This week, most of my time has been absorbed by cases involving some frankly appalling treatment of their customers by the banks. One client was given an overdraft facility, and charged over £100,000 for the repeated renewal fees involved every time the overdraft was renewed – and the bank made sure each renewal was only arranged on a very short term basis, for a few months here and there, thus increasing the level of fees – yet he was never allowed to draw down on the very facility he was paying for! Another client was told that her debt of £40,000 could only be supported by the bank if she agreed to enter into an invoice factoring arrangement, for a fixed annual fee of £5000. Over time the debt reduced, but the fixed annual fee remained the same, so that latterly the fee came to represent 70% of the debt.
This got me to thinking: why is it that banks are able to get away with these sorts of outrageous charges? In the UK it is very difficult to bring the banks to book on the basis of any sort of breach of any code of conduct. Not so in Australia where a landmark court ruling has required financial institutions to stick to their own code of conduct.
The Victorian Supreme Court has ruled NAB broke the banking industry's code of conduct in its dealings with a wealthy property investor. The precedent setting judgment will cost NAB millions of dollars and sparked a scramble from the industry as it means the code of conduct goes from being a guide to contractually binding.
NAB suffered the defeat in court after it tried to argue that the industry's self-regulatory Banking Code of Practice has no legal effect. However, the Victorian Supreme Court Justice ruled that the code has contractual force, and that, because NAB breached it, the bank could not recoup $6 million in loan guarantees for a series of failed Gold Coast property investments.
In a common scenario, Rose, as director of a number of companies with large amounts of borrowing from NAB, was asked by NAB to guarantee multi-million dollar loans to these companies. Following failure of the companies, NAB sought repayment of the indebtedness from Rose under the personal guarantees. Rose defended the claim.
The Victorian Supreme Court held that the bank had failed to warn Rose of the risks involved in guaranteeing the loans.
The Court also held that the bank had also failed to tell Rosethat he should seek independent legal and advice, and failed to offer a 24-hour cooling off period. These failings were a breach of clauses 28.4 and 28.5 of the code, and meant NAB could not enforce the guarantees made by Mr Rose. NAB apparently plans to appeal the ruling.
At the start of the case, NAB's lawyers had tried to argue that the banking code of conduct – which requires banks to provide full disclosure to clients and act with integrity – was of "no legal effect" and merely a "desirable" way of doing business. However, as the case progressed, they accepted that the code of conduct was contractually binding.
It remains to be seen whether these are arguments that can successfully be run in the UK in respect of the codes of practice imposed on the UK banks.
Banking codes have in most countries been replaced by government imposed financial regulation governing banking practices. However, the position in the UK is muddled.
On 1 November 2009 the Financial Services Authority’s Banking Conduct Regime commenced. It applies to the regulated activity of accepting deposits, and replaced the non-lending aspects of the Banking Code and Business Banking Code (industry-owned codes that were monitored by the Banking Code Standards Board).
The Banking Conduct Regime includes:
• the full application of the Principles for Businesses;
• the conduct of business requirements of the Payment Services Regulations (PSRs): UK legislation on payment services that implements the Payment Services Directive, a piece of European Community law; and
• a Banking Conduct of Business sourcebook (known as BCOBS), which contains rules and guidance.
It is to BCOBS that we need to look for guidance for much of the day to day lending activity undertaken by UK banks. It contains rules and guidance on:
• communications with banking customers and financial promotions;
• distance communications, including the requirements of the Distance Marketing Directive and E-commerce Directive;
• information to be communicated to banking customers, including appropriate information and statements of account;
• post sale requirements on prompt, efficient and fair service, moving accounts and lost and dormant accounts;
• unauthorised and incorrectly executed payments; and
• cancellation, including the right to cancel and the effects of cancellation.
Although the FCA describes BCOBS as containing “rules”, it is important to understand that these are not rules as we know them - by contrast to the situation in Australia, they do not have binding contractual effect on banks, and it is not possible for a customer to sue its bank for breach of a BCOBS rule. Currently BCOBS rules are advisory only – and to that extent, little really seems to have changed for UK consumers. We can only hope that eventually the UK courts will follow the Australian example and give these rules contractual effect. Only by doing so will the banks become genuinely answerable to its customers.