The Customer Owned Banking Code Compliance Committee (the Committee) encourages and promotes customer owned banking institutions (institutions) to meet customer and community needs and expectations. The following is a case study relating to obligations under the Customer Owned Banking Code of Practice (the Code) towards co-borrowers.

Key learnings

  • Your institution must refuse to accept someone as a co-borrower if they will not receive a benefit from the loan contract or other credit facility. The general rule to follow is that an individual who does not receive a benefit from a loan should not be included as a co-borrower.
  • The test of benefit can sometimes be harder or easier to determine. Under the general law, the test of benefit looks at the substance rather than the form of the arrangement. Section D 11.1 of the Code refers to benefit rather than direct benefit or financial benefit. The use of the broader concept may give some additional flexibility.
  • Where you are unsure about the application of the ‘benefit’ test, you should seek legal advice. Alternatively, adopt a conservative approach and do not allow someone to be a co-borrower unless it is clear they will themselves receive a clear financial benefit from the loan.
  • While it may be easier and quicker to document a loan with co-borrowers, if there is no benefit to one of the parties, that party should be treated as a guarantor – and the guarantee, so defined, will then generally not be enforceable because the formal requirements for a guarantee (under the National Credit Code and the general law) will not have been satisfied.


The customer owned banking institution (institution) provided the customer and her then husband (co-borrower) with a personal loan (the Loan). The purpose of the Loan was to refinance existing liabilities.

The customer said that she did not benefit from the Loan and should not have been signed up as a co-borrower. She also said that she could not afford the loan and that it should never have been provided.  She referred to her husband suffering from gambling and alcohol addiction and that the household did not receive any benefit from the Loan.

FOS findings

Following lodgment with the Financial Ombudsman Service Australia (FOS), FOS issued a Determination which held that:

  • The institution was not entitled to accept the customer as a co-borrower as the information available to the institution shows that she did not obtain a benefit from the majority of the Loan funds.
  • The customer was only liable for the Loan in so far as it refinanced an existing joint personal loan held with the institution which was paid to the customer’s saving account with the institution (the revised liability).
  • The institution was entitled to charge interest on those amounts at the contract rate and to apply any payments made by the customer to the Loan from an account with the institution held in her sole name in reduction of the customer’s revised liability plus interest on that amount.
  • Any amount paid by the customer in excess of the revised liability was to be refunded to her and the customer was to be released from liability with respect to the remaining balance of the Loan.

In the course of its investigation FOS identified that the institution may have breached its obligations under the Customer Owned Banking Code of Practice (the Code) and referred the matter to the Customer Owned Banking Code Compliance Committee (the Committee).

Code Concerns

The institution accepted a customer as a co-borrower when it was aware, or ought to have been aware, that the customer would not receive a benefit from the Loan.

Obligations under the Code

Key Promise 8 states:

We will comply with our legal and industry obligations

We will be responsible, prudent managers of our institution, and will comply with all our obligations under the law and relevant codes of practice. We will act fairly and consistently with good banking and financial service industry practice.

Part D section 11.1 ‘Safeguards for co-borrowers’ states

We will not accept you as a co-borrower if we are aware, or ought to be aware, that you will not receive a benefit from the loan or other credit facility.

Spirit of the Code

The common law position in relation to what constitutes a benefit under a loan is that a benefit must be a real, or tangible, benefit which must be a direct or immediate gain, not an implied benefit. A benefit through an improved lifestyle obtained through the loan is not sufficient. Common law principles provide that where a person receives a limited benefit from a loan then their liability will be restricted to those loan funds from which they received a direct benefit.

The Code should not set a standard less than what the law would require. Where there is doubt, a Code provision should be read so as not to reduce, or limit, a benefit or protection conferred by the Code.

In the case of section D 11.1 of the Code the purpose is to provide safeguards to co-borrowers so that guarantors are not characterised as co-borrowers, even when they have participated in the loan application process.

In the absence of a real benefit this creates an obligation on the institution not to treat a person as a co-borrower when they should instead be characterised as a surety or guarantor.

Code investigation and outcome

Following its investigation, the Committee issued a notice of proposed determination and found:

  • Part C of the Code sets out the Key Promises a Code subscriber makes to a customer. These promises reflect the spirit of the Code and embody the principles and values held by Code subscribers towards their customers and the broader community.
  • As legal obligations include obligations at common law, the institution’s breach of part D section 11.1 of the Code also amounts to a breach of Part C Key Promise 8 of the Code.
  • By accepting the customer as a co-borrower when it should not have, the institution breached its obligation at common law and, by extension, breached part D section 11.1 of the Code.

To correct the breach, the institution:

  • accepted the findings in the notice of proposed determination
  • agreed to report the breach in its Annual Compliance Statement
  • undertook a review of its processes to accept a co-borrower under a loan contract and provided the Committee with its findings, and
  • provided the Committee with information that this matter had been used in staff training to improve its processes and procedures.