Introduction

Contributed by MariosFitirikkos and current to 1 May 2016

Dealing with a bank is, in many respects, similar to dealing with any other business. A bank offers services, which a customer may choose to use, agreeing to pay for them, either directly or indirectly.

This chapter is intended to provide an overview of some of the characteristics of banks and their legal relationship with their customers; a summary of the regulatory framework within which they operate; and an outline of some of the legal issues that arise for consideration by lawyers advising banks or their customers.

Banking law is not a discrete area of law like contract or torts. It conveniently describes, however, the collection of legal principles which impact on banking transactions and on the banker-customer relationship. In that sense, the activity of banking is the location at which a diverse range of legal principles intersect which we call banking law.

Those legal principles are drawn from a range of sources, including common law, equity and statute. In addition, for banks that subscribe to it, the Code of Banking Practice is a legally enforceable set of principles and rules incorporated into the contract between the bank and its retail customers.

Relevant legislation includes: Banking Act 1959 (Cth); Reserve Bank Act 1959 (Cth); Australian Prudential Regulation Authority Act 1988 (Cth); Australian Securities and Investments Commission Act 2001 (Cth), which contains in Division 2 the unconscionable conduct and consumer protection provisions in relation to financial services providers that are no longer in the Trade Practices Act; Corporations Act 2001 (Cth), in particular Part 7; Privacy Act 1988 (Cth), in particular the credit information provisions in Part IIIA; Consumer Credit Code, usually referred to as the Uniform Consumer Credit Code; Cheques Act 1986 (Cth); various State Fair Trading Acts, for example, Consumer Affairs and Fair Trading Act (NT).

The consumer protection laws that apply to consumer transactions also apply to transactions between a bank and its customers. These laws are outlined in Contracts and consumer protection.

However, the nature of bank products raises some specific issues, so the law has provided a number of special rules for bank-consumer transactions.

The consumer is likely to deal with a bank in one or more of the following ways:

• as a borrower (ie a person with a home loan or credit card)
• as a depositor (ie a person with a savings account or a term deposit)
• as a user of one of a number of payment systems operated by the bank (ie a cheque account, credit card electronic periodic payments).

Borrowing money from a bank is essentially the same as borrowing money from any other credit provider. Since November 1996 borrowers in the NT have been covered by the Consumer Credit Code (CCC). The credit aspects of banking are covered in Buying on credit. This chapter covers the law relating to general banking issues, deposit accounts and payment systems

Authorised Deposit-Taking Institutions

Banks are not the only financial institutions that provide banking services. For instance, credit unions and building societies provide similar services, such as cheque facilities, deposits and loans and insurance services. These entities are now referred to as 'authorised deposit-taking institutions' (ADI). Under section 5 of the Banking Act, an ADI is a body corporate authorised by the Australian Prudential Regulation Authority (APRA) under section 9 of the Banking Act to carry on the business of banking. Section 5(1) of the Banking Act defines 'banking business'.

Authorised ADIs now include banks, credit unions, building societies, specialist credit card institutions (such as MasterCard and VISA), PayPal and others - a full list is available on APRA's website at http://www.apra.gov.au/Pages/default.aspx.

The use of the names 'bank', 'banker' and 'banking' by an authorised ADI is subject to control under section 66 of the Banking Act and the consent of APRA is required to use them.

As a result, what consumers would readily identify as a bank is now, in legislative terms, an ADI which has the consent of APRA under section 66 of the Banking Act to call itself a bank.

In summary, ADIs are supervised and regulated by APRA and ASIC.

The Regulatory framework

There are three main regulatory agencies for the financial system in Australia and their responsibilities are:

• Reserve Bank of Australia: monetary and banking policy and the stability of the Australian economy. The Reserve Bank includes within its structure the Payments System Board, which is responsible for payments system policy.
• Australian Prudential Regulation Authority: prudential regulation of a range of financial institutions including banks, credit unions, insurance companies and superannuation funds. The aim of prudential regulation is, essentially, to ensure sound practices and financial stability.
• Australian Securities and Investments Commission: consumer protection and market integrity. The ASIC Act gives power to ASIC to facilitate and improve the services of financial institutions. ASIC's functions also require it to promote the confident and informed participation of consumers and investors in the financial system. ASIC has responsibility for monitoring and reviewing financial industry codes of practice such as the Electronic Funds Transfer Code of Conduct. ASIC also has responsibility for enforcing company law and licensing and conduct of corporations.

In addition the Australian Competition and Consumer Commission (ACCC) has an economy-wide role to protect competition. The responsibility for consumer protection in the financial services sector, however, lies with ASIC.

Regulation of financial services and markets: ASIC's role

Consumer protection

The role, powers and responsibilities of ASIC are set out in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). They include the power to regulate unconscionable conduct and consumer protection in the financial services industry [Pt.2 Div.2].

It is important to be aware that the consumer protection provisions contained in Part IVA and Part V of the Trade Practices Act 1974 (Cth) (TPA) no longer apply to financial services.

This means that when considering bringing claims for misleading or deceptive conduct or unconscionable conduct, you will need to refer to and plead the relevant provisions of the ASIC Act. For example, the prohibition against misleading or deceptive conduct by a financial services provider is in section 12DA of the ASIC Act, not section 52 of the TPA.

Licensing and disclosure

Chapter 7 of the Corporations Act was introduced via what is commonly known as the Financial Services Reform Act 2001 (Cth). It contains the licensing, disclosure and other conduct requirements for the financial services industry, including banks.

For example, Chapter 7 requires people who provide financial services to obtain an Australian Financial Services Licence (AFS licence) or become the representative of a licensee. A person provides financial services if they carry out certain activities, such as advising or dealing, in relation to financial products. Therefore, in addition to holding an APRA licence, banking institutions must also hold an AFS licence, which is issued by ASIC.

Under the licensing requirements, a licensee must be a member of an approved dispute resolution scheme. ASIC is required to approve industry dispute schemes that comply with certain standards. This should lead to a more consistent approach across the industry to resolving disputes. Chapter 7 requires licensees to provide internal and external dispute resolution mechanisms to customers [Corporations Act s.912A], including the requirement that a licensed financial services provider be a member of an ASIC-approved dispute resolution scheme.

Chapter 7 is the source of the obligation, for example, to 'do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly' [Corporations Act s.912(1)(a)].

Finally, the Corporations Act imposes disclosure obligations on banking and other institutions for financial products, which are designed to help consumers make a fully informed choice about their need for a particular financial product. Under these disclosure obligations a financial product supplier is required to provide a product disclosure statement (PDS) to a retail client before they acquire a financial product. The PDS sets out the features of a financial product, including its risks, benefits and costs. Therefore before a bank account can be opened, the law requires a bank to provide the consumer with a PDS setting out the features of the account. ASIC has put together a series of Regulatory Guides for financial providers on how to prepare PDS documents. These can be downloaded from the ASIC website at http://www.asic.gov.au/or obtained from the nearest ASIC office (see Contact points).

Banking standards and disputes

The first step in solving a dispute with a bank depends on the type of complaint. In many instances a customer's complaint is dealt with by specific legislation such as the Consumer Credit Code (see Buying on credit,), in which case conciliation with a Fair Trading officer or ASIC officer, is the most appropriate place to have the dispute heard. In general, it is helpful to keep in mind the following avenues if a customer's complaint is in relation to a consumer banking service:

• Internal dispute resolution mechanisms: most banks already have a process whereby customers' complaints can be heard by senior officers within the bank. Under the COBP, all banks must have this process available for disputes with individual customers.
• An external dispute resolution service such as the Australian Financial Complaints Authority: as described below, the Australian Financial Complaints Authority (AFCA) provides a free service, and is able to hear complaints if the customer has already sought to resolve the dispute directly with the bank. It is also able to hear complaints about other financial products and services and/or can provide advice to consumers about the appropriate body to handle specific complaints.
• ASIC: ASIC is the consumer protection regulator for financial services and products. It generally investigates systemic consumer protection issues.
• The court system: if a customer has a legal right (resulting for example from a breach of contract by the bank) they may seek to have it enforced in a court. Customers may also pursue a dispute in court if they have complained to the AFCA and are unhappy with that decision.

External dispute resolution services

Most financial institutions have internal complaint-handling procedures; however, where the financial institution does not deal with the account holder's complaint satisfactorily or a resolution cannot be reached, the account holder may refer their complaint to the AFCA.

A dispute resolution framework is mandated in section 912A of the Corporations Act and the relevant regulation in the Corporations Regulations reg.7.6.02. Clauses 35-37 of the Code of Banking Practice mirror this requirement. Therefore even if a bank or other financial services provider has not adopted the Code, it will still have similar dispute resolution obligations to those set out in the Code.

ASIC's Policy Statement 139 requires an approved dispute resolution scheme to be accessible, independent, fair, accountable, efficient and effective. The ASIC-approved schemes are free for customers to use.

Lawyers need to familarise themselves with the available external dispute resolution schemes to ensure that they are able to advise their clients about any appropriate scheme in jurisdictional terms and to know when a court or tribunal will be the more appropriate forum. Currently the ASIC-approved external dispute resolution scheme that operates in the Australian financial and credit industry is the Australian Financial Complaints Authority (AFCA)

Code of Banking Practice

In November 1993 the Australian Bankers' Association (ABA) released its Code of Banking Practice (COBP), which was reviewed in January 2013. The COBP outlines a number of minimum standards that a bank needs to adhere to when dealing with customers, including the information that it is required to give customers and how complaints are to be handled. Each bank/consumer contract entered into since that time includes a term stating that the relevant provisions of the COBP are included in the terms and conditions of that contract. The COBP is, therefore, contractually binding on a bank.

The COBP only applies to the banks which adopt it; however, most of the major banks in Australia have adopted the COBP, and as such it applies to most consumer transactions in Australia.

The COBP sets out the requirements for a bank when dealing with a customer, including:

• disclosing fees and charges
• how the bank may change fees and charges
• issues relating to the customer's private information
• how a customer can obtain copies of their bank documents
• how the bank collects debts
• disclosure rights for guarantors.

The COBP also provides that in the event of a dispute between bank and customer, the bank must have in place an internal process for hearing a customer's complaint. Once a customer makes a written complaint to the bank they are entitled to a written reply from the bank, explaining its position.

Should the customer not be satisfied with the outcome of the internal process, the bank must have in place an external and impartial person to adjudicate the dispute. The Australian Financial Complaints Authority is generally the body that determines such disputes.

Unlike most consumer protection legislation, the COBP applies to small business and investment customers as well as individuals. It gives customers of adopting banks an important set of rights in relation to matters including: disclosure; conduct; provision of documents; contractual enforceability of statutory obligations; debt collection; and dispute resolution.

Banking issues that could be referred to external dispute resolution

Legal issues that arise between consumers and banking institutions that the external dispute resolution services could deal with may include:

• breach of contract, including the contractual duty to provide services with care and skill
• misleading or deceptive conduct
• unconscionable conduct
• Breaches of the provisions of the UCCC
• breach of the Code of Banking Practice
• inappropriate allocation of liability for an unauthorised electronic funds transfer under the EFT Code
• breach of the Privacy Act, including the national privacy principles, or the bankers' duty of confidentiality.

The subject matter of disputes can include:

• unauthorised withdrawals from bank accounts by a third party or by error of the bank
• whether the bank undertook a reasonable assessment of a customer's ability to repay a loan or other facility before making the decision to lend
• representations made to customers about a product or service
• the price obtained for a property on sale by the bank as mortgagee
• other action taken in enforcement of a debt
• errors in the calculation of repayments required on a loan
• non-disclosure of material information in the taking of a guarantee.

Australian Financial Complaints Authority

The Australian Financial Complaints Authority (AFCA) brings together separate external dispute resolution schemes: the Banking and Financial Services Ombudsman Ltd (BFSO), the Financial Industry Complaints Service (FICS), the Insurance Ombudsman Service Ltd, and the Insurance Brokers Disputes Limited (IBDL). The AFCA an independent dispute resolution service for up to 80 per cent of Australian banking, insurance and investment disputes.

The AFCA is not a regulator as such, nor is it a government agency: it is a dispute resolution scheme that is part of the regulatory framework. External dispute resolution services provide independent, free, fair and accessible dispute resolution for consumers who are unable to resolve a dispute directly with their financial service provider. External dispute resolution services allow consumers to have complaints that would not normally be brought before a court, due to the cost of legal proceedings, aired and resolved.

The AFCA is approved by ASIC as an external dispute resolution scheme for financial services licensees under Part 7 of the Corporations Act 2001 (Cth). Membership of an approved scheme is a licence requirement.

An important part of the AFCA's role as an external dispute resolution scheme is identifying and addressing systemic issues - issues which affect a number of customers. The AFCA reports to ASIC on systemic issues identified in its dispute resolution work.

For further information about the AFCA visit their website at http://www.AFCA.org.au/ or telephone them on 1300 780 808. The AFCA's website provides regular information including the number and types of cases received by AFCA and how cases are resolved. These statistics are also published in the AFCA Annual Report.

The AFCA can help customers sort out complaints against banks. It is a free service to individuals and small businesses and operates Australia-wide. Most banks are members of the scheme. AFCA considers disputes in banking, credit cards, mortgages, general and life insurance, financial planning and investment advice and may be able to provide help when a financial service provider has acted unfairly, by:

• breaking a law
• breaching a relevant Code of Practice
• not meeting standards of good practice in the relevant industry sector

From 1 January 2015, the scheme is able to make decisions for compensation up to a limit of $309,000.

There are some types of complaints that AFCA will not deal with and they are listed in detail in the Terms of Reference on the AFCA website. It is also important to note that time limits apply for lodging a dispute with AFCA. A summary of complaints AFCA cannot deal with:

• a business that is not a member of AFCA (at the time the dispute is lodged)
• issues that have already been dealt with by a court, tribunal, arbitrator or another ASIC-approved EDR scheme
• specific insurance products, such as compulsory third party insurance or private health insurance and some commercial general insurance products
• decisions of trustees of regulated superannuation funds and approved deposit funds
• an FSP's assessment of the credit risk posed by a borrower (with exceptions in cases of maladministration or financial hardship)
• the investment performance of an investment product (unless it concerns non-disclosure, misrepresentation or misleading conduct)

AFCA also cannot deal with complaints about fees, unless certain limited circumstances apply. AFCA can't help with a customer complaint that a fee charged was 'too high', but can deal with complaints where the client claims:

• the fee charged was not allowed by the contract between them and the FSP
• the fee was not adequately disclosed
• there was poor service (the dispute is about poor service) and they are claiming a refund of the fee

Member banks pay for the scheme, but it is directed by an independent council made up of consumer and financial institution representatives.

Once a dispute is lodged, the AFCA checks to see whether the consumer has already complained to their financial service provider (FSP).

• If the consumer has not already complained to their FSP, AFCA will refer the dispute directly to the FSP. The FSP then has 45 days from the date of referral to settle the dispute with the consumer; this is the Internal Dispute Resolution period. If the matter has not been resolved in the period, AFCA will begin their investigation. Matters involving financial difficulty have 21 day Internal Dispute Resolution period before AFCA begin to investigate.
• If the consumer has already complained to their FSP and the matter has not been resolved, AFCA will register the dispute and give the FSP a further 21 days to resolve the matter. If the matter is not resolved within 21 days, AFCA begins their investigation.
• AFCA continues to track registered disputes when they have been referred back to the FSP for Internal Dispute Resolution.

If AFCA has conducted an investigation and there is still no resolution, a conciliation conference (Alternative dispute resolution) can be called by the AFCA. The conference is a joint telephone call between the parties in dispute, led by a AFCA conciliator.

If the problem remains unresolved, it is likely that AFCA will carry out a further detailed investigation to try and resolve the dispute. AFCA may be able to establish at the conference, what the outcome of the investigation is likely to be and make a decision about the dispute. In some cases, AFCA might need to ask the consumer or the financial service provider to give more information before AFCA can make any decision about the dispute.

Before contacting the AFCA, a customer should try to sort out the problem with the bank given that many banks have adopted the COBP and are entitled to provide their customers with their internal dispute resolution process.

The complaint process runs more smoothly if details are outlined clearly in writing, setting out:

• the steps already taken by the customer to sort out the complaint
• what the customer thinks the bank has done wrong
• the loss the customer has suffered