The ABA’s update of the Code of Banking Practice provides an opportune moment to review the scope and operation of the Code.

The amendments make only minor changes to COBP. Banks will be bound from the date they adopt the amendments which is intended to be prior to 1 February 2014. Not all banks adopt the Code, however, some adopt the Code on a qualified basis. The ABA website shows the ‘adoption status’ of each bank.

What is the legal effect of the Code?

Clause 4.2 of the revised Code is in the same terms as clause 3.2 of the current Code. This clause provides that if the Code imposes an obligation on a bank in addition to obligations applying under the law, the bank will also comply with the Code, except where doing so would lead to a breach of a law (for example, a privacy law).

The effect of this provision was recently considered by the Supreme Court of South Australia in Commonwealth Bank of Australia v Starrs [2012] SASC 222. Although the Code did not apply in that case, the judge considered whether if it did apply would a breach wholly invalidate the relevant transaction document (for example, a guarantee). The judge concluded that “it cannot be taken to be the intention of the parties…that a breach of a provision, or even a number of provisions, of the Code will necessarily have that effect.”

The court considered that the Code is largely a collection of ‘dos and don’ts’ of bankers’ conduct, which might give rise to a claim of unconscionability in some cases. The Code does not specify any specific remedy for breach of any of its provisions.

What is the Code about?

The Code generally applies to individuals (ie natural persons) and small businesses. Its over-riding purpose is to set out standards of good conduct. The Code operates in addition and often over-laps protections in the National Credit Code and other legislation.

The key provisions of the Code deal with:

  • information subscribing banks need to provide customers and guarantors about their banking services;
  • hardship applications;
  • debt collection; and
  • chargebacks on credit cards.

Importantly, clause 29 which provides that banks will not accept a person a co-debtor under a credit facility where it is clear that the person will not receive a benefit. These ‘third parties’ should be guarantors. Also, banks need to make it clear to joint debtors that they are jointly liable for the full debt.

What’s changed?

The following is an incomplete summary of the key changes. The changes apply to new banking services provided after the adoption date and some ongoing banking services.

  1. New provisions regarding customers in a remote indigenous community regarding more tailored disclosure, products, assistance, and training (clause 8).
  2. If the bank holds a mortgage over a customer’s primary place of residence or residential investment property, the bank will remind the customer annually of the customer’s obligations to insure the property. The reminder will include a general statement to make inquiries with the insurer about the cover, and refer to ASIC’s MoneySmart website for information about property insurance (clause 12.6).
  3. If low income earners or disadvantaged persons requests information about accounts which attract no or low standard fees and charges, the bank will provide information about those accounts. In addition, if in the course of speaking with a customer a bank becomes aware that a person may hold a Commonwealth Seniors Health Card, Health Care Card, or Pensioner Concession Card, the bank will provide information about those accounts (clause 16.3). Gadens note: these are low fees, not low interest rates.
  4. Banks will disclose the existence of any application fee or charge and whether the fee or charge is refundable prior to customers becoming liable to pay that fee or charge (clause 18)
  5. Banks must not combine accounts (set-off) or assign debts while actively considering a hardship application (clause 19 and 32).
  6. If a bank varies the terms of a credit facility provided to a specific small business (as distinct from varying the terms applying to all small business customers), and the variation may materially adversely affect the small business, the bank will give reasonable notice (not less than 10 business days) unless the bank considers a shorter period is necessary to avoid or reduce credit risk (clause 20.4).
  7. The hardship provisions have been amended to generally fall in line with the new Credit Code regime. Banks agree not to require customers to apply for early release of their superannuation, and recommend that customers seek independent advice about this option. These provisions apply to small businesses (clause 28).
  8. On request by the customer, banks will deal with financial counsellors (instead of the customer) in relation to credit facilities when the customer is suffering financial hardship (clause 28.3).