Ombudsman’s report: Big reforms for small business banking

The Australian Small Business and Family Enterprise Ombudsman’s report for the inquiry into small business loans was released on 6 February. The Ombudsman, Kate Carnell AO, made 15 recommendations to the government and the banking sector to reform regulatory practices for small business lending.

It appears that a number of submissions made to the inquiry related to concerns held by customers regarding:

• the involvement of third party valuers, investigative accountants and receivers
• contracts which the Bank can make unilateral changes to and are said to be one-sided
• the difficulties in challenging bank’s decisions and actions, particularly if a dispute is outside the scope of the Financial Ombudsman Service.

A full list of the Ombudsman’s recommendations is set out below, and a copy of the report is located here. The report includes an explanation of each recommendation.

Financial Services Minister Kelly O’Dwyer has said that the government is expected to provide a response to the report in early March. The timeframe recommended by the Ombudsman for implementation of the recommendations is short (see dates below), having regard to the proposed new documents that banks would need to implement.

There is no doubt that there is community concern regarding the conduct of banks.  However, changes to the process for briefing and appointing valuers, independent accountants and receivers will not alter the unfortunate reality that asset prices can fall and a failing business can be worth very little.

We will continue to provide updates on the proposed recommendations and other regulatory reform in the banking sector.

Ombudsman’s recommendations

• The Australian Bankers’ Association’s six-point plan must be strengthened by publishing individual bank implementation plans, including key milestones and deliverables. Outcomes against these plans must be published (implementation by 1 July 2017).
• The revised Code of Banking Practice 2017 be approved and administered by the Australian Securities and Investments Commission under Regulatory Guide 183. The Code must be written in plain English and include a dedicated section on small business clarifying how breaches will be enforced (implementation by December 2017).
• For all loans below $5 million, where a small business has complied with loan payment requirements and has acted lawfully, the bank must not default a loan for any reason. Any conditions must be removed where banks can unilaterally:
  • value existing security assets during the life of the loan; and
  • invoke financial covenants or catch-all ‘material adverse change’ clauses (implementation by 1 July 2017).
• A minimum 30-business day notice period to all changes to general restriction clauses and covenants (except for fraud and criminal actions) be added to give borrowers more time to respond and react to a potential breach of conditions (implementation by 1 July 2017).
• For loans below $5 million, banks must provide borrowers with decisions on roll over at least 90 business days before loans mature, so borrowers can organise alternative financing. A longer period of time should be given for rural properties and complex businesses that would take longer to sell or refinance (implementation by 1 July 2017).
• For loans below $5 million, banks must provide a one-page summary of the clauses and covenants that may trigger default or other detrimental outcomes for borrowers (implementation by 1 July 2017).
• For loans below $5 million, banks must put in place a new small business standard form contract that is short and written in plain English (implementation by December 2017).
• All banks must provide borrowers with a choice of valuer, a full copy of the instructions given to the valuer and a full copy of the valuation report (implementation by 1 March 2017).
• Every borrower must receive an identical copy of the instructions given to the investigating accountant by the bank and the final report provided by the investigative accountant to the bank (implementation by 1 July 2017).
• Banks must implement procedures to reduce the perceived conflict of interest of investigating accountants subsequently appointed as receivers. This can be achieved through a competitive process to source potential receivers and by instigating a policy of not appointing a receiver who has been the investigating accountant to the business.
• The banking industry must fund an external dispute resolution one-stop-shop with a dedicated small business unit that has appropriate expertise to resolve disputes relating to a credit facility limit of up to $5 million.
• Banks must establish a customer advocate to consider small business complaints and disputes that may or may not have been subject to internal dispute resolution.
• External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigating accountants and receivers, and to borrowers who have previously undertaken farm debt mediation.
• A nationally consistent approach to farm debt mediation must be introduced.
• The Australian Securities and Investments Commission must establish a Small Business Commissioner.