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30 October 2018

Banking code needs major overhaul to address unfair treatment of small businesses

The submission on the interim report of the banking royal commission, lodged by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), dissects the Australian Banking Association’s (ABA) Code of Banking Practice, highlighting where it still falls short of addressing the imbalance of power held by the banks.

As required, the ASBFEO submission addresses the policy and not individual cases or the substance of the interim report.

“Commissioner Hayne reported that the ‘chief protection for small business borrowers … remains the code’, so unless the code delivers fair and equitable outcomes for small business, what’s to stop the banks reverting back to the aggressive behaviour and questionable conduct revealed during the royal commission?” Ms Carnell questioned.

“We have examined the code clause by clause and found banks can still change their risk appetite, call in loans with no notice and choose not to work with small businesses to return a loan to performing when impairment has been caused by factors outside the control of small business.

“We also found that each clause that provides notice periods is offset by a clause giving the bank the right to disregard if, in their opinion, they need to.

“For example, Clause 77 says: ‘we may give you a shorter notice period, or no notice period, if: based on our reasonable opinion …’. Clause 155 says: ‘We may give you a shorter notice period, or no notice, of an unfavourable change if: a) we believe doing so is necessary for us …’.

“Administration and enforcement of the code should be revisited. We want the code enforced by a truly independent body, which the Banking Code Compliance Committee is not.

“Another concern is there are many financial service providers who do not subscribe to any code of conduct and are not members of any external dispute resolution scheme, such as Australian Financial Complaints Authority.

“We also recommend looking at how a code of conduct and access to dispute resolution can be applied broadly across the financial service sector.”

The Ombudsman is pleased Commissioner Hayne supported the view that the small business definition of a loan facility in the code be $5 million and not the current $3 million, as was recommended in the ASBFEO Small Business Loans Inquiry.

“Importantly, the interim report has identified misconduct that breached the code or fell below community standards and expectations,” Ms Carnell said.

“When the royal commission has completed its work, we call on the government to respond to Professor Ramsay's recommendations on a scheme for redress of past disputes which avoids costly court action.”