Government report into small business lending puts blame on the banks
The report made 15 key recommendations, 11 of which are directed at the banking industry.
The Turnbull Government has released its recommendations following the small business loans inquiry, commissioned by the Government in August 2016. This is not the first time the small business lending market has come under scrutiny, with 17 inquiries and reviews held since the GFC and 40 recommendations made to improve the sector. However, according to the Government, the "banking industry has taken little action".
This time, minister for revenue and financial services Kelly O'Dwyer said that the Government expects a change from the banking industry.
"The Government expects the banking industry to give the highest priority to careful consideration of the 11 recommendations that focus on changes to the way banks deal with their small business customers. The Government will expect the banking industry to provide a considered response to the report, and a proposed plan of action to address the issues of concerns raised," she said.
The recommendations, most of which have implementation deadlines of 1 July 2017, are as follows:
Changes to loans
- Banks cannot default a loan for any reason where the business has made loan repayments and acted lawfully (loans under $5 million)
- Banks need to provide 30 business days notice for changed to general restriction clauses and covenants to give businesses more time to respond and react
- Banks need to provide rollover decisions 90 business days before loans mature (loans under $5 million)
- Banks must provide a one-page summary of clauses and covenants that might trigger a default
- Banks must introduce a small business standard contract that's written in plain English (loans under $5 million)
- The banking industry must fund an external dispute resolution one-stop shop with a dedicated small business unit. The unit needs appropriate expertise to resolve disputes for credit facilities up to $5 million.
- Banks need to establish a customer advocate to consider small business complaints and disputes that may/may not be subject to internal dispute resolution
- External dispute resolution schemes need to be expanded to include disputes with third-parties that have been appointed by the bank, such as valuers.
Government and industry bodies
- The Australian Bankers' Association six-point plan must be strengthened by publishing individual bank implementation plans
- The revised Code of Banking Practice 2017 must be written in plain English and include a dedicated "small business" section. It also must be approved and administered by ASIC.
- There needs to be a nationally consistent approach to farm debt mediation
- ASIC must establish a Small Business Commissioner
Dealings with valuers and accountants
- Banks must provide borrowers with a choice of valuer and a copy of the instructions given to the valuer
- Borrowers will receive an identical copy of instructions given to the investigating accountant by the bank as well as a copy of the final report
- Banks must implement procedures to reduce the perceived conflict of interest of investigating accountants
The recommendations have been welcomed by the Australian Bankers' Association (ABA).
"The issues raised by Australian Small Business and Family Enterprise Ombudsman Kate Carnell in this report are important," ABA chief economist Tony Pearson said.
"The ABA supports simplifying the current external dispute resolution system, creating an easier ‘one-stop-shop’ model and expanding the scheme so more small businesses can have complaints heard without needing to use the courts.
“At the same time, banks are improving their own complaints handling processes and appointing new dedicated customer advocates. Six banks have already appointed their customer advocate, with the other banks committed to have theirs in place by April,” he said.
The business banking inquiry was not the first inquiry for 2016, with the Big Four facing questions over general banking practices earlier in the year. Despite multiple reviews into their practices, Pearson says the banks are committed to change.
O'Dwyer MP says the Government is expecting a response to the report and a plan of action from the banks no later than the next House of Representatives Standing Committee on Economics public hearings on 3 March 2017.