What the Royal Commission findings mean for small business

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has welcomed the recommendation of the Royal Commission to strengthen the Australian Banking Association (ABA) Code of Banking Practice, describing it as “the chief protection for small business borrowers”.

Ms Carnell stressed, however, that it is imperative the ABA and its members immediately embrace the recommendations her office has made identifying where the code is still inadequate.

“The code has too many ‘get out of jail’ clauses that advantage the banks and it still contains provisions at odds with the unfair contract terms legislation,” Ms Carnell said.

“There is no reason for the ABA not to address these concerns immediately. The code needs to provide adequate notice periods of changes or decisions not to roll-over a loan. Yet where notice periods are defined, the code then has ‘get out’ clauses for the lenders to ignore them.

“For example, clause 77 allows lenders to give a shorter notice period or give no notice where they require full repayment of a loan based on their ‘reasonable opinion’ or to protect their risk.

“Clause 213 requires lenders to only cooperate and comply with the request from their own code compliance body if they consider the request ‘reasonable’. For the code to be meaningful rather than tokenistic, there needs to be an effective mechanism in place to ensure adherence.”

In response to the Commission’s findings, Business Council chief executive Jennifer Westacott said, ”We welcome Commissioner Hayne’s recommendation on business culture and governance and believe every business should take his advice to implement the proper steps to assess, identify and deal with any problems.

“Effective regulation and well-resourced regulators are critical to the financial sector and Commissioner Hayne identifies some important improvements, in particular simplifying existing laws, clarifying the responsibilities of ASIC and APRA and strengthening their accountability.”

Peter Langham, CEO of business finance provider Scottish Pacific, said, “It’s important that the changes flagged in today’s Royal Commission report don’t negatively impact the flow of funding for SMEs. To keep SME funding flowing, there should be broad business and political sector support for promoting viable alternatives to the banks that are available for small business funding.

“Small-business owners must be prepared to seek out alternative financiers to the banks,” Langham added. ”There are a range of funding options already available to them if they look beyond the banks. Interest in alternatives is already increasing – Scottish Pacific saw a doubling in SME funding enquiries in December 2018, compared to the previous year. Business owners are looking to do things differently, in light of the Royal Commission.”

Langham also warned that the combination of Australia’s cooling property market and more stringent lending conditions introduced due to the Royal Commission will definitely impact SME owners who need to use their home as security for their business loan.

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