The COBP review report is imminent: The Australian Bankers Association has announced that it expects the report of the Khoury Review to be published shortly, and that it aims to respond to the recommendations, as well as those from the Australian Small Business and Family Enterprise Ombudsman small business loans inquiry, by the end of February.

CCMC Provision of credit Inquiry: automated systems and clause 27 COBP

Separately, the Code Compliance Monitoring Committee (CCMC) has released the report of its Own Motion Inquiry into Code-subscribing banks’ compliance with the provision of credit obligations under clause 27 of the Code of Banking Practice.

Clause 27 of the Code states:
“Before we offer, give you or increase an existing, credit facility, we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay the credit facility.”

The Inquiry focused on unsecured loans, overdrafts, credit cards and credit card limit increases to individual and small business customers and whether the use of technology and automated systems associated with the provision of credit is appropriate to comply with the Code obligations.

According to the report automated systems are used by Code-subscribing banks to process approximately 97% of applications for unsecured credit.

The CCMC identified a number of potential issues regarding:

• banks not making inquiries about a customer’s purpose for credit card applications;
• the collection and verification of current customer information when processing applications for credit card limit increases, and
• the assessment of a customer’s ability to repay a credit card balance.

The CCMC concluded that “At this point in time banks have not demonstrated, to the CCMC’s satisfaction, that the use of an automated system or statistical credit scoring model alone is sufficient to comply with the Code obligations, unless up-to-date information regarding a customer’s financial position is incorporated into the credit assessment. The CCMC considers that having a full and current picture of a customer’s financial circumstances is fundamental to complying with the Code obligations.”

The CCMC made nine recommendations in its Report including that “banks should consider developing and using automated tools that can better verify a customer’s actual financial circumstances. This may include tools for the analysis of transactional account data (where the customer is already a customer of the bank), and/or documentation to demonstrate income and expenses.”

Helping customers in financial difficulty: clause 28.2

In Marsden v DCL Developments Pty Ltd (No. 3) [2016] NSWSC 1795 the Supreme Court of NSW dismissed a defence resisting an action for possession of a chicken farm by the mortgagee. The mortgagors claimed that clause 28.2 of the Banking Code was breached and that the breach amounted to a breach of contract.

Clause 28 of the Banking Code is headed “If you are experiencing financial difficulties with your credit facility”. It provides:

“28.1 This clause 28 applies to a credit facility you have with us.
28.2 With your agreement and co-operation, we will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan.”

Justice McCallum concluded that:
“It may be accepted that the Banking Code formed part of the loan contract between the bank and DCL …. Whether clause 28.2 of the Code imposes any enforceable obligation on the bank must be doubted when it contains such vague and amorphous concepts as “try to help you overcome your financial difficulties”. These terms seem to me to be similar to an agreement to negotiate in good faith which has been held not to be enforceable…
If, on the other hand, the words are commensurate with “using best endeavours” then the obligation is not to go beyond the bounds of reason but to do all he, she or it reasonably canThis imports an objective test. On the assumption that the clause does impose an enforceable obligation in this way I am entirely satisfied that the bank complied with that obligation.
DCL’s financial difficulties consisted of a lack of income because it had no birds laying eggs. The most obvious way of helping DCL to overcome those financial difficulties was to assist it in buying birds. That was exactly what the bank did. It went beyond “trying” to help. It did help. Moreover, it did exactly what the cross-claimants asked, that is, it made a further loan of $325,000. They did not ask for anything more. It is not easy to understand how it can be asserted that the bank did not try to help when they did exactly what was asked of them.
However, the “help” went further. Although DCL had defaulted on making a [compulsory p[rincipal repayment] CPR in November, and was obliged under the existing arrangement to make such a payment each month thereafter, the bank did not require another CPR until April 2016….

The only possible basis for the assertion that the bank did not “try to help” is the imposition of the two conditions complained of. Unless, however, it could be shown that either or both of the conditions imposed had the effect of significantly undermining the positive steps the bank took, it could not be concluded that the bank had not tried to help. Moreover, the bank was not obliged to ignore its own interests when it tried to help.”