Broker association calls for balance with SME finance complaints 

As part of its submission to AFCA’s draft Approach to Appropriate Lending to Small Business (which ran between August and September 2023), the association urged the regulator to recognise the difference between commercial lending and consumer credit products, such as residential mortgages.

The MFAA noted that lending to small businesses was intentionally less regulated compared to consumer lending to avoid onerous barriers to finance and impeding access to liquidity for small businesses.

It added that brokers were a critical part of the consumer lending space for small businesses, providing a “critical distribution channel” that allows both small-business lenders to access customers and vice versa.

MFAA chief executive Anja Pannek added: “Small businesses should have access to credit, they should also have an avenue for external dispute resolution. However, considering the fact commercial lending takes a variety of forms, it is important that there isn’t a one size fits all approach.”

The MFAA’s six recommendations were:

1. The approach must strike an appropriate balance and must be flexible

The association recommended that AFCA’s approach needed to achieve an appropriate balance between “guiding industry participants with respect to lending to small businesses while also recognising that small-business lending is fundamentally different to consumer lending”.

It stated that several differences made small-business lending different to consumer lending such as the nature of the borrower, the risk profile of a small business and the wide range of lending products to small businesses.

2. Include brokers in the approach as well as where AFCA will look to join brokers to a complaint

AFCA’s draft approach states that the regulator “may join other parties (including brokers) to a complaint where that party has contributed to the loss”.

The MFAA recommended that, despite complaints related to broker-facilitated small-business loans being low, it was important for the broking industry to understand how AFCA would approach a broker complaint.

The association added it would be “helpful for brokers to understand in what circumstances AFCA would look to join a broker to a complaint, and how AFCA would deal with complaints involving multiple parties”.

It urged AFCA to recognise that not all small-business lenders are AFCA members and that it would therefore be inappropriate to allow a complaint to proceed against a broker if the other parties were not a member.

“Therefore, in a situation where a broker is an AFCA member, but the lender is not, it is not appropriate for the complaint to proceed simply because the only avenue for AFCA to facilitate the complaint is against the broker,” Ms Pannek outlined.

3. No compensation for fraud or fault

The association’s CEO added that when a complainant’s conduct through the lending process had been “less than transparent and open” and if they were found to have withheld information from the loan assessment, no compensation should be awarded.

“We consider that to award compensation in circumstances like this could unintentionally incentivise dishonest behaviour,” Ms Pannek stated.

4. Consider the broader economic environment at the time of lending in assessing the complaint

The MFAA recommended that when assessing an “appropriate lending complaint”, AFCA should consider the context and the environment in which the credit was provided.

It referenced the struggles many small businesses faced during the pandemic and how small-business lenders have needed to “look through” it in some instances due to an absence of accounting or financial information available for several organisations during that time.

5. Recognise the importance of voluntary membership of AFCA

The broker association recommended that the regulator recognise that many financial firms were already members of AFCA in order to provide their customers with the ability to access an independent and efficient dispute resolution scheme.

Ms Pannek said this relates to its second recommendation, ensuring those who take up memberships with AFCA voluntarily are not punished and joined to another party’s mistake only because they are a member.

6. AFCA establish a regular forum with industry representatives in relation to implementation of its approach documents

The MFAA agreed that AFCA’s approaches should not be prescriptive in terms of how the regulator assesses complaints, with each complaint containing its own set of facts and circumstances.

It recommended that AFCA establish a regular forum for industry representatives to discuss how the approach is being applied in practice and to identify whether any changes are required or any other action is necessary.

Ms Pannek stated: “Finance brokers are heavily involved in commercial lending with Productivity Commission research indicating that at least 40 per cent of commercial loans are written by brokers.

“This is why it was important for us to represent the industry on this issue, in particular highlighting the differences between residential mortgages and commercial loans.”

[Related: Mortgage broker complaints are nominal, AFCA data shows]