Draft Code of Banking Practice
- What is the Code of Banking Practice?
- Why is NZBA proposing a new approach to the Code?
- What are the five principles of the proposed Code?
- Does the proposed Code reduce customers’ existing rights?
- How is the principles-based approach preferable to the prescriptive approach?
- How will the Banking Ombudsman determine what good banking practice is?
- How does the proposed Code relate to bank terms and conditions?
- Why doesn’t the proposed Code include customer obligations?
- What are the main laws that set out banks’ consumer responsibilities to their customers?
- How does the proposed Code compare to the approach in other countries?
The Code of Banking Practice has been around since 1992. The current fifth edition was published in 2012 and is available here.
The Code is developed by the banking industry through NZBA in consultation with the public. It is intended to set out what good banking practice looks like. NZBA member banks agree to observe that good practice as a minimum standard in how they relate to their customers.
The Code applies to banks’ relationships with all their customers except wholesale customers.
The Code is used by the Banking Ombudsman, along with bank terms and conditions, and the law, to assess and make recommendations in disputes between banks and their customers.
Over the years the Code has grown and moved away from its original purpose. The current Code now largely duplicates banks’ standard terms and conditions.
The Code also hasn’t kept up to date with changes in the way we now prefer to do our banking. The review presents an opportunity to modernise both the content and structure of the Code.
The current Code is 51 pages long, is prescriptive, reads like bank terms and conditions, and easily gets out of date in the face of banking innovation. We propose simplifying the Code and adopting a principles-based approach that is easy to read.
The proposed approach should make the Code easier for customers to understand and avoid duplicating bank terms and conditions. It should also keep the Code up to date in terms of changes to the way we’re banking and new consumer law obligations for banks.
We are looking to distil the good banking practice principles underlying the current Code and set out what banks will do to give their customers a good banking experience. The principles we have identified are that banks will:
- Treat customers fairly and reasonably
- Communicate with customers clearly and effectively
- Respect customers’ privacy and confidentiality and keep their banking systems as secure as they can
- Act responsibly when offering or providing customers with credit
- Deal effectively with customer concerns and complaints.
In no way is the proposed Code intended to reduce customers’ existing rights. It actually gives the Banking Ombudsman more flexibility to determine what good banking practice looks like and how banks should behave in particular cases.
A principles-based Code is intended to be more focused on customer needs. Prescriptive approaches tend to be more directed at banks.
The new Code is intended to be more easily read and accessible than the current Code.
In setting out five principles of good banking practice, the proposed Code allows greater flexibility for banks to help ensure they do the right thing by their customers. It also provides the Banking Ombudsman with greater flexibility in determining what good banking practice is in making recommendations on particular cases.
The principles-based approach also helps avoid duplication of bank terms and conditions.
The proposed approach also helps the Code keep up with banking innovation. The ways in which we’re banking are evolving in response to changing customer preferences. A principles-based Code helps to keep it current.
The proposed Code makes clear that banks will comply with all relevant legislation, and ensure that staff are trained to do so. This approach allows the Code to stay up to date with changing legal obligations for banks such as amendments to the Credit Contracts and Consumer Finance Act and the Financial Advisers Act.
The Code sets out the principles of good banking practice.
As well as looking at the relevant law and bank terms and conditions, the Banking Ombudsman may seek the industry’s view on what is good banking practice in a particular case. This may take the form of an industry survey or consulting a reference group of industry representatives.
The scheme is not bound by any previous decision because the relevant standards change and develop over time. It does however recognise that its decisions should be as consistent as the circumstances of the case allow.
The proposed Code sets out the principles of good banking practice which banks agree to observe in their relationships with customers as a minimum standard.
Unlike previous Codes, the proposed Code does not duplicate bank terms and conditions.
The Code focuses on what banks will do for their customers. It seeks to avoid customer obligations, because they are already contained in the contracts that banks have with their customers; the terms and conditions for their products and services.
The Code focuses on what banks will do for their customers to provide a good banking experience. It does include some suggestions about what customers can also do to help the bank best meet their needs.
The proposed Code avoids duplicating contractual terms and conditions.
Customer obligations are set out in bank terms and conditions, rather than the Code, as these often depend on the nature of the products and services banks provide.
Some of the main legislation that sets out banks’ consumer responsibilities to their retail customers includes:
- Credit Contracts and Consumer Finance Act 2003
- Fair Trading Act 1986
- Financial Advisers Act 2008
- Financial Markets Conduct Act 2013
- Privacy Act 1993.
This list is not exhaustive.
Other countries that have codes of banking practice have tended to adopt a more prescriptive approach, rather like our current Code.
In adopting a principles-based approach, we want the Code to be a simple, clear, and accessible resource for our customers. The proposed Code is intended to be more focused on customers and their needs, rather than directed at banks.
Our innovative approach for the new Code aims to support positive relationships between banks and their customers in a way that everyone can understand.
We are aware that the Australian Bankers’ Association has recently brought forward a review of its Code of Banking Practice and is also considering a principles-based approach.