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03 February 2020

Banks still have lessons to learn from Royal Commission: Ombudsman

On the first anniversary of the Banking Royal Commission, the Australian Small Business and Family Enterprise Ombudsman Kate Carnell says banks still have many lessons to learn, while small businesses continue to pay the price of poor behaviour.

“Banks and financial institutions still have a long way to go if they are serious about repairing their relationship with small businesses,” Ms Carnell says.

“Even a year on from the Banking Royal Commission, banks and other large financial institutions are more focussed on passing on their punishment to small businesses.

“For instance, many small businesses in the financial planning industry have faced financial ruin in the aftermath of the Banking Royal Commission, with hundreds of planners bearing the brunt of brutal restructures and fire sales by banks and wealth funds.

“Many of these small business owners are facing the prospect of losing their homes, families and livelihoods as these financial institutions and banks bulldoze their way through their exit strategies.

“Equally the new-look Banking Code of Practice in effect from March this year, fails to sufficiently protect small business borrowers.

“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.

“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.

“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 and their ability to secure guarantors.

“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.


(**)Banking Code of Practice 2019:

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.