Royal commission: Ombudsman disappointed with lack of scrutiny over banks “aggressive behaviour” toward SMEs

Small business advocates have expressed disappointment with the interim report from the banking royal commission, which has poured cold water on the prospect of tougher SME lending regulations.

Commissioner Kenneth Hayne’s interim report, released last Friday, has drawn the ire of the Australian Small Business and Family Enterprise Ombudsman Kate Carnell, who says the likes of Commonwealth Bank (CBA) and Bankwest have escaped a degree of scrutiny over “aggressive behaviour” in their dealings with small business.

“[Commissioner Hayne] hasn’t really made many findings, particularly in regard to the small business space. He’s determined that to some extent there’s nothing to be seen in terms of the Bankwest-Commbank scenario, we don’t agree with that,” Carnell tells SmartCompany.

“He’s determined that to some extent there’s nothing to be seen [here] … That’s simply not true.”

Commonwealth Bank notified the royal commission earlier this year that some CBA and Bankwest merchant customers may have been charged fees for merchant facilities they weren’t using or had ceased using.

Carnell says about 2,000 businesses with performing Bankwest loans experienced defaults and “overly aggressive tactics”, such as revaluation of property, changes to loan-to-value ratios, withholding valuation information and applying exorbitant default penalty interest rates.

Carnell doesn’t believe CBA broke the law because the contracts in place before the introduction of unfair contract terms legislation in 2016 gave the bank freedom to “do whatever they wanted to”.

“The concern that [commissioner Hayne] hasn’t addressed [is] whether the approach Commbank took met community expectations,” Carnell says.

Council of Small Businesses of Australia chief executive Peter Strong shared Carnell’s disappointment with the lack of scrutiny over bank behaviour.

“The banks have become disconnected with the business community,” Strong tells SmartCompany.

A Tasmanian farming family who fronted the royal commission has criticised the interim report for lacking any mention of financial compensation for affected business owners.

“It’s going to have to be a money redress to be able to get people’s lives back on track again just so they can restart,” farmer Dimity Hirst told the ABC.

Hayne: Little appetite for tougher regulation

The banking royal commission’s interim report poured cold water on the prospect of tougher regulations guiding small business lending.

“The evidence and submissions provided to the Commission did not reveal any great appetite to change the legal framework,” Hayne wrote.

‘’I did not understand there to be substantial support for changing the legal framework in ways that would bring some or all SMEs within the application of the NCCP [National Consumer Credit Protection] Act.”

Both Carnell and Strong welcomed this finding, citing concern tougher regulation would make it more difficult for businesses to access finance.

“We need to make sure we don’t have an overreaction and it makes it harder for people to secure funds,” Strong explains.

But Strong believes the lending system should be simplified, to make it easier for business owners to navigate.

“Let’s not make it more complicated, let’s make it less complicated,” he says.

Hayne suggested some new protections could be introduced, namely the provision of more information to potential loan guarantors about the borrower and loans themselves.

“Should lenders give potential guarantors more information about the borrower or the proposed loan? What information could be given with respect to a new business?” Hayne wrote, asking for further submissions.

Carnell: ASIC must enforce the code

The Banking Code of Practice, developed by the banking industry, is the main piece of regulation covering small business lending by banks.

Traditionally the code has not been overseen by ASIC, but a new version approved by the corporate regulator earlier this year will commence on July 1 2019.

This code, alongside unfair contract terms legislation, will be crucial to ensuring small businesses aren’t exploited by lenders in the future, Carnell says.

ASIC will be responsible for ensuring banks abide by the code, which among other things commits banks to exercising the “care and skill of a diligent and prudent banker” when considering new loans, or increases to loan limits.

“ASIC has to step up and ensure the new code and unfair contract term legislation is actually implemented,” Carnell says.

There is, however, still disagreement about what constitutes a small business in the first place.

The new banking code defines a small business as meeting three criteria: annual turnover of less than $10 million in the previous financial year, fewer than 100 full-time employees, and less than $3 million in total debt to all credit providers (including any loan being applied for).

Hayne recommended a simpler method, whereby the code would govern loans to any business where the loan itself was valued at less than $5 million.

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