What are industry 'codes' and why don't they work?

How the finance and banking industries write their own rules.

Laws are a normal part of our lives.

When you get in the car to travel to work, you interact with a number of laws that exist to keep us all in check.

Tempted to speed? Chances are you'll end up with a hefty fine. Drive dangerously? Police patrol the roads and will take your licence away in a heartbeat.

Our road laws and patrol cars are there to keep us safe and regulate our more impulsive behaviours. And we know that real penalties are attached to breaking road rules.

But imagine if you wrote your own rules for the road – and imagine if the most trouble you got in for speeding or dangerous driving was a slap on the wrist?

For the people who sell us banking, finance and insurance products, that scenario is a reality, thanks to what's called a "code of practice". 

What's a code of practice, and what's wrong with them?

A "code" is the rule you create when you want to avoid being bound by an actual law. It's a document that sets the standard for an industry – you sign up as a member to your industry's lobby group and commit to the standards set by that group's code.

An industry code is often:

  • written by industry for industry – usually an industry lobby group is at the forefront of developing a code. Consumer groups like CHOICE may be asked to comment on a code but we don't get the final say in the rules
  • optional – in many cases if a particular business doesn't like the code, they can just leave or choose not to comply.

Codes are a tool the finance sector has used for decades to write its own rules, avoid scrutiny, and get away with behaviour of the likes we saw at the banking royal commission in 2018.

Codes aren't enough to keep the big banks honest

Codes in the financial services sector too often do the bare minimum. The worst codes are simply public relations documents that pay lip service to consumer protection. Some codes re-state existing laws, setting no higher standard than what the law already requires. Even when codes do set a higher standard, the consequences of not following them are underwhelming at best.

During the 2018 banking royal commission, insurance companies reported breaking their own rules over 13,000 times. The General Insurance Code Committee (the industry's own '‘cop on the beat') failed to sanction a single insurance company for breaking the rules of their code.

Codes are how the financial services industry have avoided effective laws – a way to say "we'll fix this ourselves” and deflect lawmakers until their most recent indiscretions have been forgotten.

What's wrong with industry codes

"We've been asked to help industries develop codes more times than we can count," says Patrick Veyret, policy and campaigns adviser at CHOICE.

"But most of the time industries develop watered-down and useless documents, barely worth the paper they're printed on. 

"It's clear that in the minds of industry, the involvement of consumer advocates is no more than ticking a checkbox or at worst, a cynical PR move to say later on that they consulted us."

What needs to change

In a submission to Treasury, CHOICE has called on the next federal parliament to kill off useless industry codes and give the finance regulator, the Australian Securities and Investments Commission (ASIC), the power to set and enforce these codes, away from the influence of industry lobby groups.

"The scandals of the banking royal commission mean that we must change how financial services industry codes work in Australia," says Veyret.

"It's clear the industry cannot be trusted to write their own codes. We need to kill off useless codes and give ASIC real power to hold the finance industry to account.

"After decades of watching industries scuttle meaningful reform and continue to harm the community, CHOICE says it's time to take away this industry tool of lip service and PR."

Want to dig into the detail? Join CHOICE Community where our community discusses CHOICE's behind-the-scenes policy work or read our Treasury submission.