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Royal commission too short for ‘breadth’ of cases

Royal commission too short for ‘breadth’ of cases

The Small Business Ombudsman has called for another set of royal commission hearings to investigate more cases of inappropriate practices pertaining to small business loans, claiming the previous round was too short.

Speaking with My Business’ sister title The Adviser, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, said that the “dilemma” with the third round of royal commission hearings (which focused on the provision of credit to small businesses) was too short, resulting in only a limited number of cases being investigated.

“The royal commission was called on because of a huge amount of agitation from many small businesses, a joint parliamentary inquiry, a range of cross-benches that indicated they might cross the floor because they had small business constituents, who believed that they hadn't had an opportunity to have their cases heard,” Ms Carnell said.

“I believe that they need to do another two weeks [of hearings] or another set of cases.”

She added that the few cases heard in the third round of hearings is “[not] representative of the breath of cases that exist”, though noted that the next round, which will focus on the provision of finance to customers in regional and remote areas, could bring to light further issues experienced by SMEs.

Ms Carnell cited cases where the banks had dragged out a loan’s sign-off process, then decided against the loan as little as 24 hours before it was expected to roll over, thereby not giving enough time for the business to find an alternative solution.

“Small businesses [are] getting very mixed messages… In a number of the cases that we saw, the bankers were telling [SMEs] ‘no problem, we’ll refinance you’ and then two weeks (or in one case, 24 hours) before the rollover was due to happen, the bank said they changed their mind,” the ASBFEO said.

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“There's no capacity to refinance, to find another bank… and so the business ends up going into default, at which stage their interest rates double or even triple in some circumstances.

“The [cases] where banks actually told people one thing and then did something totally different and where timelines for businesses were just far too short to allow [them] to reorganise their operations… I don't think were brought out nearly enough.”

Another issue that Ms Carnell argued didn’t get enough airtime at the last royal commission hearings is the nature of the relationships between banks and third-party valuers, administrators, and liquidators, which she said are frequently problematic.

The royal commission heard one example where receivers took control of a brand new, unoccupied hotel and then “refurbished it” prior to sale.

“The small business pays for the liquidator or the valuer or the investigative accountant… but they have no input into the appointment in many cases,” the ASBFEO said.

“In our inquiry, we found it interesting and concerning that regularly the investigative accountants that gets sent in to have a look at the business to determine what should happen is then appointed as a liquidator, [which we thought] certainly didn't look right.

“You could argue [that] an investigative accountant ends up financially benefiting from recommending a liquidation if they're going to end up with the job… [This] isn't an occasional scenario; it's very regular.”

She also questioned whether banks are getting “friendly valuations” that work in both the bank’s and valuer’s favour.

“I'm not suggesting valuers and administrators aren't professional people, but if their livelihood depends on bank work, there are some questions to be asked,” Ms Carnell said.

“Is [the] motivation for what you do in the interest of the consumer, who is paying you, or is it in the interest of the bank, who you rely on for work?”

“In situations like that, transparency is really important… You’ve got to really know whether there are any kickbacks, any real incentives for people to act in particular ways [such as] provide a low valuation or a high one, or recommend a liquidation or not, recommend a particular loan product or not.”

Ms Carnell concluded that transparency around the banks’ relationships with third-parties needs further exploration by the royal commission.

Royal commission too short for ‘breadth’ of cases
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