Ombudsman ‘disappointed’ with SME definition in new banking code

On Tuesday, ASIC announced its approval of the ABA’s new Code of Banking Practice, set to commence operation on 1 July 2019.

The new code has been approved following a prolonged dispute over certain terms, which came to light during the third round of hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The code contains new rights and protections for small business, which include:

• Simplified loan contracts that are written in plain English and easier to understand.
• Contracts with fewer conditions for those with loans under $3 million.
• Give more notice when loan conditions change — helps with business planning.
• Improved communication and greater transparency when using valuers and insolvency practitioners.
• If a small business, with loans under $3 million, has met their loan repayment terms, a bank will not take enforcement action against the business (unless they fall within a limited area including bankruptcy, broken the law or loss of a licence to continue to operate).

While supportive of much of the new provisions, Ms Carnell has contended that the definition of a small business loan facility be revised.

“The new code is in line with our Small Business Loans Inquiry, where we recommended the code be revised, that it be approved by ASIC and include a dedicated section on small business written in plain language,” the Ombudsman said.

“We are disappointed the cap for small business loans is still set at a total loan facility of $3 million, as we had recommended a credit facility of at least $5 million which would encompass capital-intensive small businesses such as farms, building and manufacturing.”

However, following ASIC’s announcement, the regulator noted that its approval of the new code is “conditional”.

It was revealed during the course of the financial services royal commission that ASIC and the ABA could not agree on the definition of a small business.

The regulator has now said that its approval of the new COBP is conditional on an independent review of the definition of a small business within 18 months of the code’s commencement.

“This targeted review will test the adequacy and application of the code’s small business coverage in practice, and will occur well before the code’s comprehensive review, due three years after its commencement,” ASIC said.

The regulator also stated that it will collect quarterly data from banks and the Australian Financial Complaints Authority (AFCA) to monitor the extent of the code’s coverage of small business and ensure that the data is made public every six months.

Ms Carnell noted: “We are pleased ASIC will monitor the extent of the code’s coverage of small business with data collected from banks and AFCA and publish that data every six months.

“We will be keeping a close eye on those figures, with particular focus on industries we think require a higher lending cap, and also on ASIC’s work on the review of the small business definition.”

ASIC has also said that it could review its approval of the new COBP if the financial services royal commission makes findings relevant to the new code.

Following the announcement, ABA CEO Anna Bligh highlighted the benefits of the new code, noting: “The new code will introduce a range of new measures to make banking products easier to understand and more customer-focused.

“It represents a stronger commitment to ethical behaviour, responsible lending, greater financial protection and increased transparency.

“Banks value their customers and the new code is a big step towards providing better banking for all Australians.

“Customers will see real tangible benefits, including more information about changes to their accounts, delay in offering on add-on insurance products and simpler contracts, with fewer conditions for small business loans.”

Ms Bligh added: “Banks understand that Australians have high expectations and know that they have a big challenge ahead of them. The new Code of Banking Practice marks an important step in the right direction.”

Suncorp’s banking and wealth CEO, David Carter, has also expressed his support for the ABA’s new code.

“Suncorp has been a signatory of the Code of Banking Practice since 30 June 2004, and we are supportive of the implementation of a new code, which will lead to better customer protection and experiences,” Mr Carter said.

“The new plain English code is good news for customers as they will benefit from improved transparency and it will make it easier for them to manage their finances.

“The introduction of small to medium enterprises into the new code will hold the industry to a higher level of customer service and responsible lending obligations.

“We are committed to ensuring we have implemented the required changes by the introduction of the new code.”

[Related: SME finance shouldn’t fall under NCCP: ASIC]