18 December 2019
Banking Code still unfair to small business: Ombudsman
The Australian Small Business and Family Enterprise Ombudsman Kate Carnell has a range of concerns about the newly approved version of the Banking Code of Practice in effect from March 2020, saying it doesn’t go far enough to protect small businesses.
“The ABA claims it has implemented the Royal Commission recommendations but it has not acted on all of the recommendations including one that is critical to small business,” Ms Carnell says.
“Commissioner Hayne recommended that the definition of a small business should be businesses that apply for a loan up to $5 million and have fewer than 100 employees*.
“Despite our repeated efforts, the Code only protects small businesses with up to $3 million in total debt to all credit providers.
“What that means is that a large number of small businesses, particularly those capital intensive businesses such as agriculture, building and manufacturing, are not covered by the Code.
“While we support approved amendments to the Code to help drought-affected farmers, that same level of protection ought to be given to small businesses in these rural and remote communities that are also suffering.
“Of particular concern, is a new addition to the Code under paragraph 115 b)** which in effect, allows banks to take action against the small business guarantor, before enforcing recovery against the security provided by the small business borrower.
“This is totally unacceptable and has the potential to be seriously detrimental to the small business borrower.
“During the Royal Commission, Commissioner Hayne acknowledged the ABA Banking Code of Practice is the chief protection for small business borrowers and as such, it needs real and meaningful changes to give it teeth.
“While the Code has been improved, the number of get-out-of-jail clauses for the banks still dilute the protections for small businesses.
“We will continue to push for a better framework for a balanced relationship between banks and their small business customers.”
(*) Commissioner Hayne Recommendation 1.10 – Definition of ‘small business’
The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.
115. However, the restrictions under paragraphs 113 and 114 do:
a) not apply if you have specifically agreed in writing after the default notice is issued and we have informed you of the limitations of our enforcement rights under this chapter that they do not apply; or
b) not require us to first enforce any mortgage or other security that the borrower has provided if we reasonably expect that the net proceeds of that enforcement will not be sufficient to repay a substantial portion of the guaranteed liability, or because of the borrower not providing us with information, documents, or access to premises or assets as required, we are unable to reasonably assess whether the net proceeds of that enforcement will not be sufficient to repay a substantial portion of the guaranteed liability.