Bankers’ association considers adopting “small business test” in response to Code of Practice review

Small business ombudsman Kate Carnell has said the banks really have no excuse not to adopt recommendations from recent reports into their interactions with SMEs, but the Australian Bankers’ Association’s response to a review of the sector’s code of practice suggests not all suggestions will be adopted.

On Tuesday the banking industry responded to recommendations from a review of the ABA’s Code of Banking Practice by independent reviewer Phil Khoury. Khoury’s review echoed calls made by Carnell in her report on small business lending practices to improve the clarity and simplicity of terms and conditions for small businesses when interacting with banks.

Khoury’s report focused on how the banking code could be rewritten with consumers and business owners in mind, and in an executive summary he said he’d “focused as much on the challenge of rebuilding trust between banks and their customers as … on the many technical and specific fairness issues raised with me”.

The recommendations that relate to small business included calls for a specific and separate part of the code that focuses on SMEs, as well as altering the definition of small business loans to those worth up to $5 million.

However, while ABA supports a number of the recommendations for SMEs “in principle”, it looks unlikely the sector will budge on the definition of a small business loan, with a preference to cap the loan amount at $3 million.

Read more: Why are ASIC and Kate Carnell teaming up to take on the big banks over small business loans? A SmartCompany explainer

“Based on bank lending data, the ABA estimates this definition would capture 97% of bank business customers. Businesses with total lending above $3 million tend to be larger and more sophisticated businesses,” the ABA said in its response.

However, the association said it would instead propose a “small business test” for determining whether a company could be considered a small business for the purposes of taking out a loan. To qualify, a company would have to employ 20 or fewer people, or 100 or fewer if it was in manufacturing; have an annual turnover of $5 million or less; and not have a loan that exceeds $3 million.

However, Carnell has previously told SmartCompany the $5 million threshold was necessary to capture all small businesses, particularly those in farming.

The Khoury report also recommended extending the amount of notice banks would have to give when unilaterally changing loan terms from the current window of 10 business days to 30 business days, and reducing the number of reasons a bank can use to vary those terms.

On this point the ABA said it agrees “in principle”, but would prefer to extend this to 30 calendar days, rather than 30 business days. The sector also wants a list of exemptions through which it can vary loan terms for reasons other than a business being unable to make payments, including if the company goes into liquidation, if the company is wound up or if there are “animal welfare issues”.

When Khoury’s report was released earlier this year, Carnell told SmartCompany that if the banks don’t adopt the suggested changes, it would show they “aren’t serious” about actual reform, especially because the same issues had been raised in a number of recent inquiries into the sector’s treatment of smaller operators.

“A chunk of stuff [raised] is the same. You’d have to ask, what is the excuse? Why wouldn’t the banks pick up on this now?”

However, the ABA has said it will adopt a majority of the recommendations and is committed to making things easier for small business customers.

“We need to do more to help these customers through good times and bad and support them in growing their businesses,” the association acknowledged.

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