By Philip Soos
A comprehensive report was published by the Council of Small Business Organisations of Australia in 2010, explaining how the Australian Bankers’ Association (ABA) and subscribing banks have thoroughly subverted our system of co-regulation. This describes a system consisting of a combination of self-regulation and prudential regulation, with government and other regulatory organisations, such as ASIC, taking a more hands-off role to policing lenders.
After Australia’s rapid deregulation when the recommendations of the Campbell Committee of 1981 were implemented by the Keating government, by 1987 it was feared that deregulation had gone too far and too fast. Policymakers were also concerned about the unequal bargaining power between lenders and borrowers.
This resulted in the 1991 Martin Review, which concluded that lenders had an overwhelming advantage in the legal system, dominating businesses and individuals who had few resources to fight the banks through the courts. The review recommended that a code be crafted that set out high-minded principles that lenders ought to abide by: The Code of Banking Practice.
Unfortunately, the ABA and subscribing banks, through their vast rent-seeking power, have managed to neuter the Code of Banking Practice, rendering it an unenforceable piece of toilet paper. The organisation established to monitor lenders’ breaches of the code, the Code Compliance Monitoring Committee (CCMC) has been turned into a lame duck, along with the ombudsman, the BFSO (now the FOS).
The point of this soft corruption was to influence public perception that lenders were law-abiding organisations out to help businesses and individuals, and the very low number of breaches as determined by the CCMC was proof of lenders’ meticulous compliance to the rule of law.
Despite this public relations propaganda, what you will find is truly a Game of Mates in action.
The report is summarised below, with important points noted along with the corresponding pages. It is well worth the read for those not wanting to read the full 335 page report, though a more up to date report of only 30 pages is also available.
TSBC (2015) The Australian Bankers’ Problematic Code, 30 pages, (download here)
COSBOA (2010) The Australian Bankers’ Problematic Code, 335 pages, (download here)
Before 1981, the activity of Australian banks and their manner with dealing with customers, was heavily regulated by the federal government. Following the 1981 Campbell report, this regulation was significantly reduced. After the stock market crash of 1987, there was concern that deregulation had gone too far. An alternative approach was suggested to ensure customers achieved fair treatment, which was the subject of the Stephen Martin committee of 1991. The report suggested that a formal system of self-regulation be enacted, given the high costs of legal disputes in the courts to all parties (2).
The first Code of Practice was established in 1993 but not adopted until 1996, and underwent a substantial revision in 2003 and modified again in 2004. Although reviews took place in 2005 and 2008, it appears the 2004 version is still in force (at the time of this report). The 1993 code was authored by the ABA but failed to include recommendations from the Martin Committee the banks did not like. The current versions similarly do not take the recommendations into account. The key organisation which oversees the application of the code is the CCMC but is thwarted by another, undisclosed organisation, the CCMCA. Their constitution severely restricts how the CCMC can enforce the code (3).
The constitution and weasel words means banks can filter and limit complaints, limiting the power of the CCMC. The banks and ABA have maintained control over compliance procedures which would require them to deal fairly with customers (4).
Martin cited the inequality of laws and courts to resolve bank disputes, all but the wealthiest could afford it. The committee expressed concern for small business redress: high costs, powerful banks, protracted proceedings, inability to continue legal action and failure to ensure adequate discovery (6).
The 2003 code redefined the meaning of a number of words and terms, allowing banks room to manoeuver to ensure they did not have to fully comply with the recommendations and spirit of the 1991 Martin review and the 2001 review by Richard Viney. The modifications to the code made in 2004 varied only slightly (7).
From 20February 2004, it appears the code was not binding when signing contracts, given the implementation of the hidden, unpublished and compulsory constitution of the CCMCA which highly restricted the CCMC from examining potential breaches of the code. This essentially nullified the Martin Committee recommendations and principles (7-8).
Post February 2004, the bankers and ABA used media statements to sell myths that the code is a contract, it protects individuals and small business, the CCMC is independent, member banks must comply with high standards, etc. The Martin Review principles were watered down in 2003 and then obliterated in February 2004 with the constitution (8-9).
The code which has evolved over more than 20 years was intended to balance the unfair asymmetry between lenders and borrowers but instead became the exclusive tool of bankers (13).
The ABA was founded in 1947, and the bankers’ judgement, via the ABA, substituted for government committees, legislators, regulators and other stakeholders (15).
The powers, independence and authority of the CCMC were watered down (16).
Banks can breach most of the 250 clauses and sub-clauses in the 80 provisions in the revised or modified Codes, implying that the CCMC cannot hear, investigate and adjudicate on such breaches due to the restrictions of the CCMCA constitution (19).
S52 of the Trade Practices Act 1974 (Cth) provides that a corporation shall not, in trade and commerce, engage in conduct that is misleading or deceptive (25).
As the fortunes of the banking sector has increased after the early 1990s recession cleared, the public has seen the responsibilities of regulators transferred from the public sector to the banks themselves. The introduction and reliance on voluntary self-regulation i.e. the code, has opened the door to questionable activities by lenders (31).
The report’s recommendations led to deregulation of the financial services industry, the floating of the dollar, the removal of exchange controls and permitting the entry of foreign banks. It was a seismic shift and the industry rapidly grew in the decade thereafter. There were concerns, however, that deregulation had gone too far, with the Standing Committee on Finance and Public Administration on 27 November 1991 publishing its report on banking and deregulation; the Martin Committee. It was this report that recommended the adoption of a code of banking practice (34).
While a government task force was set up to draft a new code, with input from stakeholders, it was the ABA who managed to draft the final version. This version ignored many of the Committee’s recommendations (35).
The Wallis Committee of 1997 advocated that rather than relying on industry, government should comprehensively regulate to enforce the rule of law in the banking sector. Following the Wallis Committee, the government established the regulators ASIC and APRA and later the ACCC (35-36).
Joe Hockey, then the Minister for Financial Services and Regulation, responded to the Wallis Committee by creating a uniform prudential regulatory environment to balance the goals of increasing competition while preserving fairness and security of the financial system. He was strongly in favour of self-regulation, with government regulation to only enforce against severe market failure. In 1999, he created the Self-Regulation Task Force to advise government on how best the industry could regulate itself (45-46).
It was the officers of the ABA who appointed Richard Viney to conduct a review of the first code on 12 May 2000 (48).
The Campbell report of 1981 advocated a system of co-regulation, primarily of industry self-regulation and some limited government regulation to achieve desired prudential objectives (54).
The Campbell report, infamously, declared that the more efficient manner of organising economic activity is through markets. The Rae Committee Report of 1974 argued that regulators to have regard for efficiency as well as investor protection; that excessive attention on investor protection may impose undue burdens on firms, generating inefficiency (55).
Given the problems that may emerge from a system of self-regulation, the Campbell Committee advocated a system of co-regulation (56).
A government task force proceeded to draft a code with the input of many stakeholders (76).
The Martin Review a first by a modern government to develop standards of fair treatment of customers in banking (76-77).
A government committee assessed the progress of the banks in implementing the report’s recommendations in 1992. It found that most of the banks’ implementation of some recommendations were unsatisfactory (77).
The code was initially designed as a response to an unworkable legal regime, and as a contractual provision, was not intended to become the primary tool available to customers seeking to assert their rights. It was the code’s initial diversion from the principles of the Martin report that has reduced its effectiveness as a regulatory regime. Its inception and subsequent incarnation in the 2003 update that has made it unsuitable for the protection of banking customers (87).
The 1993 code was an 11 page document that didn’t reflect the 572 page Martin Report, falling short of basing itself on the report’s recommendations. While a government task force drafted the code in consultation with stakeholders, the final draft was by the ABA. This advantaged the lenders over the borrowers (90).
The 1993 code opposed any increase in the monetary threshold of the ABIO (92).
The code stipulated that customers must first use the subscribing bank’s IDR process, which predictably favoured the institution over the customer (93).
Although it has been already noted that the code does not properly reflect the Martin report, the report lists six key areas in which the code did deviate (94-95).
The 1993 code become fully operative in November 1996 (95).
The Wallis Committee recommended that the new ASIC should have a strong focus on preventing fraud (99).
Following Costello’s establishment of ASIC and APRA, it was envisaged that these two regulators, including the RBA, would oversee the scheme of co-regulation, with the former two enforcing consumer protection and prudential regulation, and monitor compliance with the code (103).
ASIC was given the responsibility of monitoring banks’ compliance with the code, which has been removed from the APSC (104).
Despite being statutorily bound to enforce codes of practice in the financial services industry, ASIC has consistently characterised the operation of codes as non-enforceable (110).
ASIC announced it stopped monitoring industry compliance as a result of the code of 2003, later clarifying its role in developing and updating codes, approving EDRs and consulting with consumer affairs stakeholders (111).
Codes are approved by ASIC, including setting standards for IDRs and EDRs, including breaches of these schemes. Unfortunately, ASIC is often unwilling to use its powers, their decision-making is opaque and consumers are provided with minimal guidance on how to use such provisions for their benefit (115).
On 12 May 2000, the ABA appointed Richard Viney to review the 1993 code (118).
Toward the end of the review process, ASIC, consumer organisations and Viney agreed there needed to be effective sanctions for code breaches and monitoring (123).
This led to the formation of the CCMC (124-125).
As the same time as the Viney review, the government task force on self-regulation advocated just that. These two paved the way for self-regulation to become the prominent form of regulation, even though it may be contrary to the recommendations made by the Martin Committee and the Wallis Inquiry (128-130).
Many years transpired after the final version of the code was authored by the ABA, whereby stakeholders thought that banking principles needed to be strengthened along with a mechanism for monitoring and dispute resolution. The industry appeared to have convinced the government and public that self-regulation was workable and the best way to proceed. Out of this came the revised 2003 Code (1 August) and modified 2004 code (131).
The CCMCA constitution was already published by 20 February 2004 (133).
The message put forth by the ABA and industry, to convince the government and public that the code is an enforceable contract, the banks would submit to independent monitoring, the CCMC may take action against rogue banks and each bank would have to submit an annual code of compliance report. This of course assume the code was an enforceable contract and the CCMC was independent – both of which was not true (134-135).
On 14 May 2004, the ABA amended the 2003 code and published their modified 2004 code. This included disclosure of fees and charges, changes to terms, fees and charges, privacy and confidentiality and complaints handling (135-136).
The banks which knew of their legal and regulatory duties under the Banking Act and APRA guidelines, still chose to go forward with promoting the modified 2004 code on the basis of high-minded principles while implementing the hidden CCMCA constitution (145).
Extraordinary: in 2004/05, the CCMC closed 10 cases with one determination, whereas the BFSO closed 3,949 classes referred by customers of subscribing banks. It is clear the banks were not happy about using the CCMC as investigate and close cases given the reputational hit upon bank CEOs and directors. Also, there were entirely arbitrary limitations imposed upon the BFSO, which suited banks, like capped damages. If code breaches revealed unlawful conduct by the CCMC, the consequences for the bank could be serious, and for individuals within the bank, ruinous for their reputation and career (164-165).
The FEMAG report was the first to uncover the CCMCA’s hidden constitution (165).
The first review of the code was carried out by FEMAG in 2005 (167).
The Jan McClelland review of December 2008 found that the CCMCA constitution hinders the effective operation of the CCMC but did not place much emphasis on rectifying these issues (169).
The McClelland and Viney reports in 2008 both concluded the CCMC was performing its duties effectively, with no intractable problems, with neither report fully addressing the dubious governance practices. Both were funded by the same subscribing banks. The CCMC code dealt with the possibility of civil and criminal implications. This is clearly a worry for the banks (178).
A very good step by step guide is noted here to demonstrate how the bureaucratic mess between the banks’ IDRs and CCMC is designed to ensure the complaints end up in court, sidestepping the recommendations and intentions of the Martin Committee. The banks can therefore cover up allegations of serious misconduct, undermining the intention of the code to protect all of the banks’ customers (187-188).
There are slight differences between what the BFSO and the CCMC are designed to investigate in terms of disputes and breaches of the code (190).
Both the 2003 and 2004 codes were inadequate because they did not deal with the conflicts of interest. The ABA, BFSO and CCMC and CCMCA were all substantially funded by subscribing banks, including acting to appoint consumer representatives of the BFSO and CCMC. Networking between subscribing banks and ex-bankers within and between these organisations not only generates conflicts of interest, it openly signals the appearance of conflicts of interest (201).
After the CCMC was established, ASIC limits its role in enforcing self-regulated voluntary industry codes. This left the CCMC as the sole guardian of consumer protection in the financial services industry (203).
In October 2005, the CCMC commissioned FEMAG to conduct the initial review of the CCMC’s activities (204).
Unbelievably, the CCMC annual report for 2004/05 demonstrates the organisation only investigated and made a determination in one case, while 18 other complaints remained open or were considered inappropriate. This is what FEMAG had to base its analysis of off; hence it was mostly a theoretical investigation of the CCMC (208-209).
The FEMAG report concluded the CCMC was performing largely according to its aspirations but potential failures could arise due to flaws in the code and the CCMCA’s restrictive and opaque constitution (210).
The FEMAG was the first to make public issues with the CCMCA’s unpublished constitution (212).
The FEMAG report noted the CCMCA was an unincorporated, unregistered entity, and because its constitution did not provide for a governing committee, its affairs would be governed by general meetings of members. The members would have opportunity to influence the appointment of the committee and the CCMC’s activities. In effect, the committee was appointed by the CCMCA. The subscribing banks controlled the publishing of the code and promotion through the administration and funding of the ABA, the CCMC practices and guiding principles through the CCMCA, and with support of the BFSO appointed preferred committee members (215).
FEMAG noted that the CCMCA constitution prohibited the CCMC from hearing any complaint that was in or has been investigated by another forum (or was going to be heard), and a very wide definition of forum was cast. As the CCMC has next to no visibility among the public, complainants would invariably go to a ‘forum’ such as the FOS, thus rendering it impossible for the CCMC to even accept that case to investigate if any breach of the code had been made. It is essentially an opt-out clause which clearly detracts from the principles and recommendations made by the Martin Committee (222, 232).
The independence of the CCMC is severely undermined by the suppression of free speech. For the CCMC to issue any public statements, they require the approval of the bank parties which appointed them, the BFSO and CMCCA chairs (226).
The CCMC argued in their submission to the McClelland review that the constitution made carrying out their duties under their code unworkable (240).
CCMC independence was stunted in a number of ways. They were unable to make public statements without the approval of banks, and was funded by banks and thus subject to financial oversight powers. The latter meant that the power for the BFSO and CCMA chairs to determine funding, budget and remuneration for the CCMC (240-241).
Previously, banks were required to report code breaches to the CCMC but following opposition by the ABA in the McClelland review, the clause governing this requirement was removed. The lack of a statutory duty for banks to report their own breaches thus required the CCMC to monitor for breaches; this made their job of monitoring and investigating breaches a far more difficult logical exercise to follow (242).
There is a strong probability the banks’ legal counsel and law firms knew about the CCMCA constitution and how it restricted the CCMC in carrying out the duties, and likely also support it. At the time, the constitution was not publicly available, kept from bank customers for the last six years (this report was published in 2010), there was a lack of transparency, the CCMCA was not registered, does not host a website or list its details through any public directory. In other words, the CCMCA and its restrictive constitution was never meant to be discovered by the public or bank customers (246).
The FOS replaced the BFSO and commenced operations on 1 July 2008 (263).
The CCMC annual report 2007/08 notes that for the first time, a bank has been named for serious non-compliance with the code: WBC. It took four years since the inception of the CCMC to name a bank. Are we to believe that in a thoroughly criminogenic environment, that there has only been one bank named and shamed, and in a restrictive manner, being kept to the CCMC annual report? (270).
The Jan McClelland final report advocated subsuming the CCMC into the FOS along with other recommendations to enhance the efficiency and effectiveness of both organisations but failed to mention the major problem of the CCMCA’s restrictive constitution rendering the CCMC into a lame duck, even though the CCMC’s submission clearly highlighted this issue. The parties that did have knowledge of the constitution predictably failed to advocate reform of it (271-275).
The 2008 Viney review, the second he had performed after the 2001 review which led to the revised 2003 code, was in command of all the submissions to the McClelland review and yet failed to deal with the substance of the serious issues the CCMC submission had raised in connection with the constitution. It was essentially a whitewash confirming the CCMC was doing a good job, when in fact, it was heavily constrained in carrying out its job (276-289).
After the McClelland and Viney reviews of 2008, two diverging perspectives emerged. On one side were the bankers, ABA, FOS and reviewers who were unconcerned about the restrictions placed upon the CCMC. On the other were former members of the CCMC who had made their concerns known but were ignored. It is easy to see which side won the bureaucratic battle (290).
During FY 2008/09, there were 6,731 new disputes lodged with FOS yet only 11 determinations carried out by the CCMC, and this was up from 9 determinations reported during the previous year (291).
The only serious content relating to rendering the CCMC an effective organisation by reforming the CCMCA’s constitution were the 2005 FEMAG review and the CCMC submission to the McClelland 2008 review (305).