Jenolan Caves Tourism Submission to Senator David Fawcett's Parliamentary Inquiry into Engineered Loan Defaults

Ms T Matulick Secretary Parliamentary Joint Committee on Corporations and Financial Services PO Box 6100 CANBERRA ACT 6100

21 August 2015

Dear Ms Matulick,

SUBMISSION TO PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES BY THE JMA PARTIES

Please find attached a copy of the JMA Parties submission to the Impairment of Customer Loans Inquiry.

The attached documents record the history of events at Jenolan Caves that has been the subject of several earlier inquiries.

With this submission we bring to your attention the concerns of the JMA Parties. The JMA Parties are made up of a group that have been severely affected by the failings of the current financial regulatory system in Australia. We believe our experience should be demonstrative of a need for the reform of this system. It is our hope that the Parliamentary Joint Committee on Corporations and Financial Services will read this submission and be persuaded to act to protect Australian consumers.

This submission consists of a written piece that specifically addressing the Committee's published Terms of Reference as well as Attachment A, which further outlining the concerns of the JMA Parties with the current banking regulatory system in Australia.

Should you require any further information, please contact the JMA Parties at the address below.

Yours sincerely,

Petra White Research

On behalf of the JMA Parties

The impairment of customer loansSubmission 120

Submission to the Parliamentary Joint Committee on Corporations and Financial Services by the JMA Parties

TERMS OF REFERENCE

The following outlines the relevance of this submission to the Terms of Reference of the Parliamentary Joint Committee on Corporations and Financial Services.

TOR 1. (f) extent to which borrowers are given an opportunity to rectify any genuine default event and the time period typically provided for them to so;

As outlined in the attached summation of the banking issues experienced by the JMA Parties, under the Code of Banking Practice the leading Australian banks commit that:

"With your agreement, we (the bank) will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan."

Note that the ABA's industry guidelines on Promoting Understanding About Banks' Financial Hardship Programs, state that:

"'Financial hardship" is when a customer is willing and has the intention to pay, but is unable to meet their repayments or existing financial obligations, and with formal hardship assistance, a customer's financial situation can be restored... Financial hardship can be due to factors, unforeseen circumstances, or unexpected events, for example ... emergency event or natural disaster"1

As outlined in the attachment below, in June 2005, the Jenolan Caves Resort, a business operating a 99-year lease over the Caves House in the Jenolan Caves in NSW, had its loan come due. The lessee could not immediately repay the full amount of the loan-$5.5 million-due to financial difficulties. These difficulties had occurred due to the failure of the Jenolan Caves Reserve Trust and the NSW State Government to comply with their contract with the lessee and provide essential services such as potable water to the Caves House. The bank was made aware of these concerns.

As confirmed by the bank's own accountancy report, in 2004 the Jenolan Caves House had an operating profit of $275,000. The business was viable, and as the bank's report further stated, the lessee had significantly progressed in its attempts to sell the Caves House lease to a major hotel group. Under the Code of Banking Practice, read in conjunction with the ABA's guidelines, the bank in question should have helped the lessee with their attempts to compel the government to provide essential services to the Caves House. The bank was repeatedly informed by the lessee that it had a responsibility to do so under the Code of Banking Practice. This issue was brought to the attention of the bank's internal dispute resolution mechanism, the Australian Bankers' Association, and finally, members of the bank's senior

2



leadership, including the bank's CEO. 2 The bank, however, continued to refuse to comply with its obligations.

In failing to do so, the bank did not give the borrower the opportunity to rectify its default. Indeed, during the lessee's attempts to refinance the loan, potential financiers reported that during meetings with the lessee's bank, bank staff reported that not did the bank have no intention to assist the lessee, its aim was instead to bankrupt the lessee.

This case is a clear demonstration of a failure of the existing consumer protection obligations on Australian banks. Despite committing to help small business and individual customers with any credit facility they have, the Australian banks do not do so. As highlighted by the Financial Systems Inquiry, this practice must change if customers are to receive fair protection from the abuse of market power by the leading Australian banks.

TOR 1. (h) appropriateness of the loan to value ratio as a mechanism to default a loan during the period of the loan; and

The bank responsible for the loan to the lessee of the Jenolan Caves House did not use loan to value ratios provisions to default the lessee. However, it is indicative of the weakness of consumer protections and the unfair nature of standard banking contracts in Australia that the bank had to power to do so if it chose.

Due to the actions of the NSW State Government-which are outlined in the attachment below-the Jenolan Caves House lease became unsaleable. This occurred both because the Jenolan Caves Reserve Trust and the NSW State Government were not providing adequate essential services and as a result of the NSW government's decision to remove the Jenolan Caves Reserve Trust Board. As a result, the lease could not be sold as it lacked basic amenities such as potable water and in any case, no authority existed to authorise the sale.

Under Australian standard banking contracts, through actions taken by the state government, the Caves House lessee's bank could have used the loan to value ratio as a mechanism to default the loan. This ability is outlined in General Standard Terms (Annexure 8).3

Section 9.1 of the General Standard Terms (Annexure B) states that:

"We [the bank] may obtain a valuation report of any secured property at any time. You must pay us all costs in connection with the valuation". 4

Section 9.4 states:

3



"Any report we obtain from the valuer, investigator or consultant is for our use only ... You cannot sue us, the valuer, investigator or consultant if the report is wrong." 5

In regards to 'default', the General Standard Terms (Annexure B) states in section 10:

"You are in default if: (k) in our opinion, the value of the secured property materially decreases from its value at the date of this facility agreement or it becomes less saleable than its saleability at the date of this facility agreement."6

Where a customer is in default, the General Standard Terms (Annexure B) provides in section 11 .1 :

"(a) we [the bank] no longer need to provide any facility; and

(b) the sum of the total amount owing for all facilities is payable on demand."7

As a result, Australian banks are legally allowed to re-value a secured property at the customer's expense. If the valuation shows that the secured property has fallen in value since the loan was agreed, then the bank has the right to default the customer and demand full payment of all amounts owing. As a result, even if a customer has made all repayments on time and in full, a bank has the right to call in its loan if the "saleability" of the held security falls at any time below its initial level. The consumer cannot challenge the def a ult, nor has the right to challenge the valuation on which the bank has relied. This is the case even where the valuation is wrong, as outlined in section 9.4.

With the Jenolan Caves House lessee's bank having conducted a valuation that found that the NSW State Government's actions had made the lease less saleable, the bank was well within its rights under its banking contract to engineer a default. This situation is intrinsically unjust and the case of the Jenolan Caves House demonstrates that consumer protections in Australia against leading banks are thoroughly insufficient.

TOR 2. (a) i. in undertaking this inquiry, the Committee take evidence on: the incidence and history of: loan impairments; and

As referred to above in response to TOR 1. (h), and in the attachment below, it is clear that standard banking contracts as they exist in Australia are fundamentally flawed. These contracts give the leading Australian banks almost untrammelled ability to engineer the default of small business and individual customers. If a bank follows this process, in the vast majority of cases it will cause such financial damage to customers that they have little opportunity to challenge the bank. As the Federal Attorney General, the Hon

, has written:

4



"[U]nless you are a millionaire or a pauper, the cost of going to court to protect your rights is beyond you ... the costs of legal representation an court fees mean that ordinary Australians are forced either to abandon their legitimate claims or enter the minefield of self-representation."

In her article, "The Equitable Doctrine of Undue Influence Considered in the Context of Spiritual Influence and Religious Faith: Allcard v Skinner Revisited in Australia" (2003) 26(1) University of New South Wales Law Journal 66, Pauline Ridge states that:

"The requirement of the doctrine of unconscionable dealings is a special disability in the weaker party that is knowingly taken advantage of by the stronger party to secure the transaction."

The case of the Jenolan Caves Resort shows that banks engage in unconscionable dealings with their customer, of which small businesses and individuals are undoubtedly the weaker party. With their standard banking contracts the leading Australian banks abuse their power and have orchestrated a system under which they have the right to engineer a default even where customers have not fallen behind in repayments. This must change.

TOR 2. (a) ii. the forced sale of property;

When the bank defaulted the lessee of the Caves House, it made the decision to forcibly sell the lease. It did so in June 2006, surrendering it to the Jenolan Caves Reserve Trust, an agent of the NSW State Government. The bank did this with full knowledge of the legal issues surrounding the Trust's ability to legally authorise the sale. The bank did so knowing that the lessee had submitted multiple complaints over the bank's failure to comply with the Code of Banking Practice. The bank did so knowing it was breaching its commitment under the Code to help the lessee with temporary financial difficulties that were the result of the NSW State Government's failure to provide essential services. The bank undertook a forced sale of the property and that the bank has not been brought to account for its actions highlights the failure of the current regulatory system in Australia.

TOR 2. (c) comparisons between valuations and sale price;

When the banks surrendered the Caves House lease to the Jenolan Caves Reserve Trust, it did so for a price some 1 O percent the amount of previous valuations of the lease. Two valuations from 2004 put the market price of the lease at $9.7 million and $11.3 million respectively. The bank sold the lease to the Trust for $1.3 million. This occurred despite the bank receiving an offer from the lessee of $3.35 million to purchase the bank's debenture.

5



The bank and its receivers and managers claimed it had received interest in the sale of the lease from two parties, however, the later stated that it had not offered the lease for sale or received any offers. It is hard to know what to believe, but it seems clear that the bank failed to sell the property at its market value and failed to attempt to receive the highest market price for the lease.

The practice of receiving a price through a forced sale of a property that is below its valuation is an inherent abuse of power. While writing off the difference between valuations and sale price may be of little concern to banks as large as the leading banks in Australia-as profitable as they are-it represents a major blow to small business and individual consumers. When the bank sold off the Caves House lease at less than market price, it ensured that lessee did not receive any funds from its sale and as a result had no resources with which to pursue legal action against the bank's misconduct. This situation is occurring across Australia. Individuals and small businesses-especially farmers, as demonstrated by recent media coverage-lack the ability to act when faced with gross injustice. It is the opinion on this submission that the Federal Government must act now to ensure that the leading Australian banks cannot continue abusing their customers.

TOR 2. (e) any related matters.

Any exploration of shortcomings in the current banking regulatory system must inevitably look at the adequacy of the enforcement mechanisms for consumer protections. This submission finds these protections overwhelming feeble.

As stated above, the court system in Australia is closed to small businesses and individuals attempting to compel banks to abide by their own Code and regulations. The costs are prohibitive and the banks have vast resources at their disposal to ensure they are not obliged to follow their own rules.

In Australia, in an attempt to avoid this situation, two regulatory organisations have been created, the Financial Ombudsman Service, and the Code Compliance Monitoring Committee. These two organisations are incorporated in the Code of Banking Practice. The history of the complaints put to these groups by the JMA Parties is, however, demonstrative of the failure of the Code Compliance Monitoring Committee and the Financial Ombudsman Service.

The Financial Ombudsman Service (FOS) is a private company started, funded, and coordinated by the leading Australian banks and tasked with providing an external dispute resolution scheme for customers. The FOS, though, is restricted under its Terms of Reference from awarding compensation of more than $309,000. 8

6



The JMA Parties are all individuals or small businesses and do not have the financial resources to take their complaints against their bank to the courts. Nevertheless, when the JMA Parties put the complaints outlined above to the FOS, it was restricted from adjudicating their claims as they did not meet the monetary limits set by the Terms of Reference. This means that despite the recommendations of the Campbell Review and the Martin Committee, the dispute resolution mechanisms failed and the JMA Parties were denied access to this purportedly cheap, quick, and fair arbitration.

The Code Compliance Monitoring Committee (CCMC), the other regulatory body set up to help monitor the regulatory system, is fundamentally flawed. The is evident in a report in The Australian in 2012 that 2.5 million complaints had been made under the Code of Banking Practice in the eight years between 2004 and 2012. Of these, only 200 complaints were fully investigated.9 This occurred despite clause 34(b)(ii) of the Code stating that:

"(The CCMC will) investigate, and to make a determination on, any allegation from any person that we have breached this Code". 10

Although this clause seems to require the CCMC to investigate any and all allegations that a bank has breached the Code, the CCMC is also bound by a constitution imposed on it by the ABA in 2004. This constitution was not made available to the public until 2012, and is still not readily provided to consumers. 11 Under the constitution, the CCMC's powers to investigate are seriously restricted.

This is set out under clause 8.1 of the constitution, which restricts the CCMC from having to investigate a dispute, if:

"(b) [it] is, or becomes, aware that the complaint:

(i) is being, or will be, heard ... by another forum". 12

Thus, leading banks could now silence any and all critics by taking a case to another 'forum'. This could be achieved without the customers' knowledge and without the other forum having powers to investigate code braches.

For the purposes of Clause 8.1, a 'forum' is widely classified as:

"Any court, tribunal, arbitrator, mediator, independent conciliation body, dispute resolution body, complaint resolution scheme (including, for the avoidance of doubt, the BFSO scheme) or statutory Ombudsman, in any jurisdiction". 13

When a bank does take a complaint to another 'forum', consumers unwittingly relinquish 'alt rights to have breaches of the code investigated by the CCMC. The small business, farmer or individual consumer is not provided an explanation beyond being informed that there is a "conflict of interest".

7



The Caves House lessee, having had all complaints to the bank's internal dispute resolution mechanism seemingly ignored, was served with a court summons in 2006. With this, the Bank denied the JMA Parties their right to put complaints to the CCMC as their concerns were to be heard by "another forum".

The CCMC constitution-which outlines the restrictions imposed on the CCMC concerning which complaints it can hear-was not made available to the lessee when the Caves House lease was signed, nor to the JMA Parties filed their complaints. This constitution was, indeed, not provided to any customers or small businesses for a period of ten years.

Australian banks that breach the Code rely on a secretive constitution to prevent the CCMC from performing its intended function to monitor banks' compliance with the Code. As small business owners and individual bank customers, it was the right of the JMA Parties to expect the bank to comply with the Code and the consumer protections it proscribes. This did not occur. This is indicative of a system that has failed.

In his book, Contract Law (Australian Blackletter Law Series, Butterworths, 1993), Philip Clarke distinguishes between a pre-contractual misrepresentation and a term of the contract:

"A misrepresentation is a false statement of fact made by one party (the representor) to the other (the representee) during pre-contractual negotiations which induces the latter to enter into the contract'

It seems clear that the self-regulatory system in Australia represents a significant misrepresentation by the banks to their customers.

Evidence of this has been referred to the Australian Securities and Investments Commission (ASIC), outlining the manner in which the banks have developed an institutional arrangement that enables them to remain unaccountable for deceptive conduct. ASIC, with its mission of ensuring Australian financial markets are effectively regulated in a fair and transparent manner, has an obligation to investigate these concerns. Indeed, under the ASIC Act 2001, the behaviour of the leading banks appears to amount to unconscionable conduct. That Act states:

"(1) A person must not, in trade or commerce, in connection with:

(a) the supply or possible supply of financial services to a person (other than a listed public company) ... engage in conduct that is, in all the circumstances, unconscionable."

We have seen no evidence to suggest that ASIC has upheld this standard to the Australian banks. Indeed, an examination of ASIC's 'Financial Tips and

8



Safety Checks' website reveals that ASIC-whether unknowingly or otherwise-has been complicit in the banks' failed self-regulatory regime.

On its website, ASIC states that if a bank customer has a complaint that their bank has breached the Code of Banking Practice, they should bring this complaint to the bank's internal dispute resolution mechanism. If this does not produce results, the customer should bring the dispute to the FOS. ASIC makes no mention of the fact that by bringing a complaint to the FOS the costumer loses all rights under the Code of Banking Practice due to terms in the CCMC's constitution. This submission notes that the constitution has recently be renamed a 'mandate', but little has changed in its composition.

The ASIC website goes on state that:

"if you believe the breach of Code is serious and/or may involve bank customers apart from yourself, you may wish to make a complaint to ASIC'

ASIC, however, has demonstrated it has either little interest or ability to investigate the banks' abuse of the Code and the CCMC.

In a speech in 2001, the Deputy Chair of ASIC stated the following:

"self-regulation must have vigorous and active accountability mechanisms... if accountability is not a place, then the risk is not just that self-regulation will be ineffective, but that it may be harmful as industry and regulators devote resources elsewhere on the assumption that self-regulation is working. If this occurs, the existence of selfregulation would be counter-productive". 14

Whether through a lack of understanding or concern, the Australian Governments have been complicit in creation of a self-regulatory system that fails to protect consumers. The assumption that the system works needs to change.

1 Australian Bankers ' Association, 2013, "Promoting Understanding About Banks ' Financial Hardship Programs", Industry Guideline: 1-2 2 See "Memorandum from Archer Field to Chairman of 'the Bank"', 16 June 2006 3 White, P. 2014, "Submission to the Senate Standing Committees on Economics", 1 O December. 4 "General Standard Terms" (Annexure B}, section 9.1. 5 ibid. section 9.4 6 ibid. section 1 O(k) 7 ibid. section 11.1 8 Financial Ombudsman Service, 2015, "Operational Guidelines to the Terms of Reference": 24, 105. 9 The Australian, "Wilkie Bill Would Impose Banking Code", 1 O September. 1° Code of Banking Practice (2004), clause 34(b).

9



11 The Constitution of the CCMC (2004) was made available to Ms Rosemarie Bayne, on behalf of the JMA Parties on 27 July 2012. 12 Constitution of the CCMC (2004), clause 8.1. 13 Ibid. 14 An address by Jillian Segal, Deputy Chair of the Australian Securities and Investments Commission, to the National Institute for Governance Twilight Seminar, "Institutional self-regulation : what should be the role of the regulator?", Canberra, 8 November 2001

10



SUBMISSION TO THE PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES BY THE JMA PARTIES

ATTACHMENT A: The JMA Parties and an Unregulated Banking Sector

An Introduction

When the Jenolan Caves House lessee's $5.5 million bank loan became due in October 2005, the lessee's bank was faced with a choice. It could either act on its knowledge that the New South Wales Government breached its contractual duties and destroyed the viability of Caves House or ignore its own problematic contractual obligations and collude with the government. It chose the latter.

In deciding to do the latter, the bank breached the Code of Banking Practicewhich the bank had first subscribed to in 1996-and caused very severe financial damage to its customer. Its choice also demonstrated the fundamental inadequacy of the banking self-regulatory regime in Australia. In doing so, the bank was apparently willing to engage in deceptive conduct and potentially fraudulent behaviour.

Code of Banking Practice

The Code of Banking Practice (the 'Code') was born in 1993, the product of two federal government inquiries into the Australian financial system, the 1981 Australian Financial System Inquiry and the 1991 Martin Committee on Banking and Deregulation.

The findings of these inquiries-contained in the Campbell Report and the Pocket Full of Change report respectively- recommended that the government pull back from direct intervention into the financial system. To ensure that the system remained fair and stable, however, the reports both recommended the establishment of strong consumer protections. The resulting 1993 Code came into force in 1996 and has been subsequently revised three times, most recently in 2013.

The Code, -the CEO of the Australian Bankers Association (ABA), which represents the leading Australian banks-claimed, is:

"An effective demonstration to the Government that self-regulation works, and is a real alternative to the heavy hand of legislation". 1

The Legally Binding Code

The Code forms part of the binding contract between subscribing banks and their customers in the standard banking contracts used by the leading Australian banks. This view has been confirmed by the ABA2 and in the courts system.

1



The lessee's bank's Facility Agreement-part of its standard banking contract-acknowledges The General Standard Terms are a part of the contract:

':4 legally binding contract is created between you and us".

The General Standard Terms (Annexure B) of the bank's standard contracts sets out in clause 35 that:

"The relevant provisions of the Code of Banking Practice apply to this facility agreement if you are an individual or small business". 3

The original 1993 version of the code prescribed in clause 1 .3 that:

"[A bank] will be bound by this Code in respect of any Banking Service that the Bank commences to provide to the Customer". 4

Clause 3 of the 2003 code confirms this, stating:

"If this code imposes an obligation on us, in addition to obligations applying under a relevant law, we will also comply with this code except where doing so would lead to a breach of a law". 5

ABA director, when commenting on the code, stated that:

Once a bank has adopted the code, it binds the bank contractually to the customer. So if a bank breaches the code, it has breached its contract to the customer... A bank must be sure it is ready to comply with its obligations under the revised code before it adopts it because the code is an enforceable contract between the bank and the customer". 6

Indeed, although the National Australia Bank (NAB) has appealed its ruling, the Supreme Court of Victoria recently confirmed that the Code is a legally binding contract between subscribing banks and customers in National Australia Bank Limited v Rice [2015] VSC 10.7

It is clear that the Code is contractually binding between banks and their customers.8 Breaches of the Code are, therefore, contractual breaches.

The Bank's Breaches

In defaulting the lessee of the Caves House, the lessee's bank breached clause 25.2 of the Code of Banking Practice. This clause commits each of the subscribing banks to:

2



" ... help you (its small business and individual customers) overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you (emphasis underlined was added by banks) to develop a repayment plan".

Clause 25.2 is guided by clause 2.2, which states that:

"We (the bank) will act fairly and reasonably towards you in a consistent and ethical manner".

The view that clause 2.2 guides the other specific clauses in the Code - like clause 25.2 - is supported by the 2008 Review of the Code, commissioned by the ABA. It is also supported by Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 676 at [27], Seeto v Bank of Western Australia Ltd [201 O] NSWSC 922 at [38], ING Bank (Aust) Ltd v Stafford [201 O] QSC 289 at [32].

The JMA Parties have accepted that the terms of clause 2.2 are broad, but they are at the heart of any interpretation of specific breaches of other clauses in the Code.

To consider the lessee's bank's breach of clause 25.2 in the context of clause 2.2, it becomes necessary to look at what constitutes the "help" to be given to customers to overcome financial difficulties. The ABA's own industry guidelines on Promoting Understanding About Banks' Financial Hardship Programs appear relevant to the JMA Parties' concerns.

The guidelines state that:

""Financial hardship" is when a customer is willing and has the intention to pay, but is unable to meet their repayments or existing financial obligations, and with formal hardship assistance, a customer's financial situation can be restored... Financial hardship can be due to factors, unforeseen circumstances, or unexpected events, for example ... emergency event or natural disaster".

The guidelines then state that when "When restoring a customer's financial situation is possible", the bank should work with the customer to come to an arrangement that helps ensure the customer's ongoing financial viability.

In 2004, the Jenolan Caves Resort posted an operating profit of $275,000. The company was viable and, as the Grant Thornton review outlined, the lessee had significantly progressed in its attempt to sell the property to the Accor hotel group.

However, during the due diligence process, this and previous attempts to sell the property ultimately failed. Without the government fulfilling the requirements set out in the 1989 lease, Plan of Management, and Services Agreement, no sale could take place.

3



To assist the lessee with their financial difficulties the bank, under the terms of its contract, needed to help the lessee resolve outstanding issues with the Trust and the government. Instead, on November 4 2005, the bank called in the Receivers and Managers.

Breaches of the Code: Failed Dispute Resolution Mechanisms

The Campbell Report and Martin Committee found that the costs associated with taking the leading Australian banks to court for breaches of consumer protections were beyond the financial capacity of small businesses and individuals. As the now-Federal Attorney-General, the MP, stated:

"[U]nless you are a millionaire or a pauper, the cost of going to court to protect your rights is beyond you ... the costs of legal representation an court fees mean that ordinary Australians are forced either to abandon their legitimate claims or enter the minefield of self-representation".

To counter this, the inquiries recommended the creation of dispute resolution mechanisms to adjudicate complaints quickly, cheaply, and fairly. As the Martin Committee states, the government must ensure that:

"Adequacy of redress is available to [consumers] in cases of dispute with their bani<'. 9

As a result, the Code placed the requirement on subscribing banks to make external dispute resolution schemes available to customers in addition to internal dispute resolution schemes under clauses 35 and 36.

The JMA Parties submitted multiple complaints to the lessee's bank's internal dispute resolution mechanism, as well as members of the bank's board, including the bank's then-CEO. However, despite these complaints, the lessee's bank either did not conduct an internal investigation into the JMA Parties' concerns, or the bank did not advise the JMA Parties of their findings in writing as required by clause 35.1 (d) of the Code.

The JMA Parties then put their complaints to the Financial Ombudsman Service Limited (FOS). The FOS is a private company started, funded, and coordinated by the leading Australian banks and tasked with providing an external dispute resolution scheme for customers. The FOS, though, is restricted under its Terms of Reference from awarding compensation of more than $309,000. 10

As a result, although the JMA Parties are all individuals or small businesses and do not have the financial resources to take their complaints against their bank to the courts, the FOS was restricted from adjudicating their claims

4



against the bank. Despite the recommendations of the Campbell Review and the Martin Committee, the dispute resolution mechanisms failed and the JMA Parties were denied access to this purportedly cheap, quick, and fair arbitration.

The Code Compliance Monitor

In 1999, the Federal Treasury commissioned the Self-Regulation Task Force. The taskforce found that the Code of Banking Practice lacked the monitoring and enforcement mechanisms that give force to other industry Codes-such as those in the health and broadcasting sectors. This concern was further explored during submissions by both government and industry bodies to the 2000 Viney Review of the Code.

In its submission to the Viney Review, the Joint Consumer Submission suggested that an independent external body be tasked with undertaking compliance monitoring. The Australian Securities and Investment Commission stated in a similar vein that:

"This review should consider establishing an independent regime for investigating contraventions and imposing appropriate sanctions". 11

The Australian Bankers' Association expressed their preference for:

"An independent, well-resourced code-monitoring agency with capacity to impose a range of effective sanctions for code breaches" 12

The NSW Government agreed, submitting that:

"It is important that the monitoring and reporting on the Banking Code of Practice is carried out by an organisation with experience in the consumer banking issues, and which is seen to be independent of the banks. ASIC is one such agency. Compliance with the Code should be able to be independently double-checked, and not rely entirely on the bank's self-assessment". 13

The Australian Consumers' Association criticised the 1993 version of the Code, stating:

"The lack of sanctions in the Banking Code presents a fundamental weakness and raises doubts about the credibility of the Code for both industry participants and consumers... A range of sanctions, underpinned by regulatory mechanisms, is essential for Code credibility". 14

In the face of this criticism, the CCMC was formed, funded, and its staff appointed by the leading banks and their industry body, the ASA. The CCMC was intended to investigate and 'name and shame' banks that breached the

5



Code.15 However, despite these commitments, the CCMC does not protect consumers, as its ability to investigate Code breaches is severely limited.

A Weak Regulator

In 2012, The Australian reported that 2.5 million complaints had been made under the Code of Banking Practice in the eight years between 2004 and 2012. Of these, only 200 complaints were fully investigated. 16 The JMA Parties represent 25 of these complaints that were not investigated by the CCMC. The JMA Parties' requests that the CCMC look into their complaints have been repeatedly rejected by the CCMC, despite clause 34(b)(ii) of the Code stating that:

"(The CCMC will) investigate, and to make a determination on, any allegation from any person that we have breached this Code".17

Although this clause seems to require the CCMC to investigate any and all allegations that a bank has breached the Code, the CCMC is also bound by a constitution imposed on it by the ASA in 2004. This constitution was not made available to the public until 2012, and is still not readily provided to consumers. 18 Under the constitution, the CCMC's powers to investigate are seriously restricted.

This is set out under clause 8.1 of the constitution, which restricts the CCMC from having to investigate a dispute, if:

"(b) [it] is, or becomes, aware that the complaint:

(i) is being, or will be, heard ... by another forum".19

Thus, leading banks could now silence any and all critics by taking a case to another 'forum'. This could be achieved without the customers' knowledge and without the other forum having powers to investigate code braches.

For the purposes of Clause 8.1, a 'forum' is widely classified as:

"Any court, tribunal, arbitrator, mediator, independent conciliation body, dispute resolution body, complaint resolution scheme (including, for the avoidance of doubt, the BFSO scheme) or statutory Ombudsman, in any jurisdiction".20

When a bank does take a complaint to another 'forum ' its consumer unwittingly relinquishes 'alf rights to have breaches of the code investigated by the CCMC. The small business, farmer or individual consumer is not provided an explanation beyond being informed that there is a "conflict of interest".

6



The JMA Parties, having had their complaints to the bank's internal dispute resolution mechanism seemingly ignored, were served with a court summons. With this, the lessee's bank denied the JMA Parties their rights to put complaints to the CCMC as their concerns were to be heard by "another forum".

The CCMC constitution-which outlines the restrictions imposed on the CCMC concerning which complaints it can hear-was not made available to the lessee when the Caves House lease was signed, nor to the JMA Parties filed their complaints. This constitution was, indeed, not provided to any customers or small businesses for a period of ten years.

The lessee's bank breached the Code, and relied on a secret constitution to prevent the CCMC from performing its intended function to monitor banks' compliance with the Code. As small business owners and individual bank customers, it was the right of the JMA Parties to expect the bank to comply with the Code and the consumer protections it proscribes. This did not occur.

Non-Disclosure and Banking Regulation

'Non-disclosure' -so states the 2014 Financial Systems Inquiry (the Murray Review)-and the danger arising from consumers committing to contracts "they do not fully understand' are critical issues in Australian banking. 21

Recommendation 21 criticised the existing regulatory framework for relying too heavily on disclosure by banks and banks providing adequate financial advice to consumers.

The major Australian banks clearly did not fully disclose the nature of the selfregulatory system to customers. The JMA Parties went into their banking contracts satisfied with their bank's promise of a "world class" regulatory system. When faced with complaints of the bank breaching its own Code, though, the bank, the FOS, and the CCMC all demonstrated that the JMA Parties did not fully understand how insufficient the Australian financial regulatory system is.

In order to increase this accountability, Recommendation 22 of the review suggested the introduction of 'product intervention power', by amending the law to enhance ASIC's 'regulatory toolkit' where there is risk of significant consumer detriment.22 According to the Murray Review, ASIC lacks lack the 'intervention power' needed "to reduce significant detriment arising from consumers buying financial products they do not understand". 23 To counter this, the inquiry recommended:

"Reducing the risk of significant detriment to consumers with a new power to allow for more timely and targeted intervention [by regulators]".24

7



The inquiry further suggested that government amend the law in order to ensure that regulators can "enforce action against conduct causing consumer detriment" before a "demonstrated or suspected breach of the law" has occurred. 25 Such amendments would give regulators preventive powers under government legislation, as opposed to this intervention power merely being afforded to ASIC following suspected breaches of the Code. 26

The Murray Review further noted that while the conduct of financial institutions that causes 'significant consumer detriment' may be systemic, ASIC is only able to assess cases on a 'firm-by-firm basis'. This significantly limits the powers of ASIC, as one of the major industry regulators.

The Review further encouraged increased regulator accountability through the creation of a new 'Financial Regulator Assessment Board', designed:

"To advise Government annually on how financial regulators have implemented their mandates".27

This formal mechanism would allow government:

"To receive annual independent advice on regulator performance, and strengthen the accountability framework governing Australia's financial sector regulators". 28

In turn, the Review's recommendations would increase the accountability of both the financial institutions and their regulators, thus insuring accountability at a more systemic level.

Government Inaction

These recommendations clearly resonate with the problems facing the current Australian self-regulatory system in the finance sector. However, despite these recommendations, the government and its regulators are yet to adequately require banks to protect the rights of their customers in the manner recommended more than 30 years ago with the Campbell Report. Governments, both federal and state, have failed to protect Australian bank customers.

Indeed, despite the apparent inadequacy of ASIC to police the Australian banks, the Australian state governments agreed to reduce regulatory powers against banks by transferring the responsibilities of state-based regulators to federal regulators. In NSW, this resulted in the NSW Fair Trading regulator having its authority over the finance industry passed on to ASIC.

In a speech in 2001, the Deputy Chair of ASIC stated the following:

"self-regulation must have vigorous and active accountability mechanisms ... if accountability is not a place, then the risk is not just

8



that self-regulation will be ineffective, but that it may be harmful as industry and regulators devote resources elsewhere on the assumption that self-regulation is working. If this occurs, the existence of selfregulation would be counter-productive". 29

Whether through a lack of understanding or concern, the Australian Governments have been complicit in creation of a counter-productive regulatory system so strongly criticised by the Murray Review. The assumption that the system is working needs to change.

Potential Criminal Behaviour

The lessee's bank has engaged in deceptive and potentially fraudulent behaviour. It claims to protect its customers' rights while participating in a regulatory regime that denies individuals and small businesses any avenue of redress for alleged breaches of consumer protections. The FOS is so severely restricted by its Terms of Reference and the CCMC by its constitution that the two organisations fail to investigate all but a very small percentage of customer complaints.

The JMA Parties are only one example of the collateral damage of the current financial self-regulatory regime in Australia. The injustices met out to them by their bank are indicative of consumer protection system that fails to protect those who need it the most.

(ASA CEO), 2000, quoted in: "The Australian Bankers' Problematic Code", Report to Council of Small Business Organisations in Australia, 5 December 2010, p. 118

3 'General Standard Terms' (Annexure B), 2003 version, clause 35 4 Code of Banking Practice (1993), 3 November 1993, clause 1.3(a), 5 Code of Banking Practice (2003), clause 3.2 6 Ibid. 7 National Australia Bank Limited v Rice [2015] VSC 10. Available from: http://www.aust!ii.edu .au/cgi-bin/sinodisp/au/cases/vicNSC/2015/1 O .html. 8 Code of Banking Practice (2003), clause 2.1

9



9 Martin Committee on Banking and Deregulation, 1991, "A pocket full of change", House of Representatives, Standing Committee on Finance and Public Administration 1° Financial Ombudsman Service, 2015, "Operational Guidelines to the Terms of Reference": 24, 105. 11 Richard Viney, "Review of the Code of Banking Practice", Issues Paper, February 2001, p. 25-27. 12 Ibid. 13 Ibid. 14 Ibid. 15 Howell, N., 2015, "Revisiting the Australian Code of Banking Practice: Is SelfRegulation Still Relevant for Improving Consumer Protection Standards?" UNSW Law Journal, Vol. 38, No. 2, 544-586: p. 545. 16 The Australian, "Wilkie Bill Would Impose Banking Code", 1 O September. 17 Code of Banking Practice (2004), clause 34(b) 18 The Constitution of the CCMC (2004) was made available to Ms Rosemarie Bayne, on behalf of the JMA Parties on 27 July 2012. 19 Constitution of the CCMC (2004) , clause 8.1 20 Ibid. 21 Financial Systems Inquiry ('Murray Review'), November 2014, Final Report, recommendation 22. 22 Ibid, recommendation 22 23 Ibid. 24 Ibid. 25 Ibid. 26 Ibid. 27 Ibid, recommendation 27 28 Ibid. 29 Address by Ms Jillian Segal, Deputy Chair, Australian Securities and Investments Commission, to the National Institute for Governance Twilight Seminar, "Institutional self-regulation : what should be the role of the regulator?" Canberra, 8 November 2001

10


Documents

Jenolan Caves Tourism Submission to Senator David Fawcett's Parliamentary Inquiry into Engineered Loan Defaults