15 August 2018
Banking Code of Practice offers small business a safeguard
By Kate Carnell
Perseverance is a critical factor in advocacy success. When the Australian Securities and Investments Commission (ASIC) approved the revised version of Australian Banking Association’s Banking Code of Practice, it was a significant milestone for us.
The new Banking Code of Practice puts into practice most of the recommendations in our Small Business Loans Inquiry report, which we have been publically arguing for on a weekly basis since it was released in February 2017.
The new code contains significant positive initiatives and protections for small business, and since it is ASIC approved, ASIC will ensure it is enforced properly.
As recommended in our inquiry, the code has a dedicated new small business chapter, which requires a contract to be concise and written in plain English, not legalese.
There are significantly better timeframes around the loan contract; if your contract with the bank is due to expire, the bank must give you at least 90 days’ notice if they are not going to renew the loan. In the past, there was no timeline attached – you might have received just 24 hours’ notice, with insufficient time to seek alternative financing.
The bank can no longer change the loan contract in any way without a reasonable timeline, which is now 30 days or more. And the bank can only change that contract under very narrow circumstances, which gives small businesses more protection.
New small business loan contracts of up to $3 million will no longer include the unfair ‘non-monetary default clauses’, which previously gave banks almost unfettered powers. If a small business has met all its loan payment terms and hasn’t contravened any laws, the bank will not default a loan using non-monetary default clauses. Existing loan contracts backdated to 12 November 2016 will have these clauses removed and banks will remove unfair contract clauses from all small business loans contracts written after this date.
We are disappointed the cap for small business loans is still $3 million. We suggested $5 million as that amount is more appropriate for capital intensive small businesses such as farms, building and manufacturing.
However, ASIC says it will closely monitor the extent of the code’s coverage. This will be done using data collected from banks every quarter, and that data will be published online every six months. We will be keeping a close eye on this to ensure it does cover up to 97% of small business in Australia, as has been quoted. If certain sectors are disadvantaged, we will again call for a change to the threshold.
There will be improved communication and transparency when using valuers and insolvency practitioners and receivers, with valuation reports and instructions to be provided to customers.
The establishment of the Australian Financial Complaints Authority (AFCA), another of our recommendations, will significantly improve small business access to justice. AFCA will open for business in November, with an independent Board that includes small business representation, will deal with small business disputes with a loan facility up to $5 million and will have the capacity to give compensation of up to $1 million.
Small businesses don’t have the time or the money to hire lawyers and challenge banks and other financial institutions through the court system. We hope AFCA will significantly reduce the need for litigation.
An independent Customer Advocate embedded in each bank who understands small business and is able to handle complaints should improve customer experience. Hopefully this will mean that problems will be solved quickly, without the need to go to AFCA.
The ABA says the Banking Code of Practice, to come into effect from 1 July 2019, is enforceable and that banks with small business customers in Australia will be required to sign up to the new code if they wish to be members of the ABA.
Representing the interests of Australia’s small businesses and family enterprises presents daily challenges across a huge range of issues, so when we experience a win, we often don’t have the time to take a breath and reflect on what we have achieved.
We consider the revised Banking Code of Practice as a positive step to improve banks’ small business lending practices, provide a safeguard against misconduct and possibly, restore confidence in banks among small businesses.
That said, I urge all small businesses that are having problems with their bank or financial institution to get in touch with us quickly. The earlier we can investigate a problem, the more chance we have of achieving a good outcome.