer will be notified of changes to theTerms and Conditions and changes to interest rates, fees andcharges;

(iv) if appropriate, the fact that more than one interest rate may apply;

(v) any minimum balance requirement or restriction on depositing moneyin, or withdrawing money from, an Account;

(vi) in respect of term deposits:

• the manner in which payment of interest and principal will bemade;

• the manner in which funds may be dealt with at maturity; and

• the nature of any charge or variation to an interest rate resultingfrom a withdrawal in advance of maturity;

(vii) in respect of a loan to the Customer, the repayment details;

(viii) the frequency with which statements of Account will be provided;

(ix) a statement that information on current interest rates and fees andcharges is available on request; and

(x) how a Customer or a Bank may alter or stop a payment service.

3.0 DISCLOSURE: COST OF CREDIT

3.1 A Bank shall make available to a Customer, a prospective Customer or anappropriate external agency the interest rates and Standard Fees andCharges applicable to a Banking Service offered by the Bank, for use inthe preparation of a comparison rate.

4.0 DISCLOSURE: FEES AND CHARGES

4.1 A Bank shall, before or at the time of providing a particular BankingService to a Customer for the first time or otherwise on request by aCustomer, make available to the Customer a schedule containing theStandard Fees and Charges which currently apply to the Banking Service.

5.0 DISCLOSURE: PAYMENTS SERVICES

5.1 Where a Bank provides a Customer with a direct debit or credit paymentservice, an automatic payment service or access to an account by meansof instruction via telephone or personal computer, the Bank shall makeavailable to the Customer details of any bank fees or charges applying tothe service.

6.0 DISCLOSURE: OPERATION OF ACCOUNTS

Appendix 2 5 March 20015

6.1 A Bank shall provide to a Customer or prospective Customer for a BankingService upon request general descriptive information concerning BankingServices, including where appropriate:

(i) Account opening procedures;

(ii) the Bank's obligations regarding confidentiality of information relatingto the Customer and the Customer's right to instruct a Bank inaccordance with section 12.2(b) not to disclose information to aRelated Entity of the Bank and the means by which that instructioncan be given, such as by marking a box in an application form;

(iii) complaint handling procedures;

(iv) the Bank's right to combine Accounts;

(v) bank cheques;

(vi) the advisability of a Customer informing the Bank promptly when theCustomer is in financial difficulty; and

(vii) the advisability of a Customer reading the Terms and Conditionsapplying to the Banking Service.

6.2 A Bank shall provide to a Customer who opens a cheque account, and toother Customers on request, general descriptive information on:

(i) the time generally taken for clearing a cheque and how a chequemay be specially cleared;

(ii) the effect of crossing a cheque, the meaning of "not negotiable" and"account payee only" and the significance of deleting "or bearer"when any of these expressions appear on a cheque;

(iii) how and when a cheque may be stopped;

(iv) how a cheque may be made out so as to reduce the risk ofunauthorised alteration; and

(v) the dishonour of cheques, including post-dated and stale cheques.

PART B: PRINCIPLES OF CONDUCT

7.0 PRE-CONTRACTUAL CONDUCT

7.1 A Bank shall have readily available any Terms and Conditions of eachBanking Service it currently offers to Customers or prospective Customers.

7.2 A Bank shall disclose the existence of any application fee or charge andwhether the fee or charge is refundable if the application is rejected or notpursued.

7.3 Where a fee or charge is levied by a Bank for the provision of a bankcheque, a travellers cheque, an inter-bank transfer or the like service theBank shall disclose the fee or charge to a Customer upon request whenthe service is provided or at any other time.

Appendix 2 5 March 20016

8.0 OPENING OF ACCOUNTS

8.1 A Bank shall provide to a Customer or prospective Customer upon requestgeneral descriptive information (which may consist of or include materialmade available by a government) about the identification requirements ofthe Financial Transaction Reports Act 1988 (Cth) and the options availableto the Customer or prospective Customer under tax file number legislation.

9.0 VARIATION TO TERMS AND CONDITIONS

9.1 When, in relation to a Banking Service, a Bank intends to introduce a feeor charge (other than a government charge referred to in section 9.2), or tovary the method by which interest is calculated or the frequency with whichit is debited or credited, the Bank shall provide written notice of the changeto each affected Customer at least 30 days before it takes effect.

9.2 A Bank shall notify affected Customers of the introduction or variation of agovernment charge payable directly or indirectly by its Customers byadvertisement in the national media or local media or in writing to affectedCustomers, unless the introduction or variation is publicised by agovernment, government agency or representative body.

9.3 A Bank shall notify affected Customers of other variations to the Termsand Conditions (including a variation of Standard Fees and Charges or ofan interest rate) in relation to a Banking Service by advertisement in thenational media or local media or in writing to affected Customers, no laterthan the day on which the variation takes effect.

9.4 Unless otherwise agreed, a Bank may give any written notice to aCustomer at his or her mailing address that was last recorded with theBank. A Bank may require a Customer to notify the Bank promptly of achange to his or her name or address.

9.5 If a Bank considers there are sufficient changes to warrant doing so, theBank will make available a consolidation of the Terms and Conditionsapplying to a Banking Service.

10.0 ACCOUNT COMBINATION

10.1 A Bank shall inform a Customer promptly after exercising the Bank's rightto combine Accounts affecting the Customer.

10.2 In exercising a right to combine Accounts, a Bank shall comply with anyapplicable requirements of the Code of Operation for Social Security DirectCredit Payments.

11.0 FOREIGN EXCHANGE SERVICES

11.1 In providing a foreign exchange service, other than by credit or debit cardor travellers cheque, a Bank shall provide to a Customer:

(i) details of the exchange rate and commission charges that will applyor, if these are not known at the time, details of the basis on whichthe transaction will be completed; and

Appendix 2 5 March 20017

(ii) an indication of when money sent overseas on the Customer'sinstructions would normally arrive at the overseas destination.

11.2 Prior to granting a foreign currency loan in Australia, a Bank shall provideto the Customer a general warning in writing of the risks arising fromexchange rate movements and shall inform the Customer of the availabilityof mechanisms, if they exist, for limiting such risks.

12.0 PRIVACY AND CONFIDENTIALITY

12.1 A Bank acknowledges that, in addition to a Bank's duties under legislation,it has a general duty of confidentiality towards a Customer except in thefollowing circumstances:

(i) where disclosure is compelled by law;

(ii) where there is a duty to the public to disclose;

(iii) where the interests of the Bank require disclosure; or

(iv) where disclosure is made with the express or implied consent of theCustomer.

12.2 Subject to section 12.1, a Bank may not, without the consent of theCustomer, disclose information concerning the Customer to anotherperson but the Bank may disclose -

(a) to a Related Entity, information necessary to enable an assessmentto be made of the total liabilities (present and prospective) of theCustomer to the Bank and the Related Entity, and

(b) to a Related Entity of the Bank which provides financial serviceswhich are related or ancillary to those provided by the Bank,information concerning the Customer unless the Customer instructsthe Bank not to do so. A Bank shall advise those who becomeCustomers after it adopts the Code that they have the right to givethis instruction by the means referred to in section 6.1(ii).

12.3 A Bank shall not collect information relating to Customers by unlawfulmeans.

12.4 A Bank shall on request provide a Customer with information about thatCustomer which is readily accessible to the Bank and which may lawfullybe provided. The information required to be provided is limited to theBank's record of the Customer's address, occupation, marital status, age,sex, Accounts with the Bank and balances and statements relating tothose Accounts (in this section 12 called "Customer information").

12.5 A Bank need not comply with a request under section 12.4 unless theCustomer has, as clearly as possible, identified the Customer informationrequested and its likely location (if known to the Customer).

12.6 A Bank may recover its reasonable costs of supplying Customerinformation to a Customer.

Appendix 2 5 March 20018

12.7 A Customer of a Bank may request the correction of Customer informationabout the Customer held by the Bank.

12.8 A request for access to Customer information, or a request for thecorrection of Customer information, shall be dealt with in a reasonabletime.

12.9 A Bank may not collect, use or disseminate information about aCustomer's:

(i) political, social or religious beliefs or affiliations;

(ii) race, ethnic origins or national origins; or

(iii) sexual preferences or practices;

except that it may collect or use such information in accordance with thisCode for a proper commercial purpose.

12.10 A Bank shall take reasonable steps to protect personal informationheld by it relating to a Customer against loss and against access, use,modification or disclosure that is unauthorised. A Bank shall require allstaff with access to personal information concerning Customers tomaintain confidentiality concerning that information.

12.11 In relation to a "banker's opinion" a Bank shall comply with anyapplicable requirements of any Credit Reporting Code of Conduct issuedby the Privacy Commissioner under section 18A(1) of the Privacy Act 1988(Cth).

12.12 In this section 12 "Customer" includes an individual who would havebeen a Customer if this Code had applied at the time that individualacquired a financial service.

13.0 PAYMENT INSTRUMENTS

13.1 A Bank may inform a Customer of the advisability of safeguardingpayment instruments such as credit and debit cards, cheques and passbooks.

13.2 A Bank may require a Customer to notify the Bank as soon as possible ofthe loss, theft or misuse of his or her payment instruments.

13.3 A Bank shall inform a Customer of:

(i) the consequences arising from a failure by the Customer to complywith any requirement referred to in section 13.2 that is imposed onthe Customer by the Bank; and

(ii) the means by which the Customer can notify the loss, theft or misuseof his or her payment instruments.

14.0 STATEMENTS OF ACCOUNT

14.1 At least every six months, a Bank shall provide a Customer with a recordof all transactions relating to a deposit account of the Customer since theprevious statement unless:

Appendix 2 5 March 20019

(i) a passbook is provided or it is agreed that other documentation willbe the record of transactions on the deposit account;

(ii) there has been no transaction effected by the Customer on thedeposit account during the past six months; or

(iii) the deposit account can be accessed by the combined use of a PINand an EFT card (in which case the requirements of the ElectronicFunds Transfer Code of Conduct apply).

15.0 PROVISION OF CREDIT

15.1 In considering whether to provide a Banking Service involving theprovision of credit to a Customer, a Bank shall take into account the rangeof factors it considers are relevant to the Customer and the BankingService to establish whether, in the Bank's view, the Customer has or mayhave in the future the capacity to repay. These factors may include:

(i) the Customer's income and expenditure;

(ii) the purpose of the Banking Service;

(iii) credit scoring (being a scoring method used by Banks to assesswhether a credit applicant is an acceptable risk); and

(iv) the Customer's assets and liabilities.

16.0 JOINT ACCOUNTS AND SUBSIDIARY CARDS

16.1 A Bank shall provide to Customers opening a joint Account generaldescriptive information on:

(i) how funds may be withdrawn from the joint Account having regard tothe instructions given by the Customers;

(ii) the manner in which such instructions can be varied; and

(iii) the nature of liability for indebtedness on joint account.

16.2 When accepting a Customer's instructions to issue a subsidiary credit ordebit card, a Bank shall:

(i) provide general descriptive information to the primary cardholder onhis or her liability for debts incurred by the subsidiary card holder byuse of the card; and

(ii) inform the primary card holder of the means by which a subsidiarycard may be cancelled or stopped and the fact that this may not beeffective until the subsidiary card is surrendered.

17.0 GUARANTEES

17.1 This section shall apply to each guarantee and each indemnity (whether ornot contained in a security) (called "guarantee" in this section 17) obtainedfrom a third party who is an individual (called "the guarantor" in this section17) for the purpose of securing any financial accommodation or facilityprovided by a Bank to any person (called "the borrower" in this section 17)other than -

Appendix 2 5 March 200110

(i) a public corporation or any of its Related Entities;

(ii) a corporation of which the guarantor is a director, secretary ormember or any of its Related Entities;

(iii) a trustee of a trust (including a discretionary trust) of which theguarantor or a corporation or a Related Entity that is referred to inparagraph (ii) is a beneficiary or one of a class of beneficiaries underthe trust; and

(iv) a partner, co-owner, agent, consultant or associate of any of theguarantor, a corporation or Related Entity referred to in paragraph (ii)or a trustee referred to in paragraph (iii);

at the time the guarantee is obtained. The term "public corporation" hasthe meaning set out in section 9 of the Corporations Law.

17.2 A Bank may only accept a guarantee if the amount of the guarantor'sliability is limited to, or is in respect of, a specific amount plus otherliabilities (such as interest and recovery costs) that are described in theguarantee.

17.3 Before accepting a guarantee a Bank shall inform a prospective guarantorthat the documents specified in section 17.4(ii) and 17.6 will be provided tothe prospective guarantor if the borrower consents. If the borrower doesnot consent, the Bank shall so inform the prospective guarantor and shallnot accept the guarantee without the agreement of the prospectiveguarantor to proceed with the guarantee in the absence of such consent.

17.4 A Bank shall provide to a prospective guarantor -

(i) a written warning about the possibility of the prospective guarantorbecoming liable instead of, or as well as, the borrower; and

(ii) subject to obtaining the consent of the affected borrower, a copy orsummary of the contract evidencing the obligations to be guaranteed.

17.5 A Bank shall recommend that a prospective guarantor obtain independentlegal advice.

17.6 Subject to obtaining the consent of the affected borrower, a Bank shallsend to a guarantor:

(i) a copy of any formal demand that is sent to the borrower; and

(ii) on request by the guarantor, a copy of the latest relevant statementsof account provided to the borrower, if any.

17.7 A guarantor may at any time extinguish the guarantor's liability to a Bankunder a guarantee by paying to the Bank the then outstanding liability ofthe borrower to the Bank (including any future or contingent liability) or anylesser amount to which the liability of the guarantor is limited by the termsof the guarantee or by making other arrangements satisfactory to the Bankfor the release of the guarantee.

18.0 ADVERTISING

Appendix 2 5 March 200111

18.1 A Bank shall ensure that its advertising and promotional literature drawingattention to a Banking Service is not deceptive or misleading.

18.2 In any advertising in the print-media and any promotional literature thatdraws attention to a Banking Service and includes a reference to aninterest rate, the Bank shall also indicate whether other fees and chargeswill apply and that full details of the relevant Terms and Conditions areavailable on application.

19.0 CLOSURE OF ACCOUNTS

19.1 Subject to the terms and conditions of any relevant financial service, aBank:

(i) will upon request by the Customer close an Account of the Customerthat is in credit;

(ii) may close an Account of the Customer that is in credit by giving theCustomer notice that is reasonable in all the relevant circumstancesand repaying the Customer the amount of the credit balance; and

(iii) may charge the Customer an amount that is a reasonable estimateby the Bank of the costs of closure.

PART C: RESOLUTION OF DISPUTES

20.0 DISPUTE RESOLUTION

20.1 A Bank shall have an internal process for handling a dispute between theBank and a Customer and this process will be readily accessible byCustomers without charge upon them by the Bank. A dispute ariseswhere a Bank's response to a complaint by a Customer about a BankingService provided to that Customer is not accepted by that Customer.

20.2 A Bank shall have available in branches general descriptive informationon:

(i) the procedures for handling such a dispute;

(ii) the time within which the dispute will normally be dealt with by theBank; and

(iii) the fact that the dispute will be dealt with by an officer of the Bankwith appropriate powers to resolve the dispute.

20.3 Where a request for resolution of the dispute is made in writing or theCustomer requests a response from the Bank in writing, the Bank shallpromptly inform the Customer in writing of the outcome and, if the disputeis not resolved in a manner acceptable to the Customer, of:

(i) the reasons for the outcome; and

(ii) further action the Customer can take, such as the process forresolution of disputes referred to in section 20.4.

Appendix 2 5 March 200112

20.4 A Bank shall have available for its Customers free of charge an externaland impartial process (not being an arbitration), having jurisdiction similarto that which applies to the existing Australian Banking IndustryOmbudsman Scheme, for resolution of a dispute that comes within thatjurisdiction and is not resolved in a manner acceptable to the Customer bythe internal process referred to in section 20.1.

20.5 The external and impartial process shall apply the law and this Code andalso may take into account what is fair to both Customer and the Bank.

Appendix 3 5 March 20011

APPENDIX 3. A SET OF PRINCIPLESBANKS AND SMALL BUSINESS WORKING TOGETHER

Australian Bankers’ Association

July 1998

INTRODUCTION

Commencement

This set of Principles supports the extension of the Australian Banking IndustryOmbudsman Scheme to incorporated small businesses, commencing 6 July1998.

Objectives

The Principles have been developed to:

• foster good working relations between banks and their small businesscustomers,

• outline a number of principles which will help ensure a mutually beneficialand rewarding relationship can be developed and maintained, and

• encourage a greater understanding of each other’s roles andresponsibilities.

The Principles are intended to be a guide which may be adopted in whole or inpart, depending on the particular needs of a bank and its small businesscustomers.

It is proposed that the Principles should apply in relation to small businesseswhich has at least:

• 15 full time equivalent employees or fewer

• an annual turnover of $1 million or less; and

• independent ownership and management (not being a subsidiary or arelated entity of a public company or a statutory authority, a trust, or acharitable organisation).

Overview

Banks are the major source of finance for small businesses and lending to smallbusiness makes up a significant proportion of bank commercial lending. Thereare clear incentives for banks and their small business customers to positivelymanage their relationship.

The Principles seek to promote an environment of open communicationbetween banks, their small business customers and advisers and are intendedto help small business customers work effectively and harmoniously with theirbank.

Appendix 3 5 March 20012

Occasionally small businesses can meet difficulties due to internal or externalfactors. The Principles underline the need to identify problems early and forsmall businesses and their advisers to consult with their bank in order to worktowards appropriate solutions.

The principles stress important elements in developing a positive relationship,including the exchange of information between small businesses and their bank.The banks will provide timely information as outlined in the Principles, while thesmall business borrowing customer should assist with provision of suchinformation as a business plan, supported by relevant financial informationregularly reviewed by comparing budgets to actuals. Adverse trends should beadvised to the bank as soon as possible.

The Services Banks Provide

The banking industry provides small businesses with an extensive range offinancial products and services that enable small businesses to quickly respondto changing circumstances and manage their financial and transactional needs.These include services which can enable small businesses to efficientlymanage cash and non-cash payment by customers, complete transactions withsuppliers, manage the payment of staff, manage periods where the businessescash flows are in deficit as well as when they are in surplus, assist with theacquisition of plant, equipment and fixed structures, assist in managing foreignexchange exposures and the trade finance needs of importers and exporters.

Broadly, these products and services fall under the following categories:

• Long term borrowing products

• Short term borrowing products

• Business transaction services

The industry also provides access to a range of other non-bank financialservices such as:

• Funds management

• Insurance

• Superannuation

• Factoring

• Leasing and Hire Purchase

• Operating Leasing and Fleet Management

These services may be available direct from your bank or a subsidiary.

Application

Banks are able to voluntarily subscribe to the Principles in their entirety, ormodified form, depending on the bank’s particular position in relation to smallbusiness customers.

Appendix 3 5 March 20013

From the day a bank subscribes to the Principles or a modified version aspublished by that bank, the bank would apply those aspects of the Principles towhich it subscribes:

• to any banking services the subscribing bank commences to provide to arelevant small business customer after that date; and

• apart from those aspects of the Principles dealing with the terms andconditions, variations and guarantees, to any banking service that italready provides to a small business customer.

Review

The Australian Bankers’ Association will review these Principles having regardto the views of interested parties in the year 2000 or before if the majority ofbanks subscribing to it agree to do so.

THE PRINCIPLES

In this document “we” means a bank subscribing to this set of Principles and“you” and “business” mean a small business customer as defined by the bank.

1. We will have available information on terms and conditions

We intend that the terms and conditions for a banking service are easy tounderstand and are available before, or as soon as practicable after, thecontract for the banking service is made.

You should read all relevant documents carefully and feel free to ask questions.You should ensure you understand the nature and effect of any documents yousign because they will legally bind both of us. We will attempt to clarify anythingyou are unsure about. However, if you are uncertain about any aspect of atransaction, or any documentation, you should seek independent professionaladvice. Depending on the nature of the banking service the documents willnormally describe:

• the nature of fees and charges that apply;

• the method by which interest, if any, is calculated and the frequency withwhich it will be credited or debited;

• the manner in which you will be notified of changes to the terms andconditions and changes to interest rates, fees and charges;

• if appropriate, the fact that more than one interest rate may apply;

• any minimum balance requirement or restriction on depositing money in,or withdrawing money from, an account;

• the nature of additional costs fees and charges that may be imposed byus if you operate the service outside of agreed arrangements;

• when statements of account will be provided and the basis on whichaccount information can be accessed outside of this arrangement.

In the case of a term deposit, the documents will normally include:

Appendix 3 5 March 20014

• the manner in which payments of interest and principal will be made;

• the manner in which funds may be dealt with at maturity; and

• the nature of any charge or variation to an interest rate resulting from awithdrawal in advance of maturity

In the case of a payment service, the documents will normally include:

• how you or we may alter or stop a payment service

In the case of a financial accommodation facility, the documents may include:

• the amount of credit or financial accommodation to be provided;

• when repayments are to be made;

• the interest rate and other charges for the product;

• when the bank intends reviewing the facility with the customer;

• the security and guarantees, existing or new, required, including anyminimum values to be maintained;

• advise that the facility is to be repaid on demand;

• the sort of circumstances that will trigger an early review or acceleratedrepayment; and

• the minimum information you will be required to provide at a review.

You should also be aware that certain rights may be implied by law into youragreement with us (for example, under the Trade Practices Act 1974(Commonwealth).

2. We will provide notice of variations to Terms and Conditions

When a variation to a term or condition for an existing banking service is to beintroduced or there is to be a variation in the interest rates or bank fees andcharges we will give you notice. If your rate is determined by reference to abase rate we will give you notice of changes to that rate. This notice will begiven no later than the day on which the variation takes effect, but in somecases, notices may be given after the relevant event has occurred, for example:

• interest rate variation may be notified on or before the next statement ofaccount sent to you after the interest rate variation, and

• where the term of the banking services allow the interest rate to changeintra day.

For your part you should notify us promptly of a change to your contact detailsso as to facilitate us giving notice of changes to you.

3. We may give you documents or notices in writing or electronically orby newspaper advertisement

Appendix 3 5 March 20015

We will be flexible about how documents and notices are given to you. Theymight be provided in writing including by statement of account, electronically orby newspaper advertisement depending on the nature of the document ornotice and the relevant banking service.

4. We will respect your rights to Privacy and Confidentiality

We acknowledge that, in addition to our duties under legislation, we have ageneral duty of confidentiality towards you. There are times however, when wewill be obliged to release information:

• where disclosure is compelled by law;

• where there is a duty to the public to disclose;

• where our interests require disclosure (eg. for the purposes of litigation ,but this does not mean, for example that we would disclose yourinformation to a third party for marketing purposes); or

• where disclosure is made with your express or implied consent.

There may be specific provisions relating to confidentiality of your information inyour agreement with us.

5. We will assess an application for financial accommodation in aprofessional manner.

In considering whether to provide financial accommodation to you, we will takeinto account the range of factors we consider relevant to establish whether inour view you will be able to meet your financial obligations.

These factors may include:

• the income and expenditure of the business and any related entity;

• the assets and liabilities of the business and any related entity;

• the financial position of the owners, directors, and guarantors;

• the purpose of providing financial accommodation;

• relevant business management experience;

• the type and locale of the business;

• cash flow forecasts;

• business plan that includes budgets to actuals;

• available security;

• the existing or past relationship with the bank.

• a report from a credit bureau.

Where there is more than one applicant, the details of each will be assessed.You should ensure that these details are accurate. We do not want a businessto over commit itself.

Appendix 3 5 March 20016

A cash flow forecast and business plan that includes reviews of budgets toactuals, prepared prior to lodging an application for financial accommodation,will greatly assist in assessing the application.

Where a decision to provide a banking service involving financialaccommodation to you cannot be made at the time of application, we will:

• upon request tell you if the decision will depend partly or wholly uponcredit scoring or other risk assessment processes;

• promptly notify you of any further or additional information requirementswhich arise from our evaluation of the application;

• expect you to comply to a reasonable request for further information orfurther access to your books of account, records, personnel, advisers orpremises in connection with an existing application.;

• expect you to promptly notify the bank if any adverse change occurs inthe circumstances of your business between the date of application andthe receipt by you of our decision to approve the application;

• notify you, as soon as practicable of the decision;

• if an application for credit is declined we will provide at your request theprincipal reasons for our decision.

The cost of financial accommodation usually includes an amount necessary tocover the risk to the bank of default. Historically, this risk is greater for lendingto small business than, say, for a home loan. This may vary from business tobusiness as businesses often have varying risk profiles.

6. We may ask for guarantees

Prior to a guarantor signing a guarantee, we will:

• with your consent, give a copy of the contract or summary showing theobligations to be guaranteed, to the prospective guarantor. If you do notconsent, we will not accept the guarantee without the prospectiveguarantor’s agreement in writing to proceed in the absence of suchconsent;

• if the prospective guarantor is an individual recommend that they obtainindependent professional advice; and

• provide a written warning about the possibility of the prospectiveguarantor becoming liable instead of, or as well as, you.

We may ask for a limited or unlimited guarantee depending the nature of yourbusiness and the banking services we provide you.

Subject to obtaining your consent, we will send to the guarantor:

• a copy of any formal demand that is sent to you, and

• on request by the guarantor, a copy of the latest relevant statements ofaccount provided to you, if any.

Appendix 3 5 March 20017

Guarantors may at any time settle their liability to us under a guarantee bypaying the outstanding liability including any future or contingent liability. Orthere may be a lesser amount to which the liability of the guarantor is limited bythe terms of the guarantee or the guarantor may make other arrangementssatisfactory to your bank for the release of the guarantee. Where a guarantorsettles their liability then the guarantor maybe entitled to stand in our place andto use all our remedies in any proceeding to recover from you or a co-debtor orsurety the amounts paid or any loss suffered. We may also cancel the facilitywhere the guarantors settle their liability.

7. We will confirm any changes to your contract

If you and we agree to a change to the terms and conditions on your contractfor financial accommodation, we will confirm any changes made, or provide acopy of the contract as renegotiated, as soon as practicable. An agreed changemight occur because, for example, there has been a change in your financialposition.

8. We want to build a strong working relationship with you

To help foster a strong and successful relationship we will advise you of whatinformation should be provided to us and how frequently. We will endeavour tomake our needs clear. Examples of what might be included are:

• periodic comparison of the forecasts in the business plan with actualresults

• management accounts

• analysis of creditors and debtors, showing how much has beenoutstanding for how long and to or by whom

• progress on important elements in the business plan like contractrenewals

• revised cash flows

• major capital expenditure proposals

• evidence of compliance with any covenants

9. We ask that you take responsibility for advising of problems

In building a strong working relationship you should inform us of problems whichmay effect your business.

You may be required, as a normal part of the terms under which financialaccommodation is provided, to advise us of any problems that arise with yourbusiness. Here are some examples of situations that could cause concern ifyou were not to explain what was happening:

• not supplying agreed monitoring information as requested

• failing to make repayments or to keep to conditions specified in theagreement

• exceeding an agreed limit

Appendix 3 5 March 20018

• losing a key customer or employee

• using a facility for a purpose not agreed

• suffering unexpected or persistent trading losses

• incurring substantial increase or decrease in turnover

• disposing of a substantial part of the business

10. We may seek from you additional information and/or an independentreview

If you are unable to resolve an underlying problem with your business and seekour help, we may ask for additional financial information and/or seek anindependent review of your business. This will help identify your business’needs and the key factors which could determine its survival. A viable survivalplan may be possible if you contact us early enough. Responsibility for seekingand implementing such a plan must rest with you, because it is your business.

If we ask for an independent review, we will:

• explain our requirements

• discuss the nature of the review

• discuss who should conduct the review, and

• obtain your agreement as to the costs you will incur for the review.

Such a review can be valuable to both of us by providing an outside view of thefuture prospects of the business. It will be conducted by someone withexperience in these situations. A review would normally cover all the optionsavailable, including, for example, cost cutting, better use of working capital, achange to management practices and refocussing the core business. It wouldnormally include an evaluation of the underlying business andrecommendations for the future.

Where possible we will discuss the information provided by an independentreview with you and, if requested, your advisers before taking any action. Ifagreement on the way forward is reached between us you will need to preparea new business plan to implement the new strategy. We may agree to newfacilities. If agreement cannot be reached on the way to fix an underlyingbusiness problem, and if we cannot continue to provide support, we will give anexplanation for that decision.

Keeping to your contractual agreement, acting in good faith, heeding what yourown and any independent advisers say, and being prepared to make changesearly enough to preserve the underlying business, will help maintain a positiverelationship with us.

11. We will take care with our advertising

We will ensure that our advertising and promotional literature drawing attentionto a banking service is not deceptive or misleading.

Appendix 3 5 March 20019

12. We will be timely and courteous in making arrangements to closeaccounts.

Upon your request and in a timely and courteous manner, we will end a bankingservice we provide to you. If we exercise a right we have to end a bankingservice we will give you reasonable notice in all the relevant circumstances andrepay to you any credit balance. You may be charged an amount that weestimate is a reasonable cost of ending a banking service, or the amountspecified in any relevant contract or agreement as the cost of ending theparticular banking service.

13. We will have processes for the resolution of disputes

We will have a readily accessible internal process for dispute handling to youwithout charge. A dispute arises where you do not accept our response to acomplaint you have raised.

We will also have available general information on:

• the procedures for handling a dispute;

• the time within which the dispute will normally be dealt with by us; and

• the fact that the dispute will be dealt with by one of our officers withappropriate powers to resolve the dispute.

Where your request for resolution of the dispute is made in writing or yourequest a response from us in writing, we shall promptly inform you of theoutcome in writing and, if you are not satisfied, of:

• the reasons for the outcome; and

• further action that you can take.

The Australian Banking Industry Ombudsman Scheme is available to smallbusiness customers of participating banks to assist in resolving disputes. Smallbusiness customers that can use the scheme need to have:

• 15 or less full time equivalent employees, and

• less than $1 million gross annual turnover, and

• independent and ownership and management (not being a subsidiary ora related entity of a public company or a statutory authority, a trust, or acharitable organisation)

For incorporated small business customers, the act or omission that gave rise tothe complaint must have occurred on or after the 6 July 1998. Please refer tothe Australian Banking Industry Ombudsman for full access particulars.

Excluded from this dispute process are issues relating to commercialjudgement.

If we are not a participating bank in the ABIO Scheme we shall have availablean external and impartial process (not being an arbitration), that has similarjurisdiction which applies to the scheme, for resolution of a dispute that comes

Appendix 3 5 March 200110

within that jurisdiction and is not resolved in a manner acceptable to you by ourinternal process.

14. We welcome your comments on this set of Principles

If you have any queries or comments about the contents of regarding this set ofPrinciples, we would be pleased to hear from you.

Appendix 4 5 March 20011

APPENDIX 4. UK CODE

TheBanking

Code

January 2001

Setting theStandards of BankingPractice

TheBanking

Code

TheBanking

Code

TheBanking

Code

January 2001

British Bankers’ Association

Pinners Hall

105-108 Old Broad Street

London EC2N 1EX

Phone: 020 7216 8800

Fax: 020 7216 8811

Website: www.bba.org.uk

The Building Societies Association

3 Savile Row

London W1X 1AF

Phone: 020 7437 0655

Fax: 020 7734 6416

Website: www.bsa.org.uk

Association for Payment Clearing Services

Mercury House

Triton Court

14 Finsbury Square

London EC2A 1BR

Phone: 020 7711 6200

Fax: 020 7256 5527

Website: www.apacs.org.uk

3INTRODUCTION

INTRODUCTION

2 CONTENTS

Page

Introduction

Key commitments

Information

Helping you to choose products

and services which meet your needs

Interest rates

Charges

Terms and conditions

Changing your account

Advertising and marketing

Account operations

Running your account

Cards and PINs

Lending

Foreign exchange services

Protection

Confidentiality

Protecting your accounts

Difficulties

Financial difficulties: how we can help

Branch closures

Complaints

Monitoring and compliance

Help section

Getting help

Money advisers

Glossary

3

4

5

5

6

7

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CONTENTS

1 Introduction1.1 This is a voluntary code which sets standards of good banking

practice for banks and building societies to follow when they

are dealing with personal customers in the United Kingdom.

As a voluntary code, it allows competition and market forces

to work to encourage higher standards for the benefit of

customers.

1.2 Within the code, ‘you’ means the customer and ‘we’ means the

bank or building society the customer deals with.

1.3 The code provides valuable protection for you. It will help you

understand how banks and building societies are expected to

deal with you day-to-day and in times of financial difficulty.

1.4 You can check which banks and building societies follow the

code by contacting the Banking Code Standards Board, the

independent organisation which monitors how well banks and

building societies are meeting the code. (Their address is on

page 20.)

1.5 The standards of the code are covered by the 10 key

commitments found at the beginning. These apply to the

following products and services provided to personal

customers.

■ Current accounts.

■ Basic accounts.

■ Deposit and savings accounts.

■ Cash mini ISAs and TESSA-only ISAs.

■ Card services and cash machines.

■ Loans (not including mortgages) and overdrafts.

■ Payment systems, including direct debits and

standing orders.

■ Foreign exchange transactions.

■ Electronic purses.

1.6 Not all banks and building societies offer all the products and

services listed.

1.7 Unless it says otherwise, all parts of this code apply to all the

products and services listed above, whether they are provided

by branches, over the phone, through interactive TV, on the

internet or by any other method.

1.8 Throughout this code, any words which are shown in bold

print are defined in the glossary at the end of the code.

1.9 This revised edition is effective from 1 January 2001 unless

otherwise shown.

5INFORMATION

3.1

3.2

3.3

INFORMATION

Helping you to choose productsand services which meet yourneeds

Before you become a customer, we will:

■ give you clear information explaining the key

features of the services and products you tell us

you are interested in;

■ give you information on a basic account if we

offer one and if we think you might be interested in

it;

■ give you information on a single product or service,

if you have already made up your mind; and

■ tell you what information we need from you to

prove your identity (by law, we have to check your

identity).

Once you have chosen an account or service, we will

tell you how it works. For example, for a current

account, this will include information on:

■ stopping a cheque or other types of payment;

■ direct debits (including the Direct Debit

Guarantee) and standing orders;

■ how the clearing cycle works, including when you

can withdraw money after paying cash or a cheque

into your account, and when you will start to earn

interest;

■ unpaid cheques;

■ out-of-date cheques; and

■ when we may pass your account details to credit

reference agencies and the checks we may make

with them.

When you open a joint account, we will give you extra

information on your rights and responsibilities.

4 KEY COMMITMENTS

KEY COMMITMENTS

2 Our key commitments to you

2.1 We promise that we will:

a act fairly and reasonably in all our dealings with

you;

b make sure that all the products and services we

offer meet this code, even if they have their own

terms and conditions;

c give you information about our products and

services in plain language, and offer help if there

is anything you do not understand;

d help you to understand the financial implications

of our products and services, how they work, and

help you to choose the one that meets your needs;

e have secure and reliable banking and payment

systems;

f make sure that the procedures our staff follow

reflect the commitments set out in this code;

g consider cases of financial difficulty

sympathetically and positively;

h if things go wrong, correct mistakes, tell you how

to make a complaint, and handle your complaints

quickly;

i make sure that all products and services meet

relevant laws and regulations including those

relating to discrimination; and

j tell you if we offer products and services in more

than one way (for example, on the internet, over

the phone, or in branches and so on) and tell you

how to find out more.

3

7INFORMATION

4.8

4.9

4.10

4.11

5.1

it. This summary will also include:

■ superseded accounts clearly marked;

■ the names of the newspapers we usually use to tell

you about changes in interest rates;

■ our helpline numbers; and

■ our website address.

Unless your account has less than £100 in it, we will

also tell you the different interest rates which have

applied to your account during the year (unless we

have already told you personally about these as they

have happened).

Superseded savings accounts

If you have a savings account, other than a fixed-rate

account, which has been ‘superseded’ because we no

longer open new accounts or we do not actively

promote the account, we will either:

■ keep the interest rate on the superseded account

at the same level as an account with similar

features from our current range; or

■ switch the superseded account to an account

with similar features from our current range.

Examples of similar features include notice periods,

types of withdrawals, numbers of free withdrawals, and

how money is paid into and drawn out of the account.

If there is no account with similar features we will

contact you, within thirty days of your account being

superseded, to:

■ tell you that the account is superseded;

■ tell you about our other accounts; and

■ help you to switch to one of these accounts without

any notice period and without any extra charges.

Charges

When you become a customer, we will give you details

of any charges for the day-to-day running of the

account you have chosen.

6 INFORMATION

4.1

4.2

4.3

4.4

4.5

4.6

Interest rates

When you become a customer we will give you

information on the interest rates which apply to your

accounts, and when we will deduct interest or pay it to

you. We will also tell you our website address, helpline

number and, where relevant, the newspapers we

usually use to tell you about changes in interest rates.

You can also find out about our interest rates by:

■ phoning our helpline;

■ looking on our website; or

■ asking our staff.

If you ask us, we will also give you a full explanation of

how we work out interest.

Changes in interest rates

When we change the interest rates on your accounts,

we will update the information on our telephone

helpline and our website within three working days. To

help you compare rates, the old rate will also be

available on our website and helpline.

For types of account which we mainly run through

branches, we will either:

■ tell you personally within thirty days of the change;

or

■ within three working days of the change, put

notices in our branches and in the newspapers we

usually use (to help you compare rates more easily,

our newspaper notices will show clearly the old and

new rates).

For types of account which we do not mainly run

through branches, such as postal, internet and

telephone accounts, we will tell you personally within

thirty days of the change.

Interest on savings accounts

To help you compare interest rates on all our savings

accounts more easily, at least once a year we will send

you a summary of these products and their current

interest rates unless your account has less than £100 in

4.7

4

5

9INFORMATION

5.11

6.1

6.2

6.3

6.4

6.5

6.6

7.1

The message will also tell you that your card issuer

may charge you for the transaction.

We will show cash-machine charges on your statement

of account.

8 INFORMATION

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

5.10

You can also find out about these charges by:

■ phoning our helpline;

■ looking on our website; or

■ asking our staff.

If we increase any of these charges, we will tell you

personally at least thirty days before the increase takes

effect.

We will tell you the charge for any other service or

product before we provide that service or product, and

at any time you ask.

We will tell you of any extra charges you may have to

pay if:

■ your account becomes overdrawn without our

agreement;

■ you go over your overdraft limit;

■ you are behind with your loan repayments; or

■ you change your mind about a fixed-term

product, decide to repay it early or (where this is

allowed) withdraw money from it.

Before we deduct interest or charges for standard

account services from your current or savings

account, we will give you at least fourteen days’ notice

of how much we will deduct.

Cash-machine charges

We will give you details of any charges we make for

using cash machines when we issue the card.

You will not be charged more than once for any

transaction at one of our cash machines.

When you use a cash card at one of our cash

machines, a message on the screen will tell you, before

you commit to make a withdrawal, the amount (if any)

you will be charged for the transaction and who is

making the charge.

When you use a card other than a cash card at one of

our cash machines, a message on the screen will tell

you, before you commit to make a withdrawal, the

amount (if any) we will charge you for the transaction.

Terms and conditions

All written terms and conditions will be fair and will set

out your rights and responsibilities clearly and in plain

language. We will only use legal or technical language

where necessary.

When you become a customer, we will tell you how we

will let you know about changes to terms and

conditions.

If the change is to your advantage, we may make the

change immediately and tell you about it within thirty

days.

If the change is neither to your advantage nor

disadvantage, we will always give you at least thirty

days’ notice before making the change.

If the change is to your disadvantage, we will tell you

about it personally at least thirty days before we make

the change. At any time up to sixty days from the date

of the notice you may, without notice, switch your

account or close it without having to pay any extra

charges or interest for doing this.

If we have made a major change or a lot of minor

changes in any one year, we will give you a copy of the

new terms and conditions or a summary of the changes.

Changing your account

Cooling off

If you are not happy about your choice of current or

savings account (except for a fixed-rate account) within

fourteen days of making your first payment into the

account, we will help you switch to another of our

accounts or we will give all your money back with any

interest it has earned. We will ignore any notice period

and any extra charges.

6

7

11ACCOUNT OPERATIONS

9.1

9.2

9.3

9.4

9.5

9.6

9.7

ACCOUNT OPERATIONS

Running your account

Statements

To help you manage your account and check entries on

it, we will give you regular account statements unless

this is not appropriate for the type of account you have

(such as an account where you have a passbook).

We will normally provide you with a statement every

month, every three months or, in any case, at least once

a year. You can ask us to provide you with account

statements more often than is normally available on

your type of account, but there may be a charge for this

service.

If you have a card which allows you to withdraw money

from your account, we will provide you with account

statements at least every three months if the card has

been used. From 31 December 2001, this will apply to

passbook accounts with a card.

We recommend that you check your statement or

passbook regularly. If there is an entry which seems to

be wrong, you should tell us as soon as possible so that

we can sort it out.

Cheques

We will keep original cheques paid from your account or

copies for at least six years unless we have already

returned these to you.

If, within a reasonable period after the entry has been

made on your statement, there is a dispute with us about

a cheque paid from your account, we will give you the

cheque or a copy as evidence. If there is an unreasonable

delay after you have told us about it, we will add the

amount of the cheque to your account until we have

sorted the matter out.

If we already return your paid cheques or copies to you,

we will continue to do this, and we will tell you our

charges for this service.

10 INFORMATION

7.2

7.3

8.1

8.2

8.3

8.4

8.5

Moving your account

If you decide to move your account to another bank or

building society, we will co-operate with them and give

them information about regular payments from your

account, so that the transfer is made as efficiently as

possible.

Closing your account

Unless there are exceptional circumstances, such as

suspected fraud, we will not close your account without

giving you at least thirty days’ notice.

Advertising and marketing

We will make sure that all advertising and promotional

material is clear, fair, reasonable and not misleading.

We will take care when sending marketing material to

you, particularly if it relates to loans or overdrafts, or if

you are under 18.

Unless you specifically give your consent or ask us to,

we will not pass your name and address to any

company, including other companies in our group, for

marketing purposes. We will not ask you to give your

permission in return for standard account services.

We may tell you about another company’s services or

products, and if you say you are interested, that

company may contact you directly.

When you become a customer, we will give you the

opportunity to say that you do not want to receive

marketing approaches from us. At least once every

three years, we will remind you that you can ask us not

to contact you for marketing purposes.

8

9

13ACCOUNT OPERATIONS

12.1

12.2

12.3

your permission to give confidential information about

your finances to the person giving the guarantee or

other security, or to their legal adviser. We will also:

■ encourage them to take independent legal advice to

make sure that they understand their commitment

and the possible consequences of their decision

(where appropriate, the documents we ask them to

sign will contain this recommendation as a clear

and obvious notice);

■ tell them that by giving the guarantee or other

security they may become liable instead of, or as

well as, you; and

■ tell them what their liability will be.

We will not take an unlimited guarantee.

Foreign exchange services

We will give you an explanation of the service, details

of the exchange rate and an explanation of the charges

which apply to foreign exchange transactions which

you are about to make. If this is not possible, we will

tell you how these will be worked out.

If you want to transfer money abroad, we will tell you

how to do this and will give you:

■ a description of the services and how to use them;

■ details of when the money you have sent abroad

should get there and the reasons for possible

delays;

■ the exchange rate applied when converting to the

foreign currency; and

■ details of any commission or charges which you

will have to pay and a warning that the person

receiving the money may also have to pay the

foreign bank’s charges.

If money is transferred to your bank account from

abroad, we will tell you the original amount we have

received and any charges. If the sender has agreed to

pay all the charges, we will not deduct charges when

we pay the money into your account.

12 ACCOUNT OPERATIONS

9.8

10.1

10.2

10.3

10.4

11.1

11.2

If we need to tell you that a cheque you have written or

another item has been returned unpaid, we will do this

either by letter or in another private and confidential

way.

Cards and PINs

We will only send you a card if you ask for one or to

replace a card you already have.

We will give you your PIN (personal identification

number) separately from your card. We will not reveal

your PIN to anyone else.

Choosing your own PIN

We will tell you about our systems to allow you to

choose your own PIN. This should make it easier for

you to remember. You should choose your PIN

carefully.

You can choose not to be issued with a PIN.

Lending

Financial assessment

Before we lend you any money, we will assess whether

we feel you will be able to repay it. This assessment

may include looking at the following.

■ Your income and financial commitments.

■ How you have handled your finances in the past.

■ Information we get from credit reference

agencies and, with your permission, others such

as other lenders, your employer and your landlord.

■ Information you give us, including information to

prove your identity and why you want to borrow

the money.

■ Credit assessment techniques, such as credit

scoring.

■ Any security provided.

Guarantees

If you want us to accept a guarantee or other security

from someone for your liabilities, we may ask you for

10

11

12

15PROTECTION

Data protection

We will explain to you that, under the Data Protection

Act, you have the right to see the personal records we

hold about you.

We will tell you if we record your telephone

conversations with us.

Bankers' references

If we are asked to give a banker’s reference about

you, we will need your written permission before we

give it.

Protecting your accounts

Taking care

The care of your cheques, passbook, cards, electronic

purse, PINs and other security information is

essential to help prevent fraud and protect your

accounts. Please make sure that you follow the advice

given below.

■ Do not keep your cheque book and cards together.

■ Do not allow anyone else to use your card, PIN or

other security information.

■ Always learn your PIN and other security

information and destroy the notification as soon

as you receive it.

■ Never write down or record your PIN or other

security information.

■ Always take reasonable steps to keep your card

safe and your PIN and other security

information secret at all times.

If you send a cheque through the post, it will help to

prevent fraud if you clearly write the name of the

person you are paying the cheque to and put extra

information about them on the cheque. For example:

■ if you are paying a cheque to a large organisation

such as the Inland Revenue, write on the cheque the

name of the account you want the cheque paid into

(Inland Revenue, account - J Jones);

13.5

13.6

13.7

14.1

14.2

14 PROTECTION

13.1

13.2

13.3

13.4

PROTECTION

Confidentiality

We will treat all your personal information as private and

confidential (even when you are no longer a customer).

We will not reveal your name and address or details

about your accounts to anyone, including other

companies in our group, other than in the following four

exceptional cases when we are allowed to do this by law.

■ If we have to give the information by law.

■ If there is a duty to the public to reveal the

information.

■ If it is in our interests to give the information.

But we will not use this as a reason for giving

information about you or your accounts (including

your name and address) to anyone else including

other companies in our group for marketing

purposes.

■ If you ask us to reveal the information, or if we have

your permission.

Credit reference agencies

We may give information to credit reference agencies

about the personal debts you owe us if:

■ you have fallen behind with your payments,

■ the amount owed is not in dispute; and

■ you have not made proposals we are satisfied with

for repaying your debt, following our formal

demand.

In these cases, we will give you at least 28 days’ notice

that we plan to give information about the debts you

owe us to credit reference agencies. At the same

time, we will explain to you the role of credit

reference agencies and the effect the information they

provide can have on your ability to get credit.

We will not give any other information about you to

credit reference agencies unless we have your

permission.

13

14

17PROTECTION

■ If your card is used before you receive it, you will

not have to pay anything.

Electronic purse

You should treat your electronic purse like cash in a

wallet. If you lose your electronic purse or it is

stolen, you will lose any money in it, in just the same

way as if you lost your wallet.

However, unless we can show that you have acted

fraudulently or without reasonable care, your liability

for the misuse of your electronic purse will be as

follows.

■ If your electronic purse is credited by

unauthorised withdrawals from your account before

you tell us it has been lost, stolen or misused, the

most you will lose is £50.

You will not lose anything if money is transferred from

your account to your electronic purse after you have

told us it has been lost or stolen or that someone else

knows your PIN.

If you act fraudulently you will be responsible for all

losses. If you act without reasonable care, and this

causes losses, you may be responsible for them. This

may apply if you do not follow section 14.1.

14.9

14.10

14.11

14.12

16 PROTECTION

■ if you are paying a cheque into a bank or building

society account, always write on the cheque the

name of the account holder (XYZ Bank, account - B

Brown).

It is essential that you tell us as soon as you can if you

suspect or discover that:

■ your cheque book, passbook, card or electronic

purse has been lost or stolen; or

■ someone else knows your PIN, password or other

security information.

What to do if you lose your cheque book,passbook, electronic purse or card

We will tell you the best way of telling us about the

loss. This will usually be by phone, using the numbers

we have given you, or by E-mail to the address we have

given you for this purpose.

Once you have told us that your cheque book,

passbook, card or electronic purse has been lost or

stolen, or that someone else knows your PIN or other

security information, we will take immediate steps to

try to prevent these from being used.

Cards

If you ask us about a card transaction, we will give you

more details of the transaction. In some cases, we will

need you to give us confirmation or evidence that you

have not authorised a transaction.

If we need to investigate the matter further we will

need you to co-operate with us and with the police if

we need to involve them.

Unless we can show that you have acted fraudulently or

without reasonable care, your liability for the misuse of

your card will be limited as follows.

■ If someone else uses your card before you tell us it

has been lost or stolen or that someone else knows

your PIN, the most you will have to pay is £50.

■ If someone else uses your card details without

your permission, and your card has not been lost

or stolen, you will not have to pay anything.

14.3

14.4

14.5

14.6

14.7

14.8

19DIFFICULTIES

17.3

17.4

17.5

17.6

Our procedures meet the standards set by the Financial

Services Authority (FSA). You can check these standards

with the FSA (their phone number is 020 7676 1000).

OmbudsmenAll banks which follow this code must belong to the

Banking Ombudsman Scheme or, where appropriate, to

one of the independent arbitration schemes listed below.

All building societies must belong to the Building

Societies Ombudsman Scheme. The Ombudsmen or

arbitrators are available to settle certain complaints you

make if they cannot be settled through our internal

complaints procedures. The Financial Ombudsman

Service is expected to be set up by the end of 2001. We

will join the Service if we are eligible to do so.

We will give you details about which Ombudsman or

arbitration scheme is available to you. You can also get

information by contacting the appropriate Ombudsman

or arbitration scheme at the addresses listed below.

The Office of the Banking Ombudsman

Phone: 0845 766 0902

The Office of the Building Societies Ombudsman

Phone: 020 7931 0044

Financial Ombudsman Service

Phone: 020 7964 1000

All three Ombudsmen are at:

South Quay Plaza, 183 Marsh Wall, London E14 9SR

The Finance and Leasing Association Arbitration

Scheme

Imperial House, 15-19 Kingsway, London WC2 6UN

Phone: 020 7836 6511

The Consumer Credit Trade Association Arbitration

Scheme

10 Hustlergate, Bradford West Yorkshire BD1 1RE

Phone: 01274 390380

We will display a notice on our website and in all our

branches showing which Ombudsman or arbitration

scheme we belong to.

18 DIFFICULTIES

Financial difficulties: how wecan help

We will consider cases of financial difficulty

sympathetically and positively. Our first step will be to

try to contact you to discuss the matter.

If you find yourself in financial difficulties, you should

let us know as soon as possible. We will do all we can

to help you to overcome your difficulties. With your

co-operation, we will develop a plan with you for

dealing with your financial difficulties and we will tell

you, in writing, what we have agreed.

The sooner we discuss your problems, the easier it will

be for both of us to find a solution. The more you tell

us about your full financial circumstances, the more we

may be able to help.

If you are in difficulties you can also get help and

advice from debt counselling organisations. We will tell

you where you can get free money advice. If you ask us

to, we will work with debt counselling organisations,

such as Citizens’ Advice Bureaux, money advice centres

or The Consumer Credit Counselling Service. Their

phone numbers are at the back of this code.

Branch closures

If we plan to close or move your branch, we will tell you

at least eight weeks beforehand. We will tell how we will

continue to provide banking services to you.

Complaints

Internal proceduresIf you want to make a complaint, we will tell you how to

do this and what to do if you are not happy about the

outcome. Our staff will help you with any questions you

have.

We will tell you about our internal procedures for

handling complaints fairly and quickly.

15.1

15.2

15.3

15.4

17.1

16.1

17.2

DIFFICULTIES

16

17

15

21HELP SECTION

Further information

You can get more information on a range of banking

matters from the British Bankers’ Association’s (BBA)

‘BankFacts’ leaflets; factsheets and information leaflets

from The Building Societies Association

(BSA) and the ‘Pay Points’ leaflets from The Association

for Payment Clearing Services (APACS). Also, the BBA,

BSA and APACS have customer helplines (the phone

numbers are at the front of this code).

Websites

Internet sites: www.bba.org.uk

www.bsa.org.uk

www.apacs.org.uk

www.bankingcode.org.uk

www.fsa.gov.uk

Help us to help you

It will help us to provide you with a high standard of

service if you make sure you let us know as soon as

possible when you change your:

■ name;

■ address;

■ phone number; or

■ E-mail address (if this is how we communicate with

you).

Money advisers

You may find the following phonenumbers useful

National Debtline 0808 808 4000

Consumer Credit Counselling Service 0800 138 1111

Citizens’ Advice Bureaux You can get the phone

number of you local bureau from the phone book, local

library or from www.nacab.org.uk.

Money Advice Scotland 0141 572 0237

Federation of Independent Advice Centres

020 7489 1800

20 DIFFICULTIES AND HELP SECTION

18.1

18.2

19.4

19.5

19.6

20.1

18.3

19.1

19.2

19.3

Monitoring and compliance

We have a ‘Code Compliance Officer’ and our internal

auditing procedures make sure we meet the code.

Banking Code Standards BoardThe code is monitored by the Banking Code Standards

Board whose directors include a majority of independent

members as well as representatives from the banks and

building societies. Their address is:

Banking Code Standards Board

33 St James’s Square, London SW1Y 4JS.

Phone: 020 7661 9694

You can contact the Banking Code Standards Board if you

have any complaint about the general running of the

code.

HELP SECTION

Getting help

Sponsoring associations

If you have any enquiries about the code, or if you

want a copy of it, you should contact the British

Bankers’ Association, The Building Societies Association

or the Association for Payment Clearing Services. The

addresses and phone numbers are shown at the front

of this booklet.

Copies of the code

All banks and building societies which follow the code

will make copies of it available to all their personal

customers and have notices in all their branches

explaining that copies of the code are available.

You can get guidance notes on the way this code is to

be followed from the Banking Code Standards Board at

the address shown in 18.2, or from the British Bankers’

Association or The Building Societies Association at the

addresses shown at the front of this code.

18

19

20

23GLOSSARY

Credit scoring

A system which banks and building societies use to help them

make decisions about whether to lend money. Credit scoring

measures the likelihood that a customer will repay a loan on

time. There is more information on this in a guide to credit

scoring, which the Office of Fair Trading issues.

The Direct Debit Guarantee

This protects the customer if a direct debit which they have

not authorised is taken from their account. For example, if too

much is taken, it is taken too early, it is taken after the

customer has cancelled, or if the customer has not been given

enough notice of a change to a direct debit which can vary. If

any money is wrongly taken from a customer’s account under

a direct debit then, as soon as the bank or building society is

told about it, they will refund the customer’s account.

Electronic purses

Any card, or function of a card, which contains real value in

the form of electronic money which someone has paid for

beforehand. Some cards can be reloaded with more money

and can be used for a range of purposes.

Fixed rate

An interest rate which is guaranteed not to change over a set

period of time.

Fixed term

This applies to products and services which have a set

lifetime. The customer may be charged if the bank or building

society agrees to alter the product or service before the end of

its life.

Guarantee

A promise given by a person called ‘the guarantor’ to pay

another person’s debts if that person does not pay them.

Other security information

A selection of personal facts and information (in an order

which only the customer knows) which is used for

identification when using accounts.

Out-of-date cheque

A cheque which has not been paid because the date written on

the cheque is too old, normally older than six months.

Password

A word or an access code which the customer has chosen to

22 GLOSSARY

Glossary These definitions explain the meaning of words and terms

used in the code. They are not precise legal or technical

definitions.

Banker’s reference

An opinion about a particular customer’s ability to enter into,

or repay, a financial commitment.

Basic account

A basic account has the following features:

■ income can be paid by employers directly into the

account;

■ benefits can be paid by the Government directly into the

account;

■ cheques and cash can be paid into the account;

■ bills can be paid by direct debit, by transferring money to

another account or by a payment to a linked account;

■ cash can be withdrawn at cash machines;

■ there is no overdraft; and

■ the last penny in the account can be withdrawn.

Card

A general term for any plastic card which may be used to pay

for goods and services or to withdraw cash. In this code, it

does not include electronic purses.

Cash card

A card, other than a charge card or credit card, which is

covered by the LINK network.

Cash machine

An automated teller machine (ATM) or free-standing machine

which a customer can use their card in to get cash,

information and other services.

Credit reference agencies

Organisations, licensed under the Consumer Credit Act 1974,

which hold information about people that is useful to lenders.

Banks and building societies may contact these agencies for

information to help them make various decisions, for

example, whether or not to open an account or provide loans

or credit. Banks and building societies may also give

information to the agencies.

24 GLOSSARY

allow them to use a phone or home-banking service. It is also

used for identification.

Personal customer

A person who has an account (including a joint account with

another person or an account held as an executor or trustee,

but not including the accounts of sole traders, partnerships,

companies, clubs and societies) or who receives other services

from a bank or building society.

PIN (personal identification number)

A confidential number which allows customers to withdraw

cash and use other services at a cash machine.

Security

A word used to describe valuable items such as title deeds to

houses, share certificates, life policies and so on, which

represent assets used as support for a loan. Under a secured

loan, the lender has the right to sell the security if the loan is

not repaid.

Standard account services

Opening, maintaining and running accounts for transmitting

money (for example, by cheque or debit card). These services

would normally be provided in basic or current accounts

without preferential features or advantages.

Superseded account

A savings account which is:

■ no longer opened by customers (this could be because the

bank or building society has withdrawn it or for some

other reason); or

■ not actively marketed or promoted to customers; and

■ not a fixed rate account.

Unpaid cheque

This is a cheque which, after being paid into the account of

the person it is written out to, is returned ‘unpaid’ (bounced)

by the bank or building society whose customer issued the

cheque. This leaves the person the cheque was written out to

without the money in their account.

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Appendix 5 5 March 20011

APPENDIX 5. ABA SUBMISSION ON FUTUREROLE OF CODEReview of Code of Banking Practice

Australian Bankers’ Association

Headline Issues Response for Reviewer – December 2000

Future Role of CBP

QUESTION: Are Codes the viable alternative to legislation as problems developas ASIC believes?

On the broad view, ABA believes the Code should retain its simplicity, reflectedby its current drafting, by providing for principles or benchmarks for goodbanking practice that, at the minimum, banks must meet. This allows for banksto adapt these principles or benchmarks to their particular business structuresand operations and is more likely to create an environment where banks canactually compete on the means of achieving (and exceeding) them.

That said, there will be some provisions where principles alone may not suffice,such as the provisions relating to guarantees and we recognise this. In ourdiscussions on 10 October 2000 the issues of training and service standardswere considered. ABA indicated its preference for non-prescriptive, “outcome “orientated principles with banks devising for themselves how those standardsmight be achieved. We continue to support that position.

A Code that is shaped this way will be easy to understand, both by customersand bank staff, because of its lack of complexity.

Taking the particular issue of the FSR, it is reasonable to assume that once theFSR has been finalised the major disclosure obligations will be contained inlegislation. This can be contrasted with 1993 when the Code was formulatedwhen there were no nationally uniform disclosure laws.

A possible problem with the FSR is the lack of detail that delineates a licensee'sdisclosure obligations. This “detailing” is a task that is achievable by one or acombination of regulations, ASIC policy statements, codes or simply leaving it tolicensees to devise their own detailed compliance arrangements.

One possible way for accommodating the FSR requirements under the Codewould be to explain in the Code how each of the existing Code provisionssatisfies the FSR PDS requirements. This would avoid the “detail” appearing inthe Code. This would be an extension of the “signposting” function. It would aidconsistency and retain provisions that are already familiar to banks and thecommunity.

ABA believes the Code is not the best way to tease out the detail in the FSRlegislation. The job of deciding what should be the law is the job of governmentor, more correctly, the parliament, not industry or even regulators. We agree

Appendix 5 5 March 20012

with the Reviewer’s concerns over the practicalities of the Code operating as defacto sub-ordinate regulation because from experience, the time it takes toamend a code is quite lengthy.

Also, with a voluntary code, there could be consumer confusion if non-subscribing entities adopted their own but different standards of detail or otherADIs adopted codes with different standards of detail.

The level of detail required to specify and “fill out” for example the disclosurerequirements for the PDS could be very specific leading the Code to become ahighly complex statement of prescripted rights and responsibilities. This wouldlead to the Code being an inflexible document that would not be “readerfriendly”. Recent examples of this prescriptive approach are found in the areasof life insurance and superannuation.

There is general agreement that the Code should “signpost” the reader to theexistence of disclosure laws rather than re-invent them. The Code couldprovide “gap” coverage between laws and community expectations where those“gaps” are identified and agreed. This would be achieved through a process ofengagement with the relevant stakeholders.

We strongly believe that the Code should operate as an instrument to improvestandards of conduct and provide consumers with a point of reference for this.In other words, we see the Code not as a tool for complying with the law, butrather something that customers can rely on as regards the behaviour of bankstoward them that is not necessarily dealt with by the law.

Monitoring and Administration

QUESTION: What model do banks consider suitable to meet the need fortransparency and accountability in compliance monitoring and administrationunder Code?

The Reviewer believes compliance should be demonstrable and “marking one’sown card” on its own lacks this quality. Another model should be considered.

Models include oversight by

• Regulator

• Industry

• Independent third parties e.g. auditors.

In the UK the Banking Code Standards Board monitors compliance with the UKBanking Code. Its board is comprised of a majority of independent directorsand representatives from banks and building societies.

ASIC currently has a (less than clear) statutory role under section 12FA of theASIC Act 1989 to monitor and promote market integrity and consumerprotection in relation to the Australian financial system and the provision offinancial services. This includes monitoring compliance with industry standardsand codes of practice. ASIC took over from the APSC in 1998 the role of

Appendix 5 5 March 20013

compliance monitoring of CBP. There is some member support for this agencyto fulfil this role with certain modifications. ASIC’s view would be relevant hereif it were to be both the market regulator and the compliance monitor and how itsaw these roles working together.

ASIC has submitted that improvement could be made to the current monitoringprocess and plans to review the process once the Code is finalised. This, ofcourse, may mean little if the final outcome of the Code review is that anothermonitoring model is implemented. However, there could be improvements tothe monitoring of compliance with the Code building on the current practice of“marking one’s own card” with ASIC directing targeted external monitoring(audits) where there might be evidence of non-compliance.

ABIO could serve this role but its directors are not supportive of this role forABIO.

Alternatively, the Council of the ABIO could undertake this function given itscomposition. There is some support for this approach but within themembership of ABA there is a strong view to the contrary about any ABIOinvolvement in this function. This is relevant to both organs of ABIO. Theconcern is that a quasi-judicial body, such as ABIO, would become involved inauditing the practices of banks whose decisions it is required to criticallyexamine in the course of dispute resolution.

Member banks would not be supportive of a new monitoring entity being set upfor this purpose.

There is no single view among our members on the best model for monitoringand administering the Code. Our members do agree that there needs to begreater transparency achieved through some external scrutiny of the self-assessment process but avoiding inefficiency and disproportionate cost. Thisexternal scrutiny would extend beyond just compliance assessment on thebasis of complaints or disputes and extend to compliance generally irrespectiveof whether a complaint has been made. We believe that the “how” should beable to be sorted out through a consultative process with relevant stakeholdersat a later time.

Principle of “Fairness”

QUESTION: How is “fairness” working under the NZ Code? How does ABIOmanage consideration of fairness under its terms of reference?

Our members aim to treat their customers fairly. At issue is, what is meant by“fairness” in the context of a Code that gives rise to contractual and other legalobligations that necessarily involve a desire for some precision. “Fairness” is asubjective concept that will vary from circumstance to circumstance.

An example of the subjectivity of “fairness” as a test under the Code would bewhere a bank closes a branch and the effect on one customer is substantial.Must the bank maintain the branch under a contractual obligation to thatcustomer to act fairly?

Appendix 5 5 March 20014

“Fairness” appears in the NZ banking Code but is heavily qualified. Reports arethat it has not raised any significant problems. The New Zealand Codeprovides, relevantly, Section 1.7, the governing principles and objectives of thecode:

1.7.2 (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, amongother things:

(i) Our conduct and yours, having regard to the fact that the relationshipbetween banks and their customers is contractual, with mutual rights andobligations:

(ii) The steps taken by us to ascertain your needs in order to enable you tomake the choice that best meets your needs; and

(iii) Compliance with this Code of Banking Practice

With these qualifications that clarify the contextual application of the principle of“fairness” the reported lack of significant problems in New Zealand is, perhaps,understandable.

We are awaiting information from the British Bankers Association on itsinclusion in the UK Banking Code.

The ABIO has a guideline for administering the notion of fairness in its decision-making role. It allows the Ombudsman to make a decision which:

• Takes into account the specific circumstances of a case which may justifynot applying the law rigidly;

• Allows for a balancing or weighting of the information available;

• Recognises the possibility of a higher standard of care being placed on abank by the requirements of good banking practice in certaincircumstances;

• May excuse one or both of the parties for minor breaches which mightotherwise lead to harsh results in the circumstances; and

• Takes account of any uncertainty in the facts, the law or good bankingpractice as they apply to a particular case.

We believe that despite the legal and practical complexities of applying the“fairness” principle, the above examples show how the notion of “fairness” canbe accommodated in the Code without detracting from the overall objective.

Scope of the Code

QUESTION: Why can’t the Small Business Principles be incorporated into theCode? Are there disclosure principles in the SBPs that could be incorporatedinto the Code?

Appendix 5 5 March 20015

Ultimately, ABIO will entertain disputes between banks and small businesscustomers as they will be defined under the FSR Act once it has become law.The ABIO scheme already has been extended to cover some incorporatedsmall business complaints.

ABA acknowledges there are community expectations that small businessesshould enjoy some of the protections that a range of service providers, includingbanks, already provide to individual consumers. The SBPs cover smallbusiness issues, particularly credit. The ABIO is able to take account of theSBPs in determining disputes concerning small businesses that the schemecurrently is able to entertain under its terms of reference.

If the SBPs were incorporated in to the Code they would be confined to smallbusinesses. They would presumably have to stand in the Code separately fromsome personal banking provisions. Incorporating them would be to adopt acompendium approach to the Code. If this were done there would be apreference for them to be incorporated in a separate part or chapter to reflectthe different nature of small business banking. As an alternative, the Codecould be simply a “signpost” to the SBPs. For business borrowers, there areparts of Principle 1 and all of Principles 5, 6, 8, 9 and 10 that deal withborrowing. There are some of them that do not really apply in a purelyindividual personal banking relationship, for example the ongoing provision offinancial statements and facility review provisions.

The Reviewer has acknowledged that, in the case of credit, the Code should notintroduce, through its terms, a regime comparable to the UCCC to cover smallbusiness.

If the Reviewer decides that no distinction should be drawn between personaland small business banking, presumably, once the range of customers coveredby the Code is defined, there would be no longer any need to differentiate thetypes of transaction they undertake i.e. personal/private, business, investmentand so on. They would all be covered because of the type of customer. It isperhaps neater to have the Code “signpost” the SBPs for small businesses and“signpost” the non-business borrower to the UCCC.

ABA suggests that if small business is to be covered under the Code, thereshould be a provision in the Code, similar to one in the UCCC that the point intime for determining the customer’s status as a small business should be thetime when the contract is made. We understand the FSR is to take a similarapproach. Otherwise, if unknown to the bank, the status of the customerchanged during the course of the contract the bank could find itself unwittinglyin breach of the Code.

If small business is to be defined under the Code, ABA would be keen to seethe definition as consistent as possible across relevant codes and legislation.The preferred position would be to adopt whatever the FSR defines to be a“retail client”. This is consistent with what the ABIO is to do. Over time, it canbe expected that other codes and so on will move to adopt this single definition.

Small business customers tend to require a greater degree of flexibility inproduct design and application. Whilst some of the protections afforded to non-

Appendix 5 5 March 20016

business customers could apply equally to small business customers, wemention that the SBPs were written in recognition of the need to preserve thisflexibility.

Banking Services

QUESTION: Are there any issues with an approach that “banking service”should mean a bank’s conduct in everything that the bank sells that should bemade known to the Reviewer?

The Reviewer favours the Code “signposting” that other entities in bank groups(but not the bank entity) are bound by other sectoral codes e.g. GeneralInsurance Code of Practice.

He believes the Code should not apply to the non-banking products themselvesbut possibly to the conduct of bank staff engaged in the selling activity of thenon-bank entity products. ABA agrees that the Code should not apply to non-bank entity products. It should apply only to banking products.

However, there is a view that it may prove very difficult to have the Code’sprovisions differentiate between the activity of selling a product and the productitself. For example, if the provisions of section 6.1 are retained how would theclause distinguish between general descriptive information about a strictly bankproduct and one where the bank is not the issuer of the product?

There is a close correlation here with the FSR regime where licensees will haveto ensure that their authorised representatives are competent to engage in suchactivities. In this sense there is there would be no “gap” to cover.

There is the possibility that extension of “banking products” under the Code assuggested could stray into legislated areas of market conduct in regard to non-banking products such as insurance or travellers cheques. For example, in aone-off sale of travellers cheques that are the product of a non-related entity,under FSR the bank would have to supply the PDS for the product plus the FSGdisclosing the commission arrangements.

This risk can be minimised at the time of re-drafting the Code by, for example“signposting” that legislation.

Non-Consumer Credit

QUESTION: What assistance can ABA provide to the Reviewer on this issue?Are the SBPs an appropriate source for a solution?

This issue links back to the scope of the Code and the proposal to include smallbusiness generally.

We refer to our comments above dealing with the Small Business Principles. Ifthere was to be small business coverage for credit products, we believe therewill be the need, for reasons already set out above, for some segmentation,perhaps two separate sections dealing with the issues.

Appendix 5 5 March 20017

Complaints and Disputes

QUESTION: Should the Code clause 20.1 be a more forward-lookingrequirement and what might it say?

The Reviewer says that Code clause 20.1 cannot stand in its present form. Itdoes not cover the situation where a bank simply fails to respond to a complaintand the submission of a complaint to an IDR process does not have to occuruntil the bank’s response is given. ABA would support an appropriate time limitbeing imposed on a response to a complaint after which the complaint becomesa “dispute”.

Also, we support the Code stating clearly the IDR requirement, referring to therelevant standard and including a requirement to make the existence and thedetail of IDR well known to consumers.

ABA endorses a more proactive approach on IDR processes. The FSR willoverlap with this provision. The FSR will not cover small business credit. TheCode could state affirmatively that a bank’s IDR process will apply to allcustomers covered by the Code irrespective of whether the FSR applies.

Some suggested issues for inclusion in an enhanced IDR provision in the Codeare:

• Broadening the scope of IDR starting with the complaint once it has beenfirst made;

• Describing the key parameters or features of the IDR (this could includewhere the ABIO fits into the scheme of things);

• Guidelines for better informing the complainant when the dispute isacknowledged;

• Setting response time service standards for each step of the process (witha facility to reasonably extend time and advising the complainant so thatresolving the complaint is given every chance of success whilst not cutshort by arbitrary time limits);

• Guidelines for communication channels for ongoing contact with thecomplainant through the process;

• Key responsibilities for those bank staff entrusted with the carriage of thecomplaint;

• Staff training (but see later comments); and.

• Achieving at least the Australian Standard for IDR processes.

Training of Staff

QUESTION: How much and what detail should be included in the Code ontraining and competence?

The Reviewer believes that the focus should be on “competence” rather thantraining. Training is a process with the objective being competent staff.

Appendix 5 5 March 20018

Competency would extend to lending/credit products.

FSR will require licensees to ensure that their representatives are adequatelytrained and are competent to provide financial services.

ABA supports the principle that training must be an “outcome” focusedobligation. We agree that staff should be trained so that they are competent toprovide the financial services that they are authorised by the bank to provide.The FSR will impose this obligation on banks as licensees. The obligation willextend not only to staff training but also to authorised representatives.

For these reasons, there would appear to be no point in the Code prescribingtraining details. It could “signpost” the FSR requirement. On another but relatedpoint, the more detailed and prescriptive the Code is the harder it will be toensure that staff are adequately trained. It increases the prospect of non-compliance due to its complexity.

Guarantees

QUESTION: What information should be disclosed by the bank to aprospective guarantor? Should this envisage things such as a prominentwritten warning in the guarantee, an obligation to obtain the borrower’s explicitconsent to disclosing relevant information to the prospective guarantor, advisingprospective guarantors to seek independent financial advice, ongoinginformation like statements of account, demand notices etc?

The Reviewer believes that Clause 17 of the Code is too narrow, particularly itslimitation on guarantors who may have an interest in the borrowing entity.

He believes the Code should contain a promise that adequate informationincluding the risk of giving the guarantee generally and pertaining to theparticular case should be given to the prospective guarantor. The Reviewersuggests that independent legal advice on its own is not enough. There mustbe provision of relevant information as well to ensure that advice is complete.

Banks believe the current Code provisions on guarantees are too complicated.Also, banks have concerns about taking on a “duty of care” as advisors to theprospective guarantor and to the conflict of interest banks have in advising onwhilst reaping the benefit of the guarantee.

ABA supports the idea of all guarantors receiving relevant and adequate pre-contractual information. A general obligation to provide “relevant information” istoo vague. Possibly, the point here is whether the bank actually knows of somecircumstance concerning the borrower that, if this circumstance were madeknown to the prospective guarantor, the guarantee would be refused or theterms on which it would be given would be changed. This approach wouldrequire further detailed consideration by members, particularly the legal issues,which we are prepared to do.

To avoid the conflict of interest difficulty and ensure a level of consistency, ashort “warning” document could be given to a prospective guarantor together

Appendix 5 5 March 20019

with a copy of the contract to be guaranteed. The “warning” could include extrainformation such as

• The guaranteed amount

• What else the liability extends to e.g. interest and expenses

• That the guarantee is not limited to the value of any security taken for theadvance; there could be a shortfall and the guarantor may have to pay,

• A strong recommendation to get legal and financial advice from peoplewho are not advising or associated with the borrower.

The minimum terms of the “warning” could be written in the Code.

There is case law to support a guarantor’s right to:

• Have disclosed by the bank to the guarantor without enquiry any “unusualmatters” and for the bank to answer specific questions put to it by theprospective guarantor, for example, whether the account to be guaranteedis operating within arrangements, (Goodwin v National Australia Bank(1968-69) 42 ALJR 110 and applied by Gibbs CJ in Amadio v CommercialBank of Australia (1982-1983) 151 CLR 447 at 455); and

• Obtain information as to the balance then owing, the rate of interest beingcharged and the amount, if any, realised by the bank in respect ofcollateral security on the principal debtor’s guaranteed account (Ross vBank of New South Wales (1928) 28 SR NSW 539).

These rights are available to the guarantor either before or after the guaranteeis signed and could be incorporated by reference in the Code.

Statements of account and notices of demand provided to the guarantor duringthe currency of the facility and during enforcement phase could be a way ofkeeping the guarantor informed of the status of the guaranteed debt. Theborrower’s consent would be required for this because of the bank’s duty ofconfidentiality to the borrower customer. This could be obtained either in or withthe original application form or in the loan contract itself.

Most banks recommend or, in some cases, insist that a prospective guarantorobtains independent legal advice before committing to the guarantee and wesupport retaining in the Code at least the recommendation for the prospectiveguarantor to take legal advice.

Supplementary Issues

Shadow ledgers: The Code provisions should go no further than to require abank to automatically provide customers (including borrowers, regardless of thestatus of their loans) with timely, accurate and regular statements of account,with the exceptions that currently appear in clause 14.1 of the Code. This isone of two alternative recommendations made by the ACCC (Brisbane Office)submission to this review.

Appendix 5 5 March 200110

Branch Closures: ABA supports the inclusion in the Code of a provisioncomparable with clause 16 of the UK Banking Code that recognises thatdifferent notice periods might apply depending on whether the branch to beclosed is in an urban or rural area.

Single Code for all ADIs: ABA believes that this is premature and that timeshould be allowed for the financial services reforms including FSR to settledown before a decision is taken. Also this proposal would involve extensivediscussions with other industry bodies that could delay the implementation ofCode reforms.

Prospective customers: Because of the diversity of products and the range ofoptions customers have to “customise” the product to their needs this would bedifficult to do. Banks could provide pre-printed terms and conditions that wouldapply to the product including the standard range of fees and chargesapplicable to the product. This, of course, would have to be qualified by statingthat these could change if the features of the product were changed owing tothe customer’s needs or for example another product is taken in conjunctionwith the first product etc. Our point here is that the general features and termsand conditions of a product could change from the general to the specific oncean “offer” for the product is made. In the U.K. Banking Code, clause 3.1, thereis stated a simple information process that starts with a general enquiry thatmight trigger the bank providing information on the key features of a product orservice proceeding to a more specific pre-contractual disclosure if the personhas already made up their mind about a product. This seems to us a sensibleand workable approach. We mention the FSR here, because it will require thePDS to be provided for ordinary banking (non-credit) products with the FSG andSOA (where relevant) for the more complex investment products. Perhaps theCode would “signpost” these requirements.

Advertising: There are no reported compliance difficulties that wouldnecessitate amending clause 18.2 or its deletion from the Code. ABA supportsits retention.

Further Requests for Comments

UK Banking Code

ABA supports plain language drafting style for ease of reading for bothcustomers and staff.

Clause 2.1 (b): ABA agrees that the terms and conditions of products andservices should reflect the provisions of the Code even though they may notuse the terminology of the Code.

Clause 2.1 (a): See our comments on “fairness” above.

Clause 6.1: Subject to comments above on “fairness” ABA supports theview that terms and conditions should be fair in the sense that they set outclearly obligations, legitimate terms particularly as regards the riskundertaken and they are otherwise just and equitable. This extends to the

Appendix 5 5 March 200111

manner in which they are presented. We assume that matters such aspricing decisions are not contemplated to be covered by such a provision.

Clause 15 Financial Difficulties: There is a similar provision in the SmallBusiness Principles that ABA members do support. In clause 15.2 of theUK Code we take the words “We will do all we can to help you overcomeyour difficulties” leaves the bank’s commercial judgment intact in the sensethat if the bank believes that, for example, a borrower’s business is notviable or the business will never be able to service the debt, there is nothingin reality the bank can do but explore ways of reducing the liability orliquidating it through enforcement. “Help” to the borrower may in fact be theappointment of an administrator particularly where there is the real prospectthat the borrower may be trading whilst insolvent. In other cases the bankmay undertake a “workout” to the extent that is feasible. We are concernedabout the need to avoid the bank becoming the adviser to the customer, asthere are clear conflicts of interest involved. We assume this is the intent ofthe provision i.e. that the bank will not arbitrarily or capriciously rule outexploring with the customer in difficulty possible alternative measures and inthis sense the provision would be supported.

Also, the U.K. provision, through imprecise drafting, could create unrealisticexpectations by customers about the extent that the bank shouldlegitimately go to assist them. This type of provision could lead to otherwiseavoidable and unnecessary disputes.

Clause 16 Branch Closures: The UK Code clause 16 is simple, to the pointand is therefore attractive. We refer to our comments above.

Clause 18 Monitoring and compliance: Please refer to our commentsabove under “Monitoring and Administration”

Direct Debit Guarantee

The Joint Submission from six key consumer groups dated September 2000suggests that this Code review should examine ways of simplifying thecancellation of direct debit facilities, in particular, where the customernotifies the bank that the authority is revoked.

The direct debit guarantee under the U.K. Code casts upon the processor ofthe debit (the bank) a reinstatement obligation if an amount has beenwrongly taken from the account and the bank is told about it. It is not quiteclear whether the reinstatement obligation arises on the mere allegation thata wrongful debit has occurred or once the fact that it was wrongful has beenestablished.

ABA would fully support a provision in the Code that the bank must rectifyits own error immediately that is made known to it.

We would support exploring alternative means of assisting customers withcancellations of direct debit authorities as recommended in the JointConsumer submission.

Appendix 6 5 March 20011

APPENDIX 6. CODE MONITORING ANDADMINISTRATION

Extracts from the ASIC Submission, the Joint ConsumerSubmission and the ACA Submission

Extract from the ASIC Submission130

Monitoring and Administration Code monitoring and administration is an issue of concern for ASIC. We believethat appropriate monitoring and administration is a key feature of an effectivecode, and we strongly encourage clarification and improvement of the existingprovisions in the Code.

Models for Administration

There are various functions that can be considered when looking at thequestion of administration and monitoring. These include:

• educating Code members about the Code;

• promoting the Code to consumers, their advisers, and the general public;

• monitoring compliance with the Code provisions, and administeringappropriate sanctions for non-compliance;

• arranging for regular reviews of the Code;

• implementing changes to the Code arising from formal reviews or otherwise;

• monitoring relevant external developments, including legislative changes;

• encouraging expansion of Code membership;

• maintaining a record of Code members;

• developing and promulgating guidelines to assist in the implementation andadministration of the Code.

These functions can be located in a separate Code administration body, thathas some measure of independence from the relevant industry association.Alternatively, an administration body could be established within a relevant ADRscheme.

However, it may also be possible and appropriate to divide the variousadministration functions between different bodies and organisations, includingperhaps the industry association, the ADR scheme, a separate administration

130 See ASIC Submission, pp 32-37

Appendix 6 5 March 20012

body, the regulator, and/or others. Thus, although it may be advantageous toallocate all of the various administration functions to just one body, it is notessential.

Although we do not have a firm view as to how the Code should beadministered, we think that the Code needs to detail how, and by whom, thevarious administration functions will be carried out. The existing provisions willneed to be amended if they are to achieve this goal.

We will have responsibility for approving codes (although it will not bemandatory for financial sector businesses to be party to an approved code). Asdiscussed earlier, one issue that we will consider in the approval process iswhether the code provides for effective implementation and administration.

Improving the Compliance Monitoring

If an industry code is not adequately monitored, then consumer and governmentconfidence in the code is likely to diminish. Adequate arrangements formonitoring compliance will be a key criteria if we are asked to approve anindustry code.

The Banking Code is currently monitored by ASIC. Banks self-assess theircompliance with the Code against a pre-determined questionnaire, and wereport on the results of that process annually.

We have some concerns that the current monitoring process may not becompletely effective in identifying areas of non-compliance. We also questionthe utility of some of the information collected now that the initial codeimplementation phrase has passed and systems are in place. In addition, werecognise the compliance burden on banks involved with the current monitoringprocedures and would like to minimise these where it will not impact upon levelsof confidence in the code.

We therefore plan to review the monitoring procedures that we carry out toassess whether the self-assessment process could be made more effective.However, we have held off reviewing monitoring procedures until after thereview of this Code to avoid institutions having to deal with two lots of changesin short succession.

We do not have a firm view on whether the monitoring should continue to beconducted by ASIC, or in fact should be conducted or commissioned by a codeadministration body or another organisation.

One possibility is to locate the monitoring function within an external disputeresolution scheme. However, the monitoring function is quite different in natureto the existing functions of the schemes.

Regardless of who conducts the monitoring, we consider that it is important thatthe Code provides sufficient detail of the monitoring process, including:

• the name of the body that will conduct the monitoring; and

• appropriate obligations on Code members to provide relevant information tothe monitoring body.

Appendix 6 5 March 20013

It is also very important for any self-assessment process to be complementedby some form of external monitoring. Although self-assessment generallyprovides a good guide to compliance in areas where compliance is generallyhigh, some form of external monitoring can be an appropriate means ofvalidating the results of self-assessment and increasing the credibility of thecodes.

External monitoring can also be used to identify any areas of non-compliancethat are not picked up by the internal compliance activities of the institutions.For example, in our monitoring, we have noted a discrepancy between thenumber of complaints received by institutions and the reported number ofinstances of non-compliance. (Of course, we recognise that not all complaintswill be substantiated.)

Also, some limited external monitoring exercises for the EFT Code showed thatthere were some significant discrepancies between the institutions’ reportedlevel of compliance and the results from the external monitoring exercise.Although these results are not directly relevant to the level of compliance withthe Banking Code, they do demonstrate that there can be discrepanciesbetween a self-assessment exercise and external monitoring results.

Some external monitoring would be possible without the consent or involvementof institutions. For example, compliance with the various information disclosureprovisions could be tested using a ‘shadow shopping’ exercise.

However, for external monitoring to be comprehensive, industry cooperation isnecessary.

In our view it would not be necessary or appropriate for external monitoring toinvolve an annual full-scale review of compliance with every provision of theCode and every party to the Code. This would impose heavy costs on banks.Those costs would be unwarranted, given the generally high level of compliancewith the Code that currently exists.

Instead, we suggest that external monitoring could occur less frequently thanannually, and could involve a more limited and targeted exercise, that identifiesand concentrates on higher risks areas (eg areas where higher levels ofcomplaint have been received, or issues that are of greater significance forconsumers).

A possible way to reword the Monitoring section of the Code is proposed below.Note that, in this suggested clause, the phrase ‘Monitoring body’ would need tobe replaced with the name of the body or organisation that is to undertake themonitoring function.

Appendix 6 5 March 20014

[Monitoring body] is responsible for monitoring compliance with the Code.

Each bank will provide [Monitoring body] with an annual report on:

• their compliance with the Code; and

• information concerning the number of disputes referred to in clauses [x - y]of the Code, the categories in which those disputes fall and the manner inwhich each dispute is resolved.

The content of the annual report will be developed by [Monitoring body] inconsultation with banks [and ASIC].

At least once every three years, [Monitoring body] will conduct or commission atargeted external review of compliance with the Code. The scope of the reviewwill be agreed upon by [Monitoring body] and the Australian Bankers’Association, [in consultation with ASIC].

Each bank will cooperate with the external review, and provide reasonableaccess to documents, information, bank staff, systems and procedures.

[Monitoring body] will provide a consolidated report annually to the Treasurer ofthe Commonwealth [and ASIC] on the operation of the Code and the results ofthe internal and, if any, external monitoring.

On request, [Monitoring body] will also provide ASIC with information aboutcompliance by individual banks. [Note that this clause will not be needed if ASICis the monitoring body.]

Sanctions and Enforcement

In part, enforcement of the Code provisions occurs through the internal andexternal dispute resolution processes.

However, this is not a completely satisfactory arrangement. The internal andexternal dispute resolution processes generally work best in circumstanceswhere a dispute involves a direct financial loss, and is a one-off occurrence.They are less effective in cases of Code breaches that do not involve a directfinancial loss, and where there is evidence of systemic breaches.

An effective code also needs an encompassing process for dealing withallegations of Code contraventions, and for imposing appropriate sanctions.

Other industry codes, such as the General Insurance Code of Practice,establish a regime for investigating allegations of Code breaches, and forimposing sanctions in the event that those allegations are proved. This regimecomplements the internal and external dispute resolution procedures forresolving individual disputes.

Appendix 6 5 March 20015

This review should consider establishing an independent regime forinvestigating alleged contraventions and imposing appropriate sanctions. TheCode should detail:

• who can make complaints about non-compliance (this should includeconsumers, consumer advocates, regulators and other governmentagencies, and dispute resolution schemes);

• the process for making complaints;

• the decision maker(s);

• the decision making process; and

• the available sanctions (a range of effective sanctions should be available, sothat a flexible approach can be taken).

It goes without saying that the process for investigating instances of non-compliance should be impartial, fair, transparent, and accountable.

Publicity

The Code should also make provision for publicising the Code. Althoughgeneral awareness of the Banking Code amongst consumer advisers is higherthan awareness of other payments systems codes, there is still room forimprovement. For example, a survey of 65 financial services caseworkersshowed that only 21% had a reasonable knowledge of the Banking Code and itsprovisions.

The lack of awareness of the Code is probably not unexpected, given the factthat banks are not required to publicise the existence of the Code.

It is obviously important that bank staff are aware of the Banking Code’sexistence, and can apply the relevant principles and practices in their day-to-day work. We discuss the issue of staff training later in our submission.

However, for a code to be of real value, it is also important that consumeradvocates and intermediaries assisting consumers have some understanding ofthe Code, as it can provide a standard against which the conduct of banks canbe measured.

It is not as critical that consumers know of the details of the Banking Code. Ingeneral, consumers are not interested in knowing the source of each of thevarious obligations that are imposed upon banks. However, where codemembership is/ are used as a marketing tool, consumer awareness of theBanking Code will obviously be beneficial to code members. Awareness ofrelevant codes can also play a role in increasing consumer confidence thatcode members meet standards that are above and beyond those required bylaw.

This review should therefore consider including provisions in the Code toensure that its existence and relevance is publicised by individual banks, theAustralian Bankers Association (ABA), and, if established, any administrationbody.

Appendix 6 5 March 20016

It may also assist consumers and their advisers if a summary of the Code weredeveloped, perhaps by the ABA or an administration body. Such a documentcould be made available in branches, and on web sites.

Process for review and amendment

The Code should also provide more detail on the process for its review andamendment. It could, for example, specify matters such as:

• who will conduct the review (or how that person(s) will be chosen);

• what procedures should be adopted;

• who the ‘interested persons’ are whose views should be considered;

• how transparency will be achieved;

• the manner in which amendments to the Code will be agreed upon andimplemented.

_______________________________

Extract from Joint Consumer Submission131

B.2 Code Administration and related matters

Code administration generally

In our view, an industry Code like the CBP can only be an effective regulatoryinstrument if provision is made for its ongoing administration. We note that thisview is consistent with government policy that industry codes should besupported by appropriate administrative structures. We submit that the CBP iscurrently radically defective in terms of its provision for Code administration; andthat this deficiency needs to be addressed if the revised Code is to be credible.

Code administration covers such matters as:

• promoting the Code within the industry and educating industry membersas to its requirements;

• promoting the Code to consumers and their advisers;

• monitoring compliance with the Code;

• providing a mechanism for complaints where it is alleged that the Codehas been breached;

• enforcing compliance with the Code;

• monitoring the Code in the light of changes in the marketplace, theregulatory environment etc; and

• arranging for regular reviews of the Code.

131 See Joint Consumer Submission, pp 5-10

Appendix 6 5 March 20017

The organisations making this submission do not have a final view as to howthese functions should be performed, including by which body or bodies. Webelieve, however, that the Code itself needs to specify how and by whom thevarious Code administration functions referred to above will be performed.

We also believe that administration of the Code should probably be undertakenby a single body (in conjunction with ASIC). The envisaged body could be anew stand-alone committee or other entity comprised of representatives of thevarious stakeholder groups. Among other benefits, a body of this kind couldprovide a useful structure for ongoing dialogue between industry, consumer andgovernment stakeholders about banking industry issues. It is important thatthese issues be discussed in an ongoing forum and not only in the context ofoccasional Reviews, such as the current one.

Another possible option would be for Code administration to be undertaken bythe Australian Banking Industry Ombudsman. Locating the Code administrationrole within the ABIO (along the lines of arrangements operating within thegeneral insurance industry) would be a way of limiting the duplication and costassociated with multiple industry bodies. In addition, the ABIO would be able todraw on its extensive experience as an organisation receiving enquires andcomplaints from consumers to identify compliance, training, consumereducation etc issues. A compliance monitoring role with respect to the CBPwould also go hand-in-hand with the obligation to monitor systemic conduct andserious misconduct which the ABIO will have, by virtue of PS 139, once theFinancial Services Reform Bill reforms are in place.

As indicated, however, we have no final view on which body or bodies shouldundertake the Code administration functions — only that those functions mustbe undertaken if the CBP is to represent more than tokenistic self-regulation.This is an area requiring further discussion with all interested parties.

Some comments on specific aspects of the Code administration process follow.

Monitoring compliance

The current monitoring regime under the CBP requires merely that Banks self-assess their compliance on an annual basis against a series of questions put tothem by ASIC. ASIC then publishes the results of that self-assessmentprocess.

In our view, self-assessment by industry members alone is manifestlyinadequate as a methodology for monitoring compliance with the CBP. Thelevels of documentary non-compliance and recurrent non-compliance by banksreported to ASIC for the April 1998 to March 1999 period are extraordinarily lowand hardly consistent with consumer caseworker experience. Nor are the levelsof disputes recorded consistent with either caseworker experience or thenumber of complaints handled by the ABIO over the period. Before anyreliance can be placed on such figures they should be validated, orsupplemented, by other forms of compliance monitoring which are undertaken

Appendix 6 5 March 20018

by an independent, external body. We note that this would also appear to bethe view of the regulator.

We would favour an approach to external monitoring which targets identifiedproblem areas for a defined period (eg one major area per twelve monthperiod). One technique that could be employed would be "shadow shopping".Depending on the ultimate arrangement for administration of the Code, externalmonitoring could be undertaken / commissioned by either the Codeadministration body or ASIC. The CBP would need to require the cooperationof Subscribers with the external monitoring process. It should also specify thatthe results of external monitoring exercises are to be made publicly available inthe form of reports by the Code administration body or ASIC (as the case maybe).

We would further suggest that, unless compliance reports of the kind proposedidentify the comparative 'performances' of specific institutions, their value asguides to consumers — and therefore as prompts to improved industrypractices — will be distinctly limited.

A Complaints Process

Compliance with the CBP should also be monitored through a process whichallows individual consumers and other stakeholders (including consumerrepresentatives, regulators, the ABIO, other industry members etc) to makecomplaints about breaches of the CBP. Currently, there is no body withresponsibility for receiving, and investigating, such complaints. Admittedly, inthe case of some breaches, the current ABIO processes will provide anappropriate reporting/ investigation mechanism. However, given its currentTerms of Reference, the ABIO could only play a limited role in this areabecause, while most breaches of the CBP are unlikely to result in directfinancial loss by an individual, the ABIO only handles matters involving directloss to individuals.

The Code should therefore set out a process whereby Code contraventions canbe dealt with by the proposed administration body. (As discussed above, theABIO might itself become that body). This process should specify howcomplaints are to be made and investigated. Provision should also be made fora range of sanctions that may be applied in the event that contravention isestablished.

Enforcing Compliance

As the previous statement indicates, we are strongly of the view that the CBPmust include provision for the imposition of sanctions if it is to be a credibleinstrument of self-regulation. We note that government policy is also generallysupportive of the inclusion of sanctions in industry Codes; and that provision ismade for such in other comparable Codes.

For a complaints process to be effective, it must be used by consumers.However, unless they can establish a loss which opens the way for

Appendix 6 5 March 20019

compensation, consumers will generally not have any, or a sufficient, incentiveto report breaches of the Code to the Code administration body. One way ofaddressing this issue - and in doing so of providing industry with a cheapcompliance monitoring mechanism - would be to include in the Code, amongother possible sanctions, a penalty provision under which the Subscriber wouldagree to pay a small sum to any Customer whose complaint that a Codeprovision had been breached was established. This sum would be paidirrespective of whether the Customer suffered any loss or damage inconsequence of the breach. The AAMI Customer Charter provides a possiblemodel for a penalty provision of the kind proposed.

Publicising the Code

The Financial Services Caseworker Consultation indicated that, while most ofthe caseworkers surveyed were aware of the CBP, only a relatively smallminority could lay claim to “a reasonable knowledge” of its provisions. Duringthe Consultation, many caseworkers also complained about the difficulty theyhad had in getting access to a copy of the Code. The Consultation alsorevealed that many caseworkers regularly encountered situations where Bank“front line” staff were seemingly unaware of the Code (among other regulatoryinstruments). These findings are consistent with our more general impressionthat there is a distinct lack of awareness of the CBP and its provisions exceptamong specialist Bank staff, their legal advisers and a few consumeradvocates.

We would suggest that this lack of awareness reflects, in part, the fact that thereis no provision that the Code be publicised, nor any body charged withresponsibility for publicity. As the inter-governmental Guide to Fair TradingCodes of Conduct states, for an industry Code to be of real value, consumersand suppliers (including the staff of suppliers) must be aware of its existenceand be informed of its value, requirements and procedures. More specifically,the Guide suggests that a Code should set out:

• how the industry is to publicise its Code, not just initially but continually;

• the kinds of information that members of the industry and consumersshould be given; and

• how and when consumers should be made aware of their rights and all thesteps in the complaints process.

We submit that the CBP should be amended to reflect these proposals inrelation to Code publicity.

Review and amendment

Currently, the CBP makes only very limited provision in respect of theprocesses for its review and amendment. We submit that this provision shouldbe supplemented by more detailed requirements setting out:

Appendix 6 5 March 200110

• how the Code is to be reviewed, including how the person or bodyresponsible for undertaking the review process is to be chosen and, ingeneral terms, the procedures to be adopted in undertaking a review. Inthis context, the CBP should specify arrangements for ensuring thatreviews are independent, open and appropriately resourced;

• who should be consulted in connection with the review. This could beeffected by including, after the reference to “interested parties” in thecurrent Preamble statement, a non-exhaustive list of stakeholders(including, of course, bank customers and consumer organisations whichassist or advocate on behalf of bank customers);

• how amendments to the Code will be agreed upon and implemented.

In our view, it is critical that consumer representatives and other stakeholdersbe consulted throughout the process of reviewing and amending the CBP ?including at the stage where proposed changes are to be finalised andformulated as amendments to the Code text. See further under The processfrom here below.

___________________________

Extract from ACA Submission132

• Sanctions – The MCAA guidelines note the importance of sanctions ifindustry codes are to retain credibility. The Self-Regulation Taskforce DraftReport also highlights the importance of sanctions:

The Taskforce considers that there should be a range of sanctions thatcan be used by industry in order to achieve compliance depending onthe nature of the problem and the consequence of non-compliance.

15. The importance of sanctions in industry codes has also beenemphasised in Taskforce submissions. ASIC’s submission highlighted theserious consequences – both for consumers and systemic integrity – ofinadequate enforcement of financial services industry self-regulation.

16.

17. The lack of sanctions in the Banking Code present a fundamentalweakness, and raise doubts about the credibility of the Code for bothindustry participants and consumers. For example, there are no sanctionsfor breaches such as refusing to tell a customer about dispute mechanisms,not providing information on request, or not following customers’ instructionsin relation to account cancellation. A range of sanctions, underpinned byregulatory mechanisms, are essential for Code credibility.

• Administration of the code – the failure of the industry to appoint andresource an administrative body for the Code suggests a lack of

132 See ACA Submission, pp 5-6

Appendix 6 5 March 200111

commitment to its (hardly onerous) principles of conduct and disclosure.The policy framework set out by MCCA identified three factors as illustrativeof industry commitment to codes of conduct: financial commitment (eg inadministration); consultation (in drafting and review); and monitoring andreviewing performance. The Banking Code has performed poorly in each ofthese respects. Codes of Practice in other sectors have administrativebodies, in collaboration with regulators and consumer advocates.

18.

19. ASIC has been responsible for monitoring finance Codes of Practicesince July 1998. Before that, the Australian Payments System Councilmonitored compliance with the Codes. ACA supports ASIC's involvement inthe monitoring of the Banking Code, and recommends collaboration withASIC in Code revision.

In determining a more effective administrative process for the Banking Code,the ACA recommends that the industry:

• Adopt a genuine commitment to consultation with consumers;

• Establish an appropriately resourced administrative body to overseecompliance, publicity and review of the Code;

• Ensure regular reporting and accountable performance indicators oncompliance with the Code, developed in collaboration with ASIC;

• Provide clear guidelines for further review and updating of the Code.

• Consumer Awareness: The lack of an administrative body andfailure of the industry to publicise the Code has contributed to a lackof consumer awareness of its existence, provisions and protections.Access and awareness are critical issues for all industry codes, but inthis instance even well informed consumers would find it difficult toknow about the Code’s provisions and coverage. Staff training onCode provisions (outlined in clause 2.7) also require updating andextension.

• Review mechanism: the review provisions outlined in the Code requireredrafting, to enshrine principles of independent review, adequate consumerparticipation, opportunities for consultation and comment, and input byrelevant stakeholder organisations (such as ASIC, ABIO and consumergroups).