After producing a scathing report about the way banks handle their loan guarantee obligations, the Banking Code Compliance Committee has released the findings of a follow-up inquiry that shows there has been considerable improvement.
But it wants to see further progress, including extending monitoring and control of guarantee processes to third parties, such as solicitors and brokers.
The BCCC made 23 recommendations in a 2021 review, after finding that all audited banks had control gaps in their guarantee processes, that banks were failing to provide full disclosure of key information to guarantors, compliance monitoring was inadequate and that banks were overly legalistic in their dealings with non-compliant guarantors.
Guarantees have long been controversial, with consumer groups and community legal centres frequently highlighting their link to financial abuse. Evidence at the Hayne royal commission revealed unethical behaviour by banks towards guarantors.
Guarantees support around 10 per cent of banks loans, according to data supplied to the BCCC.
The Banking Code obligations are designed to ensure that people make fully informed decisions before agreeing to be a guarantor, but the BCCC found this was not happening.
In its latest report, the BCCC said: “Banks made significant efforts to implement our recommendations. Most had implemented them in full or had plans to do so in 2023.
“In some cases, we found banks had adopted practices that exceeded the minimum obligations of the code and sought higher standards.”
However, it said there was still room for improvement. Some banks have few or no controls in place to ensure the improvements they implemented are achieving the desired results. It also found that at some banks improvements were not being implemented consistently across business units.
It wants banks to exercise more appropriate governance when it comes to third parties that undertake parts of the guarantee process.
“We understand that banks may have limited influence over broker procedures but it is important to use appropriate governance measures where possible. Effective measures include the use of forms, checklists or attestations for brokers to confirm code awareness and obligations with prospective guarantors,” the BCCC said.
The BCCC said there was a lack of progress on three of its 2021 recommendations. Some banks still do not require staff or brokers to interview prospective guarantors to ensure they are fully informed.
Some banks had not audited their compliance with the code’s guarantee obligations and few banks are using data on guarantee processes for continuous improvement.