ABA responds: Big reforms for small business lending are on their way

On 28 March 2017 the Australian Bankers’ Association (ABA) released its response to Mr Phil Khoury’s independent review of the Code of Banking Practice (Code) issued on 20 February 2017 (Khoury Report). The Code applies to personal and small business bank customers and sets out the banking industry’s key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services. Our update on the Khoury Report is available here.

On 28 April the ABA also responded to the Australian Small Business and Family Enterprise Ombudsman’s report which was issued on 6 February 2017 (Carnell Report).

The Carnell Report was produced by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) following her investigation into the adequacy of the law and practices governing financial lending to small businesses. Our update on the Carnell Report is available here.

The ABA has not accepted several key recommendations made by the ASBFEO, setting the scene for a showdown between the two bodies. With banks under fire in the recent Federal Budget and faced with the announcement of a new Australian Financial Complaints Authority which will have broader jurisdiction and wider powers than FOS, we will report on further developments as they arise.

Response to Khoury Report

Overall, the Khoury Report recommended a complete redraft of the Code with a ‘modern structure’ using key principles, in plain language with fewer carve-outs and exceptions, with supporting detail in separate Industry Guidelines. Many of the report’s recommendations were similar to recommendations made in the Carnell Report. The 240 page report made a total of 99 recommendations. Approximately 20 of these recommendations related to small business lending which, if adopted, would result in significant reform of small business banking practices.

Of the 99 recommendations recommended by the Khoury Report, the ABA supports 61 in their entirety. There are 19 recommendations that it supports in principle, 10 that it supports in part, and in respect of the remaining nine it either needs more time to consider the recommendation or disagrees with it entirely.

In our previous update on the Khoury Report, we outlined five key recommendations impacting small business lending. The ABA’s response to those five recommendations is:

Recommendation Khoury Report ABA response
1. Broadening the definition of ‘small business’ (recommendation 5) Recommended that the definition of ‘small business’ be expanded to include any business with fewer than 100 employees and where the business has a credit limit of less than $5 million per credit facility. The ABA disagrees with the definition of ‘small business’. It proposes that the definition of small business instead includes businesses where any one of the following apply:

  1. the number of employees is less than 20, or less than 100 if the business includes the manufacture of goods [no change from the current Code] or
  2. annual turnover is less than $10 million or
  3. the size of loans for business purposes (including to related entities) and from all credit providers is less than $3 million [our emphasis].
2. Further disclosure of terms and conditions (recommendation 7) Recommended better disclosure of terms and conditions by way of a summary statement (perhaps in table form). The ABA supports the recommendation in principle and notes members will use ‘best endeavours’ to produce a one page summary of terms and conditions.
3. Notice period before enforcement proceedings (recommendation 11) Recommended that 30 days’ notice to be given to the borrower before beginning enforcement proceedings, unless urgent action is necessary to recover the debt or to avoid a loss in value of the security. The ABA supports this recommendation in full, save that this applies to a smaller pool of small business customers as per the definition of ‘small business’ set out at point 1 above
4. Perceived conflicts of interest between investigating accountants and receivers (recommendation 12) Recommended that lenders have ‘arrangements’ in place to address potential conflicts of interest between investigating accountants and receivers. The ABA supports this recommendation in full and commits to developing best practice guidelines on banks’ appointments of investigative accountants, receivers, administrators and liquidators for small businesses. These will include adequate arrangements to reduce perceived conflicts of interest.
5. ASIC approval of the Code (recommendation 99) Recommended that the ABA seek ASIC approval of the Code under the Corporations Act 2001 (Cth). This is controversial as previously the Code was voluntary and overseen by the Code Compliance Monitoring Committee. This change will increase the regulatory oversight of lenders. The ABA supports this recommendation in full. The ABA confirms that the industry will be working with ASIC on having the new Code approved under section 1101A of the Corporations Act 2001 (Cth) and Regulatory Guide 183.

A copy of the ABA’s response to the independent review of the Code of Banking Practice can be found here. The ABA’s response to the Carnell Report can be found here.

What Next?

An independent consultant will be appointed to work with the ABA to redraft the Code and the ABA is hopeful that it will be in a position to publish a new Code by the end of 2017. The ABA has committed to publishing quarterly progress updates on the redraft and implementation of the Code.

Given that each bank that subscribes to the new Code will need to adopt the changes made to the Code, the ABA anticipates a transition period of 12 months will be required. However, this estimate will be revisited once the new Code is implemented.

It remains to be seen whether the ASBFEO will up the ante regarding the differing definition of ‘small business’. Will ASBFEO’s recommendation that the Code apply to any business loan under $5m gain traction? Watch this space.


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