Chapter 4
Other EDR schemes and borrower protections
Introduction
4.1
This chapter examines EDR schemes for ADIs and other legislated borrower
protections. Each of the EDR schemes is briefly summarised followed by an
analysis of the coverage of the scheme, as well as any gaps identified in the
scheme's coverage.
Self-regulation through codes of conduct
4.2
The Code of Banking Practice and the Customer Owned Banking Code of
Practice are the two primary sources of self-regulation in the Australian
banking industry.
4.3
The Australian Bankers' Association (ABA) manages the Code of
Banking Practice (the Code) that applies to their members. The ABA describes
the Code as the banking industry's customer charter on best banking practice
standards. It sets out the banking industry's key commitments and obligations
to customers on standards of practice, disclosure
and principles of conduct for their banking services. The Code applies to
personal and small business bank customers.[1] Operation of the FOS and the role that it plays in
relation to EDR and borrow complaints was discussed in detail in the previous
chapter, so it is not covered again here.
4.4
ASIC informed the committee that courts have considered that the Code
may operate as a contract between banker and customer; however, a breach of the
Code does not constitute unconscionable conduct and does not require a bank to
subordinate its own interests to that of the borrower. ASIC noted that a breach
of the Code is a factor that may be considered by the Court in determining
unconscionability.[2]
4.5
The Customer Owned Banking Association (COBA) manages the Customer Owned
Banking Code of Practice (COBCOP). COBCOP is described as the code of practice for
Australia's credit unions, mutual banks and mutual building societies.[3]
COBCOP is discussed further below.
FOSCode
4.6
The FOS has a Code Compliance and Monitoring Team (FOSCode) which is a
separately operated and funded business unit of FOS, reporting to the Chief
Ombudsman. The Team supports independent committees that monitor compliance with
codes of practice in the banking, customer-owned banking, general insurance and
insurance broking industries. These committees are comprised of an independent
Chair, an industry representative and a representative of consumers and small
business. The aim is to achieve service standards that people can trust
within the respective industries.[4]
4.7
The role of the independent FOSCode committees is to work with both
industry and consumers to ensure that key promises made about service delivery
are met and that financial service providers have effective systems in place to
ensure compliance with those obligations and to resolve disputes with their
customers, if and when they arise. This is done by actively monitoring
compliance through annual compliance statement returns, shadow shopping, own
motion inquiries and investigating concerns lodged by consumers that the codes
may have been breached.
4.8
The FOScode committees have undertaken inquiries into a range of matters
including whether banks are meeting their obligations to borrowers in financial
difficulty, the visibility and accessibility of information for consumers about
the Codes and internal and external dispute resolution, chargebacks, direct
debits and guarantees.[5]
CCMC
4.9
The CCMC is an independent compliance monitoring body established by the
Australian Bankers' Association under clause 36 of the 2013 Code of Banking
Practice (the Code). It is comprised of an independent chair, a person
representing the interests of the banking industry and a person representing
the interests of consumers and small business. This is consistent with the
model for self-regulatory governance under ASIC’s Regulatory Guide 183.[6]
4.10
The CCMC states that it adopts a collaborative approach to working with
code-subscribing banks and aims to be a trusted and valued partner, assisting
banks to comply with their Code obligations. The CCMC’s Mandate (which is an
attachment to the Code) sets out its powers and functions, which include:
-
monitoring banks’ compliance with the Code’s obligations;
-
investigating an allegation that a bank has breached the Code,
and
-
monitoring aspects of the Code that are referred to the CCMC by
the ABA.[7]
4.11
The CCMC informed the committee that the Code is a voluntary code of
conduct which sets standards of good banking practice for subscribing banks to
follow when dealing with individual or small business customers of a
code-subscribing bank, or a guarantor. The CCMC indicated that:
Eighteen banks, representing 13 banking groups, currently
subscribe to the Code meaning that it covers approximately 95% of the
Australian retail banking industry.[8]
Once a bank has subscribed to the Code, it becomes part of
the enforceable contract between the customer and the bank. A breach of the
Code by a bank is a breach of that contract.[9]
CCMC jurisdiction limits
4.12
Routine CCMC investigations are limited to matters that occurred within
the previous 12 months, however the CCMC can request a bank's permission to go
beyond 12 months or the CCMC can initiate an own motion inquiry:
The 12-month rule...arises quite frequently when complaints are
received. When it does arise, our experience to date is that, mostly, the banks
will agree to allow us to go behind the 12-month period...Once a bank declines to
allow us to go beyond the 12-month period in the code, that is the end of the
matter from our perspective...[except] if we were to form a view that, indeed,
the bank was being unreasonable in refusing its permission to go beyond the
12-month rule, we could, under another provision in the code, initiate an own
motion inquiry.[10]
4.13
The CCMC acknowledged that there are no specific provisions in the Code that
relate to the revaluation of security or impairment of loans. The CCMC is
therefore not able to investigate issues relating to impairment or valuations.
The CCMC informed the committee that it has no record of investigating any
matters where impairment or valuations were raised as part of a complaint, nor
any record of any individual or small business bank customer approaching the
CCMC with a complaint solely about revaluation of loan security or loan
impairment.[11]
4.14
The CCMC also informed the committee that the code does impose a number
of obligations that are relevant to this inquiry. The obligations are:
-
clause 27, to act as a prudent and diligent banker in assessing a
customer's ability to repay a credit facility;
-
clause 28, an obligation to try to assist customers with their
agreement and cooperation to overcome financial difficulties with any credit
facility held with the bank; and
-
clause 20, to provide at least 10 days' notice to a small
business customer of any change to terms and conditions where the change will
be materially adverse to the customer and will only affect that customer.[12]
4.15
The Tasmanian Small Business Council argued that the CCMC rules mean
that many matters are not heard:
In fact, any of the 16 banks against which a complaint has
been lodged can refer the complaint to 'any forum', meaning they can commence
an action in the court, refer customers to the Financial Ombudsman or, as has
recently been the case in drought-affected farming areas, force customers into
mediation. In each of these cases, customers' rights to have the monitors
investigate the code breaches are dishonestly taken away.[13]
4.16
The CCMC has a limited capacity to assist borrowers. The only action the
CCMC can take is to determine whether a breach of the Code has occurred. The
CCMC informed the committee that:
The sole remedy we can provide for an individual is to say,
'Yes, you are quite right. Bank X did breach the Code Of Banking Practice.' The
reason people come to us rather than going elsewhere is usually because they
want to, for example, have a technical finding of a breach of the code which
might assist them in litigation or other dealings.[14]
The Code does not give the CCMC the power to make orders for
compensation, declarations on the rights and entitlements of parties or issue
fines and penalties. Where an allegation to the CCMC is concurrently also in
another forum (such as FOS or a Court) the CCMC puts its process on hold until
that other forum has finished its review.[15]
4.17
The ABA informed the committee that the limitations on the CCMC apply to
avoid duplication of process, possible inconsistent findings and to ensure that
an allegation a bank has breached the code is made in a timely way.[16]
4.18
The CCMC informed the committee that under the terms of its mandate, any
decision made by the FOS to the effect that a code-subscribing bank has
breached the Code will be adopted by the CCMC.
4.19
The Code applies to retail banking customers of banking services
provided by banks to individual and small business customers or potential
customers as defined in the Code. The CMCC advised the committee that:
It also applies to any individual from whom a bank has
obtained or proposes to obtain a bank guarantee. Thirteen banking groups
currently subscribe to the code, meaning that it covers approximately 95 per
cent of the Australian retail banking industry. The code forms an important
part of the broader national consumer protection framework. It is a means by
which code-subscribing banks complement statutory law and regulation in areas
relating to service issues for consumers, standards of professional conduct,
banking practices and, importantly, ethical behaviour.[17]
4.20
In its 2013–14 Annual Report, the CCMC noted that in 2013–14, 26 of 48
and that in 2012–13, 12 of 84 alleged breaches of the Code were confirmed by
the CCMC.[18]
As noted above the CCMC is only able to determine that a breach has occurred.
Borrower awareness of the code
4.21
The Tasmanian Small Business Council argued that the existence and
contents of the Code of Banking Practice are not well known by customers:
The Australian Bankers' Association say publicly that the
Code of Banking Practice is part of the lending agreement which customers enter
into. Few, if any, banks actually provide a copy of that code to the customer
when the time comes to sign the documentation, although it is referred to
consistently through the lending agreement.[19]
4.22
The ABA argued that information on EDR and the Code is readily available
and that information about these arrangements must be prominently published by
the bank, including in branches, on internet sites and in telephone banking
services.[20]
4.23
The CCMC provided information about how it sought to inform bank
customers about the banking code of practice:
...there is a listing of the number of locations to which the
code is actually provided, one of which is 'every branch of every bank in the
country'. In order to ensure that these are readily available to members of the
public, the CCMC has its staff undertake mystery shopping expeditions: in
different locations they simply walk into a branch to see whether the code is
readily available—and not only in branches but on a range of websites. There
are also several hundred subscribers, in various ways electronically, to
information about the code. That represents consumer groups and others.[21]
4.24
The CCMC also noted that it maintains contact with financial counsellors
and other bodies that are dealing with people in financial trouble. The CCMC
informed the committee that:
For example, the most prominent one is Financial Counselling
Australia. There are approximately a thousand financial counsellors across
Australia. We address and attend their conferences, we send staff out talking
to consumer groups, we talk to local legal groups—legal aid groups and other
community legal centres.[22]
Credit and Investments Ombudsman
4.25
The Credit and Investments Ombudsman (CIO) provides
a free, independent and partial dispute resolution service to facilitate the
resolution of complaints between consumers and participants of the EDR scheme.
In doing so, the CIO provides both consumers and financial services
providers with an alternative to legal proceedings for resolving financial
services disputes. The CIO is required to meet benchmarks prescribed and
approved by ASIC to operate as an EDR scheme in the financial services
industry. Participants of the CIO scheme include non-bank lenders, finance
brokers, credit unions, building societies, debt collection firms, financial
planners, trustees, servicers, aggregators, mortgage managers, and many more.[23]
4.26
The CIO is also funded by participating financial service providers
through fees including application fees, an annual user levy based on the size
of the business[24]
and service fees for complaints received by the CIO.[25]
4.27
The CIO scheme has the following limits in relation to small business:
-
the borrower did not have net assets of $2.5 million or more for
each of the two financial years prior to the date of making the complaint;
-
the borrower did not have a gross income of $250,000 or more for
each of the two financial years prior to the date of making the complaint; and
-
excluding claims where the financial services provider had,
before the complaint was received by the scheme, commenced legal proceedings
against the small business complainant in relation to a credit facility having
a credit limit of more than $2 million.[26]
Customer Owned Banking Code Compliance Committee
4.28
The Customer Owned Banking Code Compliance Committee (Code Compliance
Committee) supports credit unions, mutual banks and mutual building societies
to achieve their service standards. The Code Compliance Committee monitors
compliance with the Customer Owned Banking Code of Practice (COBCOP) which is a
set of promises outlining how Australia’s customer owned banks should behave in
their dealings with customers.[27]
4.29
The role of the Code Compliance Committee is to investigate allegations
that a customer owned bank has breached its obligations under the COBCOP and to
work with the customer owned bank to ensure the breach does not happen again.[28]
ASIC
ASIC's role in regulating credit
4.30
In relation to issues raised by the terms of reference, ASIC identified
that its role as the national regulator for consumer credit is based on:
-
administering the broader regulatory framework for insolvency
practitioners, including receivers, under the Corporations Act; and
-
to the extent that it applies, the regulatory framework for
lenders under the ASIC Act and the National Consumer Credit Protection Act
2009 (National Credit Act)—noting that the National Credit Act does not
apply to loans for business purposes.[29]
4.31
ASIC also administers the Australian Securities and Investments
Commission Act 2001 (ASIC Act), which contains provisions relating to
prohibitions on unconscionable conduct and false or misleading representations
in relation to financial services, including credit. These ASIC Act provisions
are not limited to consumer credit, and extend to credit for business and
commercial purposes.[30]
4.32
ASIC's role in relation to commercial lending and borrowing is more
limited as consumer protection laws under the Australian Consumer Law do not
apply.[31]
For commercial lending activity, ASIC’s role is limited to administering the
consumer protection provisions in the ASIC Act, including the prohibition on
false or misleading representations and unconscionable conduct.[32]
4.33
ASIC regulates the conduct of lenders and receivers (and other
insolvency practitioners) under the provisions of the Corporations Act, the
ASIC Act and the National Consumer Credit Protection Act 2009 including
the National Credit Code.
4.34
ASIC noted that disputes between lenders and borrowers, including the
actions of receivers, do not necessarily suggest that the lender or receiver
has breached a regulatory obligation enforced by ASIC. This is more so the case
in relation to commercial lending and borrowing, where ASIC has a limited
jurisdiction compared with consumer credit. In addition, the focus of ASIC’s
regulatory action must be the public interest. Given limitations of ASIC's
resources, ASIC’s role does not extend to taking actions against lenders or
receivers on behalf of individuals or businesses in relation to their private
disputes.[33]
4.35
ASIC informed the committee that:
ASIC does not intervene in individual disputes in financial
services and corporate regulation, and is not resourced to undertake such a
role. ASIC’s role is not to provide an ombudsman or mediation service for
individual disputes. This includes disputes between lenders and debtors. The
exception is where such action would serve a broader public interest. The
regulatory obligations for commercial lending activity are far more limited
than for retail (consumer) lending. In general, the number of reports we have
received relating to commercial lending and the issues relating to the
inquiry’s terms of reference is small.[34]
National Consumer Credit Protection Act
4.36
ASIC is the national regulator for consumer credit under the National
Consumer Credit Protection Act 2009 (NCCP Act). Central elements of the
NCCP Act include:
-
a licensing regime that imposes minimum standards of conduct for
credit industry participants, including requirements for competence, mandatory
membership of an ASIC-approved external dispute resolution (EDR) scheme,
compensation arrangements, and adequate compliance and risk management systems.
The licensing regime provides mechanisms to cancel an Australian credit licence
(credit licence) and ban persons from engaging in credit activities;
-
responsible lending obligations (discussed below); and
-
lender disclosure and conduct obligations under the National
Credit Code which includes specific requirements for pre-contractual
disclosures, interest charges, mortgages, and enforcement action.[35]
Previous consideration of reforms
4.37
ASIC informed the committee about previous reforms that considered
extending protection of the National Consumer Credit Protection Act to small
business. In December 2012, the National Consumer Credit Protection Amendment
(Credit Reform Phase 2) Bill 2012 was released for public consultation. Among
other items, the bill proposed amendments to the National Credit Act to extend
regulation to small business lending, with a focus on disclosure of fees by
finance brokers and responsible lending provisions focused on equity stripping
(i.e. the practice of lending to small business borrowers seeking to refinance
another loan on which they had defaulted on repayments and where the new loan
is to be secured by a mortgage over residential property).[36]
4.38
In February 2013, the Commonwealth government announced that it had
decided that any reforms to small business finance would be deferred as
consultation had indicated a need to further examine a number of key issues,
including whether the benefits could be delivered in a more targeted and
effective way. Further reforms have not been proposed. ASIC indicated that its
understanding is that some small business representatives were concerned that
the proposed amendments may restrict lending in the sector.[37]
4.39
While some submitters and witnesses to this inquiry have sought reforms
to small business finance, some small business peak bodies do not share that
view. For example, the Commercial Asset Finance Brokers Association of
Australia (the national peak professional body of the equipment finance
industry) made the following statement in its 2013–14 annual review:
It is well known that CAFBA, through its association with the
Council of Small Business Organisations of Australia (COSBOA), was the primary
force behind the previous government’s deferral of NCCP Phase 2, which would
have pushed consumer type legislation into small business lending. The effect
of this would be to make lending to small business more difficult and more
expensive.[38]
4.40
The committee notes the above concerns about access to finance. However,
during its inquiry into business set-up transfer and closure, the Productivity
Commission found that access to finance is not a significant barrier for most
new businesses and that businesses with a credible business plan are successful
in seeking debt or equity finance.[39]
Responsible lending
4.41
The NCCP Act requires all providers of consumer credit, including
brokers and intermediaries to meet reasonable lending conduct requirements so
that they do not provide credit products and services that are unsuitable,
either because they do not meet the consumers' requirements or because the
consumer does not have the capacity to meet the repayments.[40]
ASIC informed the committee that:
Responsible lending obligations, which mandate that credit
licensees must make inquiries into a consumer’s objectives and financial
situation and verify their financial situation. Credit licensees must assess
this information and not provide or suggest credit to a consumer if that credit
will not meet the consumer’s objectives or the consumer will not be able to
meet their financial obligations without substantial hardship.[41]
4.42
Data collected by APRA shows that the responsible lending obligations
have had a positive impact on the credit industry. The amount of new approved
low documentation loans issued by ADIs declined
89.52% from approximately $4.8 billion on 30 June 2009 to $0.5 billion on 30
September 2013. As a percentage of all new
household loans approved per quarter, the proportion of low doc loans fell from
6.95% to 0.66% over the same period.[42]
4.43
ASIC undertakes regular monitoring of responsible lending, covering 79
per cent of owner-occupied mortgages in the big four banks every year and the
remaining 160 ADIs every 13 years.
4.44
FOS informed the committee that when a consumer cannot make their loan
repayments, they may claim their financial services provider should not have
given them the loan because they never had the capacity to repay it. The
consumer may lodge a dispute with FOS seeking compensation for a loss resulting
from provision of the loan. FOS refers to this as a “responsible lending” dispute.
When FOS considers responsible lending disputes, FOS decides whether it was
appropriate for the financial services provider to enter into the loan.[43]
Unconscionable conduct
4.45
The ASIC Act contains prohibitions on unconscionable conduct and false
or misleading representations in relation to financial services, including
credit. These provisions are not limited to consumer credit, and extend to
credit for business and commercial purposes.[44]
4.46 In seeking to enforce loans, lenders are subject to a prohibition on
engaging in unconscionable conduct. Section 12CB of the ASIC Act prohibits
unconscionable conduct in relation to credit facilities, including commercial
loans. The protections can apply to conduct in relation to the initial
provision of credit and the collection of a debt owing under a contract,
including enforcement action. Through its submission, ASIC informed the
committee that:
Whether particular conduct is unconscionable turns on the
specific facts of the case. Establishing unconscionable conduct across a number
of loan transactions can be more difficult than establishing unconscionable
conduct in an individual transaction. In addition, the courts impose a high bar
when a party is seeking to establish unconscionable conduct in relation to a
commercial loan, as performance of contracted promises freely and fairly made
is central to commerce.[45]
4.47
Where lenders are regulated under National Credit Code they are
generally required to provide debtors with a written default notice containing
prescribed particulars. Lenders seeking to enforce loans must also meet certain
other requirements, including that:
-
at least 30 days be given to the debtor to rectify a default; and
-
a lender cannot commence enforcement action until it has dealt
with any hardship application made by the debtor.[46]
4.48
ASIC informed the committee that it is very difficult to establish
conduct that is unconscionable under the law. There have been some court cases,
but borrowers have had a very difficult time in establishing their case. ASIC
indicated that:
...we have not seen a case where we would say we get involved
and will explore or better something or widen the class or the definition of
'unconscionable conduct'. [47]
In making a finding of unconscionability, Courts have
generally concluded that some moral fault or responsibility or lack of ethics
was involved. This requires a consideration of legal, commercial and social
norms. The courts therefore impose a high bar when a party is seeking to
establish unconscionable conduct in relation to a commercial loan, as
performance of freely made contractual promises is central to commerce.
In addition, the statutory unconscionable conduct prohibition
as it applies to the provision of credit does not extend to borrowers who are
publicly listed companies.[48]
Unfair contract terms
4.49
Consumers are also protected from unfair terms in standard form consumer
contracts. The ASIC Act allows a court to declare void a term in a standard
form consumer contract for certain financial products
or financial services that it finds to be unfair. A
term is unfair if it:
-
would cause a significant imbalance in the parties' rights and obligations arising under the
contract;
-
is not reasonably necessary in order to protect the legitimate
interests of the party who would be advantaged by the term; and
-
would cause detriment (whether financial or otherwise) to a party
if it were to be applied or relied on.
4.50
The Financial System Inquiry (FSI) considered unfair contract term
provisions and supported the government’s proposal to extend unfair contract
term protections to small businesses and encouraged industry to develop
standards on the use of non-monetary default covenants.[49]
From 12 November 2016, unfair contract term protections will also be available
to small businesses (businesses employing fewer than 20 people) when they
engage in standard form contracts worth no more than $300,000, or $1 million if
the contract duration is longer than 12 months.
4.51
The FOS supported the introduction of unfair contract terms for small
business. However, in doing so, the FOS noted that the introduction of the
legislation may not address all of the concerns being considered by the
committee. For example, if there has been a significant fall in the
loan-to-valuation ratio, it may be fair and reasonable for a lender to require
that the level of borrowing be reduced rather than repaid, in order to meet the
lending-to-value ratio requirements. That may not necessarily be an unfair
contract term in itself.[50]
Financial hardship
4.52
The National Credit Code also provides borrowers with mechanisms to seek
changes to credit contracts on the grounds of hardship and for the courts, on
application, to reopen unjust transactions or to annul or reduce unconscionable
interest or other charges.[51]
ASIC informed the committee that:
A lender may agree to change the terms of the credit contract
in response to the hardship notice by reducing the repayments, extending the
period of the contract or postponing the due date, or any combination of
changes.
The lender need not agree to change the credit contract as a
result of a hardship notice. This is especially true if the lender does not
believe there is a reasonable cause (such as illness or unemployment) for the
debtor’s inability to meet their obligations or the lender reasonably believes
the debtor would not be able to meet their obligations under the contract even
if it were changed.
If the lender decides not to change the credit contract, the
debtor may take the matter to an EDR scheme. This has become a significant
source of disputes for EDR schemes.[52]
4.53
The eligibility provisions for financial hardship have varied in recent
years in the following way:
-
for loans established from March 2013, there are no caps on the
loan value. Prior to March 2013, there were upper limits that varied over time
and between states and territories;[53]
and
-
since January 2014, FOS has been able to consider financial
difficulty application and has the power to vary the terms of some personal or
residential credit contacts.[54]
4.54
The CCMC informed the committee that during the 2014-15 financial year,
the CCMC conducted an own motion inquiry into how well banks comply with the
Code's financial difficulty obligations. The CCMC inquiry confirmed that banks
had improved the way they deal with customers, including small businesses, when
they were experiencing difficulty repaying a credit facility.[55]
This inquiry found that banks had in place adequate systems
and procedures to meet these obligations. The inquiry did, however, make some
recommendations to promote better informed decisions by prospective guarantors.[56]
During the last financial year, 44 allegations were received
alleging that banks had breached their obligations under the code. Of this
number, we determined that 19 were actual breaches of the code and that only
five of the breaches related to the provision of credit obligations.[57]
4.55
In its inquiry into financial difficulty, the CCMC made the following
recommendations for ways in which banks could increase their level of
compliance with the Code:
-
ensure that their processes and procedures are applied
consistently for all customers, including those who are not represented by a
consumer advocate;
-
ensure processes are appropriate for customers with particular
issues, for example those related to poor mental health or family violence;
-
consider whether their procedures are adequate to avoid making
unnecessary or inappropriate requests for information that may be difficult or
time consuming for customers to fulfil; and
-
continue to identify areas where further improvements can be made
by analysing data regarding customers who request assistance more than once and
complaints related to financial difficulty assistance.[58]
Australian Small Business and Family Enterprise Ombudsman
4.56
The Australian Small Business and Family Enterprise (ASBFE) Ombudsman
was established on 15 March 2016.[59]
Under the assistance function, the Ombudsman responds to requests for
assistance by an operator of a small business or family
enterprise.[60]
4.57
The assistance requested may relate to a dispute with another entity. In
that case, the ASBFE Ombudsman may recommend that an alternative dispute
resolution process be undertaken. The ASBFE Ombudsman may keep a list of
alternative dispute resolution providers, to assist small businesses and family
enterprises in accessing alternative dispute resolution.[61]
Treasury described this function of the ASBFE Ombudsman as providing a
concierge service for small business dispute resolution.[62]
4.58
The ASBFE Ombudsman has information-gathering powers and where directed
by the Minister, the ASBFE Ombudsman would inquire into matters including by
taking evidence in hearings.[63]
As discussed in chapter 2, the committee is recommending a significantly
enhanced role for the ASBFE Ombudsman.
Farm debt mediation
4.59
Farm debt mediation (FDM) is a mechanism to facilitate a discussion
between a farmer and their bank or other lender so they can better negotiate
their financial position. The process uses an independent mediator to help
identify workable solutions.[64]
The ABA informed the committee that:
The ABA believes that farm debt mediation can deliver
positive outcomes for all parties. The process varies across jurisdictions.
Currently NSW and Victoria are the only states with mandatory farm debt
mediation schemes. The ABA has advocated for some time for the implementation
of a consistent farm debt mediation model across Australia.[65]
4.60
The ANZ encouraged the committee to 'consider recommending a national
approach to farm debt mediation', and noted that:
While formal schemes are not currently available in all
states and territories, ANZ's approach is to offer farm debt mediation in all
cases, even if it is not mandatory. All Australian farmers should have access
to high-quality, independent mediation processes operating under nationally
consistent principles.[66]
4.61
NAB supported the development of a national farm debt mediation scheme:
...a single national farm debt mediation scheme should be
implemented as a matter of priority. Our experience of the existing state based
farm debt mediation schemes is positive. That is particularly so where there is
additional legal, financial, health and community support provided to our
farmers. However, there are areas of ambiguity and inconsistency across the
various state schemes which would benefit from a national approach.[67]
4.62
The Department of Agriculture informed the committee that a national
approach will ensure that all farmers, regardless of where they do business,
have access to a consistent and fair method of addressing debt serviceability
issues:
The FDM working group was re-established and has developed an
options paper which identifies key aspects and processes within a national FDM
approach and how these could be implemented consistently Australia-wide. Further
work is planned with the states and territories, as well as other key
stakeholders, to settle the finer details and establish the best processes for
implementing a nationally consistent scheme in due course.[68]
Commercial arbitration
4.63
The committee has noted the existence of commercial arbitration
providers and sought the banks' views of the use of commercial arbitration for
small business and commercial loan disputes that fall outside the jurisdiction
on EDR schemes.
4.64
ANZ acknowledged that in some cases borrowers cannot afford to
participate in court proceedings against banks, but indicated that ANZ was not
in favour of commercial arbitration, stating that:
Ultimately, the arbitration process is going to require
exactly the same as the court process. It is going to be just as costly.
Mediation is clearly a better outcome if the parties can get to a point where
they can agree. I am aware of several cases where there is no way there is
going to be an agreement and, for the most part, they will go through a court
process. It is unfortunate, but that is just where it is. We get to a point
where you cannot agree to something that you absolutely do not agree with. It
is not about the dollars here or there; it is about fundamental disagreement.
That is where you have those problems.
I know that we have got to a point with some of our customers
where we have paid them to get legal advice to help them through an issue
because they have a completely different view. We have paid for them to get
independent legal advice to help them better understand their situation because
we believe that they are wrong. They are better to get the advice there and
come back and mediate, rather than to go through a whole court process. But
there are some customers—and we are talking about at the very margins—who will
never agree with you. They will fight to the last. I would say one or two of
the customers who are in dispute in this inquiry fit into that camp.[69]
4.65
The Commonwealth Bank indicated that, in its view, commercial
arbitration had provided an expedient alternative in the past, however the
costs of the process were now more substantial:
...whilst in the past it had quite an attractive element to it,
these days commercial arbitration itself is quite a lengthy, time consuming and
legalistic process. Perhaps to just take your question away from commercial
arbitration per se and to look at some alternative dispute mechanisms, my
response to that would be: in the case of small business, that might be an
appropriate position to take. However, I imagine that, in the case of medium to
large businesses, we tend to operate on the basis that those businesses are
able to pursue their legal rights if the parties are unable to come to an
agreement.[70]
4.66
In 2010, the International Arbitration Act 1974 (Cth) was amended
to increase the effectiveness, efficiency and affordability of international
commercial arbitration.[71]
In May 2010, the Standing Committee of Attorneys-General agreed to implement a
Model Commercial Arbitration Bill (Model Bill) to apply to domestic arbitration
in Australia. These reforms were aimed at harmonising domestic arbitration law
with the law applying to international arbitration. The first State to
implement the Model Bill was NSW which passed the Commercial Arbitration Act
2010 in June 2010. The majority of other states and territories in
Australia have now followed suit. These reforms provide the framework for
internationally experienced arbitrators to resolve local, cross-border and
international disputes on Australian territory.[72]
4.67
The committee noted that in general the fees for commercial arbitration
are still likely to be lower than court costs based on the example fees set out
in the Australian Centre for International Commercial Arbitration rules. The
example fees include a $2 500 registration fee, plus an administration fee
ranging from 1 per cent of the dispute for dispute up to $500 000 to a maximum
fee of $60 000.[73]
The costs are generally borne by the unsuccessful party, however, the
arbitration process can apportion costs between the parties.[74]
Summary of dispute resolution schemes and consumer protections
4.68
Table 3.1 provides a summary of the existing dispute resolution schemes
and consumer protections that a borrower may consider if they have a dispute
with their lender.
Table
4.1: Existing dispute resolution schemes and consumer protections
Protections
and dispute mechanisms available to borrowers
|
Retail / Residential
|
Small Business
|
Larger
Commercial
|
Internal dispute resolution with
lenders
|
Y
|
Y
|
Y
|
Financial Ombudsman Service
|
Y
|
Some
|
N
|
FOSCode – FOS Code Compliance
monitoring team
|
Y
|
Some
|
N
|
Code Compliance Monitoring
Committee^^
|
Y
|
Some
|
N
|
Credit and Investments
Ombudsman***
|
Y
|
Some
|
N
|
Customer Owned Banking Code
Compliance Committee#
|
Y
|
Some
|
N
|
Responsible lending NCCP Act
|
Y
|
N
|
N
|
Financial hardship NCCP Act
|
Y
|
N
|
N
|
Prohibitions on unconscionable
conduct###
|
Y
|
Y
|
Y
|
Protection from unfair contract
terms##
|
Y
|
Some
|
N
|
Australian Small Business and
Family Enterprise Ombudsman*
|
N
|
Concierge only
|
N
|
National Farm Debt Mediation**
|
N
|
N
|
N
|
Commercial arbitration
|
N
|
N
|
Some
|
Taking action through the
courts
|
Y
|
Y
|
Y
|
Source: Treasury, Answers to
questions on notice, taken on 1 December 2015, received on 14 December
2015. # Customer Owned Banking Association, Customer Owned Banking Code of
Conduct, January 2014, p. 6. # The COBCOP notes that the code may be
voluntarily applied to other customers. ## ASIC information sheet, Unfair
contract term protections for small businesses. *Announcement by Minister
for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP, http://www.asbfeo.gov.au/news-article/asbfeo-commences, Australian Small Business and Family Enterprise
Ombudsman Act 2015, pp 6–7, Treasury, Australian Small Business and
Family Enterprise Ombudsman, http://www.treasury.gov.au/Policy-Topics/Business/Small-Business/Family-Enterprise-Ombudsman, (accessed
22 March 2016). *** Credit and Investments Ombudsman, Credit and
investment ombudsman rules, 5 May 2014, p. 14. ** Department of
Agriculture, Submission 44, p. 2. ### ASIC Supplementary submission
45, p. 4.
Committee view
4.69
As discussed in chapters 2 and 7, both borrowers and lenders have
discretion to make commercial judgments under loan contracts that enable them
to take actions that, theoretically, significantly affect the financial
position of the other party. In practice only the small business borrower is
likely to be significantly affected. While the committee appreciates that these
are private contracts that parties are able to freely enter into, the committee
is concerned that the transparency and accountability associated with the
discretion to make commercial judgements by banks is insufficient for customers
to be assured that they are being treated fairly at all times.
4.70
Where disputes arise that affect the interests of banks, the loan
contracts, prudential standards and accounting standards allow the banks to
adequately protect their interests. Borrowers, on the other hand, have limited
power or capacity to negotiate contract terms with banks when loans are
established. Where disputes affect borrowers' interests:
-
borrowers subject to circumstances including receivership are
often unable to use the court system to protect their interests during disputes
because the borrowers have lost legal control of their financial resources;
-
there is a group of borrowers for whom no dispute resolution
mechanism exists because their circumstances fall outside the jurisdiction of
existing dispute resolution mechanisms; and
-
existing dispute resolution mechanisms can be complex, lack
transparency and are fragmented across multiple organisations, some of which
are not perceived by borrowers to be sufficiently independent from banks.
4.71
The FOS informed the committee that it considers that there are some
banks' small business recovery areas where refresher training in relation to
provisions of the Code of Banking Practice 'would not go astray'. The FOS also
argued that there are provisions of the code that are of great benefit to
individuals and small businesses, particularly those relating to lending
standards, the taking of guarantees, and hardship.[75]
4.72
The committee considers that refresher training is not sufficient. As
recommended in chapter 2, the ASBFE Ombudsman should lead the development and
implementation of an appropriate professional standard framework by working
with relevant experts in financial services, ethics and education.
ASBFE Ombudsman and EDR schemes
4.73
The committee welcomes the creation of the ASBFE Ombudsman and the
assistance function it has in providing a concierge service for dispute
resolution, and notes that this service has the potential to assist small
business to navigate dispute resolution schemes and protections available to
them. The committee also welcomes the provisions that enable the ASBFE
Ombudsman to recommend that parties to a dispute participate in alternative
dispute resolution.
4.74
The ASBFE Ombudsman has the power to:
-
gather information and conduct investigations, including through
gathering evidence at hearings; and
-
publicise the fact that a party withdraws from or refuses to
participate in dispute resolution.[76]
4.75
However, the ASBFE Ombudsman is not able to conduct dispute resolution
and is not able to provide assistance if the person requesting assistance
became aware of the action more than 12 months before the request was made.[77]
The committee is concerned about this timeframe. The nature of matters that
arise in long term contracts such as consumer and small business loans means
that the impact of banks' actions may not be apparent within 12 months. For
actions such as irresponsible lending, unfair contract terms or unconscionable
conduct associated with troubled loans the impacts on the borrower are likely
to occur more than 12 months after the action as many submissions to this
inquiry have alleged.
4.76
As noted above, the ASBFE Ombudsman may publicise the fact that a party
withdraws from or refuses to participate in dispute resolution. The committee
welcomes that as an important aspect of accountability for both parties.
However, the committee is concerned that such a penalty is unlikely to compel a
bank to participate in dispute resolution and many borrowers will remain unable
to seek an independent consideration of their dispute.
4.77
The provisions of the ABSFE Ombudsman Act prevent the ombudsman from
recommending commercial arbitration.[78]
As discussed earlier in this chapter, commercial arbitration could provide a
viable alternative to courts for those businesses and commercial borrowers that
do not qualify for EDR schemes. The committee therefore recommends in chapter 2
that the ABSFE Ombudsman be empowered to recommend commercial arbitration for
larger commercial loans above its current jurisdiction.
4.78
The committee acknowledges the Australian Government's announcement on
20 April 2016 that ASIC would work with FOS to review FOS’s small business
jurisdiction with a view to extending FOS’s current jurisdiction to include a
wider range of small businesses loans, as well as conducting a review of
monetary limits and compensation caps.[79]
4.79
In chapter 2, the committee has recommended that the ASBFE Ombudsman
coordinates such reforms to ensure that gaps do not remain in the dispute
resolution arrangements for small business.
Farm Debt Mediation
4.80
The committee supports the development of a nationally consistent
approach to farm debt mediation. The committee notes that some work has been
progressed by the Department of Agriculture to develop a nationally consistent
farm debt mediation scheme.
4.81
In chapter 2, the committee is recommending the development of a
nationally consistent mediation scheme for both farm debt and small business
loans. The committee suggests that the development of the small business loan
mediation scheme could be informed by existing farm debt mediations schemes and
the work undertaken to date to develop a national farm debt mediation scheme.
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