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Banking Laws in Australia
Brendan Bailey
Law and Bills Digest Group
May 1997
Commonwealth, State and Industry Controls in Australia
Deregulation of the Australian banking sector accelerated in the early
1980s. A stocktake of deregulation has been completed in the context of
the Wallis Report (March 1997)(1). The existing laws and industry
codes are found in the following three-tiered system:
Commonwealth
There is prudential supervision and licensing of banks by the Commonwealth
pursuant to the Banking Act 1959. 'Prudential supervision' involves
examination by the Reserve Bank of an individual bank's management of
its financial risks to ensure that the bank's practices limit its risks
to prudent levels. The prime responsibility for the prudent management
of a bank rests with the bank's internal management and its board of directors.
From time to time, the Reserve Bank issues public statements on aspects
of its prudential supervision of banks. The statements cover such things
as ownership and control of banks, capital and liquidity requirements,
credit exposures and off balance sheet business, funds management and
securitisation, associations with non-bank entities and access to the
payments system.
The provisions of the Commonwealth's Trade Practices Act 1974
also apply.
State and Territory
There is consumer credit regulation under the State and Territory laws
which constitute the national Consumer Credit Code. The laws are
based on the principle of truth-in-lending and they enable borrowers involved
with banks and other financial institutions (and, subject to some exceptions,
the Code also applies to those who provide credit in the course
of a business) to make informed decisions. As from 1 November 1996, most
bank customers with loan accounts, overdrafts and those involved with
the general day-to-day credit transactions (for personal, domestic or
household purposes) may look to the State-based Code for possible
consumer protection. The Code covers disclosure of credit fees
and charges and interest on loans. Certain credit facilities which existed
prior to 1 November 1996 are not covered, unless there is agreement between
the parties to increase the amount of credit.
Banking Industry
The banking industry has developed a Code of Banking Practice.
The Code is intended to have contractual force. The Code was developed
by member banks of the Australian Bankers' Association in conjunction
with the Australian Competition and Consumer Commission and the Federal
Treasury. The Code covers individuals who acquire banking services wholly
and exclusively for private or domestic use. The Code is subject to Commonwealth,
State and Territory law and is also to be read subject to the Electronic
Funds Transfer Code of Conduct. The Code of Banking Practice
fosters the establishment within banks of internal dispute resolution
processes for customers and where a dispute is not resolved, free referral
to the Australian Banking Industry Ombudsman's Office (freecall 1800 337
444). This scheme covers virtually all retail banks. The scheme covers
disputes where the amount in dispute (not the loan or deposit size) is
$150,000 or less. Disputes involving incorporated businesses are outside
the Ombudsman's charter.
In addition to the above there is the long history of banking law based
on decided cases involving banker and customer. This relationship is normally
contractual in nature and invokes both common law and statutory provisions.
It is also a relationship which can give rise to legal issues of confidentiality
and trust.
There are over 16.5 million bank customers in Australia (2) and the
majority of transactions involve the banker-customer relationship which
is central to the contractual nature of banking law. A fundamental prerequisite
for the banker-customer relationship is the existence of a bank account.
The majority of disputes between banks and customers are resolved by
the parties, or with the involvement of the Banking Ombudsman (a non-government,
industry self-regulatory scheme). Legal disputes are usually a matter
for State Courts and Tribunals.
As already noted, confidentiality is an important principle in the banker-customer
relationship and it imposes a common law duty on bankers to maintain that
confidentiality. Credit reporting by a bank is permissible but it is subject
to the Commonwealth's Privacy Act 1988 and the Credit Reporting
Code of Conduct. Banks are required, by law, to comply with the Commonwealth's
Financial Transactions Report Act 1988 which requires proper identification
of customers opening an account (100 points test), and the reporting of
significant cash transactions ($10,000 or more), and of suspect transactions.
Protection of Depositors
Prudential supervision by the Reserve Bank enables it to investigate
the affairs of a bank, if that bank is in serious financial difficulty.
The Reserve Bank may assume control of the business of the bank until
the deposits have been repaid. The depositor protection provisions of
the Banking Act 1959 do not constitute a formal guarantee of depositors'
funds. The Wallis Report recommended that the protection provisions
in the Banking Act 1959 be further clarified so that it is very
clear to the public that the protection of depositors' accounts does not
extend to a guarantee over deposits.
Taxes: FIDs and BADs: Income Tax Withholding Charge on Interest
Financial institution duties (FIDs) are levied under State and Territory
laws. The bank account debits tax (BADs or 'debits tax') was introduced
by the Commonwealth in April 1983 but the administration of the tax was
transferred to the States and Territories in January 1994.(3)
Income tax is the only relevant Commonwealth tax on bank accounts. It
increases to the highest marginal rate where a tax file number has not
been notified.
FIDs and debits tax can exceed bank fees and charges but the increasing
application of bank charges vis-a-vis absolute profit levels achieved
by banks has drawn criticism from some consumer groups in recent times.
The Reserve Bank and the Australian Competition and Consumer Commission
constantly monitor changes in relation to bank fees on an informal basis.
A Prices Surveillance Authority (PSA) report in 1995 on an investigation
into bank fees and charges rejected calls by consumer groups for banks
to offer free accounts for low-income earners. The PSA did, however, recommend
that banks consider restructuring their fees with an emphasis on transactions
rather than fixed account-keeping fees.(4)
Interest Rates
Prior to deregulation, banks' lending and deposit rates were subject
to control by the Reserve Bank, with the approval of the Treasurer. Since
deregulation, controls on interest rates are no longer used.(5)
Banks' interest rates are influenced by movements in money market rates
and competitive pressures. The Reserve Bank operates in the short-term
money market to influence the cash rate (the rate paid on unsecured overnight
loans of cash), which, in turn, impacts on lending and deposit rates.
Fixed-rate loan and deposit rates tend to move in line with security yields.
A bank's right to charge interest is derived from the banker-customer
relationship and banking practice.
Endnotes
- Financial System Inquiry Final Report, Australian Government Publishing
Service, Canberra, March 1997.
- Weerasooria, W. Banking Law and the Financial System in Australia,
Butterworths, Sydney, 1996: 309. Most of the outline in this Research
Note has been drawn from this text.
- Qld does not have a FID. ACT does not have a debits tax (as yet).
- Prices Surveillance Authority, Inquiry Into Fees and Charges Imposed
on Retail Accounts by Banks and Other Financial Institutions nd y Retailers
on EFTPOS Transactions, Matter No. PI/95/2, Report No. 65, 30 June
1995.
- The power to control interest rates remains at s. 50 of the Banking
Act 1959.
Acknowledgment
The author acknowledges the assistance of the Reserve Bank of Australia
in commenting on the draft of this Research Note.
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