From miscalculating fees to abusing the trust of borrowers, the Hayne royal commission uncovered a range of issues with the big four banks’ past dealings with small business customers.
However, while the major banks had eventually confessed that their small business lending practices fell below community standards and expectations after hearing the testimonies of customers and guarantors, their submissions to the royal commission’s interim report dismiss the need for changes to existing legal frameworks or the introduction of new measures to protect small business borrowers.
All the big four banks were firmly against the idea of extending the National Consumer Credit Protection Act 2009 (NCCP Act) to small business borrowers and their guarantors — a view that is also held by small businesses themselves.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, pointed out in her royal commission submission that the NCCP Act determines the ability to service the debt based only on historical information, not future projected earnings, meaning that it would lock out a “very high proportion of businesses, especially new businesses or businesses looking to expand or grow, [as they] would not be able to demonstrate the ability to service the debt on their historical financials alone”.
National Australia Bank (NAB) said that the Australian Banking Association’s revised Code of Banking Practice, set to come into effect on 1 July 2019, provides “the necessary flexibility to accommodate a wide range of customer circumstances and allow the lender to be appropriately satisfied that the customer can repay the loan”.
“[The code] is, and should remain, the core enquiry in the area of small business lending because small business customers are diverse and require a broad range of flexible lending solutions and services,” NAB stated in its submission.
“The enquiries and risk involved in lending to a well-established customer will be very different to that of lending to a customer establishing a new business. This requires a case-specific assessment of the nature of the borrower’s business, or proposed business and borrowing needs.”
In addition to the banking code, Westpac pointed out that protections for small business borrowers apply under the common law and the Corporations Act and ASIC Act, including restrictions on misleading or deceptive conduct and unfair contract terms, while pointing out the existence of external dispute resolution schemes, such as the Australian Financial Complaints Authority (AFCA).
Similarly, ANZ said that these mechanisms are “adequate and appropriate”, especially when taking into consideration recent reforms, such as the removal of unfair terms in credit contracts and the revised banking code.
Commonwealth Bank argued that changes to legal frameworks would likely “limit or constrain the circumstances in which lenders may make credit available and/or increase the cost of lending”, which in turn “has implications for economic activity and the viability of certain businesses”.
“The [CBA Group] acknowledges that, from time to time, cases of concern will arise, some of which featured as case studies in Round 3, but to regard such cases as emblematic of the operation of the legal framework, and therefore requiring changes to this framework which would impact all borrowers, would be the wrong conclusion,” the major bank stated in its submission.
ANZ Bank and Commonwealth Bank expressed their support for the current definition of small business in the banking code as an entity with “less than $3 million in total debt”, an annual turnover of less than $10 million in the previous financial year, and less than 100 full-time equivalent employees. ANZ noted that this definition covers 98 per cent of its business customers.
However, the Small Business Ombudsman has been adamant that the definition needs some tweaking.
Ms Carnell suggested in her royal commission submission that the banking code’s current definition of small business as an entity with “less than $3 million in total debt” be changed to make the figure less than $5 million instead. This is to cover “capital-intensive small businesses such as agriculture or manufacturing” — a recommendation supported by Commissioner Kenneth Hayne.
The ASBFEO cited a finding from the Khoury review that such an increase would cover an additional 10,000 to 20,000 businesses, further noting that the revision would allow more businesses to fall within the remit of AFCA, which considers disputes regarding loans of up to $5 million.
The Ombudsman didn’t just call for small business to be redefined; she said the code requires a “major overhaul” to address small business’ “asymmetry of power, lack of resource, knowledge and time in their dealings with banks”, pointing out that such businesses do not have the same protections as consumers.
“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 [from] reverting back to the aggressive behaviour and questionable conduct revealed during the royal commission?” Ms Carnell said in a statement.
“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.”
Among some of the clauses in the banking code that the Ombudsman feels are problematic include those in which the provision of longer notice periods to small businesses are offset by clauses giving the banks the right to disregard the notice period if they think they need to.
The Ombudsman additionally raised the point that the code only applies to members of the ABA, yet it’s the “chief protection for small business borrowers”. As such, the ASBFEO suggested looking at how a code of conduct, as well as access to external dispute resolution scheme, can be applied broadly across the financial service sector.