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Australian Financial Review Mar 28 2017 4:53 PM
The banks have conceded their industry code of conduct is a "a long and detailed document [that] customers find difficult to relate to".
They have pledged to substantially re-write it to boost consumer protections while also pushing back on some of the recommendations made in a recent independent review of the code, including the need for new restrictions on cross-selling products.
The banking industry on Tuesday released its response to a February report by consultant Phil Khoury who made 99 recommendations for improving the Code of Banking Practice, a charter between banks and their customers.
The complexity of the banks' response reveals many issues need to be resolved before a new code is finalised. The code looms as a priority for the in-tray of former Queensland premier Anna Bligh, who begins as Australian Bankers' Association chief executive on Monday.
The banks said a new code will make it easier for customers to reduce a credit card limit or cancel a credit card, but they don't support the call they be prohibited from offering a credit card limit increase to a customer who doesn't ask for it.
Nor do the banks support a call by Mr Khoury for staff to be prevented from following up customers to see if they want to proceed with an offer to buy consumer credit insurance.
The banks' response reveals other areas where they are willing to change – but not all the way.
They say they will promote and improve their financial hardship programs but reject a call for the code to say a bank may decide to waive a small unsecured debt when provided with evidence a customer is in long-term hardship, because this "could create unrealistic customer expectations".
Yet the banks fully support 61 of Mr Khoury's 99 recommendations, including the call for the code to be redrafted into plain English to focus more on customer rights rather than bank compliance systems.
The ABA said it will give "in part" support for 10 recommendations; "in principle" support for 19; it wants more time to assess the impact of a further four; and, it has rejected five of Mr Khoury's recommendations.
Tensions with Anna Bligh
The ABA response also flags some potential tension between Ms Bligh and the former ACT chief minister Kate Carnell, now the small business ombudsman.
The banks said on Tuesday they would produce a new section in the code dedicated to small business – something which Ms Carnell sought in her recent review into small business lending.
But the ABA is holding ground on the definition of "small business", insisting it be limited to customers with less than $3 million of loans. Ms Carnell wants it set at $5 million, to capture more customers.
But the banks said they are confident a $3 million lending threshold will capture around 97 per cent of business customers.
"Businesses with total lending above $3 million tend to be larger and more sophisticated businesses, with more complex lending needs and arrangements and contractual obligations.
"It is not suitable for these types of businesses to be included within the definition of small business," the banks said. "It would be appropriate to utilise a standard definition across the various small business frameworks."
Mr Khoury's report picked up several of Ms Carnell's other recommendations for integration into the banking code which the banks are pushing back on.
The banks said they needed more time to consider his call for a code to prohibit banks from enforcing a credit facility of less than $5 million against a small business customer who has complied with loan payment requirements and has acted lawfully, also a key focus for the recent hearings for the banks' CEOs in front of the House of Representatives Standing Committee on Economics in Canberra.
The banks said in their response to Mr Khoury's report there were legitimate reasons for specific event non-monetary defaults, such as bankruptcy, voluntary administration, fraud, significant changes in management, loss of trading licence and changes to the underlying security.
"In addition, financial indicator covenants – for example, financial ratios, – provide early indicators of business viability and are used to encourage a business to work with the bank on ways to turn the business around," they said.
"Removing non-monetary covenants from all loan contracts and credit products for individual and small business customers could have adverse and unintended consequences for all borrowers and impact the price and availability of credit."
The banks said an independent consultant will be appointed to work with the ABA to redraft the code and it will ultimately be approved by the Australian Securities and Investments Commission.
The banks want more time to assess calls for the code to include a new provision obliging banks to set default fees that are reasonable, having regard to costs and potential restrictions on the ability to pass through mortgage insurance costs.
The banks don't agree with calls for imposing a strict penalty on requirements relating to verifying co-debtors, and for changes to how guarantees are enforced.
"By accepting the vast majority of recommendations, banks are demonstrating they are taking action to change as well as being honest about the things which are more complex to resolve," said the ABA's executive director of retail policy Diane Tate.
"In most cases where the industry does not support a recommendation, we have put forward an alternative that addresses the underlying intent of the recommendation."
The ABA is aiming to publish a new Code of Banking Practice by the end of 2017.
"This timetable is ambitious, but it is recognised that our stakeholders, customers and the wider community expect the banks to make these changes as soon as possible," the ABA said.
It anticipates a 12-month transition period for implementation while noting the potential for this timeline to increase.
The banks said on Tuesday that in the past, the code has been "primarily directed to the banks to make sure they had in place the right compliance systems and practices" but in the future it "needs to be directed to our customers to make sure the way they transact and interact with their bank is supported by best practices in banking".
The ABA said it will ensure there continues to be "full consultation with our stakeholders and other interested parties through the drafting process for the new code".
It said various recommendations in Mr Khoury's report will impact on the Carnell inquiry into small business lending, the Ramsay review into external dispute resolution and the Treasury consultation on credit card reforms.
The banks said they would publish quarterly progress updates on the redrafting and on the implementation of the new code.Last modified on