The Code of Banking Practice Compliance Monitoring Committee (CCMC) has released its Report of its Inquiry into pre-contractual obligations in relation to guarantees.
The CCMC has made some recommendations to assist with informed decision making by prospective guarantors prior to the execution of a Guarantee and has highlighted areas for bank attention when transitioning to the revised 2013 Code of Banking Practice by 1 February 2014. The 2013 Code contains clauses which are largely the same in the 2013 Code as clause 28 of the 2004 Code.
While the inquiry concluded that banks which participated in its inquiry had appropriate systems and procedures in place to comply with clauses 28.3 to 28.6 of the Code, the Report concluded that banks that only provide general warnings regarding the need for independent legal and financial advice in the Guarantee documentation should review this practice.
The Report identifies good practice as conducting interviews with prospective guarantors to explain the commitments and risks associated with entering a guarantee in addition to requiring customers to seek independent legal and financial advice.
In addition good industry practice suggests that even a prospective guarantor who has received independent advice, should be given at least 24 hours to consider the Guarantee documents prior to signing.
The Code applies to small business transactions as well as regulated consumer credit transactions.
Guarantees play a significant role in the provision of credit, both for personal and business purposes.
In some cases considered by the Financial Ombudsman Service and the courts the level of debt secured by the Guarantee was significant.
Bank obligations fall into four areas:
1. the provision of information, notices and warnings about the rights and responsibilites of potential guarantors and the risks associated with guarantees;
2. the provision of information and relevant documentation regarding the financial position of the borrower;
3. the consideration of this information by the prospective guarantor; and
4. the execution or signing of the Guarantee.
