Banks revise their code of practice to rebuild trust in the sector

| December 21, 2017

The Australian Bankers Association has unveiled a revamped voluntary code of practise to head off criticism of the scandal plagued industry and pre-empt the investigations of the recently announced Royal Commission into the financial sector.

Consumer protections will be increased, with the prohibition of unsolicited offers to increase credit limits, while the ABA will also encourage its members to make unpopular transaction fees more transparent and for small business contracts to be written in plain English.

The ABA hopes the new code will ensure “a more prominent commitment to ethical behaviour” and its chief executive Anna Bligh underlines that “banks are committed to change and the new code is stronger, broader and written in simple to understand language…to better meet community expectations and service the needs of customers.”

The refreshed code of practice has been lodged with the Australian Securities and Investments Commission, although the corporate regulator may offer amendments before approving it in 2018. The ABA’s 24 members, which include regional, community and foreign banks as well as the ‘Big Four’, will be expected to sign and adhere to the provisions once they are approved by ASIC.

The most significant change is that provisions in the code will be legally binding where they form part of contracts with customers. The previous code was voluntary, although it could be enforced if particular members of the ABA signed up to it. The implementation of the new rules will be monitored by the independent Banking Code of Compliance Committee.

Ms Bligh said the acceptance of 96 out of 99 recommendations made through a consultation process launched in April 2016 under by banking veteran Phil Khoury showed the banks were serious about change.

Although she claimed the new code offered the most sweeping reforms in two decades, it may not be enough to stave off further reforms recommended by the Royal Commission announced when the banks and Prime Minister Malcolm Turnbull caved to mounting political and social pressure on November 30.

Business reforms

While changes to consumer credit, including the ability to quickly cancel credit cards online, a reduction in interest liabilities and more transparent disclosure, will tackle criticism of the banks’ role in boosting household debt, smaller firms will also welcome the reforms.

Small business banks will be forced to provide a minimum of 30 days notice to change conditions of loans and three months before a loan facility ends, for example, while loan guarantors who have not received legal advice will be required to wait three days before signing to help avoid potential financial abuse.

Ombudsman reaction

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, has welcomed the positive initiatives for small business in the new code but notes that unresolved issues regarding power imbalance and dispute resolution remain.

Ms Carnell, who was consulted on a draft version of the code, said she was concerned the code would not be properly enforced by a proposed Banking Code Compliance Committee.

“The committee will not be fully independent and banks won’t be obliged to accept its recommendations,” she said. “The code stipulates only that banks will comply with ‘reasonable’ requests of the committee.

“This means effectively that banks will only act on recommendations if they feel like it. If they don’t think the committee is reasonable they have an escape clause. “It’s like the umpire is appointed by the home team and they don’t have to accept the umpire’s decision.”

Ms Carnell said she welcomed the code’s simplified language and the inclusion of a specific section for small business but she expressed concern that banks could still act unilaterally to change the conditions of a loan if there were “materially adverse changes” relating to government policy, commodity markets or weather conditions.

“Changes to market conditions are often outside the control of the borrower and should not be used to penalise a small business if they continue to make all their repayments,” Ms Carnell said.

“The code says a bank won’t default a loan because of a materially adverse change, but they retain the power to change a loan’s terms and conditions. We understood the big four banks had individually agreed to remove those clauses, so its inclusion in the code is perplexing.”

Ms Carnell also criticised the code’s definition of a small business loan as being a total debt facility up to $3 million. She called for the limit to be raised to $5 million, consistent with the Khoury Review recommendation and the threshold at which matters can be heard by the new Australian Financial Complaints Authority.