SMEs little changed by banking royal commission

By Peter Roberts

The banking royal commission has given little hope of change for small business dealings with the banks.

Commissioner Hayne did not recommend extending consumer protections to SMEs, though there are avenues open to legislators that might beef up existing protections.

Hayne said: “With some exceptions, I generally do not favour altering the rules that govern lending to small and medium enterprises.”

“…(this reflects) recognition of the need to ensure that small businesses have access to reasonably affordable and available credit.”

Hayne did recommend extending the definition of small businesses in the Australian Banking Association (ABA) banking code to cover businesses with up to $5 million turnover and 100 employees. Currently this applies to businesses up to $2 million in size with 20 employees.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell noted the Commissioner’s acknowledgement that the code is ‘the chief protection for small business borrowers’ and welcomes the strengthening of the code with enforceable code provisions.

Under the code a breach of such provisions would constitute a breach of the law, however she said protections were inadequate.

Carnell said: “The code has too many ‘get out of jail’ clauses that advantage the banks and it still contains provisions at odds with the unfair contract terms legislation.”

“There is no reason for the ABA not to address these concerns immediately.

“The code needs to provide adequate notice periods of changes or decisions not to roll-over a loan.”

Carnell said where notice periods are defined, the code allowed lenders to ignore them.

“For example, clause 77 allows lenders to give a shorter notice period or give no notice where they require full repayment of a loan based on their ‘reasonable opinion’ or to protect their risk.

“Clause 213 requires lenders to only cooperate and comply with the request from their own code compliance body if they consider the request ‘reasonable’.

“For the code to be meaningful rather than tokenistic, there needs to be an effective mechanism in place to ensure adherence.”

While the Ombudsman agrees the National Consumer Credit Protection Act does not apply to lending for small businesses, this does not address the current credit crunch driven by the lack of direction from the regulators on what constitutes responsible lending for small business.

“This results in uncertainty for banks who adopt an ultra-conservative approach, which is detrimental to access to finance,” Ms Carnell said.

“The Royal Commission report has not addressed this issue and has left it open to the banks, which changes nothing.”

The Ombudsman said the Royal Commission has emphasised protections required for the agribusiness sector, but has failed to recognise exactly the same circumstances apply to many small business loans.

“The impact of default penalty interest rates, the appointment of receivers and the devastation of natural disasters is not limited to only agricultural businesses. The impact of the floods on Townsville businesses is a live example,” she said.

“The government’s announcement to expand the remit of AFCA for a period of 12 months to accept applications for disputes dating back to 1 January 2008, is a step in the right direction, but will not result in access to justice for those businesses that don’t fit within the scope.

“We call on the government to implement the findings from Ramsay’s supplementary report on a scheme for past disputes that includes an independent forum to hear past disputes and government supported legal case funding. These businesses simply do not have the resources to take misconduct to court.

“The Royal Commission has failed to address conduct relating to third parties such as receivers, liquidators and valuers, in relation to small business financial services disputes.

“My office has the legislative powers to conduct such an inquiry as this remains unfinished business.”

Picture: Kate Carnell

With Helen Hull of the First5000 group

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