The code of conduct governing small business loans requires a major overhaul to prevent large lenders from exploiting power imbalance with SMEs, Australia’s small business watchdog says.
In a formal submission responding to the banking and financial services royal commission interim report, Australian small business and family enterprise ombudsman Kate Carnell has raised a series of broad-based concerns with the Australian Banking Association’s (ABA) Banking Code of Practice.
An updated version of the ABA-created code, which is the primary piece of regulation covering small business lending, will come into effect on July 1, 2019, and for the first time has been approved by ASIC.
However, Carnell says the current version of the code provides major banks with too much discretion in their dealings with small business, is not enforced by a “truly independent body” and does not cover a broad enough range of lenders.
“There are far too many outs for the banks, the enforcement of the code needs to be independent and the entity that enforces it needs to have the power to ensure the banks comply,” Carnell tells SmartCompany.
“The level of protection for small business is patchy, to say the least,” she says.
While the current version of the code obliges banks to provide 30-days notice if a business is found to have defaulted, lenders can provide a shorter notice period, or no notice, if they believe it would avoid a “material increase in credit risk.
Banks have the discretion to employ their “reasonable opinion” of a circumstance in their dealings with small businesses defaults under the code.
“There’s no guarantee they won’t use that approach,” Carnell says.
Questions raised over enforcement
In her 20-page submission to commissioner Hayne, Carnell also called for the administration and enforcement of the industry code to be revised, complaining the Banking Code Compliance Committee is not independent, as it is appointed by the banks.
While the Banking Code of Practice is the primary document regulating small business lending, Carnell and other small business advocates have opposed the idea consumer credit laws should be extended to cover SMEs.
Hayne noted in his interim report there was little appetite for this, primarily because of concern it would make it harder for small businesses to access finance.
Carnell initially expressed her disappointment with Hayne’s interim report, complaining it did not adequately address the concerns of small businesses.
The ombudsman has, however, agreed with his suggestion the definition of a small business loan under the banking code by increased from $3 million to $5 million.
In a statement provided to SmartCompany on Tuesday morning, ABA chief executive Anna Bligh said the new industry code would “lift the bar” on protections for small business.
“Independent enforcement of the new code is in addition to it relevant parts becoming part of contracts between a customer and their bank,” Bligh said.
“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.”
Bligh said enforcement of the code would be “stronger than ever” despite suggestions the compliance committee is not independent enough.
The committee has a range of powers under the code to promote compliance among signatories, including reporting offenders to ASIC and requiring a bank to rectify or take corrective action if a breach has been identified.
Banks can also be required to undertake compliance reviews, accept formal warnings, undertake training programs, and could be reported to ASIC.
However, the BCCC has discretion to “consider the seriousness” of a breach in handing down a sanction and there is no mention of financial penalties in the code.
Carnell says it’s not good enough.
“The whole administration and enforcement of the code does need to be revisited,” she says.
Concern many lenders aren’t covered
Compounding Carnell’s concern, only the ABA’s 32 members are signatories to the new code, and while this represents about 80% of small business lending, there are other institutions which remain unregulated.
“There’s virtually no protection for small business owners if the entity they are borrowing from is not a member of the ABA code or is not one of the big six fintechs that have signed that code of conduct,” Carnell says.
Bligh said she supported her association’s code being applied across the entire industry.
“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.