Independent Review of the Banking Code released 

7 minute read  08.12.2021 Kate Hilder, Siobhan Doherty

Our key takeaways from the first independent review of the Banking Code of Conduct since the Hayne Commission


Key takeouts


  • The independent Review of the Banking Code of Conduct makes 116 recommendations which are broadly aimed at maintaining the momentum from the Hayne Commission by: improving compliance with Code commitments, strengthening and clarifying consumer protections, clarifying the enforceability of Code provisions generally and updating the Code to reflect developments since the last review.  
  • On the question of how enforceable Code provisions should be designated, the Report takes as its starting point the position that the Code should remain 'self-regulation'.  Accordingly, the Report advocates minimising the number of designated enforceable provisions while also making explicit how all provisions in the Code can be enforced.  Having said this, the Report identifies a number of Code provisions as potential 'candidates' for designation as enforceable Code provisions.  These are flagged below.  
  • On the question of whether/how the government's proposed changes to responsible lending obligations should/should not be reflected in the Code, the Report makes clear that responsible lending commitments should be retained (and clarified) whether or not the government's planned changes are enacted.  
  • The Report rejects calls for the Code to include an express commitment for banks not to rely on the point of sale exemption (consistent with Hayne Recommendation 1.7) on the basis that the commitment is essentially unnecessary.  
  • Next steps: The ABA will consult with members and respond to the Report outlining proposed changes to the Code.  This processes expected to be concluded by March 2022.  The final changes to the Code (including the Pottinger Review changes) are planned to take effect (subject to ASIC approval) on the later of 1 January 2023, and six months after ASIC notifies its approval of the Code revisions.

Overview

On 6 July 2021, the Australian Banking Association (ABA) announced it had commissioned the first independent review of the Banking Code of Practice (the Code) since the Hayne Commission. The review was led by Mike Callaghan. The terms of reference for the review are here.

On 3 December 2021, the ABA released the Final Report of the review. Broadly, the Report concludes that the Code is

'an improvement on the previous version and banks are more focused on complying with the Code than they were in the past. The objective of the triennial review should be to maintain this progress. The Banking Code of Practice does not need a complete overhaul or rewrite, but it can be improved in important areas and compliance significantly strengthened.'

This conclusion is more or less encapsulated in Recommendation 1 of the Report, which emphasises the need for the industry to 'maintain' the momentum from the Hayne Commission. Recommendation 1 states:

'The ABA should use this triennial review to maintain the momentum coming from the Royal Commission in terms of improving Code awareness and compliance. The Code does not need a complete overhaul, but to maintain momentum there should be no preconceived view to keep change to a minimum. The objective of the Code and enforceability of commitments needs to be clear. Consumer benefits and protections need to be strengthened and clarified, and the commitment to compliance made more tangible'.

Key recommendations

The Report makes 116 recommendations aimed at:

  • clarifying the objective, audience and structure of the Code, adjusting the wording of commitments to make it more definite/forceful and confirming that industry guidelines should not be considered voluntary
  • clarifying and strengthening consumer protections in the Code
  • fostering compliance with the Code
  • updating the Code to reflect the raft of regulatory changes that have been implemented since it was last reviewed in 2017.

Below is an overview of some of the key recommendations and the rationale behind them. A full list of recommendations is included at p9 of the Report.

Fostering a compliance culture

Despite progress, compliance with the Code and consistency in applying the provisions is identified as a key challenge. The Report identifies the fact that the importance of the Code is not necessarily acknowledged by all banks - some banks consider the Code a to be a 'regulatory burden' – as one factor contributing to this issue.

Recommendation 2 therefore calls on banks to reassess their attitude to the Code. It states:

'Banks should view the Code as important in outlining the customer focus that is central to the overall long-term success of their organisation, rather than a regulatory burden. Senior leadership in the banks should send a clear message to staff as to the importance of the Code for the bank'.

Clarifying the intended audience for the Code

The Report also flags the way in which the Code is drafted as a problem. The report comments that 'at present, the one document is seeking to meet the needs of too many audiences'. The result is that there is perhaps too much detail included for consumers, and not enough included for bank signatories and bank staff.

To address this, Recommendation 3 recommends that:

'While the Code should be accessible to as broad an audience as possible, the primary audience should be the banks and bank staff. It is the rule book for the banks. It should be drafted with sufficient detail, either in the Code or related industry guidelines, to facilitate the implementation of the commitments by bank staff and allow consumer representatives help customers pursue their rights'.

Recommendation 4 recommends that there should be a separate, standard documents for consumers that banks would commit to providing to them, when they make a complaint. This documents would explain that:

'consumers have rights in their dealings with banks, along with indicating that the detail of their rights is in the Code as well as advising who can assist them in a dispute with their banks'.

A consumer centric, principles-based approach: clarifying the structure, objectives and status of industry guidelines

A number of recommendations are focused on clarifying the structure and objectives of the Code, again with a view to strengthening compliance.
Recommendations 9-12 recommend changes to the structure of the Code to bring it more into line with the structure (and principles-based approach) outlined in the 2017 Review, clarify the relationship between Code Commitments and those included elsewhere and emphasise the consumer-centric approach underpinning each Code commitment.

Recommendation 9 recommends that the Code should:

'begin with a clear statement of the Code’s overall objective. Then each part of the Code should start with the outcome sought for customers from that part, and the provisions flow from and are consistent with achieving that outcome'.

Importantly, Recommendation 10 recommends that industry guidelines should 'be considered as Code related documents and not outside the Code and voluntary'. The recommendation states that

'Banks should take into account industry guidelines in assessing whether they are complying with Code commitments. If they are not following the best practice outlined in the guidelines, banks will have to demonstrate they are following comparable processes in meeting the commitments. There should be greater transparency in the Code over the role of industry guidelines. They should be specifically referenced in the Code'.

Recommendation 11 recommends that references in the Code to 'legislation' or complying with the law should be clarified to specify 'what they mean for consumers in their relationship with their bank'.

Enforceable Code Provisions and the enforceability of the Code generally

The Review was not tasked with identifying which provisions in the Code should be designated as enforceable Code Provisions, but rather with identifying the appropriate approach to designating such provisions.

The Review proceeded on the basis the 'Code should remain self-regulation'. In light of this, the report suggests that designating too many provisions as enforceable is to be avoided as it

'will result in the Code increasingly becoming the main body responsible for monitoring compliance. It would also reduce the incentive for banks to set standards that go above the law'.

Likewise the Report emphasises the need to avoid 'perceptions that there are enforceable and non-enforceable provisions'. Accordingly, the report advocates amending the Code to explain that there are 'layers of enforceability of all provisions'.

  • Recommendation 5 recommends that the following factors be considered in the process of identifying enforceable Code Provisions: a) 'the extent to which a provision can be legally enforceable'; b) 'the extent to which a breach is likely to result in significant detriment to a consumer'; and c) 'existing enforceability of provisions under contract law and legislation'; and d) 'the extent to which designating the provision as enforceable will support the role, operation, and enforceability of the Code as self-regulation'. Generally, where provisions are already legally enforceable, the Report makes clear that they should not be designated under the enforceable code provisions regime.
  • Recommendation 6 recommends that in the interests of avoiding confusion over which provisions are enforceable and those which are not, the Code should:

'specifically refer to how all the provisions can be enforced. The "layers" of enforceability include contract law, Code obligations being considered by the Australian Financial Complaints Authority (AFCA) in resolving customer disputes, and the breaches of some provision resulting in a penalty under legislation'.

  • Recommendation 7 recommends that the wording of existing Clause 10 in the Code (which commits bank staff to acting in a 'fair, reasonable and ethical manner') should be aligned with the wording in s912A of the Corporations Act 2001 (Cth) (the Act) and explain that the provision is enforceable under the Act. However, the Report observes that 'Clause 10 would be suitable for designation as an enforceable code provision' if the wording is not aligned with s912A. Recommendations 28 outlined below builds on this recommendation.
  • Recommendation 8 recommends the inclusion of a new commitment for banks to 'have in place the appropriate systems, processes, and programs to support an integrated approach to compliance. Banks should commit to a program of periodically reviewing the effectiveness of their compliance framework through their internal and external audit arrangements and to reporting the detail of the outcomes of these audits to the BCCC. A summary of the audits should be included in each banks published annual reports. This commitment would be suitable for designation as enforceable under the enforceable code provision regime'. Recommendations 29-30 outlined below build on this recommendation.

The Code Commitment to act in a 'fair, reasonable and ethical manner'

Recommendations 28-30 are focussed on strengthening the commitment in existing Clause 10 of the Code which states that bank staff with deal with consumers in a 'fair ethical and reasonable manner'.

Recommendation 28 recommends that:

'The commitment for banks to engage with customers in a fair, reasonable and ethical manner (or if aligned with the Corporations Act – efficiently, honestly and fairly) underpins all Code commitments and should be prominently positioned in the Code. The Code should state the commitment is enforceable under the law (the Corporations Act if aligned, if not, Clause 10 is a suitable candidate to be designated under the enforceable code regime)'.

Recommendation 29 and 30 are focused on strengthening compliance with this commitment.

  • Recommendation 29 recommends that banks commit to having in place 'appropriate frameworks and systems to support compliance with the Code' and to conducting a 'rolling audit program using internal and external audit arrangements' to ensure effectiveness. The report observes that this recommendation is 'an appropriate candidate to be designated under the enforceable code regime'.
  • Recommendation 30 recommends that the commitment to have trained and competent staff that understand the Code and how to comply should cover staff at all levels including management. Recommendation 30 further recommends that banks should 'develop industry wide standards for competency and conduct for bank staff and that the Code should explicitly 'state that staff will be supported by appropriate systems and technology to support compliance with the Code.'

The role and powers of the Banking Code Compliance Committee (BCCC)

The Review considered whether there is a need to adjust the duties/powers of the Banking Code Compliance Committee (BCCC), including whether the sanctions available to the BCCC remain appropriate.

  • Sanctions: On the question of sanctions, the report notes that various submissions called for the BCCC's existing sanctions powers to be strengthened in various ways. However, the report recommends against giving the BCCC powers to impose financial penalties for non-compliance on the basis that doing so would potentially blur the distinction between the BCCC and ASIC (recommendation 109). The report does however recommend that the BCCC be given power to require a bank to publish a notification on its website that is has breached the Code and state what correction action the bank has taken (Recommendation 110).
  • Reporting to the BCCC: A number of submissions raised concerns about the significant burden on Code members occasioned by having to provide compliance reports to the BCCC. Recommendation 106 recommends the introduction of a 'materiality threshold for banks' breach reporting to the BCCC' and for the BCCC to review its information requests in light of ASIC's new breach reporting arrangements (Recommendation 105). However, requests to otherwise limit reporting to the BCCC were rejected.
  • The BCCC's ongoing role: Recommendation 104 the report states that:

'The BCCC should maintain its role overseeing compliance with a Code based on self-regulation and promoting best practice in helping banks achieve good outcomes for their customers. The BCCC is not a regulator enforcing compliance with the law'.

Responsible lending commitments should be retained

The review considered the consequences for the Code from the government’s proposal to remove the responsible lending obligations from the National Consumer Credit Protection Act 2009. The review concludes that whether or not the proposed changes are enacted, existing references in the Code to responsible lending obligations should be retained. However, the report also makes clear that these obligations are in need of clarification.

Key issues raised in the consultation concerned the following issues: responsible lending obligations generally, lending to co-borrowers, consumer credit insurance and lenders mortgage insurance and the recommendations reflect this.

  • Recommendation 59 recommends that: 'Irrespective of whether announced changes to the National Consumer Credit Protection Act 2009 eventuate, the principles of responsible lending (the ‘care and skill of a diligent and prudent banker’), should be set out in the Code. This should incorporate, consistent with the law, that the commitment for responsible lending for individuals is that banks will undertake reasonable inquiries to assess a borrower’s capacity to repay the loan without substantial financial hardship and in doing so to consider the borrowers income, debt and expenses and the purpose for which the borrower is seeking the loan'
  • Recommendation 60 recommends that: 'Banks should commit to assess all the information they have as to whether a co-borrower is receiving a substantial benefit under the loan'
  • Recommendation 61 recommends that: 'The protections in the Code in Clauses 64 to 66 with respect to consumer credit insurance should be applied to all sales of credit insurance and not just limited to those sold via digital channels'.
  • Recommendation 62 recommends that: 'Banks should commit not to sell consumer credit insurance with low claim to premium ratios'.
  • Recommendation 63 recommends that: The ABA’s Lender Mortgage Insurance – Guiding Principles should be referenced in the Code.

Lending to small businesses

Recommendations 64-72 relate specifically to lending to small businesses. Among other things, recommendation 65 recommends that

'While it will take time to incorporate the Pottinger Review recommended changes to the definition of small business in a revised Code following the triennial review, ABA banks should commit to introduce the changes as soon as possible'.

[Note: Hayne Recommendation 1.10 recommended that the ABA should amend the definition of small business in the Code so that the Code applies to any business or group employing fewer than 100 full time equivalent employees, where the loan applied for is for less than $5 million. The ABA has committed to implementing the recommendations of the 2020 Independent Review of the definition of small business in the Banking Code of Practice (Pottinger Review). Recommendation 5 of the Pottinger Review recommended that:

  • The definition of 'small business' in the Banking Code (other than for the purposes of financial products or services regulated by the Corporations Act 2001) should be amended to mean a business that employs fewer than 100 full time equivalent employees or, in the case of a business that is part of a group of companies, the group employs fewer than 100 full time equivalent employees
  • The provisions of the banking Code that relate to credit should apply to a small business credit facility only if it is below A$5 million]

Point of Sale exemption

Hayne Recommendation 1.7 recommended the removal of the point of sale exemption in light of the harm caused to consumers. Noting that the government has yet to implement the recommendation, consumer groups called for the Code to be amended to include an express commitment for banks not to rely on it.

The Report rejects this argument for change on the basis that it is unnecessary. The Report states:

'It appears that subscriber banks do not rely on the point-of-sale exemption, hence a commitment that they will not rely on the exemption would be largely symbolic. New protections should be targeted to areas where there is evidence of current problems'.

Ensuring access to 'inclusive and accessible' banking especially for vulnerable consumers

The extent to which the Code contributes to/supports the provision of inclusive, affordable and accessible banking services to customers, and in particular, to vulnerable consumers and those in remote and regional areas was also a focus of the Review.

The Report concludes that though progress has been made on these issues by a number of banks, consistency in approach across all member ABA banks remains an issue.

The Review identified scope to broaden the definition of 'vulnerability' within the Code (recommendation 35) and to clarify and strengthen existing Code commitments. Recommendations 35-58 are focused on driving progress on this issue. Among other things, the Review recommends that certain provisions in the Code be amended to make clear that the onus should not be on consumers to self-identify to the bank as vulnerable as in need of assistance before they can access that help. For example, 39 recommends that:

'The wording in Clause 38 that the bank "may only become aware of your circumstances if you tell us" should be removed and replaced with wording along the lines of Clause 93 in the 2020 General Insurance Code. Similarly, the wording in Clause 43 that the bank "may become aware if you are a low- income earner only if you tell us about it" should be amended. While customers should be encouraged to tell their bank if they are a low-income earner, banks should commit to proactively identify if customers may be eligible for basic accounts'.

Similarly, Recommendation 51 recommends that Aboriginal and Torres Strait Islander people should not have to self-identify as Aboriginal or Torres Strait Islander in order to access the 'tailored assistance available'. The report recommends that these options should be advertised and that 'preferable, bank staff should ask customers whether they have Aboriginal and Torres Strait Islander heritage'.

Parts 9 and 10 of the Code: Responding to and resolving complaints

Recommendations 83-95 recommend changes to Part 9 of the Code which is entitled 'when things go wrong'.

  • Among other changes, the recommendations include suggested amendments aimed at improving access to financial hardship assistance. Recommendation 84 recommends improvements to the way in which banks contract with debt buyers for the sale of unsecured debts and the treatment of vulnerable customers in this context.
  • Recommendations 96-103 recommend improvements to the way in which banks resolve complaints. Among other things, the report recommends greater alignment with ASIC requirements, including that the definition of complaint in the Code should be aligned with the definition in ASIC Regulatory Guide 271 (Recommendation 99).

Recent developments/emerging issues

Open Banking

Consumer groups called for the Code to be amended to include additional consumer protections in light of the roll out of the Consumer Data Right/Open Banking.

Ultimately, though the review does not accept all proposals put forward, it does acknowledge concerns about how the rules will apply to vulnerable customers and more particularly joint accounts in situations of family violence/financial abuse.

Recommendation 15 recommends that 'Chapter 35 of the Code should reference that a customer has the right to remove a joint account from the Consumer Data Right and banks will be proactive in identifying vulnerable customers and alerting them to this right'.

Design and Distribution Obligations (DDOs)

Recommendation 16 recommends that the Code should be amended to clarify that if a customer suffers loss or damage because a bank contravened the Design and Distribution Obligations, the customer may recover the loss or damage from the bank.

Buy Now Pay Later (BNPL)

The Review considered whether the changing consumer payment landscape, and more specifically whether the growing popularity of buy now pay later (BNPL) products/services, and the increasing involvement of ABA banks (ie either offering BNPL services or partnering with BNPL providers), warrants revisions to the Code.

Ultimately, the Report concludes that as things stand currently, some of the broader emerging issues raised by these changes may be more appropriately covered in ASIC's ePayments Code or the Australian Payments Network Industry Standards.

Having said this, the Report makes clear that

'it would be appropriate for ABA banks to signal in the Code that their involvement in the BNPL sector will be consistent with the principles that underpin the Code, such as responsible lending and dispute resolution'.

The Report points to the approach that the Commonwealth Bank has taken to setting eligibility requirements for the StepPay product as good practice in terms of banks helping to ensure the suitability of BNPL products for customers.

The Report recommends that the Code should both:

  • include a commitment that BNPL products issued by banks will be subject to credit checks and eligibility requirements to ensure the products are suitable for consumers (Recommendation 17)
  • include a commitment that banks commit only to partner with BNPL providers that are members of ACFA and agree to meet ASIC guidance on dispute resolution (Recommendation 18)

Epayments Code

The voluntary ePayments Code applies to consumer electronic payment transactions. According to the report, currently, most banks, credit unions and building societies subscribe to it.

Consumer advocates advocated for the inclusion of a commitment in the Code for subscriber banks to also subscribe to the ePayments Code. This was accepted in the final report. Recommendation 23 recommends that:

'ABA banks should commit to subscribing to the ePayments Code and complying with the consumer protections in the ePayments Code'.

A technology-neutral approach

  • The Review identified some instances where the wording of the Code needs to be updated to reflect recent developments, including changes in technology.
  • Recommendation 22 recommends that the language in the Code should be technology neutral 'where possible' to help ensure it remains as current as possible.

Scams

The Review included consideration of whether the Code should address the issue of scams (an issue which is not directly addressed in the current Code). Though the report makes clear that protecting consumers from scams should be priority for banks and for regulators, it does not endorse calls from consumer groups for the Code to include commitments from banks to be responsible for proactively identifying, preventing and compensating consumers in the event that they suffer loss as the result of scam activity.

The report does however recommend that the Code should include commitments by banks to provide appropriate training for staff on the issue (Recommendation 113) and to informing customers about their options if they have been scammed (Recommendation 114). On this last point, Recommendation 114 specifies that this information should be available in languages other than English and that banks should provide a 'dedicated scam/fraud telephone line'.

Triennial Reviews of the Code remain appropriate

  • The report concludes that the existing requirement for the Code to be independently reviewed every three years 'remains appropriate' and recommends that this continue (Recommendation 115).
  • However, noting feedback from consumer groups, the Report also acknowledges that there 'would be merit in a more structured approach for stakeholder input on the need for changes between reviews'. The Report recommends (Recommendation 116) that the ABA 'Consumer Outcomes Group should be used to provide input to the ABA as to whether amendments to the Code are required between triennial reviews, or whether the issue can wait to be considered at the next review'.

Next steps

  • The ABA will consult with members and respond to the final report outlining proposed changes to the Code. This process is expected to be concluded by March 2022.
  • The ABA intends to submit an application to ASIC for approval of Code changes by 31 March 2022.
  • The changes to the Code (including the Pottinger Review changes) are planned to take effect on the later of 1 January 2023, and six months after ASIC notifies its approval of the Code revisions.

[Sources: ABA media release 03/12/2021; Full text report: Independent Review of the banking code of practice 2021 November 2021]

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