New banking code of practice could benefit small businesses

Earlier this year, the process of developing a new code began, after the Independent Review of the Code of Banking Practice was released by reviewer Phil Koury.

Since then, the banking industry has reportedly spent “hundreds of hours of development and more than 50 meetings with banks and key stakeholders” to develop the code, which aims to provide more protections and transparency for customers.

While the full code has not yet been publicly released, some details of its contents have been revealed.

The industry has accepted 96 of the 99 recommendations “in some form”, which the Australian Bankers’ Association (ABA) said was “proof that banks are serious about change”.

The ABA added that the sector is “currently undergoing the greatest level of reform seen in more than 20 years”.

Some of the changes to the code include:

For small businesses

- Small business customers will be provided with a longer notice period about changes to loan conditions or a bank’s decision on whether it will continue to provide the loan facility, “which will help businesses with future planning”. Small business banks will need to provide a minimum of 30 days’ notice to change conditions of loans and three months’ notice before a loan facility will be ended. 

- Simplified loan contracts will be written in “plain English” and become “easier to understand”.

- Improved communication and “greater transparency” in the use of external property valuers, investigative accountants and insolvency practitioners.

Other changes cover individuals and guarantors, including the ability to cancel credit cards online, notification when introductory credit card interest-free periods expire and a three-day waiting period for signatures from guarantors.

Speaking of the new code, Australian Bankers’ Association CEO Anna Bligh commented: “Banks are committed to change and the new code is stronger, broader and written in simple-to-understand language.

“It has been completely rewritten to better meet community expectations and service the needs of customer[s].”

Ms Bligh revealed that the code has been categorised into 10 key parts, with four new sections, including one dedicated to small businesses and another related to making banking more available for customers and easier to access.

“The remaining six sections represent a complete restructure of important parts of the current code,” Ms Bligh said.

Small Business Ombudsman highlights concerns

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, who was consulted on a draft version of the code, said that the revised code had some positive initiatives for small business but that there are still “unresolved issues with power imbalance and dispute resolution”.

Ms Carnell stated that she was concerned that the code could not be enforced by a proposed Banking Code Compliance Committee.

“The committee will not be fully independent and banks won’t be obliged to accept its recommendations,” the Ombudsman said.

“The code stipulates only that banks will comply with ‘reasonable’ requests of the committee.

“This means effectively that banks will only act on recommendations if they feel like it. If they don’t think the committee is reasonable, they have an escape clause.

“It’s like the umpire is appointed by the home team and they don’t have to accept the umpire’s decision.”

Ms Carnell also criticised the code’s definition of a small business loan as being a total debt facility of up to $3 million.

“I want to see the limit raised to $5 million, which would be consistent with the Koury review recommendation and the threshold for matters to be heard by the new Australian Financial Complaints Authority,” Ms Carnell said.

“In relation to farm debt mediation, I’m pleased the banks have agreed that matters which fail to be mediated can progress to external dispute resolution.”

While Ms Carnell said that she welcomed the code’s simplified language and the inclusion of a specific section for small business, she expressed concern that banks could still act unilaterally to change the conditions of a loan if there were “materially adverse changes”. Such changes could relate to government policy, commodity markets or weather conditions.

“Changes to market conditions are often outside the control of the borrower and should not be used to penalise a small business if they continue to make all their repayments,” Ms Carnell said.

“The code says a bank won’t default a loan because of a materially adverse change, but they retain the power to change a loan’s terms and conditions.

“We understood the big four banks had individually agreed to remove those clauses, so its inclusion in the code is perplexing.”

[Related: Banking industry commits to changes for small business lending]