Banking Royal Commission Interim Report: Business Lending in the Clear

James Eyers| Australian Financial Review| 28 September 2018

https://www.afr.com/business/banking-and-finance/financial-services/banking-royal-commission-interim-report-business-lending-in-the-clear-20180928-h15zcu

Business lending is highly unlikely to face calls for tougher regulation in the final report of the royal commission, after Commissioner Kenneth Hayne suggested the hearings did not identify any need for consumer law protections to be extended to cover small business loans.

“The evidence and submissions provided to the commission did not reveal any great appetite to change the legal framework,” Commissioner Hayne says in the interim report on Friday.

“In particular, 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 Act,” a reference to the National Consumer Credit Protection legislation.

During the inquiry’s hearings, SME lending was a rare area where the banks came up on top. Senior counsel assisting the commission, Michael Hodge, QC, described relationships between business borrowers and banks as “almost always complicated” and said they are “intertwined with the operation of the business and often also the personal financial situation of the individual or individuals behind the business”.The interim report reflected this assessment. Even though the commission heard harrowing evidence relating to the provision of a guarantee by an invalid pensioner, Carolyn Flanagan, to her daughter to allow her to take out a loan from Westpac, Commissioner Hayne said he was not able to say, from the material presented in evidence, whether the guarantee was unenforceable.

He described “the central and perhaps irreplaceable role played by guarantors in securing funding for small businesses and the particular vulnerability of small businesses to failure”.

Yet the interim report did point to the “disconnect between how the law, and lenders, may treat third-party guarantors”. This suggests the final report might push towards better disclosure standards.

Commissioner Hayne wants new submissions to answer whether lenders should give potential guarantors more information about the borrower and the proposed loan, to ensure they aren’t being abused.

Code disagreement

The SME part of the interim report also reveals gaps in the Code of Banking Practice as it relates to business lending.

The code says banks should exercise care and skill when issuing business credit, and assess whether a small business customer can repay a loan based on their financial position and account conduct. However, the report said there is “disagreement about the bounds and content of these obligations”.

“That is significant given that they are the obligations that provide most practical protection to small businesses seeking funding from subscribing banks,” Commissioner Hayne said.

Carolyn Flanagan being questioned by senior counsel assisting Michael Hodge, QC, at the inquiry on May 21.
Carolyn Flanagan being questioned by senior counsel assisting Michael Hodge, QC, at the inquiry on May 21. Internet

The report also said customers successful in making claims against banks struggled to achieve what they believed was a satisfactory outcome. The interim said this raises questions about the efficacy of external dispute resolution services, like the Financial Ombudsman Service.

Commissioner Hayne wants to know if he should make recommendations in the final report on whether the government’s new Australian Financial Complaints Authority should have expanded powers to waive a business customer’s debt, or whether it should be able to awarding compensation for losses or harm caused.

Peter Strong, CEO of the Council of Small Business of Australia, said the banking system has favoured the big banks over SMEs over the past few decides, and he backed reviewing of the Code of Banking Practice to ensure its protections are sufficient.

“There has been a failure of consultation with small business about our rights in the past, and this report shows that they now need to be taken on board,” Mr Strong said.

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