A banking oversight body has expressed concern about banks’ failure to consistently make full disclosure of key information to guarantors, a dereliction it says is linked to poor record keeping practices.
In a highly critical report, the Banking Code Compliance Committee has released the results of a review of banks’ compliance with Banking Code guarantee obligations, which are designed to ensure that people make fully informed decisions before agreeing to be a guarantor.
The BCCC’s inquiry found there was inadequate or ineffective monitoring of compliance and there were numerous instances where banks could not demonstrate compliance.
There were numerous instances where banks failed to ensure that a guarantee was signed in an appropriate environment.
“All audited banks found control gaps in their guarantee process which were not previously detected by their routine monitoring activities,” the report said.
The BCCC also found that banks relied too heavily on legal advice when deciding their approach to enforcing a non-compliant guarantee.
“It is important that banks avoid an overly legalistic approach. Banks’ treatment of non-compliant guarantees must take into account the guiding principles that underpin the code and banks’ obligation under clause 10 to engage with guarantors in a fair, reasonable and ethical manner,” the report said.
Guarantees have long been controversial, with consumer groups and community legal centres frequently highlighting their link to financial abuse. In 2018, A$500 billion of consumer and small business credit was supported by guarantees.
The BCCC’s review was prompted by evidence at the Hayne royal commission that revealed unethical behaviour by banks towards guarantors.
The BCCCC has made 23 recommendations, which cover process improvements, policy updates, training and reviews, improvements to record management, and appropriate dealings with guarantors.
It also has several recommendations covering enforcement of a guarantee. It wants banks to develop guidance to help staff negotiate alternative debt recovery options with the primary borrower before enforcing a guarantee. It said enforcement should be a last resort.
The Australian Banking Association said it welcomes the BCCC's reommendations.
The ABA said in a statement: "ABA members will work through the findings. Reports such as this demonstrate that the BCCC is a strong, effective and independent enforcement body - a key requisite for the Banking Code of Practice."