Banking Royal Commission disappoints for SMEs
As we all know by now, Commissioner Hayne’s final report was made public on 4 February, with the Government pledging to take action on all 76 of the recommendations made. Federal Treasurer Josh Frydenberg stated; “From today, the banking sector must change and change forever.”
While the Commission has been welcomed in the main, for SME’s the recommendations fell well short of expectations. Our favourite advocate, Small Business Ombudsman Kate Carnell said there were some “big disappointments” in the report.
The Banking Royal Commission received more than 10,000 submissions from members of the public. While the number that came from SME’s has not been officially quantified, the woeful treatment of small business owners at the hands of the banks has been well documented. But while Commissioner Hayne was scathing in his assessment of the culture and practices of the industry as a whole; his review of SME lending was much lighter.
“With some exceptions, I generally do not favour altering the rules that govern lending to small and medium enterprises (SME’s).”
In our view, the Commission has delivered little for SME business owners and may well have a detrimental impact of business’ ability to access capital. While the banks are now rushing to announce better terms for SME’s, the more cynical of those among us might see this as nothing more than a PR stunt. One of the Big Four for example, has promised to remove fees that, in our opinion, really should not have been charged in the first place.
One of the big issues of the SME lending hearings revolved around the way in which banks denied extensions or renewals of business loans. The calling in of non-defaulting loans by CBA when they took over Bankwest in particular received lots of attention. But this was not seen as a problem by Commissioner Hayne, as he stated small business was well protected under the banking code. Hayne stated:
“Clause 86 of the 2019 Banking Code will provide, in general terms, that lenders must give three months’ notice of their intention not to renew a loan to a small business borrower who is not in default. I consider that this requirement is appropriate, and that it will go some way to ameliorating the hardship demonstrated in some of the case studies that related to loan renewal and enforcement.”
But as we are all aware, three months is a very short time in business. For SME’s looking to re-finance and begin a new relationship with another institution including providing financial information, assets, inventories, employees etc. (not to mention keeping a business running under financial stress), three months is very short.
No extension of consumer credit laws
The commission recommended against extending the National Consumer Credit Protection Act (NCCP) to cover small business. Our feeling is in line with the Ombudsman’s response – while in agreement that the NCCP should not apply to small business, we are however left with the current credit crunch being felt by small business going unaddressed. Ambiguity, uncertainty and lack of regulations may lead to an “ultra-conservative” approach from Banks which could have an ongoing detrimental effect on the sectors access to finance.
Impact on brokers
Brokers play a major role in providing non-bank alternatives as well as independent advice and real solutions to their customers (particularly when the banks can’t or won’t lend to them). While to talk of a ban on trail commissions is at present restricted to mortgage broking, this move could hamper competition in the finance space and see a rapid decrease in the availability of non-bank aligned. In other words, by putting pressure on the brokers we are playing back into the hands of the banks.
To our mind it is the not the system that was broken, the issues arose from what could be at best described as negligent behaviour from the banks, as well as a lack of enforcement by the regulators. In our view, the worst outcome of the current situation would be that the availability of advice from non-bank Brokers is curtailed and funding options to customers become limited – a truly backward step.
Where from here?
So what can we do? Our belief is that SME’s must continue to be entrepreneurial and look for the most effective ways to access capital and assist their cash flow. The big power players (the Government, the banks, the regulators) have rarely championed the cause of small business. And this report is no exception. So it is up to those of us who truly understand the value small business brings to the economy to keep up the fight. As brokers or small business owners, stay informed, keep doing what you do best and look beyond the banks find a solution that is right for you.