Chapter 5

CHAPTER 5

COMPETITION IN THE MARKET PLACE

5.1 In this chapter the Committee reviews a number of recommendations from the earlier report which relate to consumer banking issues. The areas reviewed include:

retail pricing and credit cards (Recommendation No 64);
interest on deposit accounts (Recommendations Nos 65 and 67);
cost recovery methods for early repayment of fixed interest rate loans (Recommendation No 68); and
credit assessment procedures and scoring systems

(Recommendation No 74).

5.2 The underlying philosophy of the Committee' s recommendations in the original report relating to consumer banking issues was that the pricing of bank products and services should be determined in the market place. While adopting this underlying approach, the Committee recognised the market does not always operate efficiently or deliver outcomes which are considered fair.

Shortcomings arise -

where there is poor information or a failure to communicate information adequately,
where institutions engage in deceptive practices; or
where there is unfair bargaining power between banks and customers.

Other institutions such as government can place barriers or restrictions which prevent the market from working efficiently.

5.3 Later in the chapter the Committee discusses ways of improving

information available to consumers so they in a better position to make informed

choices. The Committee develops the concept of a 'report card' on banks as a way

of placing comparative information on bank products before consumers and proposes

methods for seeing such information more available in the market place.

5.4 A major set of recommendations was made in the previous report to

address the relationship between banks and consumers. The Committee

recommended the development of a legally enforceable Code of Banking Practice to

mediate this relationship. The recommendations relating to the Code were not part

of the current review as it was the Government' s responsibility to respond to the

recommendations in this area.

5.5 The Government's response to the report tabled in the House of

Representatives on 25 June 1992 noted:

Consumer groups and individual customers frequently

complain about shortcomings of banks: at the most

general level, customers believe they are at a

disadvantage in dealing with banks because of their

relative financial weakness and the size and power of

banks. There needs to be an acceptable balance of

interests, and an appropriate code would help to achieve

5.6 Consequently the Government endorsed the development of a

comprehensive Code of Banking Practice 6 to cover best banking practices in respect

of relations between banks and their customers' .2

5.7 A task force of officials from Treasury, the Trade Practices

Commission, the Reserve Bank and the Federal Bureau of Consumer Affairs, chaired

jointly by Treasury and the TPC, has been established to develop the Code in

consultation with banks, consumer groups and other relevant organisations.

5.8 While there originally was some concern expressed by banks and

consumer groups about their lack of direct involvement in developing the Code, all

groups appear to be satisfied at this stage with the process for consultation being

undertaken by Treasury and the TPC.

5.9 In an update on progress in developing the Code, the TPC advised the

Committee a draft Code was expected to be prepared for circulation and comment

in October 1992. A further round of consultations with interested parties will be

undertaken at that time. The agreed Code package is expected to be ready for

implementation by the end of 1992.

5.10 Among issues identified by the task force for analysis in preparing the

Code are definition of terms and conditions of retail banking contracts, disclosure

of relevant information about bank products and services, advertising of banking

products and dispute resolution procedures. Work also will be undertaken on specific

issues such as guarantees, bankers' rights of account combination and offset and

confidentiality and privacy issues.

5.11 An additional area the Committee considers should be addressed in

developing the Code is the need for banks to inform customers where significant

reductions in interest rates occur. An example is housing mortgages where

consumers should be advised of the options including lower monthly loan

repayments following significant reductions in interest rates.

1 Government's response to Committee's report, dated 26 June 1991, p. 6. imiti

Government's response to Committee's report, p. 6.

5.12 The development of a Code of Banking Practice should enable the

market to work more effectively and more fairly than has been the case. It should

address many of the areas of concern about the relationship between banks and

customers which were highlighted in the Committee' s earlier report.

5.13 The recommendations from the first report in the consumer banking

area being reviewed in this inquiry can be seen as supplementing the Code of

Banking Practice. They are not designed to place restrictions on banks' activities

or prevent banks from acting in ways which are responsive to the market and which

will be of benefit to consumers.

5.14 Rather they focus on best practice in the industry in areas where the

market does not appear to be delivering the most beneficial outcomes to consumers.

The Committee took the view banks should implement these recommendations as

a recognition of this best practice and not as a result of legislative prescriptions

which might distort the market unnecessarily. The Committee, through its review,

has sought to maintain pressure on banks to implement the recommendations.

5.15 In the earlier report the Committee made two recommendations on credit cards.

The first was that the Prices Surveillance Authority (PSA) inquire into the profitability of credit cards prior to any decisions being made on deregulation of this market. This recommendation was accepted by the Government and the PSA inquiry is well advanced. The PSA is to report by 15 October 1992.

5.16 A further recommendation (recommendation no 64) was made for retailers to be allowed to dual price for credit card and cash transactions should they so desire. In the earlier inquiry, evidence was given by some merchants that they could have their credit card facilities withdrawn if they charged differently for credit card and cash transactions. The Committee considered the ability of merchants to charge differently in situations where their costs differed was merely allowing the market to operate freely.

5.17 The response of banks to this recommendation was summed up in the submission from the ABA. According to the ABA, the action of banks in refusing to allow retailers to dual price for credit card and cash transactions results from restrictions under various State Credit Card acts. If these restrictions were removed, the ABA stated banks would not oppose any dual pricing which might follow.3

Evidence, p. Sll.

5.18 The ACA claimed banks technically were wrong in stating the Credit

Acts prohibited dual pricing. In fact the Credit Acts allow dual pricing ' so long as

the extra cost of using credit is disclosed as part of the interest rate' .4 As noted by

the ACA, the difficulties in complying with this make dual pricing impractical for

bank credit cards, but not illegal While originally supporting dual pricing, the ACA

expressed concerns about changes to credit legislation to permit dual pricing

undermining the disclosure of the total cost of credit.5

5.19 The issue of dual pricing has been included in the PSA inquiry into

credit card interest rates. The inquiry is to address:

the effects on consumers of the current

charging arrangements, including the

effects of any cross-subsidisation between

different categories of users of credit cards

or between cash customers and credit card

customers.

5.20 As this matter is to be investigated fully in the PSA inquiry, the

Committee makes no further comment on it in this report.

5.21 However, the Committee has a continuing interest in credit card issues

as a result of the previous inquiry and its brief review of the issues in this inquiry.

The Committee is keen to ensure the credit card market delivers to consumers the

maximum benefits in terms of price competition and technological innovation. The

Committee asked the PSA to keep it informed of progress on the credit card inquiry.

In accord with that the Committee signals its intention to review the completed PSA

report.

5.22 In the previous report, the Committee recommended that banks should

pay reasonable interest on all deposits, taking into account the cost of maintaining

accounts (Recommendation 65).

5.23 The Committee also recommended that banks convert all remaining

accounts which pay interest on a minimum monthly balance to a daily interest

formula (Recommendation 67).

4 Evidence, p. S608.

5 Evidence, p. S608.

5.24 Contrary to the Committee's recommendation, the following banks

calculate interest on the minimum monthly balance (MMB) for the following

accounts.

Advance Bank

Bank of Queensland

Challenge Bank

Commonwealth Bank

Metway Bank

National Australia Bank

State Bank of NSW

State Bank of SA

Town and Country

Trust Bank of Tasmania

Westpac

Advance Savings

Personal Cheque account

Cashplus

Inflation fighter

Step Ahead

Current Account(pre 89)

Ultimate

NFT Savings

Today

Keycard Savings

Passbook Savings

Everyday Savings

Goal Savings

Ordinary Passbook

Solutions Cheque Account

Ordinary Passbook

Easybank Savings

State One

Everyday account

Passbook savings account

Personal Cheque account

Cashpower Visa

Trust Card

Passbook Savings

Investment Savings

Achiever

Visa Debit/Credit

Pensioner Accounts

Safeguard Savings

Ordinary Passbook

5.25 Advance Bank confuses matters further on two of its accounts

(Personal Cheque and Cashplus accounts) by swapping between interest calculation

methods depending on the account balance each month.

5.26 On its Choice account the Bank of Queensland offers customers the

option of a minimum monthly balance formula in exchange for a higher interest

rate.

5.27 The minimum monthly balance obscures the true interest rate and in

many cases reduces the amount of interest paid.

5.28 The minimum monthly balance method was developed when interest

had to be calculated by hand. There is no excuse for its continued use today.

St George Bank reported finding no evidence of consumers preferring minimum

monthly balance formula.6

5.29 It has been suggested that the MMB formula allows banks to pay a

higher nominal interest rate which would benefit those with stable balances.

However, the interest rate summaries in Tables 4-7 show that, in each product

category, there are accounts using a daily formula which pay higher rates than those

using a MMB formula.

5.30 The Committee recommends:

accounts to a daily formula, unless consumers opt for a

lum monthly balance in exchange for a higher interest

5.31 The Committee has become aware of another complexity in interest

rate calculations which obscures the true interest rate. This is where a high account

balance qualifies a customer to a higher interest rate, but the higher rate is only

paid on part of the balance. This is referred to as a 'stepped' versus 'tiered'

interest structure, but the terminology is confusing as the two terms are sometimes

used with reversed meanings.

5.32 The practice is best explained by an example. At the Metway Bank the

Options #3 account and the Savings Investment account have the same interest

rates up to $15,000.

$0 - 4,999 3.0%

$5,000 - $15,000 4.0%

However, if the account balance is $6,000, the Savings Investment account only pays

the higher rate on the part of the balance over $5,000 and 3.0 per cent on the

remainder. This gives an effective interest rate of 3.7 per cent. In contrast, the

Options #3 account would pay 4.0 per cent on the whole balance.

Evidence, p. 428.

5.33 The following banks have some accounts where a higher interest rate

is only paid on part of the balance:

Bank of New Zealand

Citibank

Commonwealth Bank of Australia

Metway

National Australia Bank

State Bank of SA

Trust Bank of Tasmania

5.34 Paying interest on part balances makes the interest rate quoted

misleadingly high and makes it very difficult for consumers to compare interest rates

between accounts.

5.35 The Committee recommends that:

of an account balance. Where a customer qualifies for a higher

interest rate, that rate should be applied to the whole balance.

The Code of Banking Practice should contain a requirement on

this issue.

5.36 The Committee has identified at least five situations where money may

earn no interest:

certain cheque accounts;

accounts with no interest below a certain balance;

many credit card accounts;

accounts calculated on a minimum monthly balance; and

trust accounts.

5.37 In June 1992, the Reserve Bank reported that banks held $13.4 billion

in zero interest accounts; an increase of $0.7 billion since the Committee's

recommendation was made in November 1991. This statistic includes cheque

accounts not paying interest. Accounts which pay interest over a certain level or on

MMB are classified as accounts paying interest even though some of these accounts

will not pay interest at certain times.

5.38 The long term trend is for these amounts to decline as a proportion of

overall deposits. Since 1987 zero interest deposits have fallen from 13 per cent to

6.6 per cent of total deposits.

5.39 However, the total amount of money involved remains large. Even

assuming banks paid a modest rate of 3 per cent interest on these accounts, the

interest foregone by individual and small business customers is $420 million per year

- a substantial loss. It is difficult to believe that zero interest represents a fair

market rate, even after taking administration costs into account.

1. Cheque accounts

5.40 Personal cheque accounts at the following banks pay no interest,

regardless of the balance:

ANZ

Bank of New Zealand

National Australia Bank

R&I Bank

State Bank of NSW

Trust Bank of Tasmania

Westpac

In addition, some business cheque accounts pay no interest.

5.41 The failure to pay interest is difficult to understand from the

perspective of a competitive banking market. Each of these banks also has an

interest bearing account with cheque access. Interest rates on accounts with cheque

access need not be miserly either. State Bank of NSW 'All-in-One' Account pays

4 per cent interest from the first dollar with even higher rates on large balances.

5.42 The Committee recommends that:

34. banks pay interest on all positive balances in cheque accounts.

Where a low interest cheque account is retained as the cheapest

option for some customers, banks should advise account holders

If banks face difficulties in paying interest on cheque accounts due to government

regulation, they are invited to draw these difficulties to the government' s attention.

2. Accounts with no interest below a certain balance

5.43 The following accounts pay no interest if the balance falls below a

certain amount. Deeming accounts where no interest is paid if the balance is below

are:

Commonwealth Bank Pensioner Security

Trust Safeguard Savings

Trust Single Pensioner

5.44 Other accounts where no interest is paid if the balance is below

certain cut-off point:

Elevator

Bank of New Zealand Smarter Cheque

Challenge Bank Investment Savings

Achiever

Citibank Citi One

Citi cheque

Commonwealth Bank Security Plus

Savings Investment

Savings Receiver

Savings Investment

Options #1

Golden Account

At Call Investment

Everyday Account

Personel Cheque

Passbook Savings

Priority Saver

Flying Start

Trust Bank Status High Interest

Investment Savings

Town and Country

5.45 This list only covers accounts included in the report card. Other

accounts (for example business accounts, cash management accounts) may also pay

no interest below a certain balance.

5.46 The problem for consumers is even more severe where a zero interest

bracket is combined with stepped interest rates. For example, with the Citibank

Citcheque Account, the first $2,000 earns no interest regardless of how high the

balance is. Even if all accounts had a substantial balance, every customer would earn

zero interest on $

5.47 These conditions are sometimes used to restrict products to a

particular target group (eg those with amounts above $5,000). While the Committee

understands this aim, it seems exploitative to pay no interest at all if the consumer

inadvertently breaches this condition, whether due to changed financial

circumstances or the consumer taking the wrong account in the first place.

3. Credit cards

5.49 Many credit cards pay no interest on positive balances. Credit cards

should be viewed as an access mechanism, not a distinct account type. Positive

balances on existing credit cards probably do not occur very often, but can involve

substantial amounts. For example a family going on an overseas holiday for 2

months may deposit $5,000 in their credit card account so they can have easy access

to funds overseas.

5.50 The following banks pay no interest on positive balances:

Advance Visa

ANZ Visa and Mastercard

Bank of Queensland Bankcard, Visa and Mastercard

Visa and Mastercard

Visa

State Bank of NSW Bankcard, Visa and Mastercard

Bankcard, Visa and Mastercard

5.51 Consistent with its earlier expressed view that banks should pay

interest on all positive balances in deposit accounts, the Committee considers all

banks should pay interest on positive balances on credit cards.

4. Minimum monthly balance

5.52 The effect of the minimum monthly balance formula is that each

month no interest is paid on any money deposited and/or withdrawn in that month.

If $5,000 is deposited on the second day of the month, it earns no interest at all that

month. On an account used for everyday banking, substantial balances may earn no

interest. A recommendation on minimum monthly balances is made earlier.

5. Trust accounts

5.53 Large sums of money are held in trust accounts, but banks do not

necessarily pay interest on these.

5.54 For example, interest is only collected on 25 per cent of the minimum

annual balance of trust accounts for NSW real estate agents. The balance (million

of dollars) is held by banks interest free. In contrast, interest is collected on

solicitors' trust accounts in NSW and used in ways which assists consumers of legal

services, such as legal aid, compensation for trust account theft and so on.

5.56 Several banks maintain old accounts when new accounts with better

terms have been introduced. While the old accounts are not offered to new

customers, they are not automatically upgraded.

5.57 The Committee is concerned that this conduct is disadvantaging

consumers who are not aware they could get a better deal or find it inconvenient to

go through the process of changing accounts. This may include people who have

poor English, are sick or disabled, have other overwhelming time commitments or

simply do not understand the differences between accounts.

5.58 This is in contrast with other banks (eg ANZ, Westpac) which have

automatically upgraded accounts.

5.59 National Australia Bank claimed it was unable to upgrade the accounts

without the consent of the customer. The Committee does not accept this argument,

given that other banks have upgraded their accounts and that accounts have been

changed in detrimental ways without consent (eg fees introduced).

5.60 For example, R&I Bank has a superseded account called Easybank

Savings, This appears inferior to R&I' s Easybank Plus account as the interest rates

are lower and the fees are the same. Both are card and statement type accounts.

Interest on:

$1 < 2,000 2.25% 2.5%

$2,000 < 5,000 2.25% 3.0%

$5,000 < 10,000 2.75% 3.5%

$10,000 < 20,000 3.0% 3.75%

37. all banks should promptly upgrade all superseded accounts to

5.62 A striking result of comparing bank products is that deeming accounts

offer far better value than all other at-call accounts for a moderate balance. While

banks have complained that the deeming rate has been set too high at times, the

fact is that many banks have been prepared to offer very attractive terms to attract

or retain pensioners as customers. The terms offered go beyond the features

required to avoid affecting pension entitlements under the deeming criteria.

5.63 For example, State Bank of NSW offers an effective rate of

6.17 per cent, calculated daily and paid monthly on the whole balance, with a $1

minimum opening balance. The account uses a card with the option of a cheque book

and Visa card.

5.64 The rates show how powerful consumers can be when they exercise

their market power. The market power has been mobilised by:

the large number of pensioners who were given an incentive to

shop around (through fear of a penalty);

clear information to consumers about the interest rate which

can be achieved; and

the report card produced by the Australian Pensioners and

Superannuants Federation, which clearly showed the best and

worst deeming accounts.

5.65 While some banks are gradually upgrading accounts which pay low

interest, there is still a wide disparity between the highest and lowest interest rates

paid. The Committee feels that the best way to make interest rates more competitive

is to have a better informed consuming public.

5.66 As one step in informing the public, the Committee has summarised

below the differences in interest rates on common banking products:

cheque accounts (Table 4);

passbook accounts (Table 5);

card statement accounts (Table 6); and

pensioner deeming accounts (Table 7).

5.67 As the Committee' s terms of reference only covers banks, this survey

excludes building societies and credit unions. As the recent Choice magazine survey

of cheque/saving accounts showed, building societies and credit unions can be very

competitive with banks on the financial returns offered.

5.68 However, consumers have to look at both price and non-price features

when deciding where to bank. This survey gives consumers assistance on some

relevant factors, but there are other important factors which they will want to take

into account including:

fees and charges on transactions and other services;

convenience of location;

service standards;

range and flexibility of products; and

financial strength and deposit protection and supervisory

arrangements.

5.69 Data is based on information supplied by the various banks and is

current as at 1 October 1992. Cannex Pty Ltd kindly gave the Committee access to

its computer database to allow double checking of interest rate information.

Questions consumers should ask banks

5.70 Consumers need to ask many questions if they want to find the best

bank account. Consumers should ask about:

the interest rate;

whether that rate is paid on the whole balance;

whether interest is calculated daily or on a minimum monthly

balance;

if there is an account keeping fee;

what transaction fees apply;

if the account has the desired access avenues (card, book, cheque

book, credit card, ATM access); and

what the deposit protection and supervisory arrangements are

for the institution.

5.71 The Committee considers the best way to make interest rates more

competitive is to have a better informed consuming public.

5.72 For a market to be fully competitive, all customers need information

on bank products which:

is useful for consumer comparisons;

is in an easily understood format;

covers the most used products; and

is independent and not misleading.

At present the information available for personal customers to compare bank

products is inadequate.

5.73 Surveys are only produced occasionally (eg Personal Investment

Annual Bank Survey, Choice magazine articles on cheque/saving accounts, surveys

by Judy Taylor at Latrobe University) and only reach a minority of bank customers.

The more complex the product the less often comparative surveys are done.

Comparative information in the newspapers sometimes suffers from being superficial

and hurriedly prepared.

5.74 Individual banks provide a range of product information. However, it

is hard to get concise information about the relevant features from each bank in a

comparable format. Even if a consumer could collect such information, the time

involved in collecting and analysing it would make comparison an impractical

exercise.

5.75 The overall picture is that, at the time consumers need up-to-date

readable information comparing bank accounts, it is rarely available.

5.76 The Australian Bankers Association has recently released a consumer

brochure "Your Savings Account - the Best Deal for You' (a copy is at Appendix 7).

The brochure explains how to calculate the overall cost or return of a savings

account, after taking interest, fees and transaction costs.

5.77 Any step by the industry to assist product comparison is to be

encouraged and the document is a welcome development. The Committee's

criticisms of it must be seen as constructive comment on an attempt at a complex

task.

5.78 Comparing savings accounts is inherently a difficult task for any

individual, and as the ABA brochure says 'you are going to have to do some

homework to find the answer'. Finding the overall cost or return for just one

account can involve:

collecting up to 20 items of information from the bank;

going over bank statements for several months to estimate

average or minimum monthly balances and estimate the

frequency of nine sorts of account use;

using a chart to convert nominal to effective interest rates; and

performing 27 calculations on the work sheet.

5.79 All this work only gives the answer for one account. To compare

several accounts, the information would need to be collected from several banks and

the calculations performed a number of times.

5.80 The ABA brochure is only likely to assist consumers who have the

numeracy skills and time to complete the process. Also as many consumers have

only relatively small amounts in deposit accounts, they would be unlikely to consider

the time involved in making detailed comparisons of different accounts to be cost

efficient.

5.81 In the area of deposit products what is needed is comparative

information which consumers can access quickly and efficiently. It is obviously more

efficient for the information collection and calculation to be done by an expert body,

with published results calculated for common consumer scenarios.

5.82 The interest rate information contained in this report is a limited

one-off exercise. To increase the availability of independent comparative information,

the Committee sees benefit in the frequent production of a report card on bank

accounts. Such a report card could take account of the different usage patterns of

various groups of consumers. Comparative guides on other issues have been very

useful, such as on car fuel consumption and on appliance energy consumption.

5.83 Such a bank report card would be of great benefit both to individual

consumers who use it and the community as a whole. A report card would show

individual consumers where they could get the best possible deal for various banking

products and save them time in comparison shopping. A report card would also put

additional competitive pressure on banks. As banks improve their products to attract

or keep the consumers who use the report card, the benefits also are passed on to

'passive' consumers.

5.84 Financial institutions already have access to services which give

detailed information on the various bank accounts, but the cost of these services

puts them out of the reach of the ordinary consumer.

5.85 The Committee encourages any independent organisation to produce

comparative information on bank products.

5.86 It may be that there is a Catch 22 in the provision of comparative bank

information. The need to recover the significant costs in collecting and updating the

information is inconsistent with achieving the widest circulation by providing it for

free or at low cost. It may be that the some seeding grant is necessary to assist an

independent organisation establish a system for producing and disseminating report

cards.

5.87 The Committee recommends that:

The Codes for the various banks are:

Adv Advance Bank

Bank of Melbourne

Bank of Queensland

Cha Challenge Bank

State Bank of New South Wales

SA State Bank of South Australia

StG St George Bank

T&C Town & Country

Tru Trust Bank of Tasmania

The columns in the tables show:

Account name

Minimum opening balance

Whether account is Open or Closed to new customers

Annual interest is earned for stable balance of:

9 If interested is calculated by MMB

10 If higher interest rates are only paid part of the balance

11 If there are bank fees (account fees, periodic fees, transactions

fees)

Maybe = Bank fees sometimes apply, depending on account balance

and/or number of transactions

Blank = no bank fees

12 Which access mechanisms are available to access cash from this

account on its own:

C ~ Card (eg keycard, Visa card)

X = Cheque book

Pensioner deeming accounts are ranked by looking at interest on both $500 and

Other accounts are ranked by the interest earned on $2,000, which is a common

account balance. On amounts below this ($500) the differences are small in dollar

terms, above this ($5,000) the consumer also needs to look at cash management

accounts.

The criteria for inclusion in each section are:

money is at call

account is open to all customers (except for pensioner deeming

accounts)

minimum opening balance is $2,000 or less (except pensioner

deeming accounts)

The survey excludes:

Term Deposits

Business Accounts

Accounts obviously aimed at depositors with large amounts

Special purpose accounts (egjunior accounts, Christmas accounts

Bank

NSW

BNZ

Bar

NSW

Wes

BoM

Cit

BoQ

T&C

Cha

BoQ

Met

R&I

BoQ

T&C

Met

Aocoirat

All-in-one

Smarter Money Minder

Visa Cheque

State One

Bonus Saver with bonus

Current Account (pre' 89)

Personal Cheque

Choice (Monthly)

Cashpower Visa

Achiever

Ultimate

Options #3

Easybank Plus

Choice (Daily)

Cashpower Savings Card

Options #2

Minimum

opening

balance

$ 1,000

$ 500

$ 1,000

Closed?

c

c

Annual interest cm:

$ 100 $ 500 $ 2,000 $ 5,000

5 6 7 8

$ 4.06

$ 2.38

$ 4.07

$ 4.04

$ 2.50

$ 3.56

$ 3.03

$ 3.02

$ 0.00

$ 2.27

$ 3.03

$ 2.52

$ 2.27

$ 2.77

$ 3.02

$ 20.30

$ 11.88

$ 20.37

$ 20.20

$ 12.50

$ 17.78

$ 15.17

$ 15.11

$ 12.62

$ 11.35

$ 15.17

§ 12.62

$ 11.35

$ 13.84

$ 15.11

$ 112.00

$ 85.00

$ 81.00

$ 80.00

$ 71.00

$ 66.00

$ 61.00

? 60.00

$ 60.00

$ 281.00

$ 211.00

$ 204.00

$ 230.00

$ 253.00

$ 200.00

$ 178.00

$ 229.00

$ 189.00

$ 164.00

$ 203.00

$ 177.00

$ 203.00

$ 189.00

$ 151.00

Watch Out For:

MMB Tier Bamk

Fees

9 10 11

MMB

Maybe

Access

Avenue

c

c

c

c

c

c

C, B

c

c

C, B

NAB

ANZ

Wes

Adv

StG

Met

Adv

NAB

CBA

Met

Wes

BoM

BNZ

Cit

Tru

Wes

NSW

BNZ

Everyday Account

Flexi Account

Access

Advantage Saver

Link Accounts

Freedom

One Plus

Personal Cheque

Solutions Cheque

Streamline

Options #1

Bonus Saver w/out bonus

Personal Current Acct

Current Account (post' 89)

Smarter Cheque

Personal Cheque

Cit-one

Citicheque

Personal Cheque

$ 100

$ 500

Personal Cheque

Hardworking Cheque

c

c

c

$ 0.00

$ 2.78

$ 0.00

$ 2.77

$ 2.75

$ 2.52

$ 0.00

$ 2.01

$ 2.00

$ 0.00

$ 12.50

$ 13.89

$ 13.84

$ 13.75

$ 12.62

$ 0.00

$ 10.05

$ 10.00

$ 0.00

$ 60.00

$ 56.00

$ 55.00

§ 50.00

$ 41.00

$ 40.00

$ 0.00

$ 163.00

$ 164.00

$ 152.00

$ 177.00

$ 164.00

$ 138.00

$ 151.00

$ 163.00

$ 152.00

$ 136.00

$ 151.00

$ 175.00

$ 144.00

$ 125.00

$ 138.00

$ 98.00

$ 0.00

MMB

Maybe

C, B

ANZ

R&I

NAB

Cheque Account

Personal Cheque

National Cheque

$ 0.00

§ 0.00

$ 0.00

Maybe

These accounts have been ranked on the basis of annual interest earned on $2,000 as at 1 October 1992. Consumers comparing these accounts will

need to be aware of other factors such as convenience of access, customer service and the level of fees and charges in making choice between

accounts.

Bank

Adv

BoM

Cit

Met

BoM

StG

Adv

Tru

NAB

T&C

Cit

Account

Incentive Saver with bonus

Investment Passbook

Cash Management

Maxi-plan

Savings Reviver

Passbook Savings

Priority Saver

Flying Start

Elevator

At Call Investment

Step Ahead

B&B

Status High Interest

Goal Savings

Maxi Rate

Savings Account

Minimum

opening

balance

$ 1,000

$ 2,000

$ 300

$ 1,000

$ 2,000

$ 500

? 2,000

$ 500

? 2,000

$ 1,000

$ 300

Closed?

Annual

$100

$ 5.06

$ 5.00

$ 4.00

$ 4.95

$ 0.00

$ 4.00

$ 0.00

? 0.00

$ 0.00

$ 2.77

$ 0.00

§ 0.00

$ 2.75

§ 0.00

$ 3.30

interest

$500

$ 25.31

$ 25.00

$ 20.00

$ 24.74

$ 0.00

$ 20.00

$ 0.00

$ 17.65

$ 0.00

$ 17.73

$ 13.84

$ 0.00

$ 17.50

$ 0.00

$ 16.49

on:

$2,000

$ 101.00

$ 100.00

$ 99.00

$ 81.00

$ 80,00

$ 76.00

$ 71.00

$ 70.00

$ 66.00

$5,000

$ 266.00

$ 250.00

$ 247.00

$ 202.00

$ 200.00

$ 217.00

$ 189.00

$ 212.00

$ 177.00

$ 189.00

$ 177.00

$ 175.00

$ 228.00

$ 165.00

Watch Out

MMB Tier

9 10

MMB

For:

Bank

Fees

Maybe

Access

Avenue

<£>

Cha

Met

T&C

Met

Tru

Met

Wes

R&I

Met

Adv

NAB

Met

ANZ

CBA

Adv

StG

Tru

StG

Investment Savings

Achiever

Target Savings

Options #3

Cashpower Savings Book

Options #2

High Interest Savings

Prime

Savings Investment

Ordinary Passbook

Everday Account

Golden Account

Passbook Savings

Inflation Fighter

Passbook

Gold Passbook

High Performance Passbook

Security Plus

Interest Plus

Freedom

Passbook Savings

Gold Passbook

$ 200

$ 500

$ 200

$ 2,000

$ 500

—

c

c

c

c

c

c

c

$ 0.00

$ 3.03

$ 2.77

$ 3.02

$ 0.00

$ 3.00

$ 0.00

$ 2.78

$ 2.52

$ 0.00

$ 2.77

$ 12.64

$ 12.62

$ 15.17

$ 13.84

$ 15.11

$ 15.00

$ 12.50

$ 13.92

$ 13.89

$ 12.62

$ 0.00

$ 13.84

? 13.84

$ 66.00

$ 61.00

$ 60.00

$ 56.00

$ 55.00

$ 165.00

$ 164.00

$ 152.00

$ 203.00

$ 189.00

$ 151.00

$ 164.00

$ 151.00

§ 150.00

$ 188.00

$ 163.00

$ 175.00

$ 139.00

$ 177.00

$ 152.00

$ 177.00

$ 164.00

$ 138.00

MMB

Maybe

C, X

C,X

C, X

c

c

C, X

Wes

Adv

Tru

NAB

Wes

CBA

Tru

T&C

R&I

Met

Cha

Adv

Cha

CBA

Cha

Passbook Saver (6 mths)

Advance Savings

Link Accounts

Investment Savings

Ordinary Passbook

Passbook Saver (1 mth)

Savings Investment

Passbook Savings

Achiever

Ordinary Passbook

Options #1

NFT Savings

Incentive Saver w/o bonus

NFT Shares

Passbook Savings

Pace (Victoria only)

$ 100

$ 250

$ 500

$ 2.77

$ o.oo

$ 0.00

$ 2.75

$ 2.53

$ 0.00

$ 2.26

$ 2.25

$ 0.00

$ 2.01

$ 2.00

$ 13.84

$ 12.58

$ 13.75

$ 12.64

$ 12.62

$ 12.50

$ 11.31

$ 11.25

$ 0.00

$ 10.05

$ 10.00

$ 55.00

$ 51.00

$ 50.00

$ 45.00

§ 45.00

$ 41.00

$ 40.00

$ 177.00

$ 138.00

$ 164.00

$ 138.00

$ 145.00

$ 165.00

$ 152.00

$ 132.00

$ 113.00

$ 177.00

$ 175.00

$ 136.00

$ 151.00

$ 113.00

$ 151.00

$ 100.00

$ 150.00

MMB

Maybe

c,x

c

C, X

These accounts have been ranked on the basis of annual interest earned on $2,000 as at 1 October 1992. Consumers comparing accounts will need to be

aware of other factors such as convenience of access, customer service and the level of fees and charges in making choice between accounts.

Bank

NSW

Adv

NSW

BNZ

Wes

NSW

BoM

Adv

BoQ

Adv

Tru

T&C

| Cha

Account

All-in-one

Incentive Svr with bonus

State Maximiser

Smarter Money Minder

Bonus Saver with bonus

State One

State Saver

State Super Rate

Current Account (pre' 89)

Elevator

Choice (Monthly)

Step Ahead

B&B

Status High Interest

Cashpower Visa

Achiever

Minimum

opening

balance

$ 2,000

$ 500

$ 2,000

$ 1,000

$ 500

Closed?

Annual

$100

$ 4.06

$ 5.06

$ 3.03

$ 2.38

$ 4.04

$ 4.07

$ 3.03

§ 3.02

$ 2.50

$ 0.00

$ 3.03

$ 2.77

$ 0.00

$ 3.02

$ 0.00

interest

$500

$ 20.30

$ 25.31

$ 15.17

$ 11.88

$ 20.20

$ 20.37

$ 15.17

$ 15.11

$ 12.50

$ 0.00

$ 15.17

§ 13.84

$ 0.00

$ 15.11

$ 12.62

on:

$2,000

$ 112.00

$ 101.00

$ 92.00

$ 85.00

$ 81.00

$ 80.00

$ 76.00

$ 71.00

$ 66.00

$5,000

$ 281.00

$ 266.00

$ 229.00

$ 211.00

$ 253.00

$ 230.00

$ 203.00

$ 202.00

$ 200.00

$ 212.00

$ 229.00

$ 189.00

$ 177.00

$ 189.00

$ 164.00

Watch Out

MMB Tier

9 10

MMB

For:

Bank

Fees

Maybe

Access

Avenue

B, X

Cha

BoQ

Met

BoQ

R&I

T&C

Met

Wes

NAB

ANZ

Adv

NAB

Adv

Met

Adv

StG

Adv

Today

Ultimate

Options #3

Choice (Daily)

Easbybank Plus

Cashpower Savings Card

Everyday Account

Options #2

Advantage Saver

Flexi Account

Access

Inflation Fighter

Link Accounts

Everyday Savings

Solutions Investment

Solutions Cheque

Personal Cheque

One Plus

Cashplus

Freedom

Advance Savings

Interest Plus

$ 1,000

$ 100

$ 500

$ 2.01

$ 2.27

$ 3.03

$ 2.27

$ 2.52

$ 2.77

$ 0.00

$ 3.02

¥ 2.78

$ 2.78

$ 0.00

$ 2.75

$ 2.77

$ 12.58

$ 11.35

$ 15.17

$ 11.35

$ 12.62

$ 13.84

$ 12.50

$ 15.11

$ 13.89

§ 13.89

$ 13.89

$ 13.84

$ 13.75

$ 13.84

$ 66.00

§ 61.00

$ 61.00

$ 60.00

$ 56.00

$ 55.00

$ 164.00

$ 203.00

$ 177.00

$ 189.00

$ 163.00

$ 151.00

$ 177.00

$ 164.00

$ 152.00

$ 139.00

$ 164.00

$ 163.00

$ 151.00

$ 138.00

MMB

Maybe

B, X

B,X

Tru

CBA

R&I

Met

BoM

Wes

Adv

CBA

Cit

BNZ

NAB

ANZ

Wes

BNZ

Visa debit/credit

Trust Card

Streamline

Passbook Savings

Easybank Savings

Options #1

Personal Current Acct

Current Account (post' 89)

Bonus Saver w/out bonus

Incentive Saver w/o bonus

Keycard Savings

Cit-one

Smarter Cheque

Personal Cheque

National Cheque

Cheque Account

Personal Cheque

Hardworking Cheque

$ 2.52

$ 0.00

$ 2.52

$ 0.00

$ 2.00

$ 2.01

$ 2.00

$ 0.00

$ 12.58

$ 12.62

$ 12.50

$ 11.25

$ 0.00

$ 10.00

$ 10.05

$ 10.00

$ 0.00

$ 55.00

$ 50.00

$ 45.00

$ 41.00

$ 40.00

$ 0.00

$ 138.00

$ 152.00

$ 132.00

$ 138.00

$ 136.00

$ 175.00

$ 151.00

$ 113.00

$ 100.00

$ 138.00

$ 144.00

$ 125.00

$ 0.00

MMB

Maybe

B,X

X

X

X

B

X

X

X

These accounts have been ranked on the basis of annual interest earned on $2,000 as at 1

to be aware of other factors such as convenience of access, customer service and the level

October 1992. Consumers comparing accounts will need

of fees and charges in making choice between accounts.

Bank

BoM

NSW

BoQ

StG

Adv

T&C

R&I

Cha

NAB

Wes

Met

CBA

ANZ

Tru

Account

Deemed Interest P ' book

Moneywise (Deeming)

Pension Plus

Protector Plan B

Pension Direct

Gold Star Deeming

Cashpower Deeming

Pension Saver

Pension Safeguard

Retirement Account

Everyday - Retiree

Passbook - Pensioner

Pension Savings

Pensioner Security

HPP Pensioner

Safeguard Savings

Minimum

opening

balance

$ 500

$ 1,000

$ 500

$ 2,500

$ 2,000

Closed?

Annual interest on:

$ 100 $ 500 $ 2,000 $ 5,000

5 6 7 8

$ 5.50

$ 5.12

$ 5.09

$ 5.06

$ 5,06

$ 5.06

$ 3.04

$ 0.00

$ 2.78

$ 2.53

$ 0.00

$ 27.50

$ 25.58

$ 25.47

$ 25.31

$ 15.21

$ 15.11

$ 13.89

$ 12.64

$ 0.00

$ 110.00

$ 102.00

$ 101.00

$ 102.00

$ 101.00

$ 102.00

$ 101.00

$ 275.00

$ 256.00

$ 255.00

$ 253.00

$ 256.00

$ 253.00

$ 255.00

$ 256.00

$ 255.00

$ 253.00

Watch Out For:

MMB Tier Bank

Fees

9 10 11

MMB

Maybe

Access

Avenue

C,X

B, X

C,B,X

B,X

C.B, X

C, B, X

B

B

StG

Tru

Protector Plan A

Single Pensioner

$ 0.00

$ 152.00

$ 151.00 MMB

B,X

These accounts have been ranked on the basis of annual interest earned on both $500 and $2,000 as at 1 October 1992. Consumers comparing these

accounts will need to be aware of other factors such as the convenience of access, customer service and the level of fees and charges in making choice

between accounts.

5.88 The Committee recommended (recommendation no. 68) banks should

recover from customers only the cost of unwinding fixed rate loan facilities rather

than applying a pre-determined fee which may not relate closely to the actual cost

of the bank recovering its former position. The Committee made this

recommendation both to ensure fairness and to encourage competition by keeping

the cost of switching between products and institutions to a minimum.

5.89 The responses from individual banks to this recommendation varied.

5.90 Five banks, Metway, National Australia Bank, R&I Bank,

State Bank of NSW and Westpac Bank already have actual cost recovery as their

practice. Bank of Queensland does not have fixed rate housing loans but has actual

cost recovery for fixed rate commercial loans.

5.91 As an example of how actual cost recovery works in practice, Westpac

stated the amount of any payment by either the bank or borrower in the event of

early termination is calculated according to an actuarially derived formula which is

quite complex. A copy of the formula is at Appendix 8.

5.92 At least two banks, the Commonwealth and ANZ Banks indicated they

will change their existing approach and move to a real cost adjustment methodology.

St George Bank stated it was considering its policy in this area.7

5.93 Advance Bank noted its former practice was to have actual cost

recovery. However, it had changed to an approach of imposing an early discharge

fee set on the basis of a number of months interest which varied with the loan' s

maturity date. The change had been made because of the complexity of the

calculations involved in the actual cost recovery procedure. All early discharge

arrangements are disclosed to borrowers at the time the loan contracts are signed

and Advance Bank stated in most cases the early discharge fee imposed is less than

would have been imposed under an actual cost recovery calculation.8

5.94 In making its recommendation the Committee was not endeavouring

to advantage fixed rate loan customers who enjoyed the benefit of lower rates when

variable rates were high. Rather it wanted to ensure customers who wished to pay

out their loans were responsible for no more than the cost to the bank of unwinding

the facility at existing market interest rates.

Evidence, p. S677.

Evidence, p. S64.

5.95 The ACA argued, as a number of banks had failed to change their

early repayment charges so that they did not exceed the actual cost incurred to the

bank, this requirement should be imposed by legislation or as part of the Code of

Banking Practice.9

5.96 While the Committee considers the recovery of no more than the actual

costs to a bank of unwinding fixed interest rate loans to be fair banking practice

which should be adopted by all banks, it would not support this being a legislative

requirement. However, consideration should be given to the incorporation of such

a requirement in the Code of Banking Practice.

5.97 In relation to fixed interest rate loans, the Committee is aware from

complaints from customers of the potential for this product to create difficulties

where short term interest rates are failing. Customers who find themselves locked

into a fixed interest rate loan when variable interest rates are falling complain about

the costs imposed by banks on them to switch to lower interest rate variable loans.

It is important that banks explain thoroughly to customers the implications of fixed

rate loans including the cost to the customer if variable rates are falling, the benefits

if variable rates are rising and the costs which properly the bank will seek to recover

for unwinding those facilities.

5.98 National Australia Bank noted it was currently reviewing its fixed rate

loans:

... to include a more prominent notice on the front page

of the document to further emphasise that the loan is for

a fixed term and that the interest rate is fixed for the

term of the loan borrowers may be placed at a

disadvantage (in comparison to an equivalent floating

rate loan) if market interest rates decline during the

term of the loan.10

5.99 The Committee considers other banks should review their literature

on fixed interest rate loans to ensure customers are given adequate information

about the implications of fixed rate borrowing both as to costs and benefits of

interest rate movements and the charges for unwinding facilities.

5.100 The Committee recommends that;

30. consideration be given to the inclusion in the Code of Banking

Practice of a limitation on the early repayment charges on fixed

interest rate loans of no more than the cost to a bank of

9 Evidence, p. S612.

10 Evidence, p. S248.

5.101 In the previous inquiry, there was evidence from consumer

organisations that over-commitment was a problem because banks lent rashly

without considering a borrower's ability to repay.11 The Committee was aware of

a report from the National Consumer Affairs Consultative Council (NCACC) which

considered banks credit scoring systems, used as one tool in credit assessment, did

not give sufficient weight to the level of income as a factor in lending.

5.102 The Committee considered banks should make a full and proper

assessment of a borrower's ability to repay a loan and recommended:

banks should ensure that their assessment of risk and

other related areas such as ability to repay are

thoroughly investigated. Credit scoring systems should

be amended to incorporate criteria such as income, or

where it already exists, to strengthen this requirement.

Bank loan officers should be adequately trained in risk

assessment techniques (Recommendation No. 74).

5.103 The following summarises the major points made by banks in response

credit scoring is an objective means of assessing capacity to

repay and credit scoring systems are reviewed regularly against

the results achieved;

credit scoring provides only a guide to credit assessment; and

income already is a key element in credit scoring systems,

although other factors can be important in credit assessment.

11 Banking Inquiry Evidence, p. S450.

5.104 The ACA criticised banks' responses to this recommendation noting:

Credit scoring assesses the likelihood of timely debt

repayment or successful debt collection. This is why a

credit scoring system with a heavy weighting on

' stability' factors can be successful. It is easier to collect

a debt if the person does not move house frequently and

owns a phone. However, just because money can be

extracted from a person does not mean they can

comfortably afford to pay.12

5.105 Earlier in the report, the Committee referred to the reaction of bankers

to the lending excesses of the 1980s and argued that, while a re-assessment of

lending criteria and procedures was understandable in the light of experience, there

should not be undue caution. The approach of banks to consumer lending and

over-commitment similarly should be balanced between a need to keep lending

available to those who wish it and an insurance to both banks and borrower that

lending commitments can be met. The Committee would expect to see banks' credit

scoring systems and their broader consumer credit assessment procedures reflecting

this balance.

12 Evidence, p. S615.

101

6.1 In this chapter, the Committee discusses other issues which were not

covered in earlier chapters. The chapter reviews the implementation of the

recommendation to put in place internal processes to enable staff to report instances

of suspected fraud (Recommendation No. 62). It also covers a number of follow up

issues relating to foreign currency loans. These include:

the disclosure by banks of margins on foreign currency

transactions (Recommendation No. 59);

allegations by the Foreign Currency Borrowers' Association

that the Committee was misled by banks in evidence given on

the foreign currency loans issue during the previous inquiry;

and

Westpac's investigation of allegations, arising from a Four

Corners Program, about the operations of its foreign currency

dealing room in the 1980s.

6.2 In the previous inquiry, allegations were made of widespread fraud and

corruption in the banking industry. However, substantive evidence to support the

allegations that fraud and corruption were widespread was not presented to the

Committee. The Committee recognised that instances of fraud do exist in the

industry, but there was no evidence of fraud being institutionalised or systematic.

6.3 The need for ' whistleblower' legislation to protect bank staff who

wished to report instances of fraud was rejected with the Committee favouring

banks developing internal processes to enable staff and customers to report

suspected fraud without fear of detriment.

6.4 The Committee recommended:

banks establish internal processes that allow staff to

report instances of suspected fraud to senior management

without fear of retribution and provide opportunity for

customers to report suspicions of fraud and corruption.

(Recommendation No. 62)

6.5 The ABA noted it has taken the Committee' s recommendation into

account in developing its fraud control program. It reported most banks have their

own fraud and investigation sections to deal with situations of staff or customer

dishonesty or fraud. Staff can expect to report their concerns about suspected fraud

without fear of penalty.1

6.6 This picture was supported by comments on this recommendation from

individual banks. All banks reported procedures for staff to report instances of

suspected fraud. The following banks advised the Committee they have a code of

conduct or ethics for staff covering matters such as provision for the reporting of

fraud or corruption - Advance Bank, Commonwealth Bank, National Australia Bank,

R&I Bank and State Bank of New South Wales.

6.7 The ABA also noted the Cash Transactions Reports Act required banks

to report on certain suspect transactions by customers.

6.8 The ACA claimed banks had misconstrued the recommendation. It

stated:

Few banks have addressed the difficulty in bank staff

reporting improper conduct which makes money for the

bank but is against the interests of customers,

competitors or the government.2

6.9 The chapter on fraud in the previous report referred to the way some

witnesses had confused supposed fraud or corruption with examples of what could

be seen as improper or uncompetitive behaviour. The Committee' s recommendation

was directed specifically at the reporting of suspected fraud or corruption. It may be

that in a broader code of ethics or conduct for staff, banks also wish to encourage

staff to report actions which may be seen as unethical or improper, even though not

fraudulent or corrupt.

6.10 The Committee strongly advocates the implementation of a code of

ethics or conduct for staff which enables the reporting of instances of suspected

fraud, corruption or illegal behaviour but which also impresses staff to deal in a fair

and proper way with customers.

6.11 The Committee recommends that:

1 Evidence, p. S10.

2 Evidence, p. S607.

6.12 In the context of the Committee' s investigation of the foreign currency

loans issues, concerns were raised by foreign currency borrowers that they were not

made aware by banks of all costs associated with foreign currency transactions.

6.13 Borrowers suggested banks charged ' secret commissions' on foreign

currency transactions which were undertaken by borrowers in an endeavour to

manage their foreign currency exposures.

6.14 The Committee considered there should be greater disclosure in this

area in future and recommended:

banks ensure greater disclosure in the area of foreign

exchange transactions by advising foreign currency loan

customers in advance of all fees and charges associated

with foreign currency transactions. (Recommendation

6.15 Banks responded that all fees and charges were disclosed on foreign

currency loans. For example, the Commonwealth Bank stated:

Customers are notified in the approval letter for any

foreign currency facility of all fees and charges. This

always has been Bank policy with such facilities.3

6.16 ANZ Bank stated:

It is ANZ policy and practice to fully disclose all relevant

fees and charges in the loan documentation for its

facilities. This covers all loans, including any such

' foreign currency loans' that may be approved from time

to time.4

Other banks responded in similar terms.

3 Evidence, p. S152.

4 Evidence, p. 205.

6.17 Most banks appeared to miss the point of this recommendation which

was directed to disclosure of margins on foreign currency transactions not disclosure

of fees and charges on foreign currency loans. Borrowers' concerns were that they

were informed foreign currency transactions would cost them a small service fee

only to find a margin (the difference the rate at which the bank had bought foreign

currency and the rate at which it had been sold to a customer) was charged on each

foreign currency loan transaction, in some cases costing thousands of dollars.5

These margins were not disclosed to borrowers.

6.18 In the previous inquiry banks stated it was not practice to disclose

margins on foreign currency transactions just as there was no disclosure by any

retailer of the difference between wholesale and retail prices on products. However,

it was suggested customers could calculate this differential approximately by

consulting daily exchange rates in newspapers or listening to the financial section

of television news reports.

6.19 Also banks claimed the margins on small foreign currency transactions

were larger than those charged on large transactions because they were not traded

on a fully reciprocal basis.

6.20 In responding to the current review, Westpac stated it did not disclose

margins between its buy and sell rates for individual foreign currency transactions.

It pointed to the volatility of the foreign exchange market and the fact that foreign

exchange may not have to be purchased for each transaction (particularly smaller

transactions) as making such disclosure difficult if not impossible.6

6.21 The Committee recognises the difficulties of disclosing margins in

relation to small foreign currency transactions such as those involving the sale or

purchase of traveller's cheques or other small transactions. However, the

recommendation was directed at situations such as those in which foreign currency

borrowers were involved. They were trading in parcels of currency which were larger

than the small end of the market (such as traveller' s cheques) but which were not

large enough to attract wholesale prices. Also these customers often were in

financial difficulties and so were locked into a relationship with their particular

institution. They were not in a position to search for the best priced deals.

6.22 In these circumstances it is possible some borrowers may have been

charged larger margins than would have been applied if the borrower had been in

a more competitive position. During the previous inquiry, Westpac acknowledged

some foreign currency borrowers involved in foreign exchange transactions could be

held to have had an ' uncompetitive status'. However, Westpac claimed these

borrowers were not exploited.7

5 Evidence, p. 49.

6 Evidence, pp. S752-53.

7 , pp

A Pocket Full of Change, op cit, p. 309.

6.23 Judgements about whether excessive margins were charged on

particular transactions will depend on views of what are ' reasonable' margins in

relation to individual transactions. This in turn would depend on the size of the

transaction and a precise basis for calculating the bank' s cost of funds for that

particular transaction. In relation to smaller foreign currency transactions where a

number of transactions may be parcelled up into a larger transaction this is not a

simple matter.

6.24 The Committee is not able to assert, in relation to any particular

transactions, that there were excessive margins charged. It can only point to a

general view that, potentially, borrowers could have been in an uncompetitive

position and consequently could have been charged excessively.

6.25 Those borrowers who consider excessive margins may have been

charged on foreign currency transactions should have the opportunity to raise their

concerns within the context of negotiation or mediation of their case and banks

should recognise these as legitimate issues to be raised in that context. Alternatively

borrowers can pursue their claims through the courts.

6.26 The Committee recommends that:

42. banks investigate appropriate procedures to ensure greater

disclosure of margins applying to foreign currency transactions;

concerns of foreign currency borrowers about excessive margins

charged on foreign currency transactions be raised in the

context of negotiation or mediation of foreign currency loan

cases.

6.27 At the first hearing of the current review, the Foreign Currency

Borrowers' Association alleged the Committee had been deliberately misled by some

banks during the previous inquiry. In particular David Lyons referred to a lengthy

submission he made regarding evidence from the Commonwealth Bank. In this

submission Mr Lyons provided a detailed rebuttal of evidence given by the

Commonwealth Bank during the Banking Inquiry and identified what he described

as * serious discrepancies' between the evidence given by the Bank' s officers during

the inquiry and the contents of the Bank's internal documentation.8

Evidence, p, 42.

107

6.28 In relation to submissions made by borrowers during the previous

inquiry refuting the evidence of some banks, the Committee examined and took into

consideration this material in the context of reaching its overall conclusions on the

vast amount of information it had before it. The Committee noted in the report

' Since taking evidence from the banks further submissions have been received from

borrowers, including analysis of the banks' evidence' .9

6.29 Specifically in the case of David Lyons' submissions to the previous

inquiry, he asked that these be held on a confidential basis. This meant the

submissions could not be forwarded to the Commonwealth Bank for response.

Instead the Committee evaluated Mr Lyons' submission (and others) against the

public evidence and internal documentation it had received from banks. As noted in

the previous report, the Committee used these documents 'to test the evidence

taken from banks and borrowers' .10

6.30 However, as the allegations of deliberate misleading have been

reiterated and raise serious issues, the Committee sought a detailed response from

the Commonwealth Bank to Mr Lyons' submission.

6.31 In its response, the Bank denied misleading the Committee and

provided a detailed refutation of Mr Lyons' allegations.11 However, in two areas

the Bank sought to clarify or correct its earlier evidence.

6.32 In relation to the letter of offer the Bank sent to borrowers, the Bank

noted Mr Lyons and at least some other borrowers were sent a different letter of

offer to the one which the Bank attached with its submission to the previous

inquiry. In the previous inquiry the Bank referred to the warnings contained in its

letter of offer as an indication of the written advice given by the Bank to borrowers

about exchange rate risk.

6.33 Mr Lyons' letter of offer did not contain all the warnings which were

present in the sample letter provided by the Bank to the Committee. Specifically it

did not include the following warnings:

We suggest you confer with your Accountant over this

matter.

We again point out the potential risk involved in borrowing in a

foreign currency without covering your foreign currency exchange

exposure and would like to remind you that any adverse exchange rate

movements are for your account.

9 A Pocket Full of Change, op cit, p. 290.

10 A Pocket Full of Change, p. 290.

11 Evidence, pp. S725-S745.

... and in this regard we suggest you make regular enquiries about

foreign currency movements and the price for hedging the loan amount

outstanding.

Similarly, we stress the importance of thoroughly investigating with

your account (tax consultant) the ramifications of foreign currency

borrowings particularly the tax treatment of any exchange rate

profits/losses.12

6.34 Mr Lyons claimed the only paragraph in his letter of offer providing

an indication of exchange rate risk was:

As you are aware exchange risks may be eliminated at

any time during the life of the loan by entering into a

hedge contract and the Bank would be happy to provide

information in this regard on request.13

Mr Lyons did not consider this to be a serious warning.

6.35 The Committee notes Mr Lyons' letter of offer also contained the

following paragraphs to which he did not refer in his submission:

On the understanding that the exchange risks associated

with borrowings in foreign currencies are fully recognised

and that any adverse exchange rate movements are for

the borrower' s account, the Bank is prepared to allow

the loan to proceed on an unhedged basis.

However, in these circumstances, it is the Bank' s normal

practice to require the borrower to regularly meet any

sizeable increases in the Australian dollar value of the

loan resulting from exchange rate movements in order to

maintain a satisfactory security/debt ratio. In this regard,

the Bank will require you to meet any increase in excess

of 5 per cent in the Australian dollar value of the loan.

These adjustments will take place at the end of each

interest period or at the expiry of twelve months from

drawdown at the Bank's option should the interest

period arranged for you exceed twelve months.14

12 Evidence, p. S340.

13 Evidence, p. S343.

14 Evidence, p. S343.

6.36 Clearly the sample letter of offer provided to the Committee by the

Commonwealth Bank during the previous inquiry was not the letter of offer sent to

all borrowers, including to Mr Lyons. With its response to Mr Lyons' allegations,

the Bank provided a letter of offer to another Taree borrower which was in the same

format as the letter of offer included with its submission to the previous inquiry. It

also provided a typical letter of offer to borrowers in Victoria which was similar, but

not identical, to the letter of offer attached with the submission to the previous

inquiry.

6.37 The Committee considers the Commonwealth Bank's evidence on its

letter of offer did not materially affect the conclusions which were drawn in the

previous report. The Committee noted in the previous report:

In terms of their formal policy guidelines, documentation

and approaches, the banks met their basic obligations to

warn customers about the dangers of foreign currency

borrowing. These invariably contained a warning that

foreign currency borrowing was risky and that techniques

for hedging were available to assist in managing the

6.38 It is noted that Mr Lyons' letter of offer did indicate the loan could go

ahead ' On the understanding that the risks associated with borrowings in foreign

currencies are fully recognised' and did indicate ' exchange risks may be eliminated

at any time during the life of the loan by entering into a hedge contract'.

6.39 The Committee emphasises again the point it made in the previous

report that individual cases would be decided on their individual facts, including the

particular form of letter of offer and other oral or written advice or warnings which

may have been given to individual borrowers by banks. These individual

circumstances should be assessed in the context of resolving particular cases through

mediation or arbitration.

6.40 The other area in which the Commonwealth Bank corrected previous

evidence was in relation to the number of foreign currency borrowers provided with

loans through the Taree branch. According to the Bank its figure of 23 loans in

earlier evidence was obtained from one internal document. The Bank commented:

15 A Pocket Fall of Change, op. cit., p. 320.

110

Unfortunately, this figure appears to be incorrect and the

total number of FCL borrowers through the Taree branch

from a reading of the document referred to by Lyons is

25 or 26 if a count is taken of two companies which

borrowed but which had the same directors and major

shareholders.16

6.41 The Committee considers this correction does not change the

conclusions it drew in the earlier report. The Committee referred there to the

tendency of foreign currency loans to be concentrated in particular branches or

regions and noted:

The pattern of take up of loans indicates that some bank

staff may have been involved, together with others

outside the banks, in stimulating local demand for the

product.17

6.42 In all other areas, the Commonwealth Bank strongly refuted

Mr Lyons' allegations and referred to documentation to support its views. Given the

complexity of the issues involved in foreign currency loan cases, the extent of banks'

documentation and the differing perspective from which banks and borrowers

approach the information available, inevitably there will be differing views on

foreign currency loan matters.

6.43 For the Committee there has been no additional evidence or

information which would change the overall conclusions of the previous report nor

the Committee' s view that the primary focus should be on resolving the outstanding

cases. Some of the central findings are reiterated here:

foreign currency loans were not an inherently faulty product but

they were a quite inappropriate product for a number of the

borrowers to whom they were provided;

there were a number of reasons for banks providing foreign

currency loans including competitive pressure from both other

domestic and foreign banks, perceived tax advantages and

lending restrictions which applied prior to deregulation;

foreign currency loans were actively promoted to varying

degrees by at least some banks including the use of advertising,

seminars and incentives to some staff;

lb Evidence, p. S731.

17 A Pocket Full of Change, op cit, p. 318.

Ill

banks' provision of formal and written warnings about the

dangers of foreign currency lending were adequate, however, the

expertise of, and advice from, individual bank staff in branches

was patchy;

a failure adequately to monitor loans and provide assistance to

borrowers when things went wrong were the major failings of

banks. The Committee considered banks had a moral obligation

to assist borrowers and this was not forthcoming from banks;

court processes to settle foreign currency loan disputes are

expensive, cumbersome and give banks a strong position. The

Committee strongly recommended banks put in place alternative

methods of dispute resolution to resolve outstanding foreign

currency loan disputes.

6.44 The Committee' s view about banks endeavouring to resolve

outstanding foreign currency loan disputes outside the courts stemmed both from

an awareness of the way in which the use of the courts favoured banks and from a

concern about the nature of foreign currency loans and the role of some banks in

promoting this product inappropriately to some borrowers. However, the Committee

emphasised it was not possible to make generalisations across all borrowers. Each

borrower's circumstances were different and individual cases would need to be

assessed on their particular facts. A system of mediation or arbitration of individual

cases would enable this individual resolution. The Committee recommended in the

Chapter 4 that banks resolve outstanding disputes quickly.

6.45 A Four Corners program on 24 February 1992 raised serious

allegations of fraud in Westpac' s foreign exchange dealing rooms in the mid 1980s.

The program reported on investigations, undertaken by a former Westpac employee,

Mr Clive Alexander, of foreign currency dealings in Westpac in the mid-1980s.

6.46 In late 1987 Mr Alexander was called in to investigate the dealings of

a Westpac foreign exchange dealer, Naji Halabi, who was suspected of acting

fraudulently in relation to foreign currency deals. Naji Halabi had been exploiting

holes in Westpac' s foreign exchange audit system to do deals at rates below normal

market rates. These caused a loss to Westpac and a profit to the banks with which

Halabi did the deals. With the assistance of corrupt dealers in these other banks,

millions of dollars in profits were creamed off from these deals into a Swiss bank

account controlled by Halabi' s brother. Halabi has been convicted.

6.47 While investigating the Halabi deals, Alexander also identified other

suspicious transactions involving other dealers. In these deals it appeared that

discount foreign exchange rates had been given to several Westpac customers. The

reasons for these customers being advantaged at Westpac' s expense was puzzling

to Alexander. In the program, Alexander noted that given more time he may have

found other suspect transactions.

6.48 Following his investigations, Alexander prepared two hand written

reports on his findings and said he submitted the reports to the then General

Manager of Westpac' s Treasury Division, Mr Stan Davis. Mr Davis claimed not to

have received the reports. They apparently went * missing' within Westpac and did

not re-emerge until the Four Corners program began asking questions about them.

Subsequently, Mr Alexander was requested to discontinue his investigations of

foreign currency dealings and was transferred to other duties. He later left the

6.49 Following the program Westpac asked Coopers and Lybrand to

investigate the deals identified in the reports. An interim report from Coopers and

Lybrand indicated there were some discrepancies in transactions in the period

1985-86. Three possible explanations for the discrepancies were identified:

they could be quite innocent;

they could be errors; or

they could be suspect transactions.

6.50 The Committee received a confidential submission, and subsequently

took in camera evidence, from Mr Alexander. As the evidence was confidential, the

Committee will not cover the detail of issues raised by Mr Alexander. However, the

Committee considered the matters raised were significant and required thorough

investigation.

6.51 With Mr Alexander's agreement, he was referred to Coopers and

Lybrand to provide them with information to assist in their investigation. The

Committee also provided to Coopers and Lybrand, with Mr Alexander * s permission,

those sections of Mr Alexander' s confidential evidence relevant to the investigation.

6.52 The Managing Director of Westpac, Mr Conroy, announced on

19 August 1992 the preliminary findings of the Coopers and Lybrand investigation.

Mr Conroy noted the Coopers and Lybrand investigation had involved a team of up

to eight people examining 3000 boxes and several thousand microfiche records,

interviewing 28 people and examining 55 bank accounts relating to the period.

According to Mr Conroy the investigation focussed on a range of foreign exchange

transactions, relationships between Westpac personnel and bank clients and detailed

cash flows over the period.

113

6.53 Mr Conroy stated the substantive conclusions of Coopers and Lybrand

were:

there is no basis for a claim that any customer improperly

profited from foreign exchange dealings by some kind of

collusion with Banks officers;

there is no basis whatsoever on which criminal charges could be

laid against any employee (past or present) or any customers;

the evidence brought to light would not support legal action by

the Bank against any present or past employee.18

As a result of these conclusions, Mr Conroy stated there would be no response to the

serious allegations made.

6.54 Of greater significance to Westpac than the operations of its foreign

exchange area five to seven years ago, Mr Conroy considered, was the current

procedure of the foreign exchange area. Coopers and Lybrand had brought experts

from London and New York to assist in advising Westpac on this. Mr Conroy stated

Westpac had been given ' a clean bill of health' and had been advised Westpac' s

'procedures conform to world best practice' .I9

6.55 The Committee has not seen the final report of the Coopers and

Lybrand investigation and so is not in a position to comment in detail on the

investigation or its findings. However, taking account of the public announcements

of Westpac' s Managing Director of the findings of the detailed Coopers and Lybrand

investigation, there would appear to be no further issues to be pursued in relation

to the allegations.

Speech by Mr F Conroy, Managing Director Westpac to the Securities Institute of

19 op. cit., p. 17.

Australia, 9 August 1992, p. 17.

114

7.1 In this final chapter the Committee draws overall conclusions about

banks' progress in implementing those recommendations of 'A Pocket Full of

Change' which were directed specifically to them. It also develops some of the

themes which were introduced in the previous report and which have been

re-enforced in this review.

7.2 The ACA entitled its submission to the current review 6 A Thimble Full

of Change - how retail banks ignored the Banking Inquiry Report *. Based on its

assessment of banks' responses to the consumer recommendations of the Banking

Report, the ACA concluded banks had a ' cavalier attitude * to complying fully with

the recommendations and, consequently, the Committee should consider making the

recommendations mandatory.1

7.3 The Committee agrees banks' implementation of some

recommendations is unsatisfactory. Those recommendations have been identified in

this report and, where appropriate, the Committee has made further

recommendations or reiterated the earlier recommendations. The Committee has

avoided making recommendations requiring banks to adopt a uniform approach to

handling issues. The Committee sees great strength in a diverse financial system.

However, the Committee also has made clear those areas where it sees questions of

fairness or good banking practice as necessitating a common adherence to standards,

if not to uniformity of approach, by all banks.

7.4 In other areas the Committee has noted satisfactory progress which

banks have made in implementing the recommendations. Some banks have

responded more positively under pressure from the continued scrutiny of the review.

In these areas the Committee has refined, or more carefully targeted, its earlier

recommendations in light of progress made.

Evidence, p. S606.

115

7.5 The Committee' s overall assessment is that most banks' have made

genuine efforts to implement specific recommendations and to respond to the

general tenor of the Banking Report. However, where specific recommendations have

not accorded with some banks' policy or practice efforts to implement

recommendations have been unsatisfactory. As the Committee considers its

recommendations embodied the better practice of banks, it will be those banks which

fail to implement the recommendations which will pay the price.

7.6 In the previous report the question was posed whether financial

deregulation had been a success from the perspective of its effect on the banking

industry. The Committee' s overall assessment was it had been a success but there

were some areas where benefits had not yet been achieved fully.

7.7 The Committee referred to the ' learning curve' which both banks and

borrowers had experienced as a result of deregulation. Neither banks nor borrowers

were adequately educated about the changed environment which resulted from

financial deregulation, in particular about the allocation of, and pricing for, risk.

7.8 The Committee saw a need for a more sophisticated and much better

informed financial services market to develop. Both banks and customers needed to

understand their relationship more clearly and make decisions from a more informed

base. The current review has reinforced the importance of both banks and customers

being better informed.

7.9 For banks this will involve them learning more about their customers

and endeavouring to meet their needs more closely. This will entail a greater

responsive to customers, the removal of barriers which prevent the market operating

effectively and a preparedness to be more technologically innovative.

7.10 In relation to small business and rural customers the Committee has

seen the relative paucity of expertise within banks to address the particular needs

of those sectors. A better understanding of the businesses with which they deal,

increased financial knowledge and improved risk assessment skills are some of the

gaps which need filling. Banks are beginning to identify these gaps in their expertise

and are adopting a variety of approaches to filling them. The Committee has

recommended banks increase their expert resources in both these sectors.

7.11 Understanding better the needs of customers is one thing, establishing

a sound relationship with them is another. The experiences of the 1980s and the

changing nature of the relationship between bank and customer has seen the public

perception of banks fall to an historic low. There is an urgent need to restore some

of the public trust and confidence which used to exist in banks.

7.12 The Committee sees the proposed Code of Banking Practice as crucial

to re-establishing the trust and confidence of consumers. An extension of the Code

to cover small business and rural customers also will be essential in rectifying

damaged relationships in these areas. The Committee has recommended the Code

be extended or further developed to cover small business and rural customers.

7.13 Responding to the challenges brought about by deregulation not only

places an onus on banks to develop their expertise, become more understanding of,

and responsive to, their customers and enhance technological innovation. It also

requires customers being better informed about bank products and services and

understanding better the increased responsibilities which a deregulated financial

system imposes on them. Customers need to examine more critically what they are

being offered by banks and to understand the way in which deregulation has

transferred risks to them in their banking relationships. To do so they need not only

better information and sources of advice, but also the appropriate tools and

questions to undertake this critical analysis.

7.14 The Committee has referred to the concept of a ' report card' on bank

products and services which brings together a wide range of information about

particular products or services. Potentially a 'report card' would place consumers

in a much sounder position to make informed choices.

7.15 While the Committee has not itself developed a 'report card' it has

endeavoured, through its discussion of deposit accounts, to point to the type of

information which can be developed for consumers. Those organisations in the

community which have a responsibility to inform their constituencies, whether they

be consumer, small business or farming organisations, are urged to develop such

comparative information about bank products and services. Banks will be driven to

provide better products and services by customers who are in a stronger position to

make well informed choices.

7.16 As well as providing better and more accessible information to

customers about bank products and services, customers also need to be empowered

to make the most of their relationship with their bank. The Code of Banking

Practice should make an important contribution to this empowerment by defining

rights and processes and providing means of redress for a breach of these.

Customers also need to be aware of the important questions and issues to raise with

their banks.

7.17 Following the excesses of the 1980s and the 'learning curve' of

financial deregulation, banks say they are developing a new culture of conservatism

and ethics. They are re-focussing on their core banking business and searching for

quality proposals which ensure an adequate return.

7.18 This re-focussing has been influenced not only by the experience of the

excesses of the 1980s, but also by the significant change in economic conditions in

Australia. Both inflation and inflationary expectations have fallen to their lowest

level for decades. The implications of this trend were outlined by the Reserve Bank:

117

... strategies which had assumed - indeed, depended on -

high inflation are beginning to be rethought. Views about

appropriate rates of return on assets and what types of

assets to hold, as well as about what borrowing costs and

gearing ratios are sustainable, are being recast. This

process is still underway and it will be some time yet

before the main economic players are fully attuned to low

inflation.2

7.19 As the Governor of the Reserve Bank noted recently, those bankers

who are quickest to appreciate the implications of sustained low inflation will do

well in the 1990s.3

7.20 Some banks noted this trend and indicated it was being factored into

their business decisions. The adjustment to a low inflationary environment shifts the

emphasis in criteria for lending more strongly on to cash flow rather than capital

appreciation.

7.21 The Committee welcomes the emerging culture and philosophy in

banks. A return by banks to the basics of their business and the adoption by them

of a strongly ethical approach to their role as bankers may see an improvement in

the public perception of banks.

7.22 However, the Committee emphasises the ' new conservatism' would

be damaging if it led to the choking off of support for lending proposals which

should be funded. As banks told the Committee, they are in the business of lending.

To make money they need to grow their business and support sound proposals. In

the context of the low inflationary environment banks must change the focus of

their lending but the Committee would expect to see levels of lending sustained and

growing. The challenge for banks is to encourage a revival of lending while

re-orienting their lending towards quality business proposals. Banks should

encourage staff to look positively on new business proposals which highlight

productive potential. This should be seen as a key consideration in promoting

lending growth.

7.23 The Reserve Bank also needs to play an active role in creating a sound

environment in which banks can respond to the new focus. Its role is important

particularly in restoring public confidence in the banking system. It also has an

significant role to play in enhancing the information base about banks to enable a

better informed public debate about the role of banks.

Reserve Bank of Australia, Report and Financial Statements, 30 June 1992, p. 2.

3 Reserve Bank of Australia, Bulletin, July 1992, p. 20,

7.24 In the previous report the Committee recommended a continuing role

for it in reviewing the banking industry. This was the first recommendation of the

report implemented only a few days after the report was tabled.

7.25 This review has demonstrated the value of the continuing role. The

review has enabled pressure to be maintained on banks to address the

recommendations of the previous review.

7.26 This is particularly well demonstrated in relation to recommendations

on resolution of foreign currency loans and the Nyngan disputes. It has been largely

pressure from the Committee which has seen relevant banks adopt a more

responsive approach to settlement. Banks' increasing responsiveness to the

implementation of other recommendations indicates further the value of continuing

scrutiny.

7.27 The Committee provides a forum for concerns about the banking

industry to be aired at the parliamentary level. However, it also provides the

opportunity for banks to inform the parliament about developments in the industry.

7.28 The Committee has recommended that progress on implementation of

particular recommendations from the previous report, those relating to resolution

of foreign currency loans and the Nyngan disputes, should be reported regularly to

it. More broadly the Committee considers a further review of implementation of the

original Banking Inquiry Report and of this review, should take place in 12 months.

This should provide sufficient time for banks to develop the systems and approaches

to give full effect to the recommendations.

7.29 As part of its continuing role of review of the industry, the Committee

intends to call the Reserve Bank annually to report on developments in the industry.

Under the Standing Orders the Committee has the Reserve Bank' s Annual Report

referred to it each year for examination. The Committee expects to call the Reserve

Bank to examine it on this years annual report shortly. In future years the

Committee also will call the ABA annually to brief it on developments in banking

from the industry's perspective.

7.30 As well as these areas, the Committee expects to undertake inquiries

as they arise into particular issues which affect the banking industry or financial

services generally. With this in mind the Committee will continue to monitor

developments in the banking and financial services industries.

7.31 The Committee recommends that:

120

There are many recommendations in the Committee's report - *A Pocket Full oi

Change' - that are the responsibility of banks rather than government to

implement. Some recommendations in which both government as well as banks have

a role, such as the Banking Code of Practice, have been included for completeness.

These recommendations are marked with an asterisk. The remaining

recommendations are those that will be reviewed under the reference from the

Treasurer on 31 March 1992.

The recommendations fall broadly into a number of categories:

Banking Code of Practice

Competition in the market place

Quality of service

Banks and confidentiality

Guarantees

Dispute resolution and mediatory mechanisms

Banks and small business

Banks and rural customers

Fraud

Credit assessment

Access to banking

other issues.

121

The need for a Code of Banking Practice was the central recommendation that

encompassed many of the reforms the Committee considered were required in

banker/customer relationships. The Committee recommended a consultative process,

under the auspices of the Trade Practices Commission, to develop the Code.

Consultation would include banks, consumer organisations, government regulators

and relevant State government authorities. The Treasurer has specifically excluded

these recommendations from the review.

Recommendations

the Australian Law Reform Commission be requested to conduct

a review of the law of banker and customer, involving

consultation with industry, regulatory authorities and consumer

groups. In cases where statutory change is required the ALRC

should draft recommendations for appropriate legislation; and

a code of banking practice, contractually enforceable by bank

customers and subject to ongoing monitoring by the Trade

Practices Commission, be developed as a result of a process of

consultation between the banking industry, consumer

organisations, Commonwealth regulatory agencies and relevant

State government authorities. The consultative process should

take place under the auspices of the Trade Practices

Commission. Monitoring should have regard to the degree of

compliance with the code and to the ongoing appropriateness of

the provisions of the code in the light of changing

circumstances, (paragraph 20.51)

the principle of disclosure be incorporated into a code of

banking practice, (paragraph 21.34)

a requirement for plain English documents be incorporated in

the code of banking practice. Plain English documents should be

produced urgently by the Australian Law Reform Commission

working wherever possible in conjunction with State law reform

commissions and in consultation with the banking industry,

consumers and users. Priority should be given to producing

important consumer documents such as the mortgage and

guarantee documents, (paragraph 21.51)

"100. personal information be provided as a 'right' to individuals.

This 'right' should be written into a code of banking practice.

122

The report generally recognised that the market should be allowed to decide the

appropriate pricing structures for particular bank products or services. However, in

some areas the Committee made specific recommendations to stimulate banks to

offer competitive products or to provide better information that would enhance

consumer choice.

Recommendations

banks ensure greater disclosure in the area of foreign exchange

transactions by advising foreign currency loan customers in

advance of all fees and charges associated with foreign currency

transactions, (paragraph 17.94)

merchants who operate a credit card facility should be free to

make their own decisions as to the prices they charge. Dual

pricing by merchants should not be prevented by banks,

(paragraph 19.57)

banks pay a reasonable rate of interest on all deposit accounts.

This should take into account the costs of maintaining accounts;

banks be strongly encouraged to convert all remaining deposit

accounts which pay interest on the minimum monthly balance

to daily interest, (paragraph 19.81)

all banks adopt the practice of recovering actual costs for early

repayment of loans rather than imposing a penalty.

banks should disclose all fees and charges and interest rates

relating to all products. Disclosure should be done in such a way

that all fees, charges and interest rates are clearly drawn to the

attention of consumers, (paragraph 21.67)

Much of consumer concern with banks relates to the quality of service offered to

customers. The Committee made a number of recommendations in this area.

Recommendations

70. continue to offer training opportunities to their staff especially

with regard to improvements in customer relations;

123

speed up their implementation of effective complaint handling

schemes and make known the existence of their complaint

departments to their customers through brochures available in

all bank branches;

make greater use of information gathered through their

complaint statistics to improve their performance; and

publish customer complaints statistics in their annual reports,

(paragraph 19.121)

Recommendations have been made about the requirement of banks to adhere to a

duty of confidentiality in relation to their dealings with customers. The Committee

said that the recommendations largely should be implemented by legislation. If this

does not occur it may be that banks implement these recommendations on a

voluntary basis, perhaps as part of the Code of Banking Practice.

Recommendations

the obligation of banks to maintain customer confidences should

be expressly recognised by law and should be subject to express

exceptions. The exceptions to the duty of confidentiality should

include the following circumstances:

disclosure of information where subpoenaed for the

purposes of litigation;

disclosure under due process of law;

disclosure pursuant to express consent in writing

obtained by the customer and for a particular purpose;

and

disclosure to other credit providers and agencies subject

to the restrictions imposed by the Privacy Act 1988 (as

amended) and the Credit Reporting Code of Conduct;

the duty of confidentiality should extend to all information

obtained by the bank in relation to its customer, other than

information readily available to the public;

customers should have access to all personal information

concerning them contained in the records of the bank;

124

®87. customers should be advised upon opening an account or

commencing a relationship with a bank and at intervals

thereafter of their right of access to personal information about

them held by the bank; and

*88. the obligation imposed upon credit reporting agencies by the

Privacy Act 1988, to take reasonable steps to ensure that

accurate files are maintained, should apply to personal

information held by banks in relation to customers,

(paragraph 20.159)

The arrangement whereby individuals provide third party guarantees to borrowers

from banks is one that has resulted in complaints from guarantors about their lack

of awareness of the implications of the agreements they have made. The Committee

made a number of recommendations in this area. Some of the recommendations

would be implemented as part of a Code of Banking Practice.

Recommendations

*89. the use of unlimited guarantees no longer be permitted;

*90. the details of the relationship between a bank and a guarantor

be clearly laid down in a code of banking practice and include

the specific undertakings that were part of the TPC' s

agreement with the National Australia Bank. In addition,

banks should be obliged to inform guarantors as to the reasons

for requiring a guarantee, (paragraph 20.179)

*91. the code of banking practice require a bank to disclose to

prospective guarantors all material facts known to it relating to

the borrower and the proposed transaction. Failure to so

disclose should render the guarantee voidable unless the bank

can show that the failure was inadvertent and the guarantor

knew of or was in a position to know of the relevant fact or

would have entered the transaction if the fact had been

disclosed;

*92. the code of banking practice also require the bank to advise the

guarantor of the state of the borrower' s account on inquiry or

as soon as the account becomes overdue.

125

The Committee was concerned about the mechanisms which consumers and other

groups had to resolve disputes with their banks. Recommendations in this area

included mediatory mechanisms for rural and foreign currency borrowers, the

Banking Ombudsman Scheme and internal dispute resolution.

Recommendations

Rural borrowers

57. the Commonwealth Bank establish an independent mediator or

panel acceptable to both the bank and the borrowers to mediate

the disputes arising in the Nyngan region. This mechanism

should include rural counsellors and should not affect recourse

under the law which either party may wish to pursue; and

58. the mechanism should be developed to have application to other

areas where similar circumstances arise. It could be activated

either by the initiative of the bank involved or by

recommendation of the Banking Ombudsman, (paragraph 16.83)

Foreign currency borrowers

60. an independent mediator (or mediators), funded by the banks,

but acceptable to both banks and foreign currency borrowers be

appointed to mediate in foreign currency loan cases that remain

in dispute. Mediation is not compulsory, banks will pay for their

own mediators or for a general mediator based on usage. The

determinations of the mediator will not be binding on either

party. Banks should endeavour, to the extent possible, to advise

all foreign currency loan borrowers of the mediatory mechanism.

The mediator should operate under the following conditions:

mediation would not be possible where cases have already

proceeded through all stages of appeal so that the court

processes are recognised;

mediation would also not be possible where out of court

settlements have been reached;

mediation can be sought where cases are still in court

without final decision, or pending; and

any determinations of the mediator will be non-binding

on both parties so that both have the appropriate option

of pursuing court action, (paragraph 17.193)

Banking Ombudsman Scheme

The participating banks in the Australian Banking Ombudsman

Scheme should increase the monetary threshold to $200,000 and

remove the exclusions relating to small proprietary companies.

The threshold should be kept under review; and

a proposal eventually to establish an ombudsman to cover the

whole financial services industry should be investigated by this

Committee. In terms of development, such a scheme should give

priority to ensuring access by consumers of retail or consumer

products and services of all financial institutions, rather than,

in the first instance, to incorporated entities, (paragraph 20.114)

Internal dispute resolution

all banks adopt a system of regular audits of all branches. Such

audits should be designed to, amongst other things, check the

availability of information to customers, the ability of staff to

answer questions about products and bank practices and the

courtesy of staff, (paragraph 20.74)

the development of comprehensive procedures for resolving

complaints and disputes be considered in the development of the

code of banking practice. Banks should ensure that all staff are

familiar with the bank' s policies and procedures relating to all

aspects of dispute resolution. In doing this, banks should ensure

that these policies and procedures are clearly set out in staff

manuals and are incorporated into both initial training

programs and refresher programs. The issues identified in

paragraph 20.123 above should be included in the development

of internal dispute resolution procedures, (paragraph 20.124)

The chapter in the report dealing with banks and business concentrated particularly

on banks' relationship with small business. A number of recommendations were

directed at the banks which would see this relationship better balanced towards

small business.

Recommendations

banks further develop packages and advisory services that will

assist small businesses to improve their financial management

and planning;

*41. small business representative organisations and relevant

Commonwealth and State government departments, provide

advice to small business about the products and services

available from banks; and

42. banks look at further product development for business,

particularly small business, to provide for the payment of

interest on working capital accounts when the accounts are in

credit, (paragraph 15.37)

43. banks reassess their lending procedures affecting small business

to ensure that sound proposals that meet usual credit criteria

are funded; and

44. in reassessing small business loans banks should:

consult with the customer;

advise in writing any changes prior to them being made;

provide an appeal mechanism against any decision; and

give added emphasis, in the current economic climate, to

assisting businesses to manage themselves out of

difficulty where some prospects for improvement exist

rather than taking precipitate action, (paragraph 15.60)

45. banks review their risk premiums on small business loans in the

light of the lesser risk of some areas of small business and in

view of the security over property taken for most small business

loans, (paragraph 15.72)

46. all margins above the bank indicator interest rate, fees and

charges be disclosed as part of loan agreements between banks

and small business;

47. any general changes made to margins above the bank indicator

rate, fees and charges during the course of a loan be

implemented only following advice to customers and any

changes made on the basis of reviews of an individual

customer's circumstances only be implemented following

consultation and advice; and

48. a comparative rate incorporating all costs associated with small

business loans be disclosed by banks to customers. The

Standards Australia comparative interest rate for consumer

credit should be used, (paragraph 15.82)

The Committee made recommendations about the development of a Code of Practice

to regulate the relationship between banks and rural customers. The ABA has

developed a draft Code of Practice, but the Committee identified shortcomings in the

Code. The development of a Code for rural borrowers is a process in which the

Government would be involved.

51. the banks ensure that farmers are made aware of the full range

of products they have available by ensuring bank staff are

familiar with the products and have the relevant expertise to

advise customers on their application.

*53. farm organisations encourage farmers to seek opinions from

appropriately qualified financial and other advisers,

(paragraph 16.44)

*54. the existing draft Code of Practice on the bank-farmer

relationship be re-examined in consultation with the ABA, NFF,

State farming associations, DPIE, rural counsellors and the

Trade Practices Commission. The final code should be

authorised by the TPC;

*55. bi-annual reviews of the Code of Practice governing bank-farmer

relationships be undertaken to ensure the Code is achieving its

original purpose; and

the Draft Code of Practice relating to bank-farmer relationship

be amended to include pastoral companies and government

business enterprises conducting similar business,

(paragraph 16.70)

The Committee rejected allegations that there was major fraud in the banking

industry. However, a recommendation was made to enhance banks' ability to see

fraud matters brought forward.

Recommendation

banks establish internal processes that allow staff to report

instances of suspected fraud to senior management without fear

of retribution and provide opportunity for customers to report

suspicions of fraud and corruption, (paragraph 18.59)

129

Recommendation

74. banks should ensure that their assessment of risk and other

related areas such as ability to repay are thoroughly

investigated. Credit scoring systems should be amended to

incorporate criteria such as income, or where it already exists,

to strengthen this requirement. Bank loans officers should be

adequately trained in risk assessment techniques,

(paragraph 19.138)

Recommendation

*101. retail banks and the Department of Social Security jointly

investigate the feasibility of developing a basic banking product.

The product should be offered by all retail banks, should allow

for a set number of free withdrawals each week and should be

targeted to the needs of low-income Australians.

There were two additional recommendations that were directed at organisations

other than banks.

Recommendations

*16. where applicable, the recommendations concerning disclosure

made in Chapter 21 also apply to other activities of bank-led

conglomerates, including companies with which they have close

associations;

*17. the Lifewriters' Association and other representatives of

financial advisers and agents should be invited, along with

government and consumer representatives, to participate in a

general review of quality control of financial advisers and

agents, (paragraph 11.88)

March 1992

Australian Bankers' Association

R & I Bank of Western Australia Ltd

Trade Practices Commission

Foreign Currency Borrowers Association

The Australian Borrowers Association

Advance Bank Australia Limited

Mr John McLennan

State Bank of New South Wales

Commonwealth Bank of Australia

ANZ Bank

Bank of Queensland Limited

National Australia Bank

Westpac Banking Corporation

Mr L J Potts, Vice Chairman

Foreign Currency Borrowers Association

15 Mr R Donald, Branch Chairman

NSW Farmers' Association

16 Mr G Hardie, Hon Secretary

NSW Farmers' Association

O c

&, i

4 i

Ja-2b

!:a-4e

»a

7,7a

9,5

10,

11,

12,

13,

ia-8c

>a-9d

lOa-lOc

l i b

13a-13g

17, 17b

Citibank

NSW Farmers' Association

131

Mr A R Jones

Ms Carolyn Currie

Mr C P Palmer

Mr John Salmon

Minister for Small Business, Construction and Customs

Australian Consumers' Association

25, 25a Australian Merchant Bankers' Association

26, 26a Metway Bank Limited

27 St George Bank Limited

28, 28a State Bank of South Australia

29 Australian Pensioners' & Superannuants' Federation

30 Mr A Lanza-Volpe

31 Reserve Bank of Australia

32 Mr A V Barker

33 Coonamble District Council

NSW Farmers' Association

34 Parkes Action and Castlereagh Action Groups

35 Sir Laurence Street

36 Barclays Bank

37 Bank of New Zealand

38 Bank of Melbourne

39 Challenge Bank

40 Trust Bank Tasmania

No.s 1-6

132

Publication received from: Australian Pensioners' and

Superannuants' Federation entitled s Actionetwork' dated

February 1992 and May 1992

Documents received from: National Australia Bank

Nos. 1-3

133

Sydney

Melbourne

Canberra

Sydney

Canberra

11 May 1992

12 May 1992

26 June 1992

29 June 1992

27 July 1992

14 August 1992

Dubbo 11 August 1992

135

Mr John James Wiltshire Gilmour

Mr John Ross McLennan

Sir Laurence Street

Mr David Lucas deGaris

Senior Economist

Mr Gary Randall Mason

Assistant General Manager

Credit, Business Banking

Ms Susan McCarthy

Chief Manager, Public Affairs

Mr John Roland McConnell

Senior General Manager, Retail Banking

Mr Neville John Warnest

Chief Manager, Credit Retail Banking

Mr Graham Clifford Broome

Chief Manager, Group Credit

Mr Grant Malcolm Godfrey

Chief Manager, Group Planning

Mr Terry Jay

General Manager, Retail

26 June 1992

11 May 1992

14 August 1992

12 May 1992

27 July 1992

12 May 1992

27 July 1992

12 May 1992

27 July 1992

12 May 1992

29 June 1992

137

Mr Alan John Chatterton 11 May 1992

Chairman, Executive Committee

Mr Alan Charles Cullen 11 May 1992

Executive Director 27 July 1992

Mr John Kelvin Dawson 27 July 1992

Chairman

Director Research 27 July 1992

Ms Lynnita Mary Maddock 11 May 1992

Chair, Banking Inquiry

Mr Graham Lloyd McDonald 12 May 1992

Ombudsman

Sir Ninian Stephen 12 May 1992

Chairman, Council

Mr Robert Drake 29 June 1992

Policy Officer

Mr Gregory John Kirk 29 June 1992

Member

Mr John Alan Hall 27 July 1992

Executive Director

Mr John Menzies McMurtrie 27 July 1992

Vice-Chairman

Mr John Patrick Barber 29 June 1992

Executive Officer

Mr Gerard Thomas 29 June 1992

Policy Officer

138

Mr Edward Harold Condran 11 May 1992

General Manager, Marketing Retail 27 July 1992

Mrs Lyndell Patricia Deves 11 May 1992

Chief Manager, Retail 27 July 1992

Mr Ian Kenneth Payne 11 May 1992

Deputy Managing Director 27 July 1992

Mr Paul John Rizzo 11 May 1992

Chief General Manager

Mr Leslie Edward Taylor 27 July 1992

Chief Solicitor

Mr Paul Merewyn Greenwood 29 June 1992

Chairman

Mr Ian Hamilton Fisher 11 May 1992

Chairman

Mr Trevor Ronald King 11 May 1992

Mr David Francis Lyons 11 May 1992

Editor, Newsletter

Mr Gerhard Moser 11 May 1992

Consultant

Mr Lionel James Pott 11 May 1992

Vice-Chairman

Mr Timothy Tyrrell 11 May 1992

Committee Member

Mr Glenn Lawrence Lord Barnes 12 May 1992

Group General Manager

Marketing and Distribution

Mr John Kelvin Dawson 12 May 1992

Group General Manager 27 July 1992

Group Strategic Development

Mr Julian James Pearce 12 May 1992

Chief Economist 27 July 1992

Mr Garry Goucher 29 June 1992

Director of Policy

Mr Terry Ryan 29 June 1992

Policy Director

Mr Stephen Ware 29 June 1992

Economist

Mr David Mark Cowper 29 June 1992

Chief Operating Officer

Mr Richard William Turner 29 June 1992

Secretary

Mr John G Alexander Goddard 27 July 1992

Chief General Manager, Operations

Mr Robert Leslie Manning 27 July 1992

Controller, Banking Services

Mr Bradley Kevin Matthews 27 July 1992

Manager, Economic Research

Miss Fiona Gladys Toose 27 July 1992

Principal Solicitor, Banking Operations

140

Dr John Tamblyn 26 June 1992

First Assistant Commissioner

Dr David Charles Cousins 26 June 1992

Group Secretary and General Counsel

Mr Alan John Chatterton

Chief General Manager,

Australian Distribution Group 27 July 1992

Mr Harvey Garnett 11 May 1992

Chief General Manager

Credit Policies and Control

Mr Geoffrey Kimpton 11 May 1992

Chief General Manager 27 July 1992

Consumer and Commercial Marketing Group

Ms Lynnita Mary Maddock 11 May 1992

Senior Manager, Public Affairs 27 July 1992

Mr David Leigh Pearson 27 July 1992

141

This document sets out principles which have been agreed by the. Foreign Currency

Borrowers Association and"Westpac Banking Corporation to provide access to a system

of arbitration intended to facilitate the resolution of disputes concerning foreign

currency loans (or OCLs).

1. The idea that an appropriately skilled and experienced person should play the

role of arbitrator in OCL disputes is accepted. A senior lawyer (such as a

retired judge) would be suitable and we envisage agreeing a panel of appropriate

persons from which the parties to a particular arbitration would select their

arbitrator. (As to expert assistance, see 11 below). If the arbitrator does not

have a good working knowledge of FX procedures, he should first undertake a

short familiarisation course provided by independent experts acceptable to both

the Bank and the FCBA.

2. We see the arbitration system as being available for any case of alleged loss

through breach of legal duty by the Bank in relation to an OCL, provided that

the case had not progressed through the court system to a full trial (or beyond)

and had not been settled by consent of the parties. Subject to those

qualifications, the Bank would agree to use the arbitration system in preference

to the courts.

3. Partnership Pacific Limited cases covered by the mediation procedures referred

to in the Bank's press advertisement of 14 March 1991 would be outside the

arbitration system, but the 14 March 1991 procedures would continue to be

available for such cases.

4. OCL cases which had progressed through the court system to a full trial (or

beyond), or had t?een settled by consent of the parties should, in the Bank's

view, be outside the arbitration system in the sense that the Bank would not in

the normal course be prepared to revisit issues which had already been dealt

with in those ways.

It would, however, be prepared to consider (on a case by case basis) the

possibility of referring to the arbitration system for determination any concisely

and clearly defined issue for a particular OCL borrower which, in relation to his

or her loan, would represent legal grounds for overturning any pre-existing court

decision or negotiated settlement involving that borrower (for example,

inadequate or defective discovery amounting to grounds for appeal ore in

relation to a settlement agreement, duress or some other vitiating factor.) In any

such case, the arbitration would be seen by the Bank as strictly limited to the

particular issue and could not traverse the whole of the relationship as if the

original court hearing (and any appeals) or negotiated settlement had never

- 2 -

5. Each arbitration would have to be established within the framework of an

arbitration agreement signed by the Bank and the OCL borrower. The Bank

would have to insist that the OCL borrower obtain separate and independent

legal advice before entering into the arbitration agreement. The Bank would

also have to insist that the independent lawyer provide a certificate that he or

she had explained to the OCL borrower all the legal ramifications of using the

arbitration system including, of course, opting out of the court system. In the

absence of these precautions, the borrower may have grounds for upsetting the

arbitration by court proceedings and that, of course, would be at odds with our

mutual aims.

6. Leaving aside any special cases that may come up under 4 above, one of the

tasks of the arbitrator in considering an OCL borrower's claim would be to

decide whether it was barred by any relevant statutory limitation period. Claims

thus barred could not proceed. The time at which any court proceedings already

on foot had been initiated would be taken into account in determining this issue.

Where court proceedings had not been initiated, the date of signing of the

arbitration agreement would fix the relevant time. Limitation period to be set

at six years from crystallisation of the loss (with the arbitrator to determine what

amounts to such crystallisation and the date on which it occurred, the arbitrator

to be available to determine such date in each case at a preliminary hearing if

desired by either party).

7. Again, leaving aside any special case within 4, the most substantial function of

the arbitrator would be to determine whether, in a particular case (and on a case

by case basis), the Bank was legally liable to compensate a borrower for loss

incurred in connection with an OCL. In deciding liability, the arbitrator would

be governed wholly by applicable legal principles so that, for the Bank to be

liable, it would have to be found by the arbitrator that the Bank had, on the

facts of the particular case, breached some legal duty.

8. Assuming that the Bank was found legally liable in a particular case, the final

task of the arbitrator would be to assess damages. The applicable legal

principles for quantum of damages would be used.

9. The arbitration system would, in general, be a complete alternative to court

proceedings, with the outcome final and binding on the parties. Legal principles

as to the review of arbitrators' decisions by courts would, however, apply to

these arbitrations in the normal way. Where the relationship between the Bank

and a particular OCL borrower became the subject of arbitration proceedings,

it would be expected that those proceedings wouid settle all issues relevant to

the relationship once and for all.

The arbitration proceedings would be informal but subject to sufficient

procedural safeguards to ensure that the rights of the parties are adequately

promoted and safeguarded. It is recognised that the efficiency and usefulness

of the arbitration system will be enhanced if both parties utilise the services of

their lawyers both in preparation and in the hearing. However, lawyers will not

represent the parties before the arbitrator unless both agree. It is also

recognised that, in some cases of need, the borrower may not be able to afford

legal assistance. In those cases, the Bank would seek to maintain fairness by

not using staff to represent it before the arbitrator who are experienced in

presenting cases in court and other tribunals.

It would be for the arbitrator to fix the manner in which the proceedings were

to be conducted. The arbitrator will be given the power to penalise or strike out

a party who is frustrating the proceedings. He would settle ways in which the

parties were to plead their cases and deal with any questions of evidence,

discovery, third party discovery and the like. In relation to discovery, the

arbitrator would decide what was necessary and lay down rules to achieve it,

with relevance always being the overriding determinant. The Bank should

produce a core list of discovery which will have to consist of relevant, bank

policy documents, procedure manuals, foreign exchange trading documents and

staff personnel files. On documents so discovered the Bank will mask only the

identities of other Bank clients. The borrower should produce all relevant

documents including correspondence with the Bank and any outside professional

advisers (such as accountants and tax consultants) relating to the OCL. The

parties would be bound by those rules. The arbitrator could also seek opinions

from independent qualified persons on matters requiring expert input as to

foreign exchange procedures and practices or calculation of loss. Again, it will

be appropriate for members of such a panel to be agreed by both parties.

The Bank would pay the arbitrator's fees plus those of any expert retained by

the arbitrator. No other arrangements as to costs are envisaged. If, in a

particular case, the parties agreed to lawyers representing them in the arbitration,

each party would meet its own lawyer's fees.

At any time during the course of the arbitration, the arbitrator may, with the

consent of both parties, adopt the role of a mediator. In such a case, attempts

at settlement by mediation under the arbitrator's guidance would be made. If

such attempts failed, it would be inappropriate for the arbitration to resume

before that arbitrator. In such circumstances the Bank would agree to

commence a new arbitration before another arbitrator provided both parties are

in agreement on this course of action.

145

The arbitration system will not exclude the Bank and OCL borrowers from

pursuing alternate forms of dispute resolution including settlement discussions,

mediations and court proceedings. In particular, the parties may elect to

postpone an arbitration temporarily and seek mediation through a third party.

ac Baruang Corporation

Ian Fisher R I Barrett

President Group Secretary

General Counsel

:a\ings accounts differ, and it is up to you to decide which meets your needs.

When choosing an account, features such as the quality of service,

the convenient location oi a bank, hours of opening, card access, availability of

loans and overdraft facilities or the simple fact that you like the staff of a bank ma\

be important in your decision.

Ifyou wish to consider interest rates and fees in detail, this brochure wili help you,

It allows you to determine which account provides maximum earnings or the least

cost, given your banking habits.

You are going to have to do some homework to find the answer.

Collect the information and brochures from the bank about the account you wish

to consider and put aside statements/passbooks concerning your current bank

account. If you wish to consider other accounts you will need to collect

information on these accounts from the bank concerned. (Each assessment will

require a separate copy of this brochure.)

Does the bank account you are assessing earn interest calculated on the minimum

monthly balance or the daily balance? If YES, tick the correct box.

If NO, place a zero in Box A (Q.5) and go to Q.6.

How frequently is interest paid?

(If you do not know how interest is calculated or paid, the bank can tell you.)

Estimate your average minimum monthly balance; that is, your minimum monthly

balance averaged over a number of months.

Estimate your average daily balance; that is, your daily balance averaged over a

number of days.

Your previous statements/passbooks may help you to estimate the above.

Given your likely balance In Q.2, what is the nominal rate of interest you will earn

per annum? The bank will be able to provide you with this information.

Given the frequency with which interest on

the account is paid (from Q.I), use Table A to

convert the nominal interest rate on the

account (Q-3) to an effective rate of interest.

Some banks may already supply details of

the effective rate of interest for your account.

The effective rate of interest is the nominal

interest rate adjusted for the effect of

compounding, i.e. interest on interest, and is

higher where interest is paid more frequently.

Example: interest is paid monthly (Q.I),

nominal interest rate (Q.3) is 5%,

therefore effective interest rate is 5.1162%.

NOMINAL

INKBEST

RATEP.A.

•2 00

2.25

2.50

'i.7o

3.0(1

3 25

3.50

-1.50

4.75

5.00

6.00

6 25

6.50

8 00

8.25

S.50

8.75

9.00

9 25

9.50

9.75

[0.00

EFFECTIVE 1WTSREST RATS P.A. IF INTEREST IS PAID

MONTHIV QUARTERLY HAtf-YBLY YSARLY

{%) [%] (%) (%}

T0U» 2.0! 5! iTo7(K! 2.0000

2 2755 a.ao'H 2.^.27

2.5288 2.52,i5 2.nt.iii

3.5567

5.815!

4.Q742

-<.33,>8

•1.5940

•1K.VI8

5.H62

5..1782

5S408

5.W0

h.1678

o ^32B

8 0313

8.JO0O

S.Bb'K

8fl.;(i!

9.1096

9.580"

1 652-1

5.5J(>L'

3.6031

4.06SM

4.8353

5.0'M;',

5.5545

:,.6\Ah

5.87:'J2

6.136-4

6.5980

6.6t,(T2

fi.9228

7.1859

7.4-1%

9.3085

9.S758

3.7H52

4.W00

to. 197/"

\QA7U

•(.HOW

5.0625

5.3189

5.8527

6.0900

6.5477

7.! T2A

7.38! 4

7 MOh

r.90<B

8.1600

S -<2f}2

8.680d

fi.'HH

9.2025

9.J659

'1.7256

•}.'I877

:o.2soo

4.0000

J 25(K)

J S000

* 7:i0D

5.0000

5 2500

5.500!)

a 7500

&0000

ii.2500

Q 50(10

ti 7500

7.0000

7 2500

7 MM

7 7.i(H!

B.OOOB

H 2500

N.500U

fi.7600

9.0000

9.250!)

9.5000

9.7500

10 0000

149

Calculate the approximate dollar value of your annual interest earnings by

multiplying the average balance (either monthly or daily) on which interest is

paid (from Q.2) by the effective interest rate (from Q.4) divided by 100.

Put this answer in Box A.

Example: The account you are considering calculates interest on the daily

balance (Q.I) and is paid monthly (Q.I). Your daily balance (Q.2) is, say,

$150.00. Effective interest rate (Q-4) is 5.1162%. Therefore, the approximate

dollar value of your annual interest earnings is S 150.00 x ^ o<f ~ $7.67 per annum.

Does the bank charge any fees not related to the number of transactions

(e.g. deposits/withdrawals) you make? Such fees may be referred to as

Account Keeping, Maintenance, Service or non-transaction based fees.

If YES, how much is the fee and how often is it charged?

•, go to Q.7 and place a zero in Box B, then go to Q.8.

Based on your likely average mmimum monthly or average daily balance (from

Q.2), and taking into account any exemption from fees that may exist when the

balance is held above a certain amount, will you be charged any Account Keeping,

Maintenance, Service or other non-transaction based fees?

If YES, how much will you pay per annum? Put your answer in Box B.

, place a zero in Box B.

150

Does the bank charge you for making transactions on this account? Ignore any

Government charges.

If MO, go to Table B and place a zero in Box C, then go to Q.I 1.

If YES, place in the second column of Table 3 the number of transactions you expect to

make in a month. (Keep in mind that this brochure does not cover transactions

associated with purchases of goods on credit cards or any cheques written on an

overdraft facility attached to an account.)

Add up the number of transactions to give a total and place the number at the

bottom of the column.

In the fifth column place the charge per transaction which the bank makes

(if applicable).

Does the bank not charge its transaction fees if the account balance remains above

a certain amount and/or your total number of transactions remains below a certain

number per month?

If YES, and you meet the bank's requirements with regard to required balance

and/or the total number of transactions, place a zero in Box C in Table B,

and go to Q.I 1.

If YIS, and you do not meet the bank's requirements with regard to required

balance and/or total number of transactions, go to Q. 10.

Some types of transactions may be allowed free and the number of free

transactions may vary with your account balance and number of transactions

•you make.

Does the bank allow you any free transactions?

If YES, fill in the third column of Table B, spreading the total number of free

transactions so as to offset your expected transactions (listed m the second column).

Complete the rest of the table and go to Q.I 1.

i, place zeros in the third column of Table B, complete Table B, then go to Q.I 1

151

Over the Counter

Cheque Deposit

ATM Cheque

Deposit

(the,' nut include

cheques written

on an overdraft)

Direct Entry

Deposit

(egjalary)

Other Deposit

(cash)

Persona! Cheque

Written

Over the Counter

Withdrawal

ATM Withdrawal

Direct Debit

(fg Liart

repayment.!,

cashwEFTPOS)

Q.8

from your bank

Q.iO

from your bank

Q.8

X12«

(ADD ALL F1GUBES IN LAST COLUMN)

Now, taking the results in Boxes A, B, and C, place these numbers in the boxes

below and calculate the answers for Boxes D and E:

The result in Box E is your estimate of the total income (or cost, if the answer is a

negative one) of operating the account for the year, based on your banking habits.

n order to keep this task as simple as possible, this brochure has focused on

the most frequent types of transactions on savings accounts.

The other transactions which may be charged for are:

B international payments

ffl requesting bank cheques

H using ATMs of other banks

8 requesting special clearances or answers on cheques

B requesting extra copies of statements

81 stopping payments on cheques

S making EFTPOS transactions

B having deposited cheques dishonoured or passing cheques that your bank

will be required to dishonour

Bank charges for the above transactions will vary. If you find that your transactions

include any of these, then you will need to take account of them when completing

this brochure. Some banks also have exemptions from fees if you purchase other

products (eg home loans) and you should check with the bank on this.

The questionnaire calculates the annual net interest earned from an account

assuming that your average balance and your levels of transactions are constant.

The results will not be accurate if your balances, or your usage patterns, vary

significantly from month to month.

It's important to note that government charges are not considered here.

These generally apply to all bank accounts, although some banks absorb these for

certain customers or certain products. Banks will be able to provide you with

further information on government charges that apply to accounts.

.' £•"*= 7 '.- •• ' •*. ' '---: :~ .*V,S .*.. f. J w . V v . *-• . -' -- -

' ..'lt'J-, -••*••. . — '-' - . - • « ' - ' - . « [ -

' * * ^ * -

> ; o<-\••>{ . - > ^ ^ ^ /

r your banking nk the

sider the number of

? I

you make each month,

may save you money.

to save costs.

this will make it easier to monitor your banking habits.

the information about your account

you understand Its operation,

you are unclear on any matters ask your

At MKAI US B.\Skf HVAWM 1 v; [OS

For additional copie,< of tbi.< brochure contact:

Australian Banker*' Association

42ndfloor, 55 Collins Street. Melbourne 3000

Telephone toll free (008) 033 6%2

The following formula, which is actuarially based, is complex but

examples can be obtained on request.

Formula for full and partial prepayments of loans approved from

The following symbols define the data required for the

calculations:

B = Balance of principal outstanding at prepayment date. Do not

include accrued interest.

A = Accrued interest outstanding to prepayment date.

K = Normal regular instalment.

q = Frequency of regular instalments per annum.

F = Final instalment. If P is not known then let F equal K.

IA - Fixed Term Loan Rate of Interest per annum expressed as a

percentage.

PA - Prepayment Rate of Interest per annum expressed as a

percentage.

c = Frequency of interest charging cycle per annum,

n *» Number of instalment cycle dates to the end of the Fixed Rate

Periods. Do not include the prepayment date if prepayment is

being made on an instalment cycle date. Include the loan

maturity date if the loan matures on or within the Fixed Rate

Period. Include the end of the Fixed Rate Period date only if

it is an instalment cycle date,

f = Number of days from the instalment cycle date immediately

prior to the prepayment date through to the prepayment date,

d - Number of days from the instalment cycle date immediately

prior to the prepayment date through to the following

instalment cycle date.

If the prepayment is being made on an instalment cycle date, then

it;

= 0,

== Balance after adding any accrued interest to the prepayment

date and deducting the regular instalment now due, and

= 0.

restrictions required to make the use of this formula valid

are thats

[a] Interest be charged on a normal interest payment date.

Hence the frequency of the interest and normal payment cycles

must be identical so that c = q, and

Jb] The end of the Fixed Rate Period must fall on an instalment

cycle date so that s = 0.

The above data can be directly extracted or calculated from

computer files.

155

The following symbols define the results of the six values

calculated:

i = Effective Fixed Term Loan Interest Rate per instalment cycle

expressed as a decimal.

L = Notional value of principal and interest owing at instalment

cycle date prior to the prepayment date.

m = Number of instalment cycle dates to the end of the Fixed Rate

Period given that the maturity date is defined as the end of

the Fixed Rate Period.

R = Expected notional Residual as at the end of the Fixed Rate

Period, if only the normal regular instalments were to be

paid each instalment cycle date.

E = Effective Prepayment Interest Rate per instalment cycle

expressed as a decimal.

P = Premium required if loan is fully prepaid.

Six calculations are required to determine P, the Premium required

when a loan is fully prepaid:

1. Calculate i . IA

C x 100

2. Calculate L B + A

L — ;—

36500

3. Calculate m

If L x i is greater then or equal to K then IB = n

otherwise let /lf _ fw

log

*.*. , * , K - L x i

m * the lesser of n or — log ( 1 + i;

If ti is not a whole number, then round m up to the next

whole number.

Note; If F is not known, then assume F equals K.

4. Calculate R

R = (L —) x <1 + i) •*• —r-

Notet R may be a negative number

5. Calculate E

E =

c x 100

6. Calculate P

p = f1+

f * Pft \J K

P i1 36500 )Xi E+

156

If P is positive then P is the Premium required to be paid to the

bank by the client. If P is negative then the positive value of P

is the amount to be paid to the client by the bank.

Where a loan is partially prepaid, the calculation will need to be

repeated for the loan remaining. The net Premium is then the

difference between the initial Premium and the subsequently

calculated Premium.

For the subsequent loan calculations, B will be the balance after

the prepayment. Further it is possible that the loan may be

restructured so that any or all of K, F and n could also be

changed.

When the loan is restructured, i (interest rate is fixed) and c

{frequency of interest charging cycle) would not change.

157

V-r.*:

^ ^ ;

This handout has been produced to assist you

in the better understanding of Fixed Interest

Rate Loans & Fixed Rate Commercial Bills.

Because fixed interest rate borrowing is not a common form of finance, many customers are not

totally familiar with its features.

It is essential that you, as a prospective borrower, be aware of the risk involved in fixed interest

rate financing.

Should interest rates fall during the term of the facility and you decide to prepay the loan before

its term expires then you may incur a substantial cost.

It is therefore advisable to seek expert advice on all aspects affixed rate financing and

prepaymetif before making the commitment.

Agreement on terms and conditions

A fixed interest rate arrangement is a contractual agreement between you and the bank and

includes:

D amount ot the facility

D base interest rate which i* fixed for a specified period

D repayment arrangements

D purpose e.g. owner occupied housing loan

D early termination provisions

What is a Fixed Interest Rate Loan?

It is a loan where [he base interest rate is fixed (stays the same) for an agreed period.

The fixed interest rate period may be different from the overall loan term e.g. for housing loans,

the overall loan tenn can be up to 30 years, but the fixed interest rate periods are for a maximum of

5 years.

At the end of the fixed interest rate period the options are (subject to original terms and conditions

of approval):

D fix the interest rate for another period at the rate then available (minimum loan balance

condition applies)

D switch to a variable interest rate

D reduce amount of loan

D repay the loan

Some fixed interest rate facilities have only their base rate fixed. The margin above the base rate can

be variable, and could change from time to time due to a change in perceived customer risk.

What is a Fixed Rate Commercial Bill Line?

A Commercial Bill Lino is m alternative to other forms ot bank finance. It involves the use of a

commercial bill, drawn by the customer and accepted by the bank.

With a Fixed Rate Commercial Bill Line the bank quotes a fixed rate tor a fixed period —

maximum term 5 years.

At the end of this period the options are (subject to original terms and conditions of approval):

G fix the rate for another period (minimum amount SIOOOOO)

D roll over to a variable rate on a 30 day basis (or longer if preferred}

D reduce amount of bill line (mmimum amounts apply)

D repay bill line in full

Locking in your fixed interest rate

For Housing Loans and Investment Property Loans, the fixed interest rate quoted is guaranteed for

14 davs trom the date ot the bank's letter to you setting out the terms and conditions ot the loan.

Please ensure you return this letter within 14 days.

Drawing of your Housing or investment Property Loan must then take place within 90 days of

your acceptance of the terms and conditions otherwise a new interest rate may need to be quoted.

Should rates fall and you do not draw the loan you may incur a cost.

For other types ot fixed rate tdciluscs the interest rate quotations are indicative only until such time

as documentation is complete and drawing date known.

Loans drawn in instalments (e.g. building advances or progressive/sequential purchases from the one

loan) can not be locked into a fixed interest rate until die loan is fully drawn. In the meantime, the

appropriate variable interest rate will apply.

What is the best type of facility — fixed or variable?

The answer depends upon your individual financial circumstances and your opinion on probable

interest rate movements in the future. There are risks involved, and factors you should consider include:

Predicting future interest rate movements

No-one can accurately forecast future interest rates. However, there are a number of sources of

information that may assist you in coming to your own conclusions. These include economic papers

produced by the government, the Reserve Bank, and comment by economic writers in the newspapers.

Westpac branch staffare not at liberty to advise you on possibie future interest rate movements.

if you consider that interest rates will fall during your proposed fixed interest rate period, then a

variable interest rate facihlty may be your preferred option.

If you consider that interest rates will rise during this period, then the fixed interest rate facility may

be your preferred option.

The end result of these considerations is your decision on which option is best for you. You should

discuss your decision with your accountant or financial adviser.

It will be only at the end of the fixed interest rate period, when you know what the variable

interest rates were during that period, that you can really make a judgement.

[es

Your interest rate is fixed for the chosen period, during which time you are unaffected by interest

rate increases. Because repayments are a known cost you can therefore budget more effectively.

What are the disadvantages of fixed rate borrowing?

Interest rates can fall leaving you to continue paying the agreed fixed interest rate throughout the

fixed interest rate period.

A switching fee is designed to cover the bank's administrative costs for changing a facility to

another type, but it does not apply to changes nude at the end of a fixed interest rate penod.

The switching fee (which does not cover differences in interest rates} applies when the following

changes are made dunng currency of the contract:

• fixed interest rate to a variable interest rate

D fixed interest rate to another fixed interest rate

D variable interest rate to a fixed interest rate

This switching fee will be in addition to any prepayment costs that may be incurred m breaking the

contract.

'Prepayment' can be simply defined as a repayment outside the terms of the original contract

agreement, or a switch to a variable interest rate facility or another fixed interest rate facility before

the expiry of the current fixed rate penod.

Such a change to your contracted conditions may result in a cost or benefit to you.

When the bank agrees to provide you with a fixed interest rate facility, it agrees to receive a fixed

rate of interest from you for a given period of time on given dates. To manage the difference

between the fixed and floating rates the bank enters into other arrangements to pay a fixed rate of

interest, a function called a 'hedge'. This is not done on a one-to-one ratio but on a managed

portfolio basis. These arrangements are entered into on the basis that you will fulfil all your

obligations for the full term of your fixed rate contract.

161

If your contract is terminated prior to the expiry of the full term, the bank is left with the

obligations of the hedge arrangement. If interest rates have fallen then we can reverse those hedge

arrangements (or transact a hedge against your termination) only at a rate lower than your onginal

rate agreed, leading to a cost for the bank. If this happens, we must pass this cost on to you. The

rate at which we can hedge your termination or reverse our original hedge arrangements is known

as the 'prepayment rate',

A payment wil! need to be made by you to the bank where the prepayment rate is lower than the

contracted interest rate paid by you. In this instance the bank is recovering from you any cost it may

have incurred in reversing the original hedge arrangement or hedging your termination.

Conversely, a payment will be made to you by the bank where the prepayment rate is higher than

the contracted interest rate paid by you. Thus the bank is passing on to you any benefit it may have

received in reversing the original hedge arrangement or hedging your termination.

Prepayment Formula

The prepayment formula is actuanally based and takes into account the following factors:

D the current prepayment rate (for the remaining period of your loan)

• the fixed base interest rate on your loan

D the repayment basis of your loan

D the remaining fixed interest period of your loan

D the outstanding balance and accrued interest at time of prepayment

A copy of the loan prepayment formula is available on request but as it is complex you may need to

contact a financial expert or actuary for clarification.

This formula is used tor term loans, a separate methodology is employed for the prepayment of

fixed rate commercial bills. Further details arc available on request.

The following diagram is indicative and for explanation purposes only. It may help you to

understand how the prepayment formula generally works:

Your current fixed base interest

13% over 5 years

Current prepayment

interest rate is 11%

Bank pays customer Customer pays bank

For a prepavmcni o f S l ' i 01)1) on j five year pnncipal and interest term loan of $100 ()(}(!.

Initial principal

Total term

Fixed term

Prepayment amount

$100 000

25 years

5 years

$10 000

Actual

Loan

Rate

I71:,

17%

15%

13"i,

13%

17'*,,

17%

15%

1y\

i3",

13%

Original

Repayments

S1437.H(i

S1437.8(i

$1280.83

S1280.83

S1127.H4

S1127.84

S1437.8H

St437.8u

S12KU.83

S1280.83

S1127.84

Current

Prepayment

Rase

n>",

2d".

1 (->%

19".,

15%

16".,

1 =>'\

! 4%

14'1',

1!%

IT1..

in%

Years

remaining

• >

~>

->

}

Outstanding

balance

S94 0H5

S99 t)H5

S98 053

S97 219

S99 1185

S99 085

S98 i i53

S98 1153

S9~ 219

S97 219

Prepayment

Quote

Bank Pays

S425.76

S(>3' i. ] 7

S! 59.0(,

Sf.lS.47

SI 77.01

$264.15

Customer PJVS

S449.48

$6X3.55

$162.12

S667.49

S18U.71

S272.47

New

Repayments

S128K.58

S128H.58

$1143.72

S1143.72

S1OH.83

S!011.83

SI 288,58

SI 288.58

SI 143.72

SUM 1.83

Sim 1.83

Notes1

D Prepayments are calculated on the basis that repayments alter and maturity date remains constant.

D Example is case specific and no further conclusions may be drawn.

Ask your manager if you have reservations that this handout, or sections of u, are not relevant to

your borrowing proposal.

Australia's,firs! bank

Y . E 5 T P S C B A N K I N G C O H C C H A T I O N

V , i j ! P A C S A V I N G S S A N K U N I T E D

" , A F l i Z ' h ' t ' i L O A N S '