ASBFEO criticises new banking code

Earlier this week, the Australian Securities and Investments Commission (ASIC) provided its final approval of changes to the Australian Banking Association’s Banking Code of Practice.

However, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, has highlighted a range of concerns she has about the newly approved version of the code, due to come into effect as of 1 March 2020.

Ombudsman Carnell stated that the new code does not go far enough to protect small businesses, particularly its rejection of the proposed definition of a “small business” as passed down by commissioner Kenneth Hayne in his final report for the banking royal commission.

In his final report, commissioner 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.

However, earlier this year, 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) – dismissed the banking royal commission’s proposed changes to the definition of a small business, and the Australian Banking Association (ABA) had also been reluctant to adopt the change.

The new definition was not included in the updated code, which the Ombudsman has lamented.

“The ABA claims it has implemented the royal commission recommendations, but it has not acted on all of the recommendations, including one that is critical to small business,” Ms Carnell said.

“Commissioner Hayne recommended that the definition of a small business should be businesses that apply for a loan up to $5 million and have fewer than 100 [full-time equivalent] employees.

“Despite our repeated efforts, the code only protects small businesses with up to $3 million in total debt to all credit providers.”

She highlighted that the definition of a small business under the code does not recognise a number of small businesses, including capital-intensive businesses such as agriculture, construction and manufacturing.

“While we support approved amendments to the code to help drought-affected farmers, that same level of protection ought to be given to small businesses in these rural and remote communities that are also suffering,” she said.

Ms Carnell highlighted one section in particular of the new code, 115 b, which essentially allows banks to take action against the small-business guarantor, before enforcing recovery against the security provided by the small-business owner.

“This is totally unacceptable and has the potential to be seriously detrimental to the small-business borrower,” she said.

“During the royal commission, commissioner Hayne acknowledged the ABA Banking Code of Practice is the chief protection for small-business borrowers and, as such, it needs real and meaningful changes to give it teeth.

“While the code has been improved, the number of get-out-of-jail clauses for the banks still dilute the protections for small businesses."

Ms Carnell concluded: “We will continue to push for a better framework for a balanced relationship between banks and their small-business customers.”

[Related: ASIC approves banking code changes]