In a report released today, the Banking Code Compliance Committee (BCCC) highlighted serious concerns about banks’ failure to consistently comply with the 2013 Code’s guarantee obligations.
For the first time in a BCCC Inquiry, a sub-set of banks conducted performance audits which identified non-compliance with several important Code provisions, including pre-guarantee disclosure obligations. Equally concerning, the audits found numerous instances where banks could not demonstrate compliance.
The report states that while banks had adequate written policies and processes to comply, they:
- lacked effective record management practices
- conducted inadequate or ineffective monitoring of compliance controls
- relied too heavily on legal advice when considering the enforceability of a guarantee, and
- lacked capability to collect guarantee-related data.
The BCCC raised concerns about failures to consistently provide full disclosure of key information to guarantors – an issue closely linked to banks’ poor record keeping practices and the challenges associated with disparate systems, business units and subsidiary brands.
The BCCC’s Independent Chairperson, Ian Govey AM, said the Code obligations are a crucial safeguard to ensure guarantors understand the risks involved when providing a guarantee. With more than $500 billion of credit supported by guarantees in 2018, it is essential that banks strictly comply with the Code’s guarantee provisions.
“When things go wrong, the Committee expects banks to hold themselves accountable, making sure breaches are dealt with appropriately and pro-actively. Banks should not wait for a guarantor to make a complaint or raise an issue,” Mr Govey said.
Banks are also at risk if they fail to comply. The report highlights that the Australian Financial Complaints Authority, which can consider complaints from guarantors, may decide that the bank cannot rely on the guarantee if it finds it did not meet its Code obligations to the guarantor.
The BCCC has made 23 recommendations for improved industry practice across the guarantee provisions. The recommendations relate directly to the 2013 Code but are also relevant to the 2019 Code which contains similar obligations.
“The BCCC expects all banks to take an active role in improving industry practice with respect to guarantee compliance. The Committee will follow-up with Code subscribers to seek updates on steps being taken to implement its recommendations and enhance their capability to comply with the Code’s guarantee provisions,” Mr Govey said.
The Inquiry was prompted by unexplained inconsistencies in banks’ breach data over several years and concerns about the evidence given in the Financial Services Royal Commission. It commenced shortly before the revised Banking Code came into operation in 2019, and all banks that subscribed to the 2013 version of the Code were subject to the Inquiry.
Details about the BCCC and its work are available on its website.