Will new Banking Code of Conduct actually change anything?

Ross Greenwood speaks to Australian Banking Association Chief Executive Anna Bligh after Australia’s corporate regulator, ASIC, has developed a new code of conduct with the nation’s banks.

Introduction: Will new Banking Code of Conduct actually change anything?

Ross Greenwood:  I said we’re set to get on the chief executive of the Australian Bankers Association, in regards to this new banking code of practice. Anna Bligh is on the line right now. Many thanks for your time Anna.

Interview with: Anna Bligh, CEO, Australian Bankers Association

Anna Bligh: Thank you very much, Ross. Nice to be with you.

Ross Greenwood:  Have you had a big win in this particular case? Because, of course, the Small Business Ombudsman had recommended a limit of $5 million when it came to the loans to small businesses that will be covered by this new banking code of practice, and yet somehow it’s ended up being $3 million. What did you do to negotiate that lower?

Anna Bligh: Ross, this new banking code of practice is a win for customers of banks, whether they are individuals or small businesses. When you pull together something that covers so much of banking experience for consumers, of course, not everybody get every single thing that they’d like to see in it but what I think everybody has agreed on including the Small Business Ombudsman in her public statements tonight, that this is a big and important step forward in better customer practice by Australian banks.

Ross Greenwood:  Okay, you didn’t answer my question now. That was, how did the bank’s negotiated the limit for small business loans from $5 million down to $3 million, which means that a number of borrowers that are small businesses from banks are excluded.

Anna Bligh:  There were a number of factors involved in our discussions with ASIC, the regulator in their approval of this code. In terms of the definition of small business, the main factors were, firstly, that at $3 million, this will capture between 92 and 97% depending on the bank, of all of their business lending. Not just their business lending to small business, but all of their business lending. The ASIC was satisfied that a very significant majority of small businesses would get the benefit of these new provisions in the code.

Secondly, it was very important to the industry to recognized that not all banks are the same, that non-major banks, particularly our Australian regional banks, have a very different loan book than the major banks. If it had gone to 5 million, then in some cases, almost their entire loan book would have been covered by these new provisions, exposing their lending to a much higher degree of risk. For banks, this is uncharted territory.

For your listeners, the new protection for small business mean much simpler contracts with far fewer conditions. That’s really a transfer of risk from the customer to the bank. Banks want to be a little conservative in the first foray into these new kinds of contracts. I should be very clear the ASIC’s approval is subject to a very intense data collection about loans in this category, for small business, with an independent review of this particular part of the code 18 months after the code has started operation.

This is something everyone’s going to monitor. It may well be that down the track, banks are comfortable with lifting the $3 million threshold somewhat higher, but they want to be slightly conservative. Having said that, they are covering more than 90% of all of their business lending with these new simpler contracts with far fewer conditions.

Ross Greenwood:  Anna, I’ll go forward in a moment but I just want to take you back say five years, maybe even we go eight years back, let’s say, some of the period covered by the Royal Commission. Under the current banking code of practice, do you believe Australian banks would have complied fully with this banking code of practice, as it’s now written and approved by ASIC, going back over the past eight years?

Anna Bligh:  The new code puts in place a whole lot of new rules and standards that never existed before. In some cases, some banks might have met these standards, but this new code means that all banks will be required to meet them, and if they don’t, then they will be consequences.

Ross Greenwood:  What are the consequences, Anna?

Anna Bligh:  The new code is enforceable. It’s important, I think, to really stress that this is not a toothless tiger. This code is legally enforceable. The provisions of this code automatically become part of every customer’s contract with the bank. When you sign up for a loan, when you sign up for a credit card, all of these protections become effectively part of your contract and therefore enforceable at law.

Now, there’ll be many customers who aren’t in a position to take their bank to court, but the new financial complaints authority that has been established by the federal government will use this code as their benchmark for best practice. When a bank fails to comply with the code and a customer takes the complaint to the new complaints authority, that is the basis on which the complaint will be judged.

Ross Greenwood:  Isn’t that a financial settlement largely with that customer? It’s not actually what many people would like to see. It’s more punitive action against a bank, that maybe it’s not able to lend money for six months, it’s not able to engage with clients for a period of time because its behavior has been so reprehensible, it’s shown to have not had the faith of the Australian public to be able to continue.

Do you know the problem? The real issue here is, of course, banks are so large and banks are so integral to our community. The issue here is maybe trying to deal, I understand, with the customer a little more equally. The question is whether the sanctions are significant enough against the banks to make their behavior, shall I say, be corrected to make certain they comply, rather than just being embarrassed, because they’re embarrassed all the time if I keep on doing business every day. It’s got to be more than that, don’t you think, Anna?

Anna Bligh: When a bank files to comply with one of the provisions of this new code, it can really happen in a couple of ways. Firstly, simple human error that happened in your particular case, Ross. Such as someone may have ticked the wrong box or made the wrong call, or it can be something that is systemic. That is that right across that particular bank’s procedures, they are failing to meet the code because of some practice that they have in place, that applies to every customer involved in that particular product. Where there is a serious and systemic breach, this code has a monitoring committee, that’s an independent committee, and they have the responsibility reporting this to ASIC.

Where a bank consistently refuses or is unable systemically to meet the code, then there are a number of options open to ASIC to take further action. I think what customers want to see, firstly is, I think customers are very realistic. They know these are big organizations, they understand that sometimes mistakes will be made or someone will do the wrong thing, but when that happens, they want to know that the bank will find it early, fix it fast, make sure the customer is compensated for any problem, and if there is something systemic that is ongoing, that the regulator will intervene and stop it.

Ross Greenwood:  Okay. The enforceable undertakings that are out there by ASIC at the moment, most of the major banks have got an enforceable undertaking of some form around the place right now. It might relate to, shall I say, some of the business loans that were out there previously or it might be in case of credit cards and fees. There’s bits and pieces already up there.

The question is whether they are speed bumps that simply get navigated across and on we go to the next thing, or whether there is actually a genuine change of behavior from the chief executive right down to the person who was at the counter of that bank. That they all understand the obligations and they are understanding if they do the wrong thing, it can have an impact not just not just on their lives but on the lives of everybody around them.

Anna Bligh: Ross, I don’t think there’s any doubt that the Royal Commission into banking and financial services is bringing forward a very large number of issues to be dealt with. Banks don’t for one minute suggests that this code of practice is the answer to all of the problem. What they are saying is, “This is a really important first step.” ASIC as the regulator has now approved this code. It is the first industry code approved by ASIC under their code approval powers. I know that they did not take that step lightly. They have been working with the banks over the past six months. This code was submitted in December. ASIC required many changes, which have all resulted in improvements for customers.

I think firstly, the public can have confidence that this code meets the requirements for a high standard code that’s set by ASIC. Secondly, I do really want to send the message and so the banks. I understand this is an important first step but there are many other steps that are necessary to rebuild and regain the trust and respect of the Australian people. Australian banks have got a long road ahead of us but every road start with the first step and this is one of ours.

Ross Greenwood:  Anna Bligh, the chief executive of the Australian Bankers Association. Anna, I appreciate your time here on the program this evening.

Anna Bligh: Thank you very much, Ross.

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