In its submission responding to the banking royal commission’s interim report, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) said the new code still fails to offer adequate protections for smaller businesses, despite it acting as their primary source of protection in their dealings with the financial services sector.
“Commissioner Hayne reported that the ‘chief protection for small business borrowers… remains the code’, so unless the code delivers fair and equitable outcomes for small business, what’s to stop the banks reverting back to the aggressive behaviour and questionable conduct revealed during the royal commission?” Ombudsman Kate Carnell said in a statement accompanying the submission.
“We have examined the code clause by clause and found banks can still change their risk appetite, call in loans with no notice and choose not to work with small businesses to return a loan to performing when impairment has been caused by factors outside the control of small business.
“We also found that each clause that provides notice periods is offset by a clause giving the bank the right to disregard if, in their opinion, they need to.”
Ms Carnell also said the code does not cover all lenders and financial services providers, creating a gap in the protections and oversight available to SMEs.
The ASBFEO’s submission noted that “similar to consumers, small businesses have an asymmetry of power, lack of resource, knowledge and time in their dealings with banks [but] small businesses do not have the same protections as consumers”.
It identified four key problems that SMEs face in their dealings with lenders:
- A wide variation of conduct that lenders deem acceptable due to the significant level of discretion and commercial judgement available to banks for initial lending and managing loans in financial difficulty.
- Complex, non-negotiable, one-sided loan contracts, coupled with gaps in legislation and regulations, that make it legal for lenders to behave in ways that – in relation to loans – are unethical, unreasonable, lacking in transparency and do not meet community expectations.
- Borrowers in financial difficulty unable to pursue their rights though the courts because of a lack of financial capacity to fund a case against a bank that could cost hundreds of thousands of dollars and could take years to resolve.
- Significant gaps in the coverage of mediation and external dispute resolution schemes leaving borrowers without the means to have their disputes with banks properly tested and appropriate compensation determined.
Among its recommendations to the royal commission, the ASBFEO is pushing for:
- A simplified definition of what constitutes a small business under the Code of Banking Practice to be a commercial loan up to $5 million, rather than the code’s current $3 million threshold.
- Remove small business lending from the National Consumer Credit Protection (NCCP) regulatory framework, so as to avoid restricting the flow of credit to businesses. (The Reserve Bank has already warned the royal commission is leading to tighter lending standards, which may be squeezed further over the coming months.)
- Further the review the Code of Banking Practice to address the power imbalance and gaps in SME protections.
- Explore how the code – which was developed by the Australian Bankers’ Association (ABA) lobby group – can be extended to cover financial services providers that are not members of the ABA.
- Encourage ASIC to play a greater role in enforcing compliance with unfair contract terms rules. (The regulator was slammed by the royal commission and the government over its failure to take a tough approach on banking misconduct.)
- Remove pre-set default interest rates of around 18 per cent on SME loan contracts and cap the default margin at a more reasonable rate.
New code ‘lifts the bar’, says ABA
The ABA hit back at the Ombudsman's claims, suggesting the new code, which is due to take effect from 1 July next year, “lifts the bar and provides greater protections for all customers, including small businesses”.
Responding to the ASBFEO submission, the ABA's CEO, Anna Bligh, said there are already plans to provide greater oversight of compliance with the new code.
“A new enforcement body the Banking Code Compliance Committee, with greater powers, will be created to monitor compliance and apply sanctions if warranted,” she said.
“Independent enforcement of the new code is in addition to it relevant parts becoming part of contracts between a customer and their bank. The Code, approved by ASIC, will be used by the Australian Financial Complaints Authority, to be launched on November 1, as the benchmark when investigating complaints.”
Ms Bligh also noted that the Ombudsman had previously recognised the introduction of some “significant positive initiatives and protections for small business” and is a “positive step to improve banks’ small business lending practices, provide a safeguard against misconduct and possibly, restore confidence in banks among small businesses”.
However Ms Bligh agreed that the new code should be expanded to cover the entire industry and not just ABA members.
“We strongly support the Ombudsman in her call for the standards in the new Banking Code of Practice be adopted across the entire industry and include credit unions, building societies and other lenders to ensure there are no gaps in protections for customers,” she said.