Hayne incites confusion over industry codes

Australian Financial Review Mar 17, 2019 6.21pm

John Kehoe

EXCLUSIVE  The Hayne royal commission has confused the government, regulators and finance lobby groups over how to implement its recommendation to make industry codes more legally enforceable.

Existing self-regulatory industry codes for general insurers, life insurers and other non-banking financial services are not legally or contractually enforceable, creating a gap the Hayne report appeared to be concerned about.

Treasury on Monday will publish a consultation paper, seen by The Australian Financial Review, asking a range of questions on the enforceability of financial services industry codes, in response to the royal commission.

Stakeholders are uncertain how to proceed and believe policymakers need to be careful to strike the right balance to avoid deterring the banking, insurance and financial advice sectors from imposing self-regulation on their industries.

"No one really knows what Hayne meant with that recommendation and it's caused a bit of confusion among the industry, ASIC and Treasury," a person familiar with the discussions said.

At present, financial services industry codes of practice are designed by industry bodies such as the Australian Banking Association, Insurance Council of Australia and the Financial Services Council. Commissioner Kenneth Hayne called for the self-regulatory framework to be underpinned by enforceable code provisions.

Commissioner Hayne noted, "… there must be adequate means to identify, correct and prevent systemic failures in applying the code … in order to do that, some provisions of the codes should be picked up and applied as law".

New code on July 1

The ABA last year became the first industry association to have its tougher code approved by the Australian Securities and Investments Commission, in order to receive a "stamp of approval" to improve the banking sector's battered reputation. The code takes effect from July 1 this year.

The banking code is already enforceable through contracts between the banks and customers, which carries a penalty of a breach of contract.

Hayne suggested financial entities also be bound by breaches of law and remedies if the code is breached.

One potential unintended consequence Treasury is considering is if the code becomes part of the law, industry bodies may avoid self-regulation and wait for Parliament to make the law. But Parliament is sometimes slower and less agile in responding to emerging industry issues.

The Financial Services Council has dropped plans to launch its new life insurance code of conduct on July 1, after stakeholders complained it was not written in comprehensible English and ASIC warned the process was being rushed.

At present, ASIC can approve but not enforce the code, which allows consumers to complain about their bank to the new ombudsman, the Australian Financial Complaints Authority. In contrast, the Australian Competition and Consumer Commission's industry codes for franchisingand telecommunications give the regulator more power and can be legally enforceable.

Commissioner Hayne said in his report that for enforceable code provisions taken to dispute resolution, consumers should be bound AFCA's decision. Currently, consumers are not bound by an ombudsman's adjudication if they are unhappy with the outcome. Hence, his recommendation could weaken the rights of consumers.

On small business, Commissioner Hayne said protections provided under the Code of Banking Practice should apply to businesses with fewer than 100 full-time-equivalent employees where they have applied for a loan of less than $5 million

The proposed update to what constitutes a small business is backed by government, but most banks have argued the loan threshold should be maintained at $3 million or risk crimping credit to business borrowers.

National Australia Bank said on Friday it would support the "intent to expand the definition of small business" by expanding its definition of a small business from one that has a total borrowing of less than $3 million to $5 million.