In my view, the law[1] should be amended to provide that breach of an enforceable code provision will constitute a breach of the law. The law should also be amended to provide for remedies that may follow from such a breach. Those remedies should be modelled on those now set out in Part VI of the Competition and Consumer Act.
I anticipate that the process of identifying and rendering enforceable the enforceable code provisions will proceed in four steps:
- industry should identify the provisions that it says govern the terms of the contract made or to be made between the financial services entity and the customer or guarantor;
- industry should seek ASIC’s approval of those provisions;
- ASIC should review the provisions put forward by industry; and
- once ASIC has approved the enforceable code provisions, they will be enforceable by statute. Customers will be able to elect whether to enforce any breaches of those provisions through existing internal or external dispute resolution mechanisms or through the courts.
I say more about each of these steps below, but before I do, I think it important to emphasise two points.
First, by creating a system of enforceable code provisions, I do not intend to interfere with ASIC’s existing, and more general, power under section 1101A of the Corporations Act to approve industry codes. I consider that industry should continue to be given the option to seek general ASIC approval of its codes, because, as ASIC commented in Regulatory Guide 183, ‘where approval by ASIC is sought and obtained, it is a signal to consumers that this is a code they can have confidence in’.[2] To that end, the law should be amended to provide that:
- ASIC’s power to approve codes of conduct extends to codes relating to all APRA-regulated institutions and ACL holders; and
- industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, being provisions in respect of which a contravention will constitute a breach of the law.
Second, the model that I have proposed is intended to supplement, rather than derogate from, existing internal and external dispute resolution mechanisms provided by the relevant codes. In my view, the model is necessary because something beyond the existing mechanisms is required. Experience shows that systemic issues identified by the Financial Ombudsman Service (FOS), or revealed in the course of determining individual disputes, have not always been resolved in ways that have encouraged or secured future compliance with norms.[3] Entities have sometimes disagreed with the conclusions reached by the external dispute resolution body and, where they have, they may have chosen to persist in some practice that has been criticised. Problems of that kind are likely to be reduced, and perhaps even eliminated, if breaches of enforceable code provisions are made contraventions of the relevant statute, and can thereby be enforced through the courts.
Returning to the steps I have identified above, industry should identify the provisions of its codes that govern, or are intended to govern, the terms of the contract made or to be made between the financial services institution and the customer. Taking the example of the 2019 Banking Code, I anticipate that this specification will include obligations such as the obligation to engage with customers in a fair, reasonable and ethical manner (clause 10), the obligation to exercise the care and skill of a diligent and prudent banker when extending credit (clause 49) and provisions about guarantees (chapters 25–29). I say more about the nature of the task presented by the three insurance codes in the chapter dealing with insurance.
Industry should then seek ASIC’s approval of the proposed enforceable code provisions. In the particular case of the 2019 Banking Code, which has already been approved by ASIC, this will require the ABA to identify for ASIC the subset of code provisions that will be ‘enforceable code provisions’.
If industry did not put forward its proposed enforceable code provisions in a timely manner, consideration would have to be given to whether it is desirable to establish and impose a mandatory industry code. The process for implementing a mandatory code should be the same as the process used in respect of industry codes prescribed under the Competition and Consumer Act.[4] To that end, the law should be amended to provide for the establishment and imposition of mandatory financial services industry codes, so that the relevant mechanisms are in existence should they need to be exercised. Those provisions should be in a similar form to the provisions that exist in the Competition and Consumer Act, including section 51AE of that Act.
After receiving a proposal from industry, ASIC should review the proposed enforceable code provisions put forward by industry. ASIC’s role must go beyond being the passive recipient of industry proposals. Rather, ASIC should assess whether industry has identified, from the provisions contained in the code, those provisions that should be made enforceable code provisions. In undertaking this task, ASIC should have particular regard to the need to ensure that all terms governing the contract made or to be made have been identified. ASIC should also assess whether the proposed enforceable code provisions are expressed clearly and unambiguously, so that they are capable of being enforced through the courts. ASIC should continue to engage with industry until any defects are remedied.
Finally, if financial services entities breach an enforceable code provision, customers and guarantors should be able to elect whether to enforce that breach through existing internal or external dispute resolution mechanisms, or through the courts. As I have said above, to effect this outcome, the law should be amended to provide that breach of an enforceable code provision will constitute a breach of the law. The law should also be amended to provide for the remedies for a breach. The remedies should be modelled on those now set out in Part VI of the Competition and Consumer Act.
As noted above, it would be for the customer (or guarantor) to elect which path was to be taken in seeking redress. Resort to internal dispute resolution procedures would not constitute any election about future action. The enforceable code provisions should specify, however, that resort to the Australian Financial Complaints Authority, or another external dispute resolution mechanism, will be treated as an election not to pursue court remedies unless good cause is shown to the contrary. I say ‘unless good cause is shown to the contrary’ because I consider that it should ultimately be left to the court to determine whether steps taken outside that forum should lead to the preclusion of court proceedings in any particular case.
[1] The Corporations Act may be the preferable option, given that it already contains ASIC’s code approval power: see s 1101A.
[2] ASIC, Regulatory Guide 183, March 2013, 4 [183.3].
[3] See, eg, FSRC, Interim Report, vol 2, 298–302.
[4] See generally Treasury, Industry Codes of Conduct: Policy Framework, 2017, 14–15.