Overview

Inquiry Type:     Follow-up

Topic:      Banks’ compliance with guarantee obligations in 2019 Banking Code of Practice

Scope:      All code-subscribing banks

Commenced:     November 2022

Status:      In progress

Have your say:     Share your experiences by emailing [email protected]

Our Focus

The Banking Code of Practice (part 7) protects individuals who give a guarantee to secure loans to other individuals or small businesses. It outlines the information banks must give prospective guarantors prior to accepting a guarantee. It also sets out requirements for banks around signing, withdrawing or ending a guarantee. Finally, it includes conditions for banks when they seek to enforce a guarantee.

Why this is important

It is critical that customers are fully informed prior to guaranteeing a loan. This is particularly important in reducing the risk of financial exploitation resulting from family violence or elder abuse.

An inquiry we completed in 2021 found that banks failed to consistently provide full disclosure of key information to guarantors. This failure was linked to poor record-keeping and inconsistent reporting systems.

Given the serious concerns highlighted in our Final Report (Report), we expected banks to have taken action to assess their practices, and, where necessary, improve them.

Follow-Up inquiry

We have commenced a follow-up inquiry to see what improvements banks have made since we published our Report.

Approach

We are engaging all Code-subscribing banks in our follow-up inquiry to look closely at their response to the recommendations in our Report.

This inquiry seeks to:

  • understand how Code-subscribing banks, including banks that were not asked to participate in the 2019 inquiry, have considered and responded (as appropriate) to our recommendations
  • assess improvements made to meet guarantee obligations
  • identify good practice and share this more broadly
  • identify areas for further improvement.

We will review the details of banks’ implementation plans, progress updates and other relevant information, including how banks considered our Report on Building Organisational Capability, when developing their response to the recommendations in our Report.

Progress

Stage

Status

Banks' responses

In progress

Stakeholder consultation

In progress

Analysis and Final Report

To commence

Guarantee obligations

Banks have specific obligations to customers under the guarantee obligations in Part 7 of the Banking Code of Practice.

Some of these obligations are outlined below:

Before accepting a guarantee

The bank must tell potential guarantors, before accepting a guarantee:

  • that they should seek independent legal and financial advice
  • that they can refuse to sign the guarantee
  • that there are financial risks involved
  • if a notice of demand has been made on the borrower for any loan within the previous two years

Signing a guarantee

  • There must be a specific warning notice above where the guarantor signs the guarantee.
  • The bank cannot accept the guarantee until the third day after the guarantor was given the required information, including the information above (unless under
  • certain circumstances, for example, the guarantor has obtained independent legal advice.
  • The guarantee documents must be given directly to the guarantor or their representative, not the borrower.

Information the bank must give the guarantor

  • The bank must provide the potential guarantor with copies of certain documents, such as the proposed loan contract.
  • During the guarantee, the bank must give the guarantor certain information about the borrower’s financial position if it is deteriorating, within 14 days, such as a copy of any default notice.

Enforcement

  • The bank will only enforce any mortgage or security the guarantor has given in connection with the guarantee, after it has first enforced any mortgage or other security that the borrower has provided.

Engagement

We would like to hear from you about your experience as a guarantor, or a customer relying on a guarantor, and how the bank managed this process.

We are particularly interested in hearing about experiences in the last two years.

Some points to think about in providing a response include:

  • Were you aware of the bank’s guarantee obligations under the Code during the guarantee process?
  • Do you believe that the bank met its obligations in the Code, such as those outlined above?
  • Did the bank engage with you directly or meet with you in person as a potential guarantor?
  • Did the bank help you understand the financial risks and consequences of acting as a guarantor?
  • Was there anything further you think the bank could have done to help you understand your responsibilities and the financial risks?
  • Did the bank suggest that you get independent legal and financial advice?
  • Did the bank provide the documents that you had to read and sign to you or your representative, and not the borrower?
  • Anything else you would like to share about your experience – what worked well and where is there opportunity to improve?

We also welcome submissions from consumer advocates and consumer advocacy groups, or legal representatives, who have assisted a customer or guarantor in a matter related to a guarantee recently.

Please provide any responses before 6 January 2023, by emailing: [email protected]

Original Inquiry

In 2019 we commenced an inquiry into banks’ compliance with guarantee obligations under the 2013 Code of Banking Practice. We examined the processes and practices of 13 banks to assess their compliance with these obligations.

Our Final Report was published in August 2021. We made 23 recommendations for the banks to improve their practices.

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