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Regulators dismiss Hayne’s call for change to SME definition

by Reporter11 minute read
ASIC, RBA, APRA, The Treasury

Australia’s financial regulators have weighed in on commissioner Kenneth Hayne’s SME recommendations, with the industry yet to reach consensus over proposed changes to the definition of a small business.

In its quarterly statement, the Council of Financial Regulators (CFR) — made up of the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury, and the Reserve Bank of Australia (RBA) — has dismissed the banking royal commission’s proposed changes to the definition of a small business.

In his final report, commissioner Kenneth Hayne proposed to amend the definition of small business in the Code of Banking Conduct to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.

The recommendation has been met with a mixed reception from industry stakeholders, with the Australian Banking Association’s (ABA) reluctant to adopt the change.


The ABA stated that it “has not yet reached a view” and issued a warning over the potential impacts of such a change, claiming that it has “serious concerns” about the “material impact” it may have on access to credit for small business borrowers.

In contrast, the Australian Small Business and Family Enterprise Ombudsman Kate Carnell stressed the importance of broadening the definition of a small business, claiming that current arrangements are “not workable”.

Ms Carnell noted that the ombudsman’s office is in discussion with the ABA and has developed a list of amendments to the code, which she said would offer a “better framework for a balanced relationship between banks and their small business customers”.

The CFR has weighed into the debate, stating that existing changes to the code, due to commence on 1 July 2019, are already “significant”.

The council also noted the uncertainty surrounding the potential impact that a broadening of the definition would have on the sector, particularly amid tighter lending conditions, and hence expressed support for current arrangements until such impact are assessed.

“The effects of these changes and any response to them by lenders, including small to medium-sized lenders, is still to be gauged,” the CFR statement read.

“In light of this and the tightening in credit conditions that has taken place, members supported maintaining the current borrowing threshold to define small businesses within the code, with an independent review to be undertaken within 18 months of the code’s commencement.”

The regulators continued: “This would allow time for sufficient information to be gathered on the effects of the initial changes and the potential effects of the changes in the small business definition recommended by the royal commission.

“At that point it would be appropriate to consider whether to increase the limit from $3 million to $5 million for all banks.”

Further, the CFR claimed that a view to a limit based on total credit exposures is “more appropriate” than one based on loan size.

The challenges surrounding access to credit for small businesses was also highlighted in the CFR’s statement.

“Members observed that new lending to small businesses has slowed over the past year,” the CFR noted. “For many small businesses, personal and business finances are intermingled.”

The CFR continued: “As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications.”

Moreover, the CFR observed that the continued fall in dwelling values could “constrain small business borrowing”, given that around half of loans to unincorporated businesses are secured by residential property.

“The council will continue to monitor developments closely and stressed the importance of lenders supplying credit to small and medium-sized businesses.”

[Related: Industry at loggerheads over SME definition]


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