I recently wrote this article for Retail Banking Review.

The Code of Banking Practice contains provisions intended to set out the high ethical and service standards that customers can expect when dealing with a bank that subscribes to that code.  It also sets out how to resolve disputes with banks.

But a recent independent review urged Australian banks to include a clear commitment to “responsible lending” in the industry’s code of practice, including a commitment to carefully assess applications for credit that may result in financial hardship.

The review also recommends the full disclosure of “exception fees” by the banks, and that they provide information to customers on how to avoid such fees, which normally apply for overdrawn accounts.

Codes of Conduct were created as a compromise between Governments’ reluctance to impose detailed legislative regulation on industries that were changing (such as financial services) and not having any regulation at all.  The compromise offered was self-regulation.

It is important to distinguish voluntary codes from legislative codes and mandatory codes. Under Part IVB of the Trade Practices Act some Codes (eg the Franchising Code and the proposed Unit Pricing Code) are mandatory; this is usually because self-regulation in certain industry-wide issues does not work. A legislative code is actually a law.

Voluntary codes of conduct typically make provision for minimum standards of performance of conduct while leaving to the regulated party discretion as to how that standard will be achieved. It is therefore possible for a number of banks to comply with their code of conduct but do it in different ways.  Industry specific codes allow variations and competition within an industry in a way that prescriptive legislation could not. That is why codes of conduct are often called codes of practice.

The legal effect of a voluntary code depends on whether it is expressed merely as a set of principles or whether it is intended to be contractually binding on a party that accepts it. 

For example, the Code of Banking Practice (CBP) is contractually binding between a bank and its customers once it is adopted by the bank.  If a bank announces it has adopted the CBP but does not follow it, it could be liable for misleading conduct under the ASIC Act and be guilty of unfair conduct under the Credit Code.

What are the Codes that affect retail banking?

The codes that apply to retail banking services are:

•             The CBP (and its equivalent Credit Union and Building Society Codes) currently apply to home loans, personal loans, margin lending, mortgages, guarantees, cheques, non-cash payment facilities and credit cards but not unauthorised overdrafts or bill facilities or business loans;

•             The EFT Code of Conduct applies to credit cards and non-cash payment facilities such as direct debit, ATM, EFTPOS, Internet banking, telephone/IVR banking, BPAY;

•             Privacy Credit Reporting Code of Conduct and personal information privacy codes;

•             Centrelink Code of Operation with Participating Financial Institutions;

•             Advertising Code;

•             General Insurance Code of Practice;

•             General Insurance Brokers Code of Practice;

•             Financial Planners Code of Ethics and Rules of Professional Conduct;

•             Internet Code of Conduct;

•             Direct Marketing Code;

•             Banks and Small Business Working Together: A Set of Principles.

I have not included the Consumer Credit Code in the list because in fact, the Consumer Credit Code is annexed to an Act of Parliament and is legally enforceable.  It is not a Code of Conduct. The CBP and the EFT Code are both entirely self regulatory codes although with external monitoring.

Mutual Banking Code of Practice update

The Mutual Banking Code of Practice will replace the Credit Union and Building Society Codes on 1 July 2009. It contains 10 key promises applying to mutual members and customers, as well as the broader community and 30 specific commitments.

EFT Code of Conduct changes

ASIC monitors compliance with the code covering Electronic Funds Transfer (EFT) transactions.

ASIC is currently reviewing the EFT Code. Its recent consultation paper proposed, amongst other things, making it easier for financial institutions to deliver required information to consumers electronically and  inserting a provision dealing with mistaken internet payments. It is expected that a Final Report will be issued in the first quarter of 2009 with a revised EFT Code being issued by June 2009.