The Australian Bankers’ Association has welcomed proposed changes to the Code of Banking Practice’s treatment of small businesses, including a section dedicated to small business and an expanded definition.
Conducted by independent consultant Philip Khoury, the review of the Code of Banking Practice was completed over approximately seven months. The final report contains 99 recommendations, after Mr Khoury consulted with a range of stakeholders, including consumer and community groups, small business and farming representatives, banks, regulators, ombudsmen, government representatives and politicians.
In welcoming the final report, the ABA said: “Through our conversations with representatives of small businesses and the review of the Code, the industry has heard we need to do more to help these customers through good times and bad and support them in growing their businesses.
“Many small businesses rely on finance to keep things running smoothly through variable business cycles. Changes to the Code will include a dedicated section for small businesses, with commitments to improve transparency, plain-English documentation, and help ensure fairer practices.”
The ABA said that based on the review, the banking industry will expand the coverage of small businesses in the Code by including a business with total credit facilities up to $3 million.
“The industry is confident that a $3 million lending threshold will capture around 97 per cent of bank business customers. Larger businesses with credit facilities above $3 million tend to be more sophisticated businesses, with complex lending needs and business arrangements, and not fit for the purposes of the Code. It would be appropriate to utilise a standard definition across the various small business frameworks,” the ABA explained.
Changes proposed by the review
The review proposed that the Code of Banking Practice should be substantially revised to “cover all banking services offered to retail and small business customers” and include an accompanying guide to the relevant parts of the Code for small business.
Additionally, the review recommended that the Code’s definition of “small business” be amended to mean “a business that employs fewer than 100 full-time equivalent employees, or, in the case of a business that is part of a group of companies, the group employs fewer than 100 full-time equivalent employees”.
Other recommendations by the review include:
• A new clause should be included in the Code applying to a credit facility, below the specified monetary threshold, that is provided for a small business purpose. The clause should oblige banks to explain:
a) The requirements needed to obtain bank credit
b) Additional information requirements where the lending decision cannot be made and how long a lending decision is likely to take; and
c) Where possible, the main reason for a refusal to lend and the requirements to enable the bank to reconsider the application.
• A new clause should be included in the Code that obliges signatory banks to provide a written pre-contractual summary statement before providing a credit facility for a small business purpose, below the specified monetary threshold. The key terms and conditions must be summarised in an accessible way, for example, a table format that includes:
a) The credit period
b) Repayment obligation
c) Applicable interest rates or how these are calculated (specifying the current rate)
d) Fees and charges (flat fee where possible or otherwise how calculated)
e) Events of default and any increased costs associated with default, again with specification of what the current rate is where a formula applies, and
f) the signatory bank’s entitlement to change terms and conditions and the notice of change that will be given.
The ABA highlighted that there are currently a number of federal government reviews that have direct implications for a number of the recommendations, including the Carnell inquiry into small business lending, which the industry plans to take into consideration.
ABA executive director of retail policy Diane Tate said that the industry is aiming to have the new Code redrafted by the end of the year.