Thinking | 29 March 2017
Khoury Report – substantial reforms for small business lending
On 20 February 2017, Mr Khoury published his final report of the Independent Review of the Code of Banking Practice (Code). Mr Khoury is an independent governance expert appointed by the Australian Bankers’ Association (ABA) to conduct an independent review of the Code.
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.
The Khoury Report follows the release of the Carnell Report on 6 February 2017, which was produced by the Australian Small Business and Family Enterprise Ombudsman following her investigation into the adequacy of the law and practices governing financial lending to small business. Our update on the Carnell Report is available here.
Overall, the Khoury Report recommends 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 are similar to recommendations made in the Carnell Report.
The 240 page report makes a total of 99 recommendations. Approximately 20 of these recommendations relate to small business lending.
If adopted, the recommendations will result in significant reform of small business banking practices.
Our pick of the top five recommendations that will impact small business lending are:
- Broadening the definition of ‘small business’ (recommendation 5): The report recommends 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.
- Further disclosure of terms and conditions (recommendation 7): Consistent with the Carnell Report, the Khoury Report recommends better disclosure of terms and conditions by way of a summary statement (perhaps in table form). However, the Khoury Report does not go as far as to recommend the incorporation of the consumer protection provisions found in the National Consumer Credit Protection Act 2009 (Cth).
- Notice period before enforcement proceedings (recommendation 11): 30 days’ notice to be given to the borrower before beginning enforcement proceedings, unless urgent action is necessary to recover the debt or avoid a loss in value of the security.
- Perceived conflicts of interest between investigating accountants and receivers (recommendation 12): The Khoury Report recommends that lenders have ‘arrangements’ in place to address potential conflicts of interest between investigating accountants and receivers. There is no guidance on what the ‘arrangements’ should be but importantly, Mr Khoury does not go as far as the Carnell Report in recommending that an investigating accountant cannot be appointed as receiver of the same borrower.
- ASIC approval of the Code (chapter 21, recommendation 99): Mr Khoury recommends 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.
A copy of the report is available here.
The ABA is expected to respond to the Cornell and Khoury Reports shortly and we will provide a further update at this time. We also expect a draft of the new version of the Code will also be circulated for comment shortly.
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