The Banking Code Compliance Committee has recommended banks increase guarantor controls on third parties such as brokers to help protect vulnerable consumers, according to a new inquiry.
The BCCC’s new report found banks had made “significant progress” on improving protection for people who go guarantor on loans since a 2021 report found failings in the process.
However, in releasing its follow-up to the 2021 report, the BCCC noted that there were still some shortcomings that need to be addressed to ensure compliance for banks that subscribe to the Banking Code of Practice.
“Guarantees are an important part of consumer credit, and we recommend that banks continue to strengthen the processes for consumers, including when dealing with brokers,” said BCCC deputy CEO Rene van de Rijt (pictured above left), who is also the deputy general manager code compliance and monitoring at the Australian Financial Complaints Authority (AFCA).
“The recommendations in the report aim to enhance consumer protection, especially for vulnerable consumers, and we would like to see even stronger processes for securing a guaranteed loan across the industry.”
In the 2021-22 financial year, BCCC data found guarantees held by banks that subscribe to the Code of Practice supported $68 billion worth of loans to individuals and small businesses.
The BCCC’s 2021 report revealed practices that did not always adequately protect people in the process of guaranteeing a loan.
Since then, van de Rijt said banks had generally contributed to “better consumer protections” in the guarantees process.
“Across the industry, we noted that there was better support for guarantors experiencing vulnerability, enhanced training for staff, and more rigorous interviews with prospective guarantors,” he said.
However, van de Rijt admitted that this meant brokers may need to follow the specific requirements of each bank’s improved processes when working on a guaranteed loan for a client.
“We expect that banks have controls to ensure consumers can make informed decisions on a guaranteed loan. Each bank’s processes will vary, but we expect that they will comply with the Code of Practice and pursue outcomes that protect the interests of consumers.”
The BCCC recognised the work of banks to improve practices in the two years since the findings of initial report.
Guarantee-related code breaches have been cut by over half, from 120 in 1H 2021 to 55 in 2H 2022, and training is more readily available.
“Our 2021 report revealed concerns, so to find significant progress from banks in our follow-up inquiry is very encouraging,” said BCCC chair Ian Govey AM (pictured above right).
“These are crucial improvements in industry practices that will help banks provide important protections for people who guarantee a loan. And the improvements really emphasise the importance of our work monitoring the Code and looking into practices of banks.”
While the improvements were significant, the 2023 Guarantees Follow-Up Report noted that there were still areas that needed attention.
Banks reported receiving a total of 2,090 guarantee-related complaints between January 1, 2022, and December 31, 2022.
Three recommendations for better practice from the 2021 report had not been adequately considered by all banks, with the report revealing that:
• not all banks consistently require staff and brokers to interview prospective guarantors,
• some banks had not yet audited their compliance with the Code’s guarantee obligations as recommended,
• few banks proactively analyse guarantee data to identify areas that need improving.
Govey addressed these drawbacks, noting that the BCCC expected the banks to “consider all the recommendations carefully”.
“Some banks had not acted on our recommendations from 2021. This was somewhat disappointing given the good outcomes we know the recommendations can help deliver,” Govey said.
“We make our recommendations to improve and strengthen practices beyond minimal compliance with the Banking Code which, in turn, helps to enhance compliance and consumer protection. This is vital for guarantors, especially for people who may be experiencing vulnerability.”
While the report noted several examples of best practices that banks had implemented, such as increased training for brokers and mandatory interviews, other examples left the BCCC “concerned”.
For example, two banks hold no interviews and rely solely on written notices to communicate information about the risks of being a guarantor. Another failed to identify a guarantor experiencing vulnerability – domestic violence – when signing a guarantee for a loan.
Because of these situations, the BCCC offered additional recommendations in the 2023 Guarantees Follow-Up Report, including extending controls to third parties who undertake part of the guarantees process on behalf of a bank, such as brokers and solicitors.
While this could lengthen and complicate the guarantee process for brokers, the BCCC considers that strengthening the controls is an important way to reduce the risk for vulnerable consumers.
“Building on the progress will be important,” Govey said. “That is why we have made further recommendations – continuous improvement is central to our focus, and we want to see banks strengthen their processes and controls on guarantees.”
