Six fintech lenders have signed a new Code of Lending Practice that aims to standardise transparency and disclosure around their online, unsecured business loans and the use of finance brokers.
Developed with support from the Australian Finance Industry Association (AFIA), the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), thebankdoctor.org and FinTech Australia, the code pulls together the obligations of online small business lenders to promote high industry standards of service, provide a benchmark with respect to the disclosure of comparable financial information to borrowers and support compliance with legal and industry obligations.
According to the group, the code is needed given the fact that the regulatory landscape is “changing rapidly” and the current legal and compliance commitments facing online small business lenders which have been labelled as being “fragmented”.
Modelled on best practice examples and feedback from the more mature fintech markets in the US and UK, the code has therefore been brought forward as part of a “proactive move to pull the obligations of online small business lenders together into one document” and make it easier for both participants and borrowers to understand their obligations.
The six signatories to the code so far are Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap.
Details of the code
The code aims to help ensure that small business owners can clearly identify if a small business online loan from a lender is right for their needs, exactly how much it is going to cost and if it is the best solution available to them.
Key elements agreed include:
- The introduction of a pricing comparison tool providing key metrics that will allow customers to compare the cost of unsecured loans from the signatories (including the total repayment amount, APR, simple annual interest rate).
- An easy-to-understand loan summary.
- A glossary of key terms in accessible language that applies directly to online small business loans.
- A requirement for signatories to attest their compliance with the code on an annual basis.
As well as including specifics around advertising, promotional material and the inclusions in standard pricing comparison documents, the code also comprises eight “promises”. These include:
- dealing fairly with complaints
- giving clear and accessible information about loan products
- acting “honestly and with integrity”
- considering loan purpose and financial circumstances
- delivering loan products that are “useful, reliable and designed to be readily understood”
- placing a high priority on service, competitiveness and customer focus
- complying with legal obligations
- promoting the code
Further, the code specifies that finance brokers operating in partnership with the lenders will be required to be made aware of, and have regard to, the lenders’ obligations to the borrower under the code.
It continues: “Where we are paying a commission to any finance broker in connection with a loan product that we are providing to you [the borrower], we will tell you that we are doing so.”
To ensure effective enforcement, the code will be supported by a charter focused on governance including its monitoring, review and enforcement processes.
Calls for the code to be extended to more SME lenders
In a joint statement, the six CEOs of the signatories to the code said: “We’re proud to be working together to take proactive steps to bring transparency to the market, and ensure we’re doing what’s best for Australian small business owners.”
Small Business Ombudsman Kate Carnell also welcomed the code, saying: “This is certainly a great starting point. Six fintech balance sheet lenders have committed to comply with the AFIA Online Small Business Lenders’ Code of Lending Practice by December 2018, which helps to address transparency and disclosure for small business borrowers.”
Ms Carnell noted that the while the principles and best practice guidelines are currently limited to balance sheet lenders, she said that discussions have been held over how the broader fintech industry could move to adopt the code.
Meanwhile, AFIA CEO Helen Gordon commented: “Our Online Small Business Lender Group members have embraced the sentiment of improving transparency and disclosure and took proactive action to come together quickly and collegiately to develop a code.
“Delivering the code within four months was an ambitious commitment, and I am proud to say using this group’s fintech agility, flexibility and technology we have delivered, with members committed to code compliance by 31 December 2018.
“This is at a time of rapid change as regulators and legislators struggle to keep pace with technology and innovation.”
Brad Kitschke, CEO of FinTech Australia, applauded the leadership of the fintech balance sheet lenders, highlighting how the recent commissions have highlighted the “serious problems encountered in our economy because small businesses cannot access credit, often without risking assets like the family home.
“Online lending to SMEs is increasingly playing a key role in filling this gap,” the CEO said.
SME advocate Neil Slonim from thebankdoctor.org said that the code was a significant step forward but called on more fintechs to become signatories and suggested the code could be extended to cover non-bank SME lenders in the future, too.
He noted that further work needs to be done in areas like implementation of the pricing comparison tool and added that an independent and “suitably qualified” Code Compliance Committee will need to be appointed to determine whether a lender is compliant.
“The CCC will also be tasked with the responsibility of ensuring ongoing compliance with and enforcement of the code,” Mr Slonim said.
The group is now engaging with key stakeholders and ASIC, and it will be focusing on developing the charter that underpins governance and a standardised pricing and disclosure tool.
The code, charter and the disclosure tool are expected to be fully functional by no later than 31 December 2018, by which date all signatories have committed to being fully compliant.
[Related: Fintechs look to develop Code of Conduct]