The Banking Royal Commission released its final report a few months ago, with a host of issues discussed. The royal commission received 10,140 submissions all throughout the hearings, and 61% of these are related to banking. These hearings also focus on individual consumers – specifically on consumer lending and financial advice.
Federal Treasurer Josh Frydenberg states that the government is taking action on all 76 recommendations from the report. The report assessed misconducts in the industry, which is driven by greed and a breach of the existing law. The commission’s aim is to create a resolution for these issues, which have fallen below the expectations of the community.
What is the Royal Commission?
A royal commission is the highest form of inquiry on matters that have great importance to the public in Australia. The commission’s hearings are connected to the peace, order and good government of the country. In the case of the banking royal commission, issues on misconduct and other matters about SME lending have been scrutinised to create viable solutions for the public.
Kenneth Hayne heavily discussed lending to SMEs on a hearing conducted last May 2018. Another hearing was devoted into financing for regional and remote communities, with a closer look into finance for farmers.
The royal commission advises the expansion of SME lending under the new industry code. This will benefit firms with less than 100 full-time employees, and who have loans that are less than $5 million.
Key Factors Pointed Out by the Commission
Frydenberg points out several issues to resolve misconducts in the industry. These royal commission policies include the banning of trail commissions for mortgage brokers and ending conflicted remuneration strategies for financial advisers.
Other things include prohibiting the deduction of advice fees from superannuation accounts. There will also be mandatory changes to insurance add-ons so that they cannot be sold at the same time as the original product. A national approach to farm debt mediation will also be adopted.
A three-person oversight body will also be created for the regulators of the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Their performance will also go through four-yearly capability reviews. The Australian Financial Complaints Authority (AFCA) will also establish a compensation scheme as a last resort.
The Impact of the Royal Commission to Australian Small Businesses
Although Commissioner Hayne was critical in his assessment of the culture and practices within the industry, he was much more relaxed in his review of SME lending. With some exceptions, he generally does not favour altering the rules that govern lending to small and medium enterprises.
The following exceptions were taken into consideration, which revolve around borrowing issues in Australia:
1. How Small Businesses Should are Defined
The definition of small businesses should be clearly stated as to how banks should classify them in approving loans. Hayne disagreed with the banking industry that the definition be loans of up to $3 million. He recommends that the Australian Banking Association (ABA) should define small businesses in the Banking Code as a group or business employing fewer than 100 full-time employees. The loan applied for can be less than $5 million.
Consumer Credit Laws
The commission also discussed the existing consumer protection laws under the National Consumer Credit Protection Act (NCCP). They have determined that extending such laws to cover small businesses would do more harm than good. It will eventually dry up the amount being loaned to SMEs. Hayne recommended against any such extension.
Commissioner Hayne said that guarantees should continue to be available for use despite issues surrounding banks attempting to enforce guarantees for business loans, and misconduct around responsible lending and means testing. Hayne suggests that guarantees should still be enforced by banks as an option for businesses to secure finance. As such, if the principles of the law does not prevent enforcement, and the principal debtor’s ability to repay has been assessed according to the standards of the 2019 Banking code, then the guarantee should be enforceable according to its terms.
Another issue addressed during the hearings was on banks denying extensions or renewals for business loans. This issue has been a great source of disagreement and dissatisfaction between bankers and small businesses.
A borrower will often feel let down by the bank if there’s a decision not to extend the term of a loan as originally agreed, or if the bank will do that on the terms the borrower thinks is unfair. The borrower’s business might fail if he or she cannot refinance elsewhere.
The new banking code already addresses this matter in Clause 86, which states that lenders must give three months’ notice of their intention not to renew a loan.
Hayne says that it will, in some way, ameliorate the hardship shown in some cases related to loan renewal and enforcement. He also says that no business should assume that a loan extension or renewal is guaranteed.
The risks that a term loan will not be extended and different terms may be sought by a lender must be shouldered by the borrower. These risks are inherent in every business that gets into borrowing money.
Farm Debt Mediation
Commissioner Hayne pointed out the mismatched approach to farm debt mediation, which is only mandated by four states. It has been treated by lenders as no more than a step to be taken before a lender demands and obtains repayment. It foregoes a legitimate means of resolving financial difficulties. Hayne recommends that the national farm debt mediation requirement be introduced to make this a compulsory and uniform standard.
For Fintech Companies
The changes that will be brought about by the commission will make it easier for the existing clients of banks to have loans approved quickly. This could also be viewed as a defensive move against the fintech competition of banks. However, by not extending SME lending into the national consumer credit protections, it won’t stifle smaller competitors to challenge the major banks.
In general, there’s not much changes needed to be enforced in SME Lending as explored in the royal commission’s hearings. What has been addressed fully are the misconducts of financial institutions in their dealings with consumers. These misconducts, according to Frydenberg, have been related to broken lives and broken businesses. It was advised that ASIC will be given powers to enforce code provisions, and elevate its breaches into breaches of law.
Anna Bligh, Head of the Australian Bankers Association, said that the report was a tough medicine for the banking industry. The commission has opened their eyes to practices which were clearly unacceptable but were passed off as standard. The number of cases brought before the commission have been referred to regulators for possible criminal charges.
The hope for the commission’s recommended actions is to resolve these issues and empower the economy. According to Peter Strong, Head of COSBOA, the recommendations are a relief for small businesses as it can hopefully release lending funds again. Regulations are going to be strengthened to support a healthy industry in SME lending. How banks are going to act will change dramatically in the coming months. Bligh also emphasised that the banks should be judged not by their words, but by their actions.