The Code of Banking Practice

Review of

The Code of Banking Practice

Final Report

December 2008

Jan McClelland and Associates Pty Limited

TABLE OF CONTENTS

TABLE OF CONTENTS

ABBREVIATIONS AND DEFINITIONS

SUMMARY OF RECOMMENDATIONS

RESPONSIBLE LENDING

General Principle of Responsible Lending - Clause 2

Provision of Credit – Clause 25.1

FINANCIAL HARDSHIP – Clause 25.2

DEBT COLLECTION - Clause 29

GUARANTEES - Clause 28

JOINT DEBTORS - Clause 26

CODE COMPLIANCE MONITORING COMMITTEE AND THE FINANCIAL OMBUDSMAN SERVICE - Clause 34

FEES AND CHARGES – New Provision

REVERSE MORTGAGES – New Provision

DIRECT DEBITS - Clause 29

ACCOUNT SWITCHING – New Provision

ELECTRONIC BANKING - Clause 33

COMMUNICATION – New Provision

ACCOUNT SUITABILITY - Clause 14

DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13

COMPLIANCE WITH LAWS - Clause 3

KEY COMMITMENTS – Clause 2

COPIES OF DOCUMENTS - Clause 11

OPENING OF ACCOUNTS - Clause 16

CHANGES TO TERMS AND CONDITIONS - Clause 18

CHARGEBACKS - Clause 20 and Clause 10

PRIVACY AND CONFIDENTIALITY - Clause 22

STATEMENT OF ACCOUNTS - Clause 24

ADVERTISING - Clause 30

INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35, 36 and 37

APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39

CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New Provision

LANGUAGE AND STRUCTURE OF THE CODE

STAFF TRAINING AND COMPETENCY - Clause 7

UNFAIR CONTRACT TERMS

ACCOUNT COMBINATION- Clause 17

USE OF FINANCE AND MORTGAGE BROKERS

PROMOTION OF THE CODE – Clause 9

CHAPTER 1 - INTRODUCTION

1.1 Appointment of the Review

1.2 The Code of Banking Practice

1.3 Terms of Reference

1.4 Approach

1.4.1 Preparation for the Review

1.4.2 Announcement of the Review

1.4.3 Consultations

1.4.4 Initial Submissions

1.4.4 Review of Documentation

1.4.5 Attendance at Forums

1.4.6 Issues Paper

1.4.7 Final Report

1.5 Structure of the Report

1.6 Acknowledgements

CHAPTER 2 - CONTEXT

2.1 Economic and Regulatory Changes

2.2 Status and Standing of the Code

CHAPTER 3 - RESPONSIBLE LENDING

3.1 Credit Assessment - Clause 25.1

3.1.1 Issues Paper

3.1.2 Responses to the Issues Paper

3.2 Unsolicited Offers of Credit Card Limit Increases – Clause 25.1

3.3 Developments since the Last Code Review

3.3.1 Subscribing Banks’ Policies on Responsible Lending

3.3.2 National Regulation of Consumer Credit

3.3.3 Ministerial Council on Consumer Affairs Regulatory Impact Statement on Responsible Lending Practices in relation to Consumer Credit Cards

3.3.4 Australian Law Reform Commission Review of Privacy Legislation

3.3.5 Financial Ombudsman Service

3.4 The Way Forward

3.4.1 Credit Assessment

3.4.2 Unsolicited Offers of Credit Limit Increases

Recommendations

General Principle of Responsible Lending

Provision of Credit

CHAPTER 4 - FINANCIAL HARDSHIP

4.1 Financial Hardship - Clause 25.2

4.1.1 Issues Paper

4.1.2 Response to the Issues Paper

4.1.3 The Way Forward

Recommendations

CHAPTER 5 - DEBT COLLECTION

5.1 Debt Collection - Clause 29

5.1.1 Issues Paper

5.1.2 Responses to the Issues Paper

5.1 3 The Way Forward

Recommendations

CHAPTER 6 - GUARANTEES

6.1 Guarantees - Clause 28

6.1.1 Issues Paper

6.1.1 1 Commercial Asset Financing Guarantors

6.1 1 2 Cooling off Period

6.1.1.3 Undisclosed Principle and Agent Arrangements

6.1.1.4 Compliance with Privacy Principles

6.1.2 Responses to the Issues Paper

6.1.2.1 General Comments on the Guarantee Provisions of the Code

6.2.1.2 Commercial Asset Financing Guarantors

6.2.1.3 Cooling Off Period

6.2.1.4 Principal and Agent Arrangements

6.2.1.5 Privacy Principles

6.2.1.6 Enforcement

6.1.3 The Way Forward

6.1.3.1 Commercial Asset Financing Guarantees

6.1.3.2 Cooling Off Period

6.1.3.3 Principal and Agent Arrangements

6.1.3.4 Privacy Principles

6.1.3.5 Enforcement

Recommendations

CHAPTER 7 - JOINT DEBTORS

7.1 Joint Debtors - Clause 26

7.1.1 The Issues Paper

7.1.2 Responses to the Issues Paper

7.1.3 The Way Forward

Recommendations

CHAPTER 8 - CODE COMPLIANCE MONITORING COMMITTEE AND THE FINANCIAL OMBUDSMAN SERVICE

8.1 Code Compliance Monitoring Committee - Clause 34

8.1.1 Issues Paper

8.1.2 Responses to the Issues Paper

8.1.3 The Way Forward

Recommendations

CHAPTER 9 - FEES AND CHARGES

9.1 Exception Fees – New Provision

9.1.1 Issues Paper

9.1.2 Responses to the Issues Paper

Recommendations

CHAPTER 10 – OTHER ISSUES

10.1 REVERSE MORTGAGES – New Provision

10.1 1 Issues Paper

10.1.2 Responses to the Issues Paper

Recommendations

10.2 DIRECT DEBITS - Clause 29

10.2.1 Issues Paper

10.2.2 Responses to the Issues Paper

Recommendations

10.3 ACCOUNT SWITCHING – New Provision

10.3.1 Issues Paper

10.3.2 Responses to the Issues Paper

Recommendations

10.4 ELECTRONIC BANKING - Clause 33

10.4.1 Issues Paper

10.4.2 Responses to the Issues Paper

Recommendations

10.5 COMMUNICATION – New Provision

10.5.1 Issues Paper

10.5.2 Responses to the Issues Paper

Recommendation

10.6 ACCOUNT SUITABILITY - Clause 14

10.6.1 Issues Paper

10.6.2 Responses to the Issues Paper

Recommendations

10.7 DISCLOSURES - TERMS AND CONDITIONS - Clauses 10 and 13

10.7.1 Issues Paper

10.7.2 Responses to the Issues Paper

Recommendations

10.8 COMPLIANCE WITH LAWS - Clause 3

10.8.1 Issues Paper

10.8.2 Responses to the Issues Paper

Recommendations

10.9 KEY COMMITMENTS

10.9.1 Issues Paper

10.9.2 Responses to the Issues Paper

10.9.3 The Way Forward

Recommendations

10.10 COPIES OF DOCUMENTS - Clause 11

10.10.1 Issues Paper

10.10.2 Responses to the Issues Paper

Recommendations

10.11 OPENING OF ACCOUNTS - Clause 16

10.11.1 Issues Paper

10.11.2 Responses to the Issues Paper

Recommendations

10.12 CHANGES TO TERMS AND CONDITIONS - Clause 18

10.12.1 Issues Paper

10.12.2 Responses to the Issues Paper

Recommendations

10.13 CHARGEBACKS - Clause 20 and Clause 10

10.13.1 The Issues Paper

10.13.2 Responses to the Issues Paper

Recommendations

10.14 PRIVACY AND CONFIDENTIALITY - Clause 22

10.14.1 Issues Paper

10.14.2 Responses to the Issues Paper

Recommendations

10.15 STATEMENT OF ACCOUNTS - Clause 24

10.15.1 Issues Paper

10.15.2 Responses to the Issues Paper

Recommendations

10.16 ADVERTISING - Clause 30

10.16.1 Issues Paper

10.16.2 Responses to the Issues Paper

Recommendations

10.17 INTERNAL AND EXTERNAL DISPUTE RESOLUTION - Clauses 35, 36 and 37

10.17.1 Issues Paper

10.17 2 Responses to the Issues Paper

Recommendations

10.18 APPLICATION AND TRANSITIONAL PROVISIONS - Clause 39

10.18 1 Issues Paper

10.18.2 Responses to the Issues Paper

Recommendations

10.19 CUSTOMERS IN REMOTE INDIGENOUS COMMUNITIES – New Provision

10.19.2 Issues Paper

10.19.2 Responses to the Issues Paper

Recommendations

10.20 LANGUAGE AND STRUCTURE OF THE CODE

10.20.1 Issues Paper

10.20.2 Responses to the Issues Paper

Recommendations

CHAPTER 11 – OTHER MATTERS RAISED IN SUBMISSIONS TO THE ISSUES PAPER

11.1 STAFF TRAINING AND COMPETENCY - Clause 7

11.1.1 Issues Paper

11.2 Response to the Issues Paper

Recommendations

11.2 UNFAIR CONTRACT TERMS

11.2.1 Issues Paper

11.2.2 Response to the Issues Paper

Recommendation

11.3 ACCOUNT COMBINATION- Clause 17

11.3.1 Issues Paper

11.3.2 Responses to the Issues Paper

Recommendations

11.4 USE OF FINANCE AND MORTGAGE BROKERS

11.4.1 Issues Paper

11.4.2 Responses to the Issues Paper

Recommendation

11.5 PROMOTION OF THE CODE – Clause 9

11.5.1 Issues Paper

11.5.2 Responses to the Issues Paper

Recommendation

CONTRIBUTIONS TO THE REVIEW BY SUBMISSIONS, CONSULTATIONS AND CORRESPONDENCE

ABBREVIATIONS AND DEFINITIONS

ABAAustralian Bankers’ Association

AbacusAssociation of Building Societies and Credit Unions

ACCCAustralian Competition and Consumer Commission

AML/CTF legislationAnti Money Laundering and Counter Terrorism Financing Act

ASIC Australian Securities and Investments Commission

ALRCAustralian Law Reform Commission

BFSO Banking and Financial Services Ombudsman

CCMCCode Compliance Monitoring Committee

Consultative ForumABA’s Community and Consumer Consultative Forum

Consumer AdvocatesJoint Consumer Submission contributors

COSBOACouncil of Small Business Organisations of Australia

COSLCredit Ombudsman Service Limited

COTA Over 50’s LtdCouncil on the Ageing

EFT CodeElectronic Funds Transfer Code of Conduct

EDRExternal Dispute Resolution

FOSFinancial Ombudsman Service

FSRFinancial Services Reform Act 2001

IDRInternal Dispute Resolution

IP Review of Code of Banking Practice Issues Paper May 2008

JCSJoint Consumer Submission

• Australian Financial Counselling and Credit Reform Association
• Care Financial Counselling Service and Consumer Law Centre ACT
• CHOICE
• Consumer Action Law Centre
• Consumer Credit Legal Centre NSW
• Consumer Credit Legal ServiceWA
• Consumers’ Federation of Australia
• Financial Counsellors Association of Queensland

MCCAMinisterial Council on Consumer Affairs

MFAA Mortgage and Finance Association of Australia

NSW OFTNew South WalesOffice of Fair Trading

SEQUALSenior Australian Equity Release Association of Lenders

The CodeCode of Banking Practice

The reviewerJan McClelland & Associates Pty Limited

UCCCUniform Consumer Credit Code

USAUnited States of Australia

UKUnited Kingdom

SUMMARY OF RECOMMENDATIONS

RESPONSIBLE LENDING

General Principle of Responsible Lending - Clause 2

1. That a key commitment to responsible lending be included in the current Clause 2 of the Code, Our key commitments to you, along the following lines:

We will be responsible lenders in approving credit, offering credit limit increases, supporting customers facing financial difficulty; and promoting responsible use of credit.

Provision of Credit – Clause 25.1

1. That a separate clause on provision of credit be included in the Code, building on Clause 25.1 but expanded to include two parts, one relating to approval of an application for a credit facility and another relating to unsolicited or other offers of credit card limit increases, which covers the following:

A. Approval of an Application for a Credit Facility

1)Before we approve your application for a credit facility or for an increase in your existing credit facility, we will exercise the care and skill of a diligent and prudent banker in selecting and applying appropriate assessment methods to your circumstances and financial position and in forming our opinion about your ability to repay the credit facility.

2)Our credit assessment methods will vary depending on a range of factors including the credit facility product, whether you are a new customer or have an existing banking relationship with us, the information you have provided to us and the information available to us from other sources. Our credit assessment methodologies will include, as appropriate to your circumstances, consideration of at least two of the following factors:

a)Information you have provided on your income and financial commitments;

b)How you have handled your finances in the past;

c)Our internal credit scoring techniques;

d)Information from credit reference agencies.

B. Unsolicited or Other Credit Limit Increase Offers

1)If we decide to make you an offer of an increase in the credit limit of your credit facility, we will take into account the following criteria:

a)Your recent credit facility repayments history, including whether you have been able to meet repayments or whether you have a history of missed or late payment;

b)Your income, if in the course of our dealing personally with you, we become aware that you are in receipt of a welfare payment that is your sole source of income;

c)Your recent credit facility history, including whether you have a history of consistently reaching or exceeding the credit limit while making only the minimum monthly repayments, and/or whether we are aware of other information that suggests you may be likely to be experiencing financial stress;

d)Your banking relationship with us, including whether you are a new customer and/or whether you have acquired any other products from us; and

e)Your request not to receive unsolicited offers of credit limit increases, if you have made such a request.

2)If we decide to make you an offer to increase your credit limit on an existing credit facility, we will provide information on:

a)The new minimum monthly payment and repayment period if you accept the offer and the credit facility is fully drawn on;

b)How to request a lower credit facility limit than the one we have offered;

c)How and when to reject the offer, for example, if you are having difficulties meeting your current repayments, or if your financial circumstances have changed or are likely to change such that you cannot afford to meet increased repayments; and

d)Easy and efficient ways to reduce your credit facility limit and how long it will take to process your request for a reduction in your credit facility limit.

FINANCIAL HARDSHIP – Clause 25.2

1. That a separate clause on financial hardship be included in the Code, building on Clause 25.2 but expanded to cover the following:

1)With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. We will deal with you or, at your request, with your financial counsellor or representative.

2)If, in the course of our personal dealings with you, we identify that you might be experiencing difficulties in meeting your repayments we may contact you and invite you to discuss your situation with us and the options available to assist you in meeting your obligations in these circumstances.

3)If at any time you feel you are experiencing difficulties in meeting your repayments, you should make contact with us as soon as possible to discuss your situation with us and the options available to assist you in meeting your obligations in these circumstances.

4)If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them.

5)We will provide you with information about our processes for dealing with customers in financial difficulty, including relevant contact numbers, at your request and when we send you a default notice.

6)We will respond promptly and courteously to any requests for assistance from you.

7)We will take into account the information available to us, including the information you provide to us, about your financial situation and determine whether or not we are able to provide assistance and the nature and extent of such assistance.

8)We will inform you in writing of our decision whether or not to provide you with assistance and the reasons for our decision. If we agree to provide you with assistance we will confirm in writing the agreed arrangements.

9)While we are considering your application for assistance where you are experiencing financial difficulty in relation to a credit facility with us, we will not commence any enforcement action in relation to the debt or assign the debt. If we reject your application for assistance, we will allow you a reasonable period of time to obtain advice, before we commence enforcement action in relation to the debt or assign the debt. If we have commenced enforcement action before you made the request, we will not proceed to judgement whilst we are considering your situation.

10)We will not require you to access your Superannuation Fund to repay your credit facility with us.

11)We will have information about our processes for dealing with customers in financial difficulty available on our website.

12)We will ensure that relevant staff are trained in the financial hardship provisions of the Code, and applicable consumer credit legislation.

DEBT COLLECTION - Clause 29

1. That Clause 29 of the Code is amended to include reference to ACCC and ASIC debt collection guidelines as amended or replaced from time to time.
2. That the debt collection clause follow the proposed revised clause on Financial Hardship and include the following:

a)We will comply with the Australian Competition and Consumer Commission and Australian Securities and Investments Commission guideline “Debt Collection Guideline for Collectors and Creditors, October 2005,” as amended or replaced from time to time, when collecting amounts due to us. We will ensure that our debt collection agents do likewise.

b)If we sell a debt to a third party we will choose firms that agree to observe the ACCC and ASIC debt collection guidelines referred to in (1) and that are members of an ASIC approved external dispute resolution scheme.

GUARANTEES - Clause 28

1. That the definition of commercial asset financing guarantor in Clause 40 of the Code be amended to broaden the class of guarantors to include directors, owners or managers of the business that is managed by or under the direction of the director, owner or manager.
2. That Clause 28.14 of the Code be expanded to provide that enforcement of a judgement against the guarantor or any security provided by the guarantor will only be taken after attempts have been made to enforce the judgement against the debtor and/or enforce any security against the debtor.

JOINT DEBTORS - Clause 26

1. That Clause 26.1 of the Code be amended to provide:

We will not accept you as a co-debtor under a credit facility where it is clear, on the facts known to us, that you will not receive a benefit under the facility.

CODE COMPLIANCE MONITORING COMMITTEE AND THE FINANCIAL OMBUDSMAN SERVICE - Clause 34

1. That the CCMC be established as a separate independent unit within the FOS reporting directly to and accountable to the FOS Board for the performance of its prescribed functions under the Code.
2. That separate terms of reference of the CCMC be developed by the CCMC in consultation with the ABA, the FOS ASIC and consumer interests. The terms of reference for the CCMC should be consistent with the compliance monitoring, investigation and reporting functions of the CCMC under the Code and be published on the CCMC, FOS and ABA websites.
3. That the terms of reference of the CCMC make it clear that the CCMC and the FOS have different functions of Code compliance monitoring and dispute resolution respectively and guarantee the independence of one from the other in the performance of those functions respectively as well as independence from banks.
4. That the charter, constitution, terms of reference and operating protocols of the FOS Board and of the CCMC and the Code make it clear that individuals and organisations have the right to make complaints about Code breaches directly to the CCMC.
5. That the Code make it clear that the CCMC retains its powers under the Code to conduct investigations in response to complaints of Code breaches from any person or organisation, and also to initiate investigations and reviews on its own initiative, and to make determinations in relation to those investigations.
6. That the Code also spell out functions of the CCMC as including to:

a)conduct its own enquiries into banks’ compliance with the Code;

b)prepare an annual report on compliance with the Code;

c)contribute to joint publications between the CCMC and FOS on Code interpretation and compliance issues; and

d)promote awareness of the Code with banks through the provision of feedback on Code issues.

1. That the charter, constitution, terms of reference and operating protocols of the FOS and of the CCMC make it clear that the following arrangements apply in matters that are referred to the FOS or the CCMC.

a)Where the FOS, in performance of its prescribed function of dispute resolution, identifies a Code issue and finds that there has been a Code breach, that determination is a final determination as to whether a Code breach has been established. FOS must report its determination to the CCMC for further monitoring as appropriate and provide access to its case file on the matter if required by the CCMC.

b)Where the FOS, in performance of its prescribed function of dispute resolution, identifies a Code issues and finds that there has been no Code breach, the determination of FOS is final and the CCMC cannot investigate the matter. FOS must inform the CCMC of its decision and provide access to its case file if required by the CCMC.