The new Banking Code of Practice (the code) introduces a range of new measures to make banking products easier to understand and more customer focussed.
Published by the Australian Banking Association (ABA), the code comes into effect from 1 July 2019 and replaces the 2013 version of the code.
What is the purpose of the code?
The purpose of the code is for banks to adopt:
- Transparent and ethical behaviour.
- Responsible lending practices.
- And to provide greater financial protection for customers.
Who benefits from the code?
- Individual customers.
- Small businesses.
- A guarantor or prospective guarantor securing a loan to an individual or small business customer.
Which banks will be impacted by the code?
Formally signing on to the code is voluntary.
However, the adoption of the code is mandatory for Australian retail banks as a condition of their membership with the Australian Banking Association.
So far, fourteen banking groups comprising of 19 banks have voluntarily signed up to the code; these banks make up around 95% of the retail banking market.
What does the new code mean for bank customers?
Bank customers will see a quality of life improvement and more transparency when dealing with banks.
Some key takeaways are:
- Banks and credit providers will now be required to put in stricter measures to assess a customer’s ability to repay their entire credit card limit within three years.
- Banks and credit providers must notify customers of expiring introductory offers on credit cards within 30 days before the due date.
- Banks and credit providers cannot offer unsolicited increases in credit card limit unless the customer requests it.
- Credit card assessment rate for home loans changes from 3% to 3.8% in-line with regulatory expectations. It is assessed on the full credit limit regardless of the balance. Learn how cancelling your credit cards can help you increase your overall borrowing power.
- Fees and commission on Lenders Mortgage Insurance (LMI) will be abolished. A fact sheet on the key policy features will be provided, which will outline all the key policy features.
- Depending on the terms of the LMI policy outlined on the fact sheet, if your loan is repaid or refinanced before the end of the policy, then you may be entitled to a partial refund of the LMI fee.
- Informed of any payment default on a loan reported to a credit reporting body so customers can better manage their credit file.
- If you are facing any financial difficulty (unable to meet repayment obligations), then you will need to contact your bank so they can give you favourable options by assessing your situation.
- The banks cannot access your superannuation to pay for any owing loan amount (unless you are borrowing for a self-managed super fund SMSF).
What are the new guidelines for co-borrowers?
Before lenders can approve a loan with a co-borrower, they must:
- Determine whether the co-borrower will receive a “substantial benefit” from the loan. Substantial benefit means an equal or greater interest in the use of the loan funds, whether the loan is used for purchasing assets, debt repayments, etc.
- Understand the reasons why they want to be a co-borrower.
- Ensure they understand the risks associated with entering into the loan, and that they understand the difference between being a co-borrower and a guarantor.
- Be satisfied that they are not experiencing any financial abuse.
What does the new code mean for small businesses?
The code defines small businesses as businesses with an annual turnover of less than $10m in the previous financial year, fewer than 100 full-time employees and less than $3m total debt.
The key takeaways from the code for small businesses are:
- Simplified business loan contracts with fewer conditions and with the terms and conditions written in plain English.
- You’ll be given 3 months notice if the banks decide not to extend your loan.
- You’ll be provided with more notice when loan conditions change.
- Improved communication and greater transparency when using property valuers and insolvency practitioners.
- You’ll receive 30 days notice if you’re in default before enforcement can begin. If the default is remedied in the 30-day period, the bank won’t require full repayment or take enforcement proceedings (unless they fall within a limited area including bankruptcy, broken the law or loss of a licence to continue to operate).
- Banks will notify you in cases where they may default a loan if the loan is used for a different purpose or if you don’t maintain a license necessary to conduct your business.
What does the new code mean for guarantors?
As part of these new guidelines from the code of banking practice 2019:
- Guarantors must be given a minimum of three days to review their guarantee documents and to consider their obligations as a guarantor before signing and returning their guarantee documents.
- Guarantors have to give a written acceptance of the guarantee if the borrower is extending the guarantee.
- Guarantors will be encouraged to seek independent legal advice before signing, as is currently the case.
- Guarantors will have a cooling-off period after signing the guarantor agreement.
- Guarantors must have a face to face interview separately from the borrower (unless the guarantor is a director of a corporate borrower).
- If you, as the guaranteed borrower, get into financial difficulty, or your circumstances change, your guarantor (parents) will be notified by the bank.
- The bank will first attempt to receive assets from you as the borrower before starting action against your parents to repay the home loan. If this is a concern to you, we recommend that you seek independent legal advice.
Which regulatory body approved the banking code of practice?
Australian Securities and Investment Commission (ASIC) approved ‘the code’ on 31 July 2018.
ASIC’s approval is conditional subject to an independent review within 18 months of its commencement date.
In addition, a comprehensive review of the code will be done 3 years after it comes into effect.
How will the banking code of practice be enforced?
An independent body called the Banking Code Compliance Committee (BCCC) will monitor the bank’s compliance with the code.
The BCCC has the following powers when enforcing the code:
- Monitor, request information and oversee compliance with the Code.
- Investigate any allegation of a Code breach noting its priority according to its charter.
- Investigate severe or systemic breaches and report ongoing issues to ASIC.
- Apply sanctions on banks and other stakeholders.
- Make findings and recommendations on Code breaches.
- Provide guidance and reports and undertake other functions and responsibilities as reasonably determined from time to time.
The BCCC can also formally warn a bank, publicly name a bank for breaches and new powers include requiring a bank to rectify or take corrective action in cases of severe violations, order them to undertake a compliance review, requiring a bank to train staff, and reporting serious, systemic and ongoing issues to ASIC.
You can also register a complaint directly with your lender’s internal dispute resolution or take your complaint to the external dispute resolution scheme, the Australian Financial Complaints Authority which is regulated by the ASIC (Australian Securities and Investments Commission).
Case study: cash out restriction under the Code
Let’s imagine a very common occurrence; mum, dad and son bought their owner-occupied property 8 years ago, they borrowed $300,000 from a bank and their property is now worth $700,000.
Son is getting married next month and wants to take out a top-up loan of $20,000 against the home to fund the wedding and honeymoon, mum and dad think this is a brilliant idea rather than giving them cash.
They approach their bank and submit the loan application on the 2nd of July 2019 after the new Code becomes effective, however, their loan submission is declined by their bank.
Because under the new Code, banks need to establish substantial benefit for all borrowers, and in this case, the bank considered the primary loan purpose was for the son solely.
If this happens to you as well don’t worry, our specialist mortgage brokers can help you find you an alternative lender that’s willing to help you out.
Give us a call on 1300 889 743 or please fill in our online assessment form today.