Banks challenged to treat small business ethically

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, has challenged banks to become leaders in ethical business practice.

Speaking at the National Small Business Summit in Melbourne, Ms Carnell said trust in banks had been eroded and must be restored.

In her speech, Ms Carnell also:

  • Welcomed the big-four banks’ commitment to eliminate unfair terms from small business contracts; and
  • Encouraged the growth of alternative lending to improve access to capital.

Corporate regulator ASIC confirmed this week that banks have agreed to implement fairer contracts for small business customers that include important protections.

Banks will no longer be able to unilaterally vary contracts, and unfair clauses such as the banks’ power to default or terminate a loan for an unspecified negative change in circumstances, have been removed.

Ms Carnell said compliance with unfair contract terms legislation and improvements to the banking code of practice had been key recommendations from her 2016 small business loans inquiry.

“Banks can no longer use their market power and their hundreds of lawyers to move all risk to the small business borrower,” she said.

“A fair contract is one where risk is shared and it is clear who bears what risk, and neither party has the power to change that balance unilaterally.

“Historically the banks have required small businesses to sign contracts that have given them the power to change the fundamentals of contracts, interest rates, the amount lent and repayment times, without the agreement of the other party.

“The agreement that ASIC and ASBFEO have reached with the big four banks has changed that.”

Ms Carnell called on the major banks to demonstrate industry leadership in embracing best practice.

“Hopefully this will set the tone for the rest of the financial services sector and their support to small business,” she said.

Ms Carnell repeated her call for the contract safeguards to apply to small business total loan facilities up to $5 million. The legislation requires compliance up to $1 million and the big four banks have agreed to $3 million.

“We’ll be talking to the government, opposition, crossbench MPs and the banks about raising the threshold to $5 million, which is appropriate for capital intensive small businesses and family enterprises such as farms,” she said.

Ms Carnell also endorsed efforts to increase competition in the financial services sector.

“Peter Costello was right when he said on the weekend that access to capital is too restrictive for business and that Australian bank business lending is negligible,” she said.

“Banks are geared towards residential property, which inflates the housing market at the cost of stifling small business investment Unless a small business has adequate property as security they have very limited access to finance through traditional banks.

“On a positive note, the alternative finance sector is growing and the government has indicated it wants to reduce barriers to entry.”

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