The corporate regulator has told the financial services royal commission that it does not believe lending regulations should be extended to SME finance.
In its submission the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released this week, the Australian Securities and Investments Commission (ASIC) noted that it does not believe regulatory provisions under the National Consumer Credit Protection Act 2009 (NCCP Act) should also apply to small business finance.
The regulator instead highlighted the obligations imposed on members of the Australian Banking Association (ABA) under the Code of Banking Practice (COBP), and those required as part of the membership of dispute resolution bodies like the Financial Ombudsman Service (FOS).
“Although ASIC does not make a submission that the National Credit Act should apply to small businesses, it does observe that small businesses can benefit from:
(a) where they are dealing with a bank member of the Australian Bankers’ Association Inc (ABA), the protections or requirements in the Code of Banking Practice; and
(b) where they are dealing with a lender, broker or intermediary that is a member of the FOS/AFCA, the obligations applying to members, and the ability to have their dispute heard without the need for court action.”
However, ASIC raised concerns over non-member financial institutions that are not bound by such regulatory provisions.
“[Small] businesses dealing with a lender that is not an ABA member do not get the protections of the Code of Banking Practice, and small businesses dealing with a lender, broker or intermediary that is not a member of the FOS/AFCA will not have access to those bodies for dispute resolution.
“Lenders, brokers and intermediaries who only offer their services to small businesses and therefore are not legally required to hold an Australian credit licence or, in consequence, be a member of an external dispute resolution scheme will generally not be members of the FOS/AFCA unless they choose to join voluntarily.”
ASIC made particular reference to companies that raise funds from third parties, including managed investment schemes, unit funds and finance companies, and also expressed concern over the “significant risks” associated with such alternative lending options.
“They tend to occupy the risk areas where the highest return for a manageable risk can be attained.
“This results in a concentration of business in short-term and bridging finance, with the provision of short-term loans at high interest rates (over 5 per cent per month).
“Given the nature of their business models, there may be significant risks for small businesses in dealing with these lenders, including asset-based lending where a short-term debt is secured against the family home and is only repayable by the sale of the home.”
ASIC slates banking culture in response to RC
The corporate regulator also raised concerns over a “cultural issue” within the banking and financial services sector, claiming that the conduct of the banks does not reflect their “professional ethos”.
ASIC claimed that the conduct of the sector has not reflected its public commitment to “do what is right” for the customer.
“[Although] many of the banking and financial services institutions regulated by ASIC publicly state that their core values include being customer-focused, ‘doing what is right’ for customers and acting with integrity, the reality of their conduct does not always reflect that professional ethos,” the regulator said.
The regulator criticised the “legalistic” attitude employed by the banks in response to wrongdoing identified by the regulator.
“The conduct ASIC referred to includes responding to requirements to change practices or remediate customers in a technical or legalistic way (as opposed to an approach focused on optimal customer outcomes). ASIC sees this as a cultural issue within banks.”
ASIC added that instances of wrongdoing identified by the financial services royal commission suggest that the banks are failing to meet community expectations, and it made particular reference to a case in which Commonwealth Bank-owned non-major Bankwest billed a small business customer for a report it commissioned.
“At the level of community expectation, general public statements of intent or value, even if not rising to the level of an enforceable promise or statement, impact how consumers and small businesses expect to be treated.
“A simple example: it is incongruous to ‘doing what is right’ to require a customer to pay for a report, and then withhold it from them.”
The corporate watchdog called on financial institutions to review their compliance protocols to ensure that they prioritise their customers’ best interest.
“What ought to flow at a minimum from such a disconnection is a firmer cultural commitment by boards and senior management of banks to put compliance with professional, legal and ethical duties to customers at the forefront of their priorities.
“That may include placing greater emphasis on the latter duties, particularly, but not exclusively, in dealing with consumers and small businesses,” the regulator said.
“In the context of small business and the Banking Code, for example, any disconnect may also warrant external dispute resolution providers having regard to public statements in considering what constitutes conduct that is ‘fair, ethical and reasonable’, or in otherwise interpreting how the Banking Code’s ‘Statement of Guiding Principles’ are to be applied.”
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