Lenders no longer able to earn commission on LMI

The first stages of the Australian Banking Association’s (ABA) new Banking Code of Practice, which have now been approved by the financial services regulator, came into effect on Monday (1 July). 

These changes, which include updates following concerns raised during the banking royal commission last year, include new provisions that “put beyond doubt” that a bank will not charge fees for services to deceased customers, where services are no longer being provided to that customer’s estate, and include changes to reflect ASIC’s implementation of law reforms to credit card responsible lending, among other updates.

As part of ABA membership, the association is requiring all members to sign up to the code, which the ABA says “represents the most significant increase to customer protections under a code in the industry’s history”. 

The code will be enforced by the Banking Code Compliance Committee, which can formally warn a bank, publicly name a bank for breaches and require a bank to rectify or take “corrective action” in cases of serious breaches. The committee can also order a bank signatory to undertake a compliance review, require a lender to train staff, and report serious, systemic and ongoing issues to ASIC.

The code is also enforceable through the courts and the new Australian Financial Complaints Authority. 

Overall, it requires signatories to comply with 215 clauses.  

Mortgage changes 

Among the lending changes under the new Banking Code of Practice, banks will no longer be able to charge commissions on lenders mortgage insurance. 

The code reads: “We may require you to pay for lenders mortgage insurance in connection with a loan you have. If we do this, we will give you a fact sheet about lenders mortgage insurance. The fact sheet will contain information outlining the key policy features. 

“We will not charge you more for lenders mortgage insurance than the actual cost we incur for that policy. We will not receive a commission on your lenders mortgage insurance policy. 

“Depending on the terms of the lenders mortgage insurance policy, if your loan is repaid or refinanced before the end of the policy, then you may be entitled to a refund of part of the fee or charge you have paid. We will explain this to you in the fact sheet.”

Other changes in the mortgage space include a mandatory three-day “cooling off period” for guarantors (to ensure they have closely considered the guarantee if they don’t have legal advice to ensure they understand what they’re signing) and a requirement that banks will first attempt to receive assets from the borrower before starting action against the guarantor to repay the loan.  

The banking code also calls on signatories to have “proactive contact” with customers deemed at risk of financial difficulty and includes a commitment for lenders to take extra care with vulnerable customers, such as those at risk of elder abuse, and to train staff to identify and help them.

Some lenders have already begun asking mortgage brokers to adopt similar strategies, which has been met with concern from the major players in the industry, due to a lack of relevant training in the industry and potential insurance burdens. 

The new code brings in a range of new requirements in finance more broadly, with signatory lenders no longer able to offer unsolicited credit card limit increases or sell insurance with credit cards and personal loans at the point of sale.

Under the new code, banks must also offer and “actively promote” low-fee or no-fee accounts to low-income customers, introduce simpler and fairer loan contracts for small business using plain English that avoids legal jargon, and provide customers a list of direct debits and recurring payments to make it easier to switch banks.

‘Banks understand they need to change their behaviour’

The CEO of the ABA, Anna Bligh, said customers can expect to see a change to banking products and services immediately.

“We’ve completely rewritten the rule book for Australia’s banks. The Banking Code of Practice has strong protections for customers, serious consequences for breaches and strong independent enforcement.

“Banks understand they need to change their behaviour and this new rule book represents an important step in earning back the trust of the Australian public,” she said.

Ms Bligh added that the code will be “strongly enforced both by an independent body, the Banking Code Compliance Committee, and the Australian Financial Complaints Authority”.

“Whether it’s through your credit card, home loan, small-business loan or just day-to-day banking, Australian customers will see tangible benefits from this new code,” she said.

The CEO of Financial Counselling Australia, Fiona Guthrie, commented: “Codes like this really can make a difference because they go beyond black letter law and instead reflect the standards that an industry voluntarily commits to.

"The banking industry released its first version of the banking code over 25 years ago and it is really pleasing to see that each version – and this is the fourth major revision – contains advances in consumer protection.”

The CEOs of all four major banks have welcomed the new code, with NAB CEO Philip Chronican saying he believed it was the “strongest one yet”.

“It delivers enhanced rights and protections for our banking customers, small businesses and their guarantors, and will play a vital role in helping banks like NAB rebuild trust with our customers and the communities in which we operate,” Mr Chronican said.

Likewise, Westpac CEO Brian Hartzer said it was a “new, stronger banking code for a new era” and “is a big step towards earning back trust in the community”.

“Westpac fully supports the new banking code, which is one part of how we are strengthening transparency, accountability and relationships with our customers,” he said.

CBA CEO Matt Comyn added: “This new code supports the progress we are making to do what is right for our customers and earn back trust.”

Meanwhile, ANZ CEO Shayne Elliott offered: “While there is more work for the industry to do in rebuilding trust with the community, this new code is an important and significant step towards achieving that goal.”

MyState Bank also announced that it had become a new signatory of the Banking Code of Practice.

MyState’s managing director and CEO, Melos Sulicich, elaborated: “Through the revised code, fairness, efficiency and honesty are the guiding principles for how customers should be treated, and regulators will be holding the industry to account in adhering to these principles.

“MyState Bank has always put customers at the heart of our business, so becoming a signatory to the code was an easy choice. We will continue to look for ways to raise the bar and to go above and beyond to make things simpler and better for our customers.

“We believe there is always more we can do to strengthen our customer experiences and outcomes. Our involvement in the code is just another example of how we are bringing this commitment to life,” he said.

He noted that the lender was “proud to be the only bank headquartered in Tasmania to be a signatory of the new code”.

The second stage of changes to the Banking Code of Practice will include further updates outlined by the banking royal commission, such as improvements to the provisions dealing with accessibility to banking products and services for vulnerable customers and commitments (for example, regarding the charging of default interest on agricultural loans in the event of natural disasters).

The second stage changes are to be reviewed by ASIC later this year and are expected to commence from 1 March 2020.

[Related: ABA consults on dealing with vulnerable customers]