The ASBFEO inquiry investigated a number of allegations of unfair conduct by the big four banks towards SMEs.
According to Ombudsman Kate Carnell AO, the big four banks consistently engage in practices that have caused significant harm to some small business customers. She concluded that many loan contract arrangements between banks and small businesses put borrowers at a distinct disadvantage.
“Fundamentally, what we’ve found is that small businesses who take out a loan do so under the impression that if they keep up their payments, they will stay out of trouble. The reality is that this is not the case,” she says.
“Clauses contained in standard small business loan contracts give banks an inordinate level of power over the borrower, who has zero ability to do anything about it. Basically, the terms in these contracts allow the bank to take action to protect itself from financial risk, by inflicting added demands on the borrower.”
As an example, Ms Carnell points to clauses permitting banks to conduct a new valuation on the assets securing a loan.
“If the value is found to have fallen, the borrower faces significantly increased – and potentially unmanageable – loan costs,” she says.
“Banks also have the power to unexpectedly call in the loan, and demand repayment in an unrealistic time frame. So what ends up happening is that through no fault of their own, small businesses could quickly find themselves in default, even though they’ve made each loan payment, on time, every time.”
Ms Carnell says that, despite arguments from the banks to the contrary, these clauses are actively used against business borrowers.
“The cases we examined during our inquiry highlighted the glaring need to ensure small business bank customers are provided with simple standard contracts, that are written in plain English, and that get rid of the clauses giving banks all the power,” she states.
“It’s also clear from the cases we looked at that current thresholds governing small business external dispute resolution are insufficient, so we will certainly support work in establishing a mechanism to provide timely and affordable access to justice for cash-strapped small businesses.”
Ms Carnell adds: “Since the GFC, there have been 17 inquiries and reviews that have produced more than 40 recommendations over the years relating to the small business sector. Despite this, the banks have consistently failed to implement changes to address persistent problems.
“Frankly, the banks take ‘kicking the can down the road’ to new levels. This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible. This report is a living document; it’s only the beginning of our work in this area.”
The Australian Bankers Association (ABA), which represents the banks, issued a statement welcoming the recommendations.
“Banks have heard the problems raised by small businesses and farmers and are focused on making banking better for them,” said ABA chief economist Tony Pearson.
“This includes being more transparent and flexible in loan arrangements, and setting new standards on appointing receivers and valuation practices.
“The ABA is also working with small business organisations to make sure they have the information they need to manage and grow their businesses, including revamping the existing Financing Your Small Business website,” he said.