Australian Bankers‘ Problematic code 1 THE AUSTRALIAN BANKERS’ PROBLEMATIC CODE Part 3b: Report to Council of Small Business Organisations of Australia Dated 5 December 2010 Australian Bankers‘ Problematic code 2 EXECUTIVE SUMMARY The Fairness of Bank / Customer Relationships in Australia This report examines, and makes recommendations in respect of, the extent to which customers of Australian banks are assured of fair treatment and full disclosure of facts that are relevant to their transactions. Before 1981, the activities of Australian Banks, including the manner in which they dealt with their customers, were subject to detailed regulations imposed by the Federal Government. Following the 1981 Campbell Committee report, the extent of this regulation was significantly reduced. After the stock market crash in 1987, it was feared that deregulation had gone too far. An alternative approach was sought to ensure that bank customers received fair treatment, and the Government assigned responsibility for suitable recommendations to a committee chaired by Stephen Martin. In its 1991 report the Martin Committee concluded that the banks should be required to establish a formal system of self regulation based on a government approved Code of Banking Practice. It further cited the high cost of resolving disputes, in the courts, between banks and their customers; and stressed the importance of an effective, low cost, complaints resolution procedure. Australian Bankers‘ Problematic code 3 The first such Code of Practice was established in 1993 but not adopted until 1996. It was substantially revised in 2003, and further modified in 2004. Despite a review in 2005 and further reviews in 2008, the 2004 code is essentially still in force. A detailed history is included in the main body of this report. SIGNIFICANT ISSUES 1. The 1993 code was written by the Australian Bankers‘ Association (‗ABA‘) and failed to include recommendations from the Martin Committee that the banks did not like. The 2003 and 2004 (current) codes are, similarly, ABA documents which do not take into account government principles and suggestions. 2. The key body that implements the codes application and rules is the Code Compliance Monitoring Committee (‗the Committee‘). However, an undisclosed body exists called the Code Compliance Monitoring Committee Association (‗the Association‘) which has drafted its own constitution that has the effect of limiting the activities of the Committee to the disadvantage of customers. 3. Despite appearances to the contrary, this report suggests that the code is not enforceable at law and does not constitute the elements of the contracts (written agreements) between the banks and their customers. 4. The constitution defines narrowly the circumstances in which the Committee reviews the banks compliance with the code. As a result very few unsatisfied complaints come to the attention of the Committee or are ever investigated. 5. Several reviews by independent or semi-independent persons have recommended change to impose greater transparency and / or increased government regulation. Australian Bankers‘ Problematic code 4 However, these have not been implemented, and incorporation of original principles of the voluntary self-regulated code or low cost dispute resolution procedures appears to have been seriously considered. 6. Although voluntary codes and self-regulation could work effectively, this report suggests this has not happened since 2003. The introduction of weasel-words and the constitution meant banks can filter complaints, thereby limiting the authority, independence and power of the Committee at their discretion. RECOMMENDATION There is significant evidence suggesting that the ABA and hence the banks and bankers, have acted to retain control over the compliance procedures that would require them to deal fairly and openly with all their customers, including all small businesses. There are also a number of specific incidents which would not appear to have been handled in accordance with the spirit of the code as originally recommended by the Martin Committee, or in accordance with banks‘ customers, and the public interest in general. This report recommends that the Senate or the Federal Government Treasurer commissions an inquiry into the issues raised herein. This government report would have specific intent of implementing legislation and procedures that would add a truly independent element to the governance and principles involving banks‘ behaviour in dealings with all their customers. If that review find banks or bankers used the constitution or other practices to their customers‘ disadvantage, the government report might recommend corrective action. Australian Bankers‘ Problematic code 5 FOREWARD THE PROBLEMATIC CODE OF BANKING The Fairness of Bank / Customer Relationships in Australia This report has its genesis in submissions sent to Jan McClelland on 11 March 2008 by the Bankers‘ Code Compliance Monitoring Committee. The Committee members noted in their submissions sent to Ms McClelland, the code reviewer, that their authority set up under clause 34 of the code to monitor bank compliance was undermined by the Bankers‘ unpublished constitution which imposed qualifications and restrictions on them. The Committee stated its ‗firm view is that the constitution is problematic‘. The Committee expressed views that its powers were inappropriate and inconsistent with its advertised role and did not reflect the unworkable practices. The McClelland Report was published following these submissions and the Committee‘s previous years‘ Annual Report that reinforced a commitment to ‗investigate and make a determination on any allegation by any person that a bank has breached the code‟. In the same Annual Report, however the Committee stated it had ‗yet to receive a complaint from a small business‘ without commenting on this abnormality or why they believed this was the case. A JOURNEY BEGINS - 1981 In 2009, the Council of Small Business Organisation of Australia considered the Committee‘s remarks that the code was problematic as it represents 2.4 million small businesses. These businesses saw deregulation introduced following the 1981 Campbell Australian Bankers‘ Problematic code 6 Committee and the improved standards of customer protection set out in the Martin Committee‘s Report in 1991. Martin cited the inequality of laws and Courts to resolve bank disputers by all but a few of Australia‘s wealthiest people. Prior to publishing its report, the Committee expressed concerns for small business to redress banking disputes noting: high cost, powerful bank positions, unnecessarily protracted proceedings, inability to continue legal action and failure to ensure adequate discovery. Stephen Martin quoted Former Governor General and High Court Justice Sir Ninian Stephen in 1991 who said: ‗the Chief Justice of a State said to me just the other day that on his salary he could not possibly afford to litigate in his own court‘. The code was therefore introduced as an alternative to Courts with cheap, speedy, fair and accessible alternative for customers to resolve complaints justly. Form the code‘s inception it was evident banks only conceded to the legislators‘ that they publish best practices, making it clear the code was only capable of being used as a shield, not a sword. In a Channel 9 interview on 20 June 1993, the Australian Banker‘s Association‘s Chair, Don Argus, said the government‘s code was complex estimating the cost of implementation to be $300 million. He added however: ‗if civil penalties were attached then whoever is doing business is going to have to cover themselves for the potential of very large claims on civil penalties‘. FIRST SIGNS: BANKERS ‘HI-JACK’ CODE This report looks at the Richard Viney review which provided the first sign of Bankers imposing lopsided principles. In his 2001 report, Viney describes ‗banking service‘ to mean ‗any service‘ provided by banks. Contrary to Viney‘s recommendations, the 2003 Australian Bankers‘ Problematic code 7 code re-defined ‗banking service‘ as a ‗financial service‘ or product. This is later used by banks to limit dispute resolution duties in the code to investigating complaints in relation to a ‗financial service or product‘; the role of the Banking and Financial Services Ombudsman‘s capped external dispute service. In clause 40, it states ‗dispute means a complaint in relation to a banking service‘ inviting customers to believe a ‗dispute‘ has a limited boundary. A ‗complaint‘ on the other hand embraces all code clauses. This sounds obscure but shows how bankers intended to disregard the 1991 legislators that intended banks publish a code that set ‗standards of good banking practice for subscribing banks to follow‘. The redrafted ‗dispute‘ definition meant banks intended to only investigate a very few of the 39 clauses and 250 code sub-clauses in the code. They did not, for instance, intend to comply with clause 35.7 and use the ‗dispute resolution process to investigate all complaints‘. Nor did they intend complying with clause 2.2 to ‗act fairly and reasonably towards their customers in a consistent and ethical manner‘ because, like most other clauses, ethics is not a ‗financial service or product‟. SCARRED CODE: BANKERS 2004 CONSTITUTION The 2003 wriggle-words didn‘t go far enough with the pending appointment of the Code Compliance Monitoring Committee in 2004. The modified 2004 code was varied; only very slightly however so the constitution could be used to impose restrictions