The US Treasury has announced a new set of guidelines on executive pay for financial institutions that are receiving government assistance. The measures are “designed to ensure that the compensation of top executives in the financial community is closely aligned not only with the interests of shareholders and financial institutions, but with the taxpayers providing assistance to those companies. “

Features in the new rules for companies receiving “exceptional assistance” from the government include a US$500,000 cap on salaries for senior executives (compensation beyond that must be in restricted stock), expanded bans on golden parachutes, and increases to “clawback” provisions.

The US President’s response to the news that “Wall Street had doled out $18 billion in bonuses, even after the government had propped up many of the Street’s most prominent firms”; here.

I recently wrote this article for Retail Banking Review.

The Code of Banking Practice contains provisions intended to set out the high ethical and service standards that customers can expect when dealing with a bank that subscribes to that code.  It also sets out how to resolve disputes with banks.

But a recent independent review urged Australian banks to include a clear commitment to “responsible lending” in the industry’s code of practice, including a commitment to carefully assess applications for credit that may result in financial hardship.

The review also recommends the full disclosure of “exception fees” by the banks, and that they provide information to customers on how to avoid such fees, which normally apply for overdrawn accounts.

Codes of Conduct were created as a compromise between Governments’ reluctance to impose detailed legislative regulation on industries that were changing (such as financial services) and not having any regulation at all.  The compromise offered was self-regulation.

It is important to distinguish voluntary codes from legislative codes and mandatory codes. Under Part IVB of the Trade Practices Act some Codes (eg the Franchising Code and the proposed Unit Pricing Code) are mandatory; this is usually because self-regulation in certain industry-wide issues does not work. A legislative code is actually a law.

Voluntary codes of conduct typically make provision for minimum standards of performance of conduct while leaving to the regulated party discretion as to how that standard will be achieved. It is therefore possible for a number of banks to comply with their code of conduct but do it in different ways.  Industry specific codes allow variations and competition within an industry in a way that prescriptive legislation could not. That is why codes of conduct are often called codes of practice.

The legal effect of a voluntary code depends on whether it is expressed merely as a set of principles or whether it is intended to be contractually binding on a party that accepts it. 

For example, the Code of Banking Practice (CBP) is contractually binding between a bank and its customers once it is adopted by the bank.  If a bank announces it has adopted the CBP but does not follow it, it could be liable for misleading conduct under the ASIC Act and be guilty of unfair conduct under the Credit Code.

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