The banking royal commission’s final report will be submitted to the government today before being made public on Monday afternoon.
The report is widely expected to include a laundry list of recommendations designed to break the cycle of appaling behaviour in the sector, but for small businesses, industry rather than government regulation is likely to be the topic of conversation
The royal commission has revealed some truly harrowing details about the behaviour of Australia’s largest banks in respect to their small-business clients, but there is also considerable concern about the credit implications of an overly zealous regulatory response.
In his interim report, Hayne determined there’s little appetite for an extension of consumer credit protections to SME lending among the banks or small-business advocates.
Access to finance is already an issue for Australian SMEs, a problem which has only magnified as public scrutiny on the big banks has intensified over the last year.
With that in mind, the discussion is most likely to centre on the revised Banking Code of Practice, which was signed off on by ASIC last year and will come into effect from July 1, 2019.
Industry code to be scrutinised
Without consumer credit protections covering SME loans, the industry code is the primary piece of regulation governing the relationship between banks and their small-business clients.
The banks are rallying behind the new code, created by their lobby group the Australian Banking Association (ABA), telling Hayne they believe it provides an appropriate regulatory mechanism for SME lending.
That view isn’t shared by Australian small business and family enterprise ombudsman Kate Carnell though, who is pushing for a major overhaul of the document, claiming it provides “too many outs” to the banks.
A reading of the new code highlights some potential issues. Banks don’t have to provide any notice to small-business clients about a default if it believes it’s avoiding a “material increase in credit risk”.
Banks are also given the discretion to employ their “reasonable opinion” of a circumstance in their dealings with small-business defaults.
Meanwhile, the administration and enforcement of the code will be handled by the Banking Code Compliance Committee, which is appointed by the ABA in conjunction with the Australian Financial Complaints Authority (AFCA).
Banks want flexibility retained
SmartCompany understands both sides of politics are adopting a wait-and-see approach with the code and will formulate a position based on whether Hayne raises any significant concerns with the balance of power and enforcement issues.
If Hayne agrees with the assessment put forward by Carnell, significant pressure could be placed on the banks to agree to amendments to the new code before its implementation date.
This could have its own effect on credit availability, particularly if the balance of power in the code changes.
The banks themselves want flexibility in the system to be maintained, particularly in relation to the way in which they evaluate SME loans, despite criticism the process lacks transparency and requires businesses to front-up unreasonable amounts of collateral.
Hayne has honed in on this as an issue and asked the banks to address the way they consider SME loan applications in his interim report.
In response, ANZ and the Commonwealth Bank both submitted that additional regulation in this area would limit credit availability.
“Ultimately, the decision to approve a business loan is a judgement call made by the bank, having regard to a number of factors, including the bank’s level of risk appetite,” CBA said.
There’s little appetite for an outcome that results in a credit squeeze on SMEs, but amendments to the code which address issues outlined by Carnell are unlikely to bolster confidence from the banks.
Bank guarantees to be spotlighted
Hayne is also considering the state of bank-guarantor protections in small-business lending. This was a particular source of horror stories during the commission.
In one case, Westpac told an elderly woman her house was being sold to recoup the losses from a $160,000 loan after her daughter defaulted.
Westpac has since admitted it took too long to process her hardship application and the customer remains in her home, but the case has highlighted a need for tougher protections.
Loan guarantees are typical in small-business lending, with family and friends often providing capital as collateral for loans.
The banks, unsurprisingly, don’t want the status quo to change, believing the industry code is adequate in protecting customers.
Small-business concern has generally centred on the discretion banks have within the current framework, especially given their track record.
NAB, however, doesn’t see this as a problem.
“While the commission has exposed issues in the application of this legal framework, they do not imply that the framework itself is inadequate,” it said in its interim report submission.