Will the new Banking Code of Practice make any difference to SMEs?

The ABA has just released its new and improved Code of Banking Practice, the fourth version since 1993. But bank behaviour has not improved over this time which lends weight to the view these codes are not worth the paper they are written on. So it would be understandable, but unfortunate, if SMEs thought this new code wont make any difference to them

Its important to note the new code is not in response to the goings on at the Royal Commission. In fact, in 2016 the Australian Bankers Association commissioned an independent expert, Philip Khoury, to undertake a review of the 2013 code. In his February 2017 report, Mr Khoury made 99 recommendations and since that time, the ABA has been engaged in protracted negotiations with various stakeholders including ASIC in order to agree on the contents of the new code.

One of the most contentious issues has been the definition of a small business. ASIC and Kate Carnell, the Australian Small Business & Family Enterprise Ombudsman, have argued that the threshold should be $5m in total borrowings but ASIC eventually rolled over on this and has agreed with the banks preferred threshold of $3m.

I don’t think the definition of a small business is a huge issue as ASIC did say that the $3m level would cover between 92 and 97 per cent of SMEs. ASIC also said it would collect quarterly data from the banks to ensure this is the case and its approval of the new code is conditional on an independent review in 2020 of how a small business should be defined.

It has taken 18 months to get the code launched and it will still not come into force until July 2019. The time it has taken get to this stage is at least as big a concern as the definition of a small business but the main thing is that banks can now work on delivering on their commitments and customers are now in a better position to hold them to account.

The code sets standards of good banking practice when dealing with individual and SME customers and their guarantors. It covers obligations for banks in areas including the offer of banking services, information and disclosure, complaints handling, customers with special needs and customers experiencing financial difficulty. The 60 page document includes 215 specific commitments which all 26 ABA member banks will be required to commit to and the code will form part of the banks’ contractual relationships with their customers.

The new code incorporates a number of specific commitments to SMEs which, if implemented, will certainly help redress the massive power imbalance which currently exists between the banks and their small business borrowers. Here are just some examples of these new commitments:

1. Banks will tell SMEs the information they require and after they have received all the information they will advise how long it will be before they are likely to make a decision. The lack of certainty as to when a decision might be forthcoming is one of the biggest bugbears of small business owners.
2. If the bank does not approve a small business loan it will, if appropriate, give the general reason why the loan was not approved. Whilst “appropriateness” is at the discretion of the bank, if this information was provided in a timely and accurate manner it would be helpful in assisting the borrower obtain finance elsewhere.
3. If a borrower is in default, the bank will give 30 days’ notice before they either require repayment of the loan in full or take enforcement proceedings and if the default is remedied during this period the bank will cease enforcement action. There are exclusions where banks may give a shorter notice period such as if in the bank’s reasonable opinion, it is necessary to act to manage an immediate risk. And if the loan is by way of an overdraft or on demand facility, the bank may not be required to give any notice about when they require repayment.
4. If a borrower has met all loan payment terms, banks will not take action based on non-monetary defaults unless the situation falls within twelve exclusions such as the loan is used for a purpose not approved by the bank or financial information is not provided as required under the agreement.
5. Banks will not include a general material adverse change clause as an event of default in any standard form small business lending contract. But for some kinds of standard form loans eg loans for property development and margin lending, banks may include financial indicator covenants or special covenants tailored to the particular nature of these loans as a trigger for default based action.
6. If a borrower is not in default, and the principal owing on a loan is not due to be fully repaid at the end of its scheduled term by regular periodic repayments, banks will give notice of their decision not to extend the loan at least 3 months before it is due to be repaid in full.
7. Banks will provide copies of property valuations and instructions except when enforcement action has already commenced. The code is silent as to whether SMEs will receive a copy of any Investigating Accountants report they pay for.

Whilst the ABA and the banks are to be commended for making many commitments to small business borrowers, consumers still seem to be afforded a higher level of protection. For example, commitment #113 says banks will not enforce any mortgage or other security provided in connection with a guarantee unless the lender has first enforced any mortgage or other security provided. However this commitment does not apply if the borrower is a small business. As an aside, in consumer situations this commitment also will not apply if the bank “reasonably expects that proceeds of enforcement against the borrower will not be sufficient to repay a substantial portion of the guaranteed liability”.

It is apparent from the above that a number of the commitments afford the banks substantial “wriggle room”. This would not come as a surprise to the cynics although I am optimistic that this time the banks will be more likely to walk the talk and there are a number of factors that support this view:

1. The banks have copped a battering at the Royal Commission and it’s not over yet. At some stage, bank CEOs will be in the witness box to answer questions about culture and accountability. If the banks did obfuscate in the past, it’s not going to look good for their leaders to do so in front of Kenneth Hayne. The Royal Commission has brought the standing of the banks to a cross road. They simply cannot afford to fall further.

2. Even though many small businesses owners are mistrustful of banks, in the past there was little they could actually do about it but the banks no longer have the SME market all to themselves. There are dozens of alternative sources of finance for SMEs these days including challenger banks, fintechs, specialist asset financiers and merchant cash advance lenders. Not only do SMEs now have options, their awareness of these options is improving all the time. This is not lost on the banks.

3. This is the first time an industry code has been approved by ASIC which noted that the ABA had “made additional significant changes in order to satisfy ASIC that the code meets it’s criteria for approval”. Westpac’s CEO Brian Hartzer noted the industry had worked with the regulator to ‘‘completely rewrite’’ the industry’s commitments. It has taken a long time to get to this stage and in the meantime ASIC itself has faced some tough questioning at the Royal Commission with inferences that, at best, it has been soft on the banks and, at worst, it has been asleep at the wheel. ASIC is heavily invested in this code and accordingly we can expect it will play a hands on role in enforcing it.

4.When the previous banking code was launched in 2013, Kate Carnell’s role as ASBFEO did not exist. Since she was appointed in 2016, small business owners have had a powerful and determined advocate who has and will continue to strongly prosecute the interests of her constituency. Other SME advocates including Peter Strong from the Council of Small Business Organisations Australia and hopefully theBankDoctor have been vocal in their support for SMEs. The voice and influence of small business advocates will only continue to grow.

WHERE TO FROM HERE?
To date, the banks have not done a good enough job in walking the talk of their codes of practice and they simply have to do better. Bank CEOs are telling us they are totally committed to making the code work. Training of staff is critical and retention of employment and remuneration needs to be tied more to performing as per the code than financial metrics.

Meanwhile SMEs have to stop believing they are powerless when it come to engaging with their bank. As busy as they are, if SMEs want to be treated better by the banks they need to invest time to understand their rights and remedies. It can’t just be left to the Royal Commission, regulators, advocates and investigative journalists to call out poor behaviour by the banks. If individual small business owners are unhappy with how a bank has conducted itself, they need to take action.

So before SMEs have their next significant encounter with their bank, they should read the code so they know what to expect. And if they believe the bank has not acted in accordance with the code, they should do something about it. SMEs now have enshrined rights and avenues of redress.

All banks have internal dispute resolution people SMEs can talk to. And if they’re not happy with this, they are able to go to the ABA’s external dispute resolution service which is run by relatively independent experts. From November this year SMEs will also have access to the new Australian Financial Complaints Authority and Kate Carnell and other advocates are also there to support small business owners.

The new code of practice represents an opportunity neither SMEs or the banks should overlook. It will make a positive difference to SMEs if they are prepared to hold the banks to account. And if bank conduct is genuinely guided by the code then they may begin to regain lost trust.

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