ABAs new banking code has removed protections critics argue

John Kavanagh

Banking Code of Practice reviewer Mike Callaghan

Submissions to ASIC’s consultation on the proposed revision of the Australian Banking Association’s Banking Code of Practice have focused on the ABA’s plan to remove obligations that it sees as duplicating existing provisions in legislation or regulation.

The most controversial of these is a proposal to remove the obligation to exercise the care and skill of a diligent and prudent banker in providing a new loan or an increase in a loan limit.

The ABA considers it a duplication of responsible lending obligations in the National Consumer Credit Protection Act but several submissions argue it extends consumer protection beyond what is in legislation and should be retained.

The ABA’s view is that obligations that are separate to legislation, but repetitive, may cause confusion.

It also proposes to remove an obligation to explain joint accounts to account holders because the terms and conditions of such accounts already include information on their use.

And it has removed several complaints provisions that are in the current code from the proposed code.

Submissions have also focused on the ABA’s decision not to accept certain recommendations of the 2021 review of the code, conducted by Mike Callaghan.

The ABA’s submission to the ASIC consultation said: “The ABA considers the simplification of the Banking Code is critical to the code achieving its role in providing safeguards and protections not set out in law in a way that is accessible to bank customers.

“The ABA has only proposed to remove an obligation from the Banking Code where an equal or higher protection exists in law or regulation.

“By paraphrasing other statutory legal rights in the code, the ABA would be creating new contractual obligations that overlap with the statutory rights. This leads to uncertainty regarding whether the statutory or contractual protection is a higher standard, how the duty is discharged and whether affected customers are better off overall pursuing statutory of contractual remedies.”

The Law Council of Australia said it has concerns about the proposal to remove the diligent and prudent banker commitment. It said case law has indicated that a lender could be required to go beyond the obligations set out in the National Consumer Credit Protection Act to satisfy the requirement to conduct an unsuitability assessment.

And it said removal of the commitment may result in the removal of consumer protections in relation to guarantees. It pointed to a 2015 Victorian Court of Appeal case involving Commonwealth Bank, where the court ruled that guarantors do not have suitability assessment protections under the NCCP Act but the diligent and prudent banker obligation “provided a benefit to guarantors”.

The Australian Financial Complaints Authority is also opposed to the removal of the diligent and prudent banker obligation. It said: “The diligent and prudent banker obligation should continue to apply to lending regulated by credit legislation. This obligation operates in addition to the law and sets a higher and broader standard of behaviour.

“We believe that the diligent and prudent commitment is, in language and form, consistent with general community expectations about how banks will treat their customers. Removal of this longstanding obligation sends a potentially negative message to bankers about what is an acceptable level of professional conduct and changes the nature and tone of the code.

The Banking Code Compliance Committee said its compliance work showed that the chapter of the code that sets out the diligent and prudent banker obligation has always been one of the top three most breached chapters.

“This shows that compliance with responsible lending obligations continues to be a major concern in the industry and among customers,” it said.

Currently, the code requires banks to inform customers how to use a joint account. The ABA plans to remove this obligation because such information is in product terms and conditions.

The BCCC said this is a problem: “Owning a joint account comes with risks that customers must understand. A joint account holder will have joint ownership of both assets and debt. This can increase the risk of financial abuse for customers in vulnerable circumstances.

“Given the risks, we consider it important to retain the proactive obligation to inform customers on how to use joint accounts, rather than rely on terms and conditions.” 

AFCA said changes to complaints provisions in the proposed code have reduced consumer protections and clarity for bank staff and consumers. For example, a commitment in the current code that says “we will ensure our process for handling your complaint is fair and reasonable” has been removed from the proposed code.

A consumer group joint submission also took up this issue, saying it did not accept the ABA’s view that the current code’s complaints provisions are contained in ASIC’s regulatory guide 271. It said it is not clear that obligations to keep customers informed of the progress of a complaint, to give a contact name and to provide a date to expect a response are replicated in RG 271.

On guarantees, the proposed code includes a new obligation that requires that reasonable steps be taken to ensure a meeting is held with a guarantor in the absence of the borrower before they sign their guarantee.

The Law Council wants to see a change from this “reasonable steps” approach to a clear statement of the steps bank officers should take to ensure the guarantor understands the effect of the guarantee being given.

The Law Council also said it wants to see the ABA take up more of the 2021 code review recommendations on guarantees. These recommendations included committing more resources to support guarantors who might be vulnerable or do not have English as their first language; meeting face-to-face with guarantors before accepting a guarantee; and conducting reviews to ensure the guarantee has been obtained in accordance with the code before commencing enforcement action.

AFCA also took up this issue, saying it was concerned at the ABA’s response to these recommendations.

The Law Council said the 2021 review identified gaps in Chapter 45 of the code, which deals with deceased estates. The review said there was scope to consider introducing greater clarity on the deceased estate process and made a recommendation along those lines.

“The ABA supported this recommendation but no change was made to the code. The Law Council would like to see the ABA take steps to implement recommendation 95 of the 2021 review, taking BCCC work in this area into account.” 

In June last year, the BCCC published a report saying it found instances of poor practice and non-compliance with the code among the six bank in the study when dealing with deceased estates.