Code of Banking Practice breaks new ground

Karen Scott-Howman

Published in KPMG’s Financial Institutions Performance Survey Review of 2017, 14 February 2018

Trust and confidence are watchwords for the banking industry the world over. The banking environment in New Zealand is different from other countries. We did not experience bank failures or bailouts in the GFC, nor the conduct scandals seen in other countries. We have a strong, stable and well-regulated industry, which benefits our economy, households and business. That said, we’re very conscious of the world around us and we’re not sitting on our laurels.

Building on our reputation and constantly looking to improve customer experience is an important driver for all banks in New Zealand. As part of that, the New Zealand Bankers’ Association will this year publish a new Code of Banking Practice. We’re taking a fresh approach to the Code that aims to boost its relevance and make it easier for customers to understand what they can expect from their bank.

The Code of Banking Practice has been around for over 25 years. It sets out what banks will do for their customers as a minimum standard, and helps ensure customers get a fair go from their banks.

The Code has played an important part in maintaining customer trust and confidence since it was first introduced in 1992. As the relationship between banks and their customers has matured over the years, the time seems right to break new ground and bring the Code into the 21st century.

The new Code states what customers can expect from their bank in a simple way. It is high-level and sits above the detail of bank terms and conditions.

The Code clearly sets out five commitments that banks will make to their customers.

It says banks will treat their customers fairly and reasonably. They’ll communicate clearly. They will protect customer privacy and security. They’ll be responsible lenders. And they’ll deal effectively with customer complaints.

These few words say a great deal about what customers can expect from their bank. While the new Code is shorter and easier to read, in no way does it reduce what banks will do for their customers. In fact, it raises the bar.

These principles avoid the old rules-based approach. This means banks have to think carefully about how their conduct meets the commitments in the Code. Following prescribed rules doesn’t always result in the best customer outcomes. The principles-based approach we’re proposing means banks will work even harder to get the right customer result. We think it’ll be great for customers, and much better aligned with how we now do things in New Zealand.

The new Code will more easily keep up to date with banking innovation. For example, the current Code has a whole chapter on cheques and only a couple of clauses on mobile banking. That doesn’t make sense in a world where cheque use is declining year-on-year, and mobile banking is hugely increasing. A higher level principles-based approach avoids the Code quickly getting out of date in light of changes to the way we prefer to do our banking.

The new Code also fits better with the changing regulatory environment. Consumer law and regulations have been enhanced over recent years, and there are more changes on the way. For example, we now have the Responsible Lending Code under the Credit Contracts and Consumer Finance Act. We’re also looking at changes coming in through the Financial Advisers Act, which propose new customer-first obligations for financial advisers.

Our new approach is quite different from other countries, including Australia. There they have a different framework for their Code of Banking Practice that involves regulator-approval and requires a more prescriptive approach. It’s a legal document that focuses on what banks need to do. By contrast, our new Code will focus on customers and what they can expect from their banks.

We’ve consulted closely with the Banking Ombudsman on the new Code because it goes hand-in-hand with the Ombudsman’s role. If you’re not happy with the way your bank has responded to your complaint, the Code says you can take it to the Ombudsman to sort out. The service is independent of the banks, and free to customers.

While the Ombudsman is more likely these days to deal with complaints about mistaken online payments than problems with cheques, the point of the disputes resolution service remains the same as when it was established 25 years ago.

All the evidence suggests that the Ombudsman scheme has worked as its architects intended. New Zealanders rate their banks highly in customer satisfaction surveys. That’s not just because banks are providing the kind of experience customers want. It’s also because banks operate in a very competitive environment and work hard to keep their customers happy. That includes putting right any problems quickly and fairly.

The new Code will provide the Banking Ombudsman with more flexibility in determining what good banking practice is. As well as looking at the principles set out in the Code, the Ombudsman will continue to take into account the relevant law, and bank terms and conditions. She may also consult other banks to determine what good banking practice looks like in particular cases. That’s important because customer expectations may change over time. This flexibility will help keep minimum standards in line with those expectations.

Customer trust and confidence in banks are essential to the industry’s ongoing success. For the last 25 years the Code of Banking Practice has played a crucial role in improving customer outcomes by setting minimum standards in what people can expect from their bank. The new Code aims to build on that solid foundation. It will create a simpler, more easily understood and relevant framework for even better banking in New Zealand.