“Cracking the Code” – The Khoury Review

The Australian Bankers’ Association (ABA) commissioned a review of the Code of Banking Practice (Code) as part of a range of industry initiatives announced on 21 April 2016 (Review).  Broadly speaking, the Terms of Reference for the Review are to identify whether the Code is serving its purpose, is meeting reasonable stakeholder expectations and where there are ways of improving its effectiveness.

Phil Khoury, an experienced governance effectiveness and regulatory consultant, conducted the Review.  His report was released earlier this week and makes many (99 in fact) recommendations for changes to the Code.  A summary of the recommendations arising from the Review is set out below.

1. An entirely new Code!

The Review recommends a new Code be drafted utilising a more modern structure, plain language and a “warmer” tone.  The new Code should be broader in the scope of issues it covers, depth of its provisions and customers it protects.  It should also be supported by Industry Guidelines setting out in detail how obligations will be met.  The new Code should oblige banks to have systems in place to identify persisting issues arising from enquiries, customer service and internal complaints information.

2. Small Business

The Review recommends changes to the way banks provide and enforce credit facilities of less than $5m provided to small businesses. The recommendations include:

• provision of an explanation of certain requirements in the lending process;
• providing a pre-contractual summary statement;
• extended notice periods if the bank has determined it will not extend a loan for a further term;
• commitments to assisting small business customers in financial difficulty;
• increased notice period to 30 days where a small business customer is in default;
• notification of customer’s entitlement to access the bank’s internal and then external dispute resolution process; and
• the ability to utilise an EDR scheme in relation to a dispute that has been the subject of mediation but failed to settle.

3. Responsible Lending

A new responsible lending clause should be drafted to oblige banks to review an applicant’s financial information, situation and requirements carefully and prudently and consider the application on its merits.  The current responsible lending obligations should explicitly state that they also apply to guarantors.  Consumer credit applicants should be provided with the bank’s “not unsuitable assessment” as a matter of course, before signing a contract.

4. Credit Card Lending

The Review recommends a more responsible approach to the setting of credit card limits and increase of credit limits, including making it easier for customers to reduce or cancel their credit card accounts.  It also recommends changes to interest charging and payment application practices.

5. Credit Contracts and Borrower Default

The Review makes a number of recommendations in relation to the way banks deal with customers in default, including restrictions on enforcement where repayments are current; providing information about adverse credit reporting and disclosure of assigned debts.

6. Joint Account Holders and Guarantors

The Review recommends that banks be required to make reasonable enquiries to ensure that a co-debtor receives a “substantial benefit” from a credit facility and if they don’t, the facility is unenforceable.  Joint account holders should be able to amend account operating instructions.  The Review also recommends further enhancements to the Code for the benefit of guarantors, including that a guarantee is unenforceable if the bank fails to comply with the pre-execution requirements.

7. Financial Difficulty

The Review recommends greater clarity in the financial hardship provisions of the Code through redrafting.  It suggests banks be obliged to establish systems and processes to identify individual customers at high risk of future financial difficulty and try to assist those customers.  The relevant clause should include a list of factors that could be taken into consideration.  There is also a recommendation that a financial difficulty assistance regime be established for guarantors of Code customers.

8. Terms and Conditions and Direct Debits

Terms and conditions should be in plain language.  Banks’ Customer Advocates should be championing better customer service in relation to direct debit cancellation requests, reporting directly to the Code Compliance Monitoring Committee (CCMC) and working with card scheme companies to achieve this.

9. Bank Fees

Guidance is given to how banks should approach the setting of transaction and default fees.  Transaction fees (or the method of calculation) should be disclosed each time a customer is invited to use the banking service and a new provision should be inserted that requires banks to set default fees that are reasonable having regard to the bank’s costs.

10. Marketing and Sales Practices

The Review recommends restrictions on the distribution of consumer credit insurance.  It also makes recommendations in relation to lenders mortgage insurance (LMI) including, explaining LMI to home loan borrowers and restricting the amount charged by the bank.

11. Customers with Special Needs

The Code should use clear and direct language to create meaningful obligations and substance to the principle of financial inclusion.  The Code should include a specific provision in relation to “customers with disability”, obliging banks to develop policies and procedures recognising that customers should be presumed to have the ability to make decisions about banking services, customers are entitled to receive support in making and communicating their decisions.  The availability of basic fee-free bank accounts should be prominently publicised and offered to assist customers at high risk of future financial difficulty.

12.    Complaints Handling and Code Monitoring

Although a number of banks have already done so, the Review recommends signatory banks be obliged to appoint a Customer Advocate.  A number of recommendations have also been made which aim to strengthen the role of the CCMC.  These include:

• developing protocols for appropriate exchange of information with EDR schemes;
• emphasising the difference between EDR and Code monitoring; and
• empowering the CCMC to investigate breaches of the Code for up to 2 years after a report is made.

Where to from here?

The Australian Bankers Association has indicated that it will provide a full response to the Review in March and aim to release a new, enhanced Code by the end of 2017.  Watch this space!

Gadens is committed to keeping you up to date with any further developments arising from the publication of the Review.