BCCC re-evaluates bank treatment of guarantors

The BCCC monitors banks’ compliance with the Banking Code of Practice, a rule book maintained by the Australian Banking Association (ABA) that sets out clear rights for customers and is enforceable by law.

It includes obligations that banks need to undertake to ensure customers make “fully informed decisions” before agreeing to be a guarantor.

For example, under the code, banks must tell potential guarantors that they can refuse to sign a guarantee and flag that there are financial risks involved in guaranteeing a loan and should therefore seek independent legal and financial advice.

Banks that adhere to the code must also highlight to potential guarantors that the guarantee may cover future credit and variations of the loan within the limits set.

However, a BCCC report released in 2021 found that banks were failing to uphold guarantor obligations. 

After completing performance audits with 13 banks, the watchdog found non-compliance with a number of the industry code’s provisions including pre-guarantee disclosure requirements and also found multiple instances where banks could not demonstrate their compliance.

The committee has now announced that it is conducting a follow-up inquiry to check that banks have improved their practices since then and are complying with the guarantor obligations.

It has now launched a survey asking borrowers about their experience with being (or using) a guarantor for a loan from a bank.

Speaking of the review, Prue Monument, the chief executive of the BCCC said: “The Banking Code obligations are a crucial safeguard to ensure guarantors understand the risks involved when providing a guarantee.

“This follow-up inquiry will identify good practice for other banks to follow as well as highlight areas that might need more focus and attention.” 

According to the BCCC’s 2021 report, around $500 billion of credit was being supported by guarantees. 

Given the rising interest rate environment and reduced serviceability, the economic environment may result in more borrowers seeking guarantor loans to purchase a property.

Ms Monument flagged that anyone signing up to become a guarantor must ensure they are clear in what they are signing up for “because of the large financial risks involved”.

“It’s also important that people don’t feel pressured into going guarantor,” she added.

“In the worst cases, this can amount to financial exploitation, or what’s known as elder financial abuse.” 

[Related: Bank of mum and dad backed 5% of buyers: survey]