Over the course of its hearings, the royal commission received 10,140 submissions – almost two-thirds of which (61 per cent) related specifically to banking. Superannuation contributed 12 per cent of submissions, and financial advice 9 per cent.
Much of the hearings and submissions focused on individual customers, from consumer lending to financial advice, superannuation and insurance.
But in May 2018, Commissioner Kenneth Hayne (pictured during the public hearings) devoted round three of hearings to specifically examine lending to SMEs. Round four also touched on the issue, with its hearings into access to finance for regional and remote communities including a look into finance for farmers.
What will change for SMEs?
In short, very little. While Commissioner Hayne was scathing in his assessment of the culture and practices within the industry more broadly, he was much more sedate in his review of SME lending.
The bold opening statement of the report section dedicated to SME finance effectively summed up this sentiment: “With some exceptions, I generally do not favour altering the rules that govern lending to small and medium enterprises (SMEs).”
Those exceptions focus on a couple of key points:
• The definition of small business: A key point of contention during the hearings revolved around the definition of what constitutes a small business under the Banking Code of Practice, which acts as the primary form of governance over such loans. Commissioner Hayne disagreed with the banking industry that the definition be loans of up to $3 million in value. Instead, he recommended that “The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million”.
• No extension of consumer credit laws: The commission explored existing consumer protection laws under the National Consumer Credit Protection Act (NCCP), but determined that it would do more harm than good by extending these to cover small business, by drying up the amount of lending being made to SMEs. As such, he recommended against any such extension.
• No restrictions or abolition of loan guarantees: Despite examples of banks attempting to enforce guarantees for business loans despite misconduct around means testing and responsible lending, Commissioner Hayne said that such guarantees should continue to be available for use, and to be enforced by banks, as an option for small businesses to secure finance. “If the principles of general law do not prevent enforcement, if the bank has assessed the principal debtor’s ability to repay according to the standard set in the 2019 Banking Code, and if no other provisions of the 2019 Banking Code stand against enforcement, then a guarantee should be enforceable according to its terms,” the report states.
• No obligation for lenders to renew loans: One of core aspects of the SME lending hearings revolved around the way in which banks denied extensions or renewals of business loans. “Matters relating to extending the term of a loan or continuing the terms on which a loan was first made have been a potent source of disagreement between small business borrowers and banks, and a frequent cause of dissatisfaction. This is understandable. If the bank will not extend the term of a loan beyond the term originally agreed or if the bank will do that only on terms the borrower considers unfair, the borrower will often feel let down by ‘his’ or ‘her’ bank. If the borrower cannot refinance elsewhere, the loan agreement will probably be enforced and the borrower’s business will fail,” the report states. But it suggests the new banking code already addresses this matter. “Clause 86 of the 2019 Banking Code will provide, in general terms, that lenders must give three months’ notice of their intention not to renew a loan to a small business borrower who is not in default. I consider that this requirement is appropriate, and that it will go some way to ameliorating the hardship demonstrated in some of the case studies that related to loan renewal and enforcement.” Commissioner Hayne said that, ultimately, no business should ever assume that a loan renewal or extension is guaranteed. “The risk that a term loan will not be extended, and the risk that new and different terms may be sought by the lender as the price for making a new loan agreement, must both rest with the borrower. These are risks that are inherent in any and every business venture that borrows,” he said in the report.
• Farm debt mediation: Commissioner Hayne derided the mismatched approach to farm debt mediation, which is only mandated by four states, and has been treated by lenders as “no more than a step that must be taken before the lender demands and obtains an order requiring repayment of all that is owing” rather than a legitimate means of trying to resolve financial difficulties. As such, he recommended that a national farm debt mediation requirement be introduced to make this a uniform and compulsory standard.
Federal Treasurer Josh Frydenberg said the government “is taking action on all 76 recommendations” from the report, although did not specify whether that meant the government will be adopting all of the recommendations in full.
“It’s a scathing assessment of conduct driven by greed and conduct in breach of existing law and fell well below community expectations,” he said.
“The price paid by our community for this misconduct is immense – and it goes beyond just the financial” he said, referring to “broken businesses and broken lives”.
“From today, the banking sector must change and change forever.”
Some of the major points outlined by Mr Frydenberg include:
• A banning of trail commissions for mortgage brokers
• Ending conflicted remuneration strategies for financial advisers
• Prohibiting the deduction of advice fees from superannuation accounts
• Mandated changes to insurance add-ons, so that they cannot be sold at the same time as the original product
• Adopting the recommendation of a national approach to farm debt remediation, and mandate that such processes be managed by people with an agricultural background
• Creation of a new three-person oversight body for the regulators ASIC and APRA, along with four-yearly capability reviews of them, with one to commence shortly into APRA by former ACCC chair Graeme Samuels.
• Establishing a compensation scheme of last resort, to be managed by the Australian Financial Complaints Authority (AFCA).
In a brief press conference, shadow treasurer Chris Bowen reiterated Labor’s previous promise to “accept in principle all of the recommendations”, and committed to “consult broadly” on implementing these recommendations should it win the federal election.
Mr Bowen called it a “dark day” and a “sobering report”, which has “vindicated” the whistleblowers who had pushed for the royal commission in the first place.
“We regard this report as the minimum of action to be taken to improving” the sector, he said.
Relief for SMEs: COSBOA chief
Speaking to the ABC after the report was released, Peter Strong, head of COSBOA, said the report and its recommendations were a relief.
“For the small business lending area, hopefully this means they can release the funds again,” he said.
He also suggested that the commissions structure changes affect mortgage brokers, not asset finance brokers which he said are pivotal for small business.
Banking industry ‘has seen itself through customers’ eyes: ABA
Head of the Australian Bankers Association Anna Bligh said the report was some “very tough medicine” for the banking industry, but that the commission had opened their eyes to practices they deemed standard but which were clearly unacceptable.
Ms Bligh noted that a number of cases brought before the commission have been referred to regulators for potential criminal charges.
She said that banks are “determined not to miss the opportunity”, but acknowledged that, in light of the revelations throughout the commission, that many people would view this with cynicism.
“I say judge banks not by their words, but by their actions” over the coming weeks and months, she said.