Over the past two days executives from the big four banks have been questioned by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell on how they treat their small business customers, especially in difficult times. Due to the significant power imbalance, small business owners who feel they have been harshly treated have limited access to justice.
The ASBFEO will now come up with recommendations to the federal government to better protect SMEs from unfair treatment by banks. Here are some of the issues raised with the banks that are likely to feature in Carnell’s recommendations.
Access to justice
The Financial Ombudsman Service (FOS) works well for consumers but not small businesses. Currently larger customers’ access to justice is limited to expensive and time consuming legal action and more recently to internal bank customer advocates. But there are concerns about these in-house functions in terms of outcomes and independence. Other than listening to the customer’s complaint it is unclear what the advocate can actually do. And while these advocates operate independently of the bankers who have made the decisions, there remains a concern about their independence, bearing in mind that any customer who has an unresolved complaint with the bank is not likely to have a high level of confidence that someone from within that organisation is going to give them a sympathetic hearing.
An independent SME dispute resolution body is needed. It may be that a one-stop shop approach under the auspices of the FOS is the best way to structure this. The biggest concern with establishing an independent formal appeals process is that it would require skilled people capable of delivering quick outcomes. Another concern is ensuring there is clarity around which regime applies to whom.
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Better engagement with valuers and investigative accountants (IA)
Businesses pay for these reports and are entitled to see the reports, as well as the instructions upon which the reports are based. They should also have the opportunity of discussing the expert’s findings before and after they are finalised and presented to the bank.
Improved communication and transparency
Banks need to take more steps to ensure customers clearly understand their rights including:
- The avenues of redress, including FOS and the internal customer advocate;
- What it means when the file is transferred from the relationship team to the credit department; and
- Timing about critical dates, such as repayment or expiry dates.
Another concern when it comes to transparency is the perception of a conflict of interest when an IA is subsequently appointed as a receiver and manager to a business. There can be advantages in having a receiver and manager who previously conducted the IA report (time savings being the major one) but there remains an understandable perception that there is a conflict of interest if the firm that conducts the IA report is subsequently appointed as receiver and manager. Whether it is reality or not, this perception can be dealt with by mandating that IA’s are unable to be subsequently appointed as receivers and managers.
Loan documentation is complex and one-sided, and needs to be simplified so that borrowers who have limited time, knowledge and access to professional advice are not disadvantaged. Examples of this include:
- Removal or limitation of non-monetary events of defaults in loan agreements, particularly where these defaults relate to external events beyond the control of the business owner; and
- Banks need to give SMEs reasonable time to make alternative arrangements when the bank decides it wants its money back.
Code of Banking Practice
The current Code of Banking Practice is a non-binding piece of self-regulation that Carnell described as “high on principle and low on delivery”. The ASBFEO wants to see the Code registered with the Australian Securities and Investments Commission, made enforceable and written in plain English.
A collaborative forum
This review has been conducted in a more collaborative manner than the recent parliamentary inquiry that came across as a contest between politicians looking to score points against defensive and well-scripted chief executives. This forum was noticeably different and credit for this must be given to Kate Carnell and Anne Scott, as well as the bank executives, the majority of which were the heads of the business banking divisions. The last banker to appear was Westpac’s David Lindberg and he impressed by opening with five recommendations that Westpac has or is implementing, including the removal of all non-financial covenants for new property-secured loans of less than $1 million.
Most of the issues raised by Carnell and Scott were given support of varying degrees by the bankers although it will be interesting to see their formal responses once the ASBFEO’s recommendations have been made public, which is expected within the next few weeks.
Of all the 17 inquiries into the banking sector since 2008 this one has the potential of making some quick and meaningful impact on redressing the power imbalance between banks and their small business customers.