Discussion Paper - Submission Summary 

March 2002

Submission to the Review of the Code of Banking Practice - Discussion Paper

General comments
Sections of the Code for specific comment
Suggested additions to the Code
Community relations and banking
Conclusion

Introduction and overview of submission

1 The Ministry of Consumer Affairs (MCA) is an operating branch of the Ministry of Economic Development. The outcomes we seek include:

• Consumer interests are well represented in public and private sector policies and decisions.
• Appropriate, accurate, and accessible information, education and advice for consumers and business.
• Information is available to help consumers make comparisons between goods and services, prices, and production processes.
• Goods and services are sold using fair rules and ethical practices.
• Appropriate redress, remedies, and penalties are available for consumers when things go wrong.

2. The Ministry of Consumer Affairs made a submission when the Code was last reviewed (1995) and welcomes the opportunity to comment on the Draft Code. Our submission to the last review was comprehensive, containing 82 recommendations. However, very few of the recommendations were incorporated into the November 1996 Code.

3. Since the 1995 review, MCA has promoted a number of significant self-regulatory initiatives. (The production of Guideline for Developing a Code of Practice, Ministry of Consumer Affairs Business Notes, July 2000; the development of the Electricity Consumer Code of Practice 2001; the recent review of the Fair Insurance Code of Practice and the Model Code for Consumer Protection in Electronic Commerce 2000)

Of these, our Guideline for Developing A Code of Practice is particularly relevant to the Draft Code and we attach a copy for your reference. We have a keen interest in the effectiveness of the current code and have kept abreast of developments in banking codes in other jurisdictions.

4. Our submission focuses on a number of key issues with a view to seeking agreement in principle to suggested changes and additions in the first instance and to working with the Bankers' Association at a later stage on detailed drafting.

5. This submission commences by discussing general matters related to the nature and scope of the Code then goes on to identify matters of specific concern, noting where revisions and/or enhancements are warranted; and concludes with a brief discussion about community relations and banking.

General comments

6. It is of concern to us that, on balance, the Draft Code provides fewer consumer protections and benefits than the current code. This is due to the introduction of numerous consumer obligations.

7. The general tone of the document is not likely to inspire the confidence of consumers. It is written in the language of contract with a heavy focus on mutuality and reciprocity of rights and obligations. This is inappropriate given that consumers are not subscribers to the Code. Many of the undertakings given by banks are heavily qualified. The overall impression is that the purpose of the Code is to limit banks' liability to consumers.

8. The purpose of the Code should be to promote good practice in banking. The Code should focus on the standards of service consumers can expect from banks. Given the competitive nature of the financial services market, a Code that reflects this purpose would be a valuable marketing tool for banks' sales staff. It could be used to promote to consumers points of difference between banks and other financial service providers that may not have a code of practice. Setting and adhering to clear standards in the market can positively differentiate the industry in the eyes of consumers and provide it with a competitive advantage.

9. An example of how this might operate in practice can be found in the electricity industry. Although the Electricity Consumer Code is in its infancy, experience to date indicates that some consumers of companies that are not party to the Code are dissatisfied with the standards of service received and are attempting to switch to those companies that are party to the Code. Companies that do subscribe to the Code advise consumers of this in their promotional material.

10. We acknowledge that a considerable amount of effort has gone into making the Code more understandable to consumers through the addition of a glossary, repetition of key concepts and the use of less formal language. However, this appears to have been at the expense of clarity and brevity. The structure of the Draft Code is inferior to that of the current code. There does not appear to be a logical order in the location and headings of provisions, resulting in unnecessary duplication and difficulties in finding information.

11. Banks have an opportunity through this review to restore consumer confidence and improve relationships between consumers and banks. We hope that banks will fully utilise this opportunity by giving full consideration to the comments below on specific sections of, and suggested additions to, the Draft Code. We would be happy to meet with you to discuss any of the issues contained in this submission.

Sections of the Code for specific comment

(The headings used in this section correspond to the section headings in the draft Code.)

Introduction

12. Clause 1.2 covers the relationship between the Code and customer contracts. It appears to us that in attempting to use less formal language (than clause 1.4 of the current code), the clause fails to encapsulate the requirements in the current code for contracts to be:

• compliant with the Code; and
• not inconsistent with the Code.

13. We suggest the provision be redrafted to make it clear that:

• The Code sets out minimum standards that apply in all circumstances.
• Particular products and services may have additional terms and conditions.
• Additional terms and conditions must not be inconsistent with the Code standards.
• Additional terms and conditions may be more advantageous to consumers but cannot be inferior to the Code standards.

Governing principles and objectives of the Code

14. This section outlines the bank's objectives (2.1) and actions the bank will take to achieve those objectives (2.2). Clause 2.3 qualifies the bank's undertakings by outlining the conditions that consumers must satisfy for the bank to achieve its objectives. Clause 2.2 (e) requires the bank to act fairly toward consumers and clause 2.4 defines "fair".

15. The Code is not a contract between consumers and banks. Consumers do not subscribe to the Code and have not agreed to the Code objectives. It is therefore inappropriate to require consumers to satisfy certain conditions before the bank can be required to meet its own objectives. The undertakings given by the bank are not onerous and should not be so heavily qualified. We therefore suggest that clause 2.3 be deleted.

16. The same issue arises in clause 2.4. The requirement for consumers to comply with the Code (2.4(c)) is misleading. If a bank wanted to make Code obligations legally binding on consumers, they would have to expressly provide for this in their standard terms and conditions and would then have to bring the provisions of the Code to the attention of the consumer at the time they entered into the contract with the bank. Unless and until banks do this, consumers should not be required to comply with the Code.

17. The definition of fairness places more emphasis on the consumer's conduct than it does on the bank's conduct. Examples include the requirement in clause 2.4 (b) to consider what the consumer did to advise the bank of their needs (no corresponding requirement to consider what the bank did to meet those needs) and the requirement in clause 2.4(e) to consider the consumer's legal responsibilities (no corresponding requirement to consider the bank's legal responsibilities). This is unreasonable. The definition in the current code provides for consideration of both parties' conduct and refrs to mutual contractual obligations. This is a more reasonable and balanced approach to determining fairness and we suggest that it be retained in place of draft clause 2.4.

18. In this context, we note that the Australian Bankers Association (ABA) is considering the incorporation of a provision similar to the current New Zealand definition of fairness into their code. The ABA submission to the 2001 review of the Australian Code of Banking Practice posed the question "How is 'fairness' working under the current NZ Code?" and noted that reports from New Zealand indicated that it has not raised any significant problems. (Review of Code of Banking Practice Issues Paper: Appendix 5 - Australian Bankers Association Submission on Future Role of Code (pp 3-4)).

Customer responsibilities

19. The Draft Code introduces numerous customer responsibilities. They are located in various sections of the document (many being repeated in several sections) and summarised in section 3. The responsibilities are a mix of existing legal obligations, requirements on customers which are fair and reasonable but not legal obligations as such, as well as requirements on customers which are neither fair nor reasonable.

20. It is not obvious on reading the Draft Code what the banks' motive is in including so many customer requirements. It is neither appropriate nor usual for codes to focus so heavily, if at all, on customer requirements. We assume the motive may be one or more of the following:

• to educate consumers about their existing legal obligations; or
• to advise consumers of actions that might benefit them, but which are not legal obligations; or
• to create new legal obligations for consumers by incorporating provisions into the Code that banks can use as the basis of standard contractual terms and conditions.

21. None of the above are primary functions of a code and we would have concerns if there has been a conscious switch in emphasis in the Code from emphasis on consumer rights to consumer obligations.

22. In any case, the Code will be of limited educational or informational value to consumers unless consumers are aware of its existence. Banks are not currently required to advertise the Code to consumers and need only provide copies on request. Promotion of the Code is discussed separately in this submission.

23. The requirements for consumers to understand products and services (3.1.1), and contractual rights and obligations (3.1.2) are unreasonable. Consumers may have an understanding that is incorrect. It is more appropriate to require banks to provide information, respond to requests for advice and provide consumers with every reasonable opportunity to understand the information.

24. The requirement to ensure that the bank has actioned a change of address notification (3.5.1) imposes an unfair and unreasonable customer obligation and is inconsistent with the bank's duty to act with reasonable skill and care. A consumer is entitled to assume that the competent banker will action a change of address notification. This requirement should be removed.

Communication

25. The Communication section is a good example of the use of the Code for information and education purposes rather than as a means of consumer protection. There are very few undertakings by the bank - the emphasis is on what the consumer must do to protect themselves.

26. In the draft Code, the consumer is required to carefully read communications (4.2); contact the bank if they do not understand information (4.4) and communicate clearly with the bank (5.1).

27. It would be more appropriate for the Code to put the onus on banks to communicate clearly with consumers, highlight important information and, where possible, to check that consumers have understood the information.

28. We also suggest that the Code provide more specific undertakings by banks to endeavour to write, email or talk to consumers regarding all changes (to standard contractual terms and conditions) of significance and certainly where the change is to the detriment of the consumer.

PINS and passwords

Selection and security of PINs and passwords

29 The Draft Code contains two prohibitions on consumers which, when combined, are unreasonable because they require consumers to memorise a considerable amount of information which may easily lead to them becoming confused:

• Customers cannot use the same PIN or password used for other equipment (11.1.4).
• Customers cannot write PINs or passwords anywhere (11.2.2).

30. In and of themselves, neither of the prohibited practices necessarily cause or contribute to unauthorised loss. A consumer might use the same PIN for banking that they use for other equipment without disclosing that information to anyone else. A consumer might write down their PIN or password but keep it separate from their cards, or disguise it so that it is not identifiable as a PIN. We understand that where these practices have resulted in unauthorised transactions; there has usually also been negligence or fraud by the consumer, or theft by another party.

31. These prohibitions appear to be without precedent: we are not aware of codes in other jurisdictions that prohibit the use of PINs or passwords used elsewhere. Banking codes in other jurisdictions allow consumers to record their PIN or password in writing provided reasonable efforts are made to disguise it and/or it is not written on, or stored with the card. (See for examples the Australian Electronic Funds Transfer Code of Conduct (cl.5.6); the South African Code of Banking Practice October 1999 (cl.4.4.2) and the Canadian Code of Practice for Consumer Debit Card services (Part 5, cl.5)).

32. With regard to clause 11.1.4; we note that the Banking Ombudsman has reported on a number of cases where this practice has, in conjunction with the subsequent theft of cards, resulted in unauthorised transactions. We can understand why banks would, therefore, want to avoid the potential security risk arising out of this practice. However, we are not convinced that reactive amendments of this nature are the best way to deal with security problems. Thieves may come up with alternative means of accessing consumers' accounts which would necessitate further amendments to the Code.

33. It is desirable that banks take a proactive and co-ordinated approach to improving security and authentication mechanisms with respect to consumer transactions. PINs and passwords are not strong forms of security, particularly in the online environment. The technology is developing which will eventually enable alternative means of preserving security, and reduce the opportunities for identity theft and unauthorised access to consumers' accounts. This is an area that consumers and their representatives might usefully contribute to should banks undertake further research and analysis of options for protecting security.

34. Rather than prohibiting the practices, it would be more appropriate for the Code to:

• require banks to warn consumers of the risks involved; and/or
• reframe the prohibitions as tips for safeguarding PIN or password security; and/or
• prohibit only one of the two practices (it is the combination of the two prohibitions that is unreasonably onerous for consumers).

35. We note that the changes suggested above would require changes to equivalent provisions in the "Cards (Credit and Debit)" section.
Liability of Card Merchant

36. Clause 11.2.3 should be reworded as an obligation of the bank: perhaps something to the effect that the bank will require card merchants to enable PINs to be entered in a confidential manner. Card merchants are not party to the Code.

Cards (credit and debit)

37. There is a considerable amount of unnecessary duplication in this section as it contains much of the same information covered under PINs and Passwords. This includes clauses 10.2.2.(a), 10.4.4, 10.4.5 and 10.4.6. We suggest redrafting the relevant sections so that the information common to cards, PINs and password security and liabilities is contained in one section and cross-referenced where necessary.

Suggested additions to the Code

38. To provide effective consumer protection, a code must offer specific and worthwhile benefits to consumers beyond those resulting from minimum legal requirements and standard industry practice.

39. With the exception of internal dispute resolution provisions and the Ombudsman scheme, there are few provisions in the Draft Code requiring more from banks than the legal minimum. Most provisions cover existing legal obligations (statutory, common law and contractual) and current industry practice. We have, therefore, identified a number of additions to the Draft Code which would provide an appropriate level of consumer protection.

Chargebacks

40. We are aware that many consumers are ignorant about the chargeback provisions that exist in some circumstances for credit card transactions and are unable, therefore, to utilise these provisions. The Code should require banks to ensure that the terms and conditions of credit card use include information about the operation of chargeback provisions where they exist.

Direct debits

41. Many consumers confuse direct debits with automatic payments and do not understand that, with the former, they are giving another party access to their account. We are often contacted for advice from consumers in dispute with service providers over amounts debited from their account and/or their inability to have the authority cancelled by the bank.

42. We suggest that the Code require banks to:

• clearly explain the difference between direct debits and automatic payments; and
• accept the customer's instruction to cancel a direct debit authority without requiring the customer to first contact the debit user.

Notification of fees and charges

43. We endorse the recommendation of the Banking Ombudsman for a notice period, perhaps five working days from the date of expected receipt of the statement of fees by the consumer, before debiting the fees. There is a significant detriment to low income consumers in particular through the imposing of fees. It is often difficult for consumers to keep track of fees as they are incurred and, thus, anticipate the total amount of fees likely to be debited (especially given that most banks change their fee schedules from time to time). It was a common complaint to Bankline that the debiting of fees pushed consumers into overdraft resulting in additional fees. ( In July and August 2000, the Ministry of Consumer Affairs ran a banking information service (Bankline) for consumers consisting in part of an 0800 hotline (where consumers could seek information and share their banking experiences with Ministry staff). The information collected from the Bankline calls was reported in 0800 Bankline Report, Ministry of Consumer Affairs, December 2000).

 Promotion of the Code

44. Many consumers are unaware of the Code's existence and are, therefore, unable to exercise their right to request a copy of the Code. The Code should require banks to prominently display copies of the Code, and/or posters or flyers advertising its availability and summarising its key provisions, at branches and on websites. We note in this context that the Code of Health and Disability Services Consumers' Rights requires health providers to display the Code. This is good practice, and in accordance with the spirit of codes of practice.

45. Consideration should also be given to promoting the Code through ATM and telebanking services for those consumers unable to use face-to-face banking services. Examples include a sentence or two at the bottom of ATM printouts and monthly bank statements advertising the Code's availability. An appropriate telebanking menu option could also invite consumers to request a copy of the Code.

46. The new initiative of the Bankers' Association to display the Code on its website is commendable and will benefit those consumers who can access the website. As the Bankers' Association is not party to the Code, we suggest that the Code also require banks to advise consumers of this initiative, as well as make the Code available on their own websites.

Review of the Code

47. We remain of the view that the Code should specify the process for review. It should state the purpose, frequency and timeframe of the review and who will be involved. The Code should expressly provide for the inclusion of consumer and community representatives in the review process. (Please refer to the Ministry's Guideline for Developing A Code of Practice).

48. We think it neither necessary nor desirable that the Code should provide for interim review independent of the public review process (1.1) for the following reasons:

• There is a need for transparency in the Code review process that is unlikely to be satisfied by anything short of a comprehensive public review process, that is well publicised.
• Legislative changes override the Code, so the Code does not need interim updates to remain relevant.
• Changes in practice that are beneficial to consumers are unlikely to be inconsistent with the Code.

49. We suggest instead that the review period be reduced to three years. Comparable codes provide for a three year review period and given the momentum of technological change in the industry, we see no valid reason why this code should retain a five year review period. (The Australian Code of Banking Practice 1993 and the New Zealand Fair Insurance Code 2001 both provide for three year review periods.).

Provision of information when declining requests for products and services (including credit)

50. Consumers continue to express dissatisfaction when banks decline an application for a particular product or service without providing reasons for the refusal. It would assist consumers in preparing a more acceptable application or pursuing alternative options if, where possible, the reasons for refusal and suggestions for satisfying the relevant acceptance criteria were provided on request. A relevant Canadian code requires the provision of the above information on request in regard to credit applications. (Canadian Bankers Association Model Code of Conduct for Bank Relations with Small and Medium-Sized Businesses 1996). The same approach could be adopted for New Zealand and extended to applications for other products and services subject to a "where possible" proviso.

Provision of Information about Complaints Procedures

51. One of the key areas of complaint to Bankline was the lack of information consumers received from banks regarding internal complaints procedures and the Banking Ombudsman Scheme.

52. We suggest that the Code supplement the current requirement for banks to display brochures about internal complaints procedures with requirements for:

• bank staff to provide information about internal complaints procedures where they are aware that the consumer has a complaint; and
• information about complaints procedures to be made available through telebanking services and on banks' websites; and
• banks to display the pamphlet about the Banking Ombudsman that is produced by the Banking Ombudsman's office.

Onus of proof

53. The Code is silent on the onus of proof regarding consumer liability for unauthorised use of a card. We note that codes in other jurisdictions provide that the onus of proof is on the bank to show that the consumer committed fraud or gross negligence (South African Code of Banking Practice October 1999), or acted without reasonable care (UK Banking Code January 2001) or received the card or PIN (Australian Electronic Funds Transfer Code of Conduct). We are also aware that the Banking Ombudsman has commented on the difficulties of administering section 5 of the current Code because of the lack of clarification as to where the onus lies. We suggest that the Code expressly provide that the onus lies with the bank to show that the customer acted fraudulently or negligently or, where receipt of the card or PIN is disputed, received the card or PIN.

Community relations and banking

54. There are a number of outstanding issues of concern to consumers not covered in the Code or Draft Code. We have loosely categorised these matters as "community relations" issues because they can impact significantly on the ability of certain sectors of a community to access banking services. We regard them as being matters of significance that require consultation, research and analysis before they might usefully be developed into specific recommendations. They include affordability of fees and access to banking services for low income, disabled, elderly and rural consumers.

55. While these issues could and should be addressed by banks, we have not formed any view at this stage as to whether the Code is the appropriate vehicle for addressing any or all of them. In seeking beneficial outcomes for consumers and banks, we should not be constrained in our thinking by the existing self-regulatory mechanisms. We note for example that in some jurisdictions such matters have been provided for through regulation and/or other related codes.

56. The Code is an appropriate vehicle, however, for providing an undertaking by banks to engage in ongoing consultation with consumers and their representatives on issues of concern to them which may include some or all of the above. Consumer/community groups have a considerable amount of expertise in these matters which we are confident would be of value to banks and may result in improved relations with, and an increase in the uptake of banking services by low-income, disabled, elderly and rural consumers.

57. The Australian Bankers' Association offered, in response to the Issues Paper prepared by the independent reviewer for their recent code review, to provide for the following in the new code:

• To establish a consultative forum (including consumer organisations) for the exchange of views on the effectiveness of the Code.
• To include a provision recognising the special needs of elderly and disabled persons and undertaking to consider and implement measures to facilitate access to banking services.
• To provide information to low income earners or disadvantaged persons about accounts most suitable to their needs. (Review of the (Australian) Code of Banking Practice Final Report October 2001, Schedule 2 - Australian Bankers Association Final Response To Issues Paper, pp 7-8).

The draft provisions do not appear to fully encapsulate the review recommendations. However, we understand that the Code is yet to be finalised.

58. We seek a commitment from the Bankers' Association, through the Code, to consult with consumers and their representatives and to ascertain their views on the above issues. A joint consultative forum similar to the Australian proposal might be one way of beginning this process. However, we would be interested in discussing any other options the Bankers' Association might identify for demonstrating this commitment.

Conclusion

59. There are three key areas where we would like to see improvements made to the Draft Code. These are:

1. Status of consumer obligations: the Draft Code is problematic in that it reads like a contract between customers and banks, rather than an undertaking by banks to observe certain practices and behaviours to ensure better than minimum standards are attained across the banking sector. To be credible as a code, the focus should be on the latter. This means that an extensive rewrite is necessary to ensure that the correct emphasis is conveyed. Clauses which place obligations on consumers need to be changed so that the obligations rest where they belong - on banks.
2. Structure, format and language: the Draft Code is poorly ordered, repetitive and could easily be made more accessible through redrafting.
3. Consultation: the Code should require banks to consult more fully with consumers and their representatives so that it can be seen as a credible document that is responsive to the changing needs of banking customers.