Tag: SME

Majors move towards simplified SME lending

From Australian Broker.

A key issue raised by Small Business and Family Enterprise Ombudsman Kate Carnell in her Small Business Loan Inquiry has caused the major banks to amend their SME loan contracts.

During the inquiry, Carnell spoke of her concern around non-monetary default clauses such as financial indicator covenants which linked defaults to aspects such as loan-to-valuation ratios.

For loans below $5m, banks must not default a loan if the small business customer has complied with loan payment requirements and has acted lawfully, she said. She also pressed banks to remove conditions that allowed them to invoke financial covenants or catch-all ‘material adverse change’ clauses. These changes would have to be made by 1 July.

Commonwealth Bank of Australia

The Commonwealth Bank of Australia (CBA) has said it will amend its small business lending contracts to address the issues raised by Carnell.

“We are simplifying our small business loan terms and conditions to make it easier for our customers. For almost all of our small business loans, financial indicator covenants will no longer be included in loan contracts and therefore will no longer be a possible cause of default,” said CBA business and private banking group executive, Adam Bennett.

“Even though we very rarely used these covenants as a reason to foreclose a loan, this means that we will be removing all references to them in our small business loan contracts where our exposure to the customer is below a value of $3m. We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”

These changes will affect 95% of CBA’s small business customers and will advise all affected existing customers of the amended contracts.

Australia & New Zealand Banking Group

The Australia & New Zealand Banking Group (ANZ) has also reaffirmed its commitment to these changes especially around small business lending contracts.

“As we outlined before the Parliamentary Committee last month, ANZ will implement all 11 banking recommendations. This includes simplified contracts for new loans to small business customers being those with total business lending of less than $3m,” said ANZ general manager of small business banking Kate Gibson.

There will be no more financial indicator covenants for over 95% of the bank’s small business customers, she said. These conditions will remain in place for borrowers seeking complex business lending products.

“We are simplifying the contracts for our small business customers to make it easier for them to understand their loan terms, so they can be clear up front about their obligations for the life of their loan. We are working to implement all these changes by the end of the year.”

ANZ’s new contracts will also remove all general material adverse clauses while clearly outlining the reduced number of specific event clauses which could result in bank enforcement action if a breach occurs.

National Australia Bank

National Australia Bank (NAB) has also stepped up to say it will follow Carnell’s recommendations around SME lending.

The bank will remove all non-monetary covenants on loans for new and existing small business customers with total lending of less than $3m. This will improve transparency for 98% of all the bank’s customers.

NAB has also promised to rewrite its small business contracts in plain English by the end of the year.

“We’ve been working constructively with the industry to address concerns raised in the Small Business and Family Enterprise Ombudsman Kate Carnell’s Small Business Loans Inquiry report. We are proud to be helping lead the charge on this – including taking measures beyond the Ombudsman’s recommendation, by applying the measures to all new and existing loans,” said NAB executive manager of business direct and small business Leigh O’Neill.

The threshold of $3m is just right as it benefits the vast major of the bank’s business customers, she added, as loans above this amount are more complex and require a greater level of management.

Cash Flow A Barrier To SME Growth

From Australian Business Review.

Cashflow issues are costing SMEs a potential $200 billion in lost revenue each year.

East & Partners has based these revenue estimates on ABS data that total revenue for the A$1 – 20m SME segment is A$1.3 trillion, and given 1150 of 1250 SME survey respondents indicated that better cashflow could have improved their revenue by an average of 18.7 percent, this has been extrapolated to indicate $222.5 billion additional revenue.

Three-quarters of SMEs who identify as being in growth phase say better cashflow would have produced revenue growth of 10 to 50 percent in 2016, Scottish Pacific CEO Peter Langham said.

Since September 2014 Scottish Pacific, Australia’s largest specialist working capital finance provider, has engaged specialist research firm East & Partners to conduct six monthly polls of more than 1200 small to medium enterprise leaders across all states and key industries, to test SME sentiment and concerns.

The Scottish Pacific SME Growth Index out today shows a record percentage of businesses plan to use non-bank financing (22 percent, doubling from 11 percent in Round One, September 2014). This contrasts with declining bank borrowing intention (29 percent, significantly down from 38 percent in Round One).

As well as the growing intention to fund business by using non-banks, just under 95 percent of SMEs indicated they planned to use their own funds to support their business, and once again respondents cited access to and conditions of credit in their top three barriers to business growth.

“It seems the day is approaching when non-banks will match or pass the banks as the first port of call for small to medium business funding,” Langham said.

“With interest rates at record lows, SME access to credit should not be a problem. And yet SME owners and leaders indicate that their full credit appetite is not being fulfilled.

“In light of ASBFEO’s Small Business Loans Enquiry which highlighted the need for a fast solution for small businesses at loggerheads with their banks over access to finance, it’s important for SMEs and their advisers to be across the full range of finance options available to them,” he said.

Only 8.5 percent of all SMEs reported that they were satisfied with their cashflow (just 5 percent of growth SMEs were satisfied). Seven out of ten, whether growth, consolidating or declining SMEs, said better cashflow would have improved 2016 revenues by more than 5 percent.

Seven out of ten growth SMEs indicated improved cashflow would have produced at least 10 percent revenue growth, with almost a quarter saying they could have achieved 25-50 percent revenue growth.

“Regardless of whether an SME had a growth or negative growth forecast, this clearly indicates the significant impact improved cashflow would have on revenue growth,” Langham said.

“The smaller the business, the greater the impact of improved cashflow, with strong indications that improving cashflow early in the life of a business has a major long-term impact on revenue growth.”

96 percent of $1-5 million revenue businesses agreed that better cashflow would have increased their 2016 revenue (with an average improvement of 23 percent); 85.5 percent of $15-20m businesses agreed, with an average revenue increase of 11 percent.

Mr Langham said the stark reality for CFOs and corporate treasurers in the SME sector was that nine out of ten firms say they could have better cashflow management.

“The unhappiness around cashflow is higher for growth businesses, as opposed to those with steady or declining revenue. It is cited as a major growth barrier by 56 percent of growth SMEs, but only by 20 percent of SMEs in a consolidation or declining growth cycle,” he said.

Langham said that in this round of the Scottish Pacific SME Growth Index, Australia’s SME owners seem to have bounced back from the pessimism they voiced in the previous round, September 2016.

“SME business confidence is on the rise, but fragile. Trend analysis shows just over 49 percent of SMEs are expecting revenue increases in the first half of 2017, a drop from 63 percent in our first round in late 2014. Since 2014, average positive revenue forecasts for growth SMEs have remained at around 4 percent, yet the average revenue drop predicted by negative growth SMEs has blown out from 5 percent to 8 percent.”

SMEs listed their top three barriers to growth as high or multiple taxes (71 percent), credit conditions (65 percent) and credit availability (61 percent). Key growth drivers are core customers (41 percent), strong staff (38 percent) – and more concerning, good luck (31 percent) and ‘just following our nose’ (37 percent).

“We’ve seen an increase in the number of SMEs citing credit conditions as a growth barrier, from just over 50 percent in 2014 to now above 60 percent,” Langham concluded.

SME Cash Flow Under Continued Pressure

We have updated our rolling SME survey, ahead of the next edition of the SME report, out soon. The previous version is still available on request. SME’s are under significant cash flow pressure. Today we walk though some of our findings.

We look at businesses up to $5m turnover, although most of the 2 million plus businesses are much smaller.

The average age of the owner is more likely to be 45-55 years, as often they have moved on to second careers, or decided to set up on their own.

Nearly half are less than 4 years old, and indeed more than half started are likely to fail in the first 3 years.

Construction and Real Estate services make up a large proportion of the total, and the SME sector overall is heavily relent on the property sector more broadly.

Around 60% of businesses are seeking to borrow, and most are looking for working capital support.

The main driver within working capital is delayed payments (especially from large private sector companies and some government agencies).

The average debtor days is more than 50 days and rising. It varies by state.

Our risk analysis metric shows that businesses in the other services and construction sectors are most risky when it comes to finance. Health care businesses are the lowest risk.

Next time we will look further at SME finances and their channel usage.

ASIC and ASBFEO join forces to ensure bank lenders meet unfair contract laws

ASIC says Australian lenders including the country’s big four banks have substantial work to do to eliminate unfair terms from their loan agreements, a joint review of small business standard form contracts undertaken by ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has revealed.

ASIC and the ASBFEO reviewed small business loan contracts from eight lenders and found there’s been a failure to take sufficient steps to comply with their new obligations under unfair contract terms (UCT) legislation.

This is despite being provided with a one year transition period, ahead of last year’s November implementation deadline.

ASIC and the ASBFEO are sending a very clear message that lenders need to immediately take steps to ensure their standard form loan agreements fully comply with the new legislation.

In their initial review ASIC and the ASBFEO found lenders continue to use clauses of concern such as:

  • Terms that give lenders a very broad discretion to unilaterally vary terms and conditions of the contract;
  • Terms that provide for loan ‘default’ (such as non-monetary default) in a very broad range of circumstances, rather than where the borrower has materially defaulted on their obligations;
  • Terms that absolve the lender from responsibility for conduct, statements or representations that the lender makes to borrowers outside of the contract (otherwise known as ‘entire agreement clauses’); and
  • Terms that too broadly indemnify the lender against losses, costs, liabilities and expenses.

Both ASIC and the ASBFEO have also reiterated their support for the recommendations made by the independent review of the Code of Banking Practice – undertaken by Mr Phil Khoury – in relation to small business loan contracts.

The additional protections for small business borrowers proposed by the Code Review are long overdue and consistent with the recent ASBFEO inquiry into small business loans. Banks must move quickly to implement:

  • A prohibition on non-monetary default clauses where the borrower is meeting their obligations under the contract;
  • 90 days’ notice period where a loan facility will not be extended; and
  • More comprehensive access to the Financial Ombudsman Service.

ASIC Deputy Chair Peter Kellsaid: ‘ASIC is committed to ensuring the UCT provisions help to raise small business lending standards. Where we identify a potentially unfair term we will work with the lender to remove or amend the term, and we have already started to raise these issues with lenders. If the lender refuses to do so we will consider all regulatory options, including taking the matter to court as ultimately a court can decide whether or not a term is unfair.’

ASBFEO Kate Carnell said: ‘I’m firmly of the belief that the loan contract terms as they currently stand, fail to comply with the UCT law.

‘Once again, repeated calls for the banks to amend their practices are falling on deaf ears, despite inquiry after inquiry highlighting major flaws in the way they treat their small business customers.’

Background

The unfair contract term protections for consumers in the Australian Securities and Investments Commission Act 2001 (ASIC Act) were extended to cover standard form small business contracts entered into, or renewed, on or after 12 November 2016.

In February 2016, ASIC released Information Sheet 211Unfair contract term protections for small businesses (INFO 211). This information sheet gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.

In INFO 211, ASIC also outlined its expectations that financial product issuers review their standard form small business contracts to remove any terms that could be considered to be unfair to ensure compliance by 12 November 2016.

ASIC is responsible for enforcing the unfair contract terms law in relation to financial products and services. For other goods and services, enforcement of the unfair contract terms law is shared between the Australian Competition and Consumer Commission (ACCC) and the State and Territory consumer protection agencies.

ASIC and the ACCC have worked together to help small businesses understand the unfair contract term protections. On 16 March 2016, the two agencies hosted a webinar to provide practical guidance about the protections for small businesses, including a discussion of the types of terms that may be unfair and what action small businesses can take if they receive a contract that contains an unfair term.

Small businesses that are concerned about whether a contract term is unfair can make a complaint directly to their financial services provider or to the relevant external dispute resolution scheme if the dispute is not resolved, or directly to ASIC.

The Code of Banking Practice is a voluntary code of conduct which sets standards of good banking practice for member-banks of the Australian Bankers’ Association.

While it is not ASIC’s role to endorse contract terms or to state that they are unfair, ASIC may apply to a court to have a term declared unfair if it is in the public interest to do so. Any party to the contract may also apply to the court if they are not satisfied with the outcome of the dispute resolution process.

Only a court or tribunal can decide whether a term is unfair.

If a court or tribunal finds that a term is ‘unfair’, the term will be void—that is, it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Prospa Seeks $500m in SME Loans After Raising

From Smart Company.

Small business lender Prospa is gearing up to hire an additional 100 employees in its next stage of expansion, after this week securing a $25 million cash injection in what is believed to be the largest fintech venture capital investment in an Australian business.

The 2016 Smart50 winner says the investment round, led by Australian venture capital firm AirTree Ventures, will shore up the company’s ability to dominate the small business lending landscape on its path to writing more than $500 million in loans.

“It’s a great story for Australian VCs, and really just cements the general market awareness of how Australia can build great tech companies,” co-chief executive Beau Bertoli tells SmartCompany.

Prospa will be using the funds to further develop the technology side of the business, and with several new projects on the go, Bertoli says the funding injection will also allow the business to keep investing in people.

“It does require a lot of people—the costs are going to be in hiring, we’re going to be looking to hire about 100 over the next year. We’ve put a lot of thought and planning into it this year—it’s not the first time we’ve tried it,” he says on hiring big cohorts of staff at once once.

The Prospa platform, which allows small businesses to apply for unsecured loans of up to $25,000, launched in 2011 and previously raised $60 million in capital in September 2015.

The lender has written more than $250 million in loans, and recorded revenue of $22 million for the 2016 financial year. The current valuation of the business is $235 million, says Bertoli, and while that’s a “substantial” number for an Australian fintech operation, he believes there’s still plenty of room to grow.

“We’ve got a really long way to go,” he says.

“It all comes back to the customer problems, and they can all use capital at different times.”

Prospa has developed a number of strategic partnerships with the likes of Westpac and Mortgage Choice, but Bertoli says the company’s connection to smaller operations has also contributed significantly to its growing the loan base.“We work with around 4,000 partners around Australia, from Westpac to small little accounting firms,” he says.

“That gives us access to well over half of Australia’s small business customers. We’re able to work with lots of [those partners] and get access to their customers.”

Why small business tax cuts aren’t likely to boost ‘jobs and growth’

From The Conversation.

The Turnbull government’s signature economic policy at last year’s election was a 5% cut in the company tax rate, over a ten-year period, at a cost to revenue estimated to be in excess of A$48 billion. As the government itself has conceded, this now stands very little prospect of being passed by the Senate.

However, there is one element of the government’s proposal which appears to enjoy almost universal political support – the idea that “small” companies should get a tax cut. The only disagreement among the Coalition, Labor and the Greens on this score is how small a company should be in order to be deserving of paying a lower rate of tax.

From the standpoint of good economic policy this is surprising. There has been a lively debate for a while among economists as to whether cutting company tax rates will boost economic growth, employment and real wages – and the extent to which this theory is supported by evidence. But there is no evidence at all to support the notion that preferentially taxing small businesses will do anything to boost “jobs and growth”.

Advocates of tax and other preferences for small businesses often argue that small businesses are the “engine room of the economy” – because, for example, 96% of all businesses are small businesses, or because small businesses employ more than 4.5 million people.

According to the latest available ABS data, small businesses (defined as those with fewer than 20 employees) employed just under 45% of the private sector workforce in June 2015. Despite this, small businesses accounted for only 5.2% of the increase in private sector employment over the five years to June 2015.

By contrast, large businesses (defined as those with 200 or more employees) employed less than 32% of the private sector workforce in June 2015 – but they accounted for more than 66% of the increase in private sector employment over the five years to June 2015.

Employment and employment growth by size of business

ABS Australian Industry (8155.0) 2014-15, Author provided

Similarly, a smaller proportion of these small businesses engage in any of the four categories of innovation which the ABS recognises in its annual survey of business innovation than of medium or large businesses.

ABS, Summary of IT use and innovation in Australian businesses (8166.0), 2014-15, Author provided

So on the basis of the available evidence, a policy which sought to encourage employment creation and innovation via the use of preferential tax treatment would surely preference large businesses, rather than small ones.

However, that would be politically challenging, given that a large majority of voters think that big companies should pay more tax, not less.

What sort of businesses create jobs and growth when tax is reduced?

An alternative approach, which would be much more likely to have positive effects on employment, investment and innovation, would be to tax new companies at a lower rate.

OECD research shows that young businesses are the primary drivers of job creation. And new companies are more likely to be at the frontier of productivity growth.

New businesses are of course likely to be small, at least initially. Confining preferential tax breaks to new businesses – for example, by prescribing that a lower tax rate is only available to a business for the first (say) three years after its incorporation – focuses the assistance on those businesses which are actually likely to innovate, and to create jobs. This is instead of dissipating it on the much larger number of businesses who have no desire, intention or ability to do either.

Preferentially taxing new businesses is therefore much more likely to achieve the stated goals of boosting jobs and growth, and of encouraging innovation, at much lower cost.

In addition to this, preferentially taxing new businesses avoids the perverse incentives that inevitably arise when the eligibility for some form of preferential treatment is determined by a business’ size. This is frequently demonstrated by the reluctance of businesses to put on an extra worker when doing so would render them liable to pay state payroll tax.

Of course, there would need to be compliance measures designed to forestall “rebirthing” of companies in order to prolong access to tax preferences intended to benefit new companies, but that would not be difficult to provide.

The Coalition’s support for a preferential tax rate for small businesses appears to owe more to its long-standing, almost religious, belief that there is something inherently more noble or worthy about owning and operating a small business, than there is about managing or working for a large one (or a government agency). Also that this belief should be reflected in the tax system, rather than basing it on any evidence that taxing small businesses at a lower rate than large ones will have any positive impact on economic or employment growth.

Why Labor and the Greens should support this view is much more of a mystery.

Author: Saul Eslake, ice-Chancellor’s Fellow, University of Tasmania

After all the talk, what is the Turnbull government actually doing for small business?

From The Conversation.

Treasurer Scott Morrison continues to warn about the decline of Australia’s global competitiveness if the centrepiece of the 2016–17 federal budget – a company tax rate cut – is not passed.

However, such tax cuts are not necessarily the best approach for the government to support small business. They need other – more immediate – forms of support, our research shows.

What’s being proposed?

The 2016-17 budget reflected the Turnbull government’s catchphrase of “jobs and growth”. From a small-business perspective, the budget wanted to:

… boost new investment, create and support jobs and increase real wages, starting with tax cuts for small and medium-sized enterprises, that will permanently increase the size of the economy by just over 1% in the long term.

In 2014, Australia had the fifth-highest company tax rate among OECD countries, albeit average in the Asia-Pacific region. Local investors benefit from lower taxes on dividends through Australia’s dividend imputation system, which passes credits onto them for corporate taxes already paid.

The Abbott government later succeeded in lowering the tax rate for small businesses with a turnover of less than A$2 million from 30% to 28.5%. The Turnbull government’s plan would eventually reduce the rate for all companies to 25% by 2026-27. It’s a phased implementation over the next ten years, starting with an immediate cut for small companies to 27.5%.

However, 70% of small businesses are unincorporated. This means their owners add profits to their personal income for tax purposes. While the government has promised an increase in their tax offset percentage, it plans to retain the cap of A$1,000.

All small businesses will benefit from the simplification of tax rules for stock, GST and depreciation. But the government’s plan introduces three levels of concessions for small businesses. This complicates the definition of what these small businesses are.

Definition disputes

Defining small business goes beyond an academic debate.

With little consensus on typical turnover numbers – these range from A$2 million to A$25 million – a better indicator could be the Australian Bureau of Statistics definition of small businesses as those with fewer than 20 employees. And 97% of the 2.1 million businesses trading in Australia fit this definition.

It is risky, though, to simplify the definition into one blunt instrument that ignores differences in industry, life cycle and high-volume versus high-worth sales. A more nuanced approach is needed to ensure relief for the businesses that need it most.

However, the major political parties seemingly remain focused on turnover as a measure of what is and isn’t a small business. The government’s plan extends the upper limit for the turnover of small businesses to A$10 million by 2016–17, which covers some of the 3% of Australia’s non-small businesses.

Meanwhile, Labor has argued for immediate support for tax cuts to small businesses with a turnover of less than A$2 million.

Lifting the turnover threshold for all small businesses from A$2 million to A$10 million in the short term will increase the number of businesses that can access some tax concessions by 90,000. And it may improve economic growth as larger firms receive some relief.

What small businesses actually need

Small businesses need immediate and certain tax relief in the short term. They struggle with an uncertain business environment.

But, in the longer term, our research shows increased competition, a lack of market demand and red tape are but a few of the issues small businesses deal with. They highlighted statutory and regulatory compliance, as well as tax planning and compliance, as major issues for them.

More than tax rates, complex tax requirements and regulations are issues causing small businesses substantial distress. The Australian Tax Office’s research supports this: more than 70% of surveyed clients viewed their tax affairs as complex. And the World Bank’s ease of doing business index ranks Australia 25th in terms of ease of paying taxes.

The immediate tax relief for small businesses is tied up in proposed legislation surrounding the government’s ten-year tax plan, which is unlikely to find enough support to pass the parliament in its current form. The uncertainty and complexity that have ensued from the political conflict over tax have negative effects on the small business landscape.

Innovation is likely to suffer under such uncertain conditions. The government’s plan recognises that:

Small businesses are the home of Australian enterprise and opportunity and they are where many big ideas begin.

In addition to ideas and passion, small businesses need resource availability, appropriate capabilities and market access to innovate. The plan proposes measures that satisfy some of these criteria, but more focus on finding ways to minimise bureaucracy to provide time to focus on innovation is needed.

The role of government is undeniable in such initiatives. Even if one argues that tax relief is a temporary reprieve, this cash injection can jump-start small business innovation and growth.

Should the two major parties fail to find common ground on the government’s company tax cut, the stalemate will continue – and leave small businesses in the lurch.

Authors: Martie-Louise Verreynn, Associate Professor in Innovation, The University of Queensland; Thea Voogt, Lecturer in Tax Law, The University of Queensland.

 

ABA Responds To SME Banking Report

The ABA has responded to the Kate Carnell SME Banking Review, and rightly highlights the importance of the SME sector to the economic future of Australia.  They said they would respond to the findings in the report later.

Of course, talk is cheap, but if it leads to real change that benefits small business it would be a good outcome.

Among the items I think they need to address are:

  1. High prices for loans to SME’s – rates have not fallen in line with cuts in the RBA cash rate
  2. Insistence on SME’s providing collateral even for relatively small loan amounts, and the fees involved in these transactions
  3. Heavy handed dealing with small business owners who get into difficulty, not just in the agricultural sector
  4. Lack of transparency in loan agreements

This is what the ABA has said:

The Australian Bankers’ Association has welcomed the report into small business lending practices released today by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP.

“Small businesses drive economic growth and jobs, and having access to finance is key to their success,” ABA Chief Economist Tony Pearson said.

“Banks have heard the problems raised by small businesses and farmers and are focused on making banking better for them.

“This includes being more transparent and flexible in loan arrangements, and setting new standards on appointing receivers and valuation practices.

“The ABA is also working with small business organisations to make sure they have the information they need to manage and grow their businesses, including revamping the existing Financing Your Small Business website,” he said.

“The issues raised by Australian Small Business and Family Enterprise Ombudsman Kate Carnell in this report are important. Alongside this, the Code of Banking Practice is currently being independently reviewed (Khoury Review).

“We expect the report of the Khoury Review to be published shortly, and we aim to respond to the recommendations, as well as those from the Carnell Review, by the end of this month.

“The ABA will make changes to the Code to make sure our commitments to small businesses are clearer. We’re looking at having a separate section for small business lending and how we can improve the transparency of loan terms and conditions.”

Mr Pearson said the industry supported giving more help to customers when things go wrong.

“The ABA supports simplifying the current external dispute resolution system, creating an easier ‘one-stop-shop’ model and expanding the scheme so more small businesses can have complaints heard without needing to use the courts.

“At the same time, banks are improving their own complaints handling processes and appointing new dedicated customer advocates. Six banks have already appointed their customer advocate, with the other banks committed to have theirs in place by April,” he said.

“The ABA is pleased the report recommends a national approach to farm debt mediation. We have been advocating for some time to have a nationally consistent and mandatory approach to mediation that helps farmers in financial difficulty, which is modelled on the existing NSW and Victorian schemes.

“This would make it simpler and fairer for farmers to get help when they need it most,” Mr Pearson said.

This week Australia’s leading banks launched a Better Banking program to deliver better products and services to customers, building on last year’s reforms that address concerns with the culture in banks.

Former Auditor-General, Mr Ian McPhee AO PSM, is overseeing the implementation of some of these reforms in his role as independent expert. He has been providing detailed quarterly reports to the public on where the industry is up to, including how individual banks are progressing.

“The ABA recognises the importance of customers and stakeholders having confidence in the changes the industry is making. We will ask for more detailed information in the next report about individual banks’ progress,” Mr Pearson said.

 

Change is Overdue and the Banks are on Notice

From the BankDoctor.

This is the confronting title of a report into the adequacy of the law and practices governing financial lending to small businesses released today by Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman. By way of background, in September 2016, the Minister for Small Business Michael McCormack asked the ASBFEO to undertake this inquiry which involved public hearings with executives from the four major banks and it also heard evidence from bank customers.

REPORT RECOMMENDATIONS
The report makes 15 recommendations designed to address gaps in the existing regulatory environment and with the practices of industry participants. These recommendations relate to businesses which borrow less than $5m.

What do these recommendations actually mean for small business borrowers, how will the banks respond and will anything change anyway? Here’s theBankDoctor’s take …..

More Breathing Space and Protection.
Banks would be required to:

  • Remove any loan conditions which allow banks to unilaterally trigger a default based on revaluing assets during the life of the loan and invoking financial covenants or catch-all ‘material adverse change’ clauses. That is, as long as the borrower is meeting repayments and is acting lawfully, the bank can’t trigger a default.
  • Provide a minimum 30-business day notice period to all changes to loan conditions and covenants.
  • Provide borrowers with decisions on roll over at least 90 business days before loans mature.

Greater Understanding & Transparency.
Banks would be required to:

  • Put in place a new small business standard form contract that is short and written in plain English.
  • Provide a one-page summary of the clauses and covenants that may trigger a default or other detrimental outcomes for borrowers.
  • Provide borrowers with a choice of valuer, a copy of the instructions and the valuation report. And borrowers would be provided with a copy of any instruction given to investigating accountants as well as the subsequent report;

Better Dispute Resolution Procedures.

  • The banking industry must fund an external dispute resolution one-stop-shop with a dedicated small business unit that has appropriate expertise to resolve disputes relating to a credit facility limit of up to $5 million.
  • Banks must establish a customer advocate to consider small business complaints and disputes that may or may not have been subject to internal dispute resolution.
  • External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigating accountants and receivers.

ONE SIGNIFICANT OMISSION
It was a little surprising not to see any reference to the critical issue of open access to client data. More needs to be done to ensure banks provide open access to customer data so that borrowers can use their data to get the best deal possible and they are able to change banks more easily. To date the banks have been, at best, cautious and, at worst, uncooperative in addressing this issue. The slower the banks are to respond to customer expectation the more difficult it will be to hold onto them. We used to talk about banks “owning” customers but this is changing. Failing to embrace open access to data will not help banks retain customers in the longer term.

HOW WILL THE BANKS RESPOND?
The banks have responded to the constant adverse public exposure by conducting their own reviews and marketing campaigns. Only last week the Australian Bankers Association on behalf of the banks announced a raft of commitments to make banking better under the heading of “we hear you”.

These newly announced initiatives include:

  • A renewed commitment to support customers in financial difficulty.
  • Providing more support to small businesses and farmers by introducing new best practice standards on valuation practices and how banks appoint receivers.
  • Developing financial literacy resources and tools for small businesses.
  • Helping customers better understand how they can switch accounts.

To their credit, the banks are at least saying the right things, they get that the loss of trust is a major issue which threatens their livelihoods especially as new, more flexible and user friendly alternatives are becoming more accessible. But will they actually follow through and how long is this all going to take? And who is going to hold them accountable?

ACCOUNTABILITY & FOLLOW UP.
Kate Carnell will do all in her power to hold the banks to account.

“Frankly, the banks take ‘kicking the can down the road’ to new levels.  This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible.  This report is a living document; it’s only the beginning of our work in this area,” she said.

She didn’t hold back when she added that “the banks have consistently failed to implement changes to address persistent problems”.

To ensure accountability the ASBFEO will publish six monthly scorecards on the progress banks are making in response to the recommendations contained in the report.

The report also recommends the ABA’s undertakings are carried out by requiring the publishing of individual bank implementation plans including key milestones and deliverables with outcomes against these plans.

A Royal Commission would take years to lead to change in our banking system. Last year’s Parliamentary Inquiry provided good reality TV entertainment as a diverse group of politicians prosecuted their own agendas against the defensive and well scripted bank CEOs.  But the ASBFEO inquiry, this report and its on-going engagement with bank leaders represents the best chance yet to drive much needed change in bank practices in the SME sector.

Yes, SME’s ARE Getting The Damp End of the Stick from the Banks

An inquiry into small business loans by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell, has found the big four banks consistently engage in practices that have caused significant harm to some small business customers. The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

This report confirms what our SME surveys show – small business has an unequal relationship with their banks, have difficulty getting the finance they need on fair terms, and find that lenders bully them especially in times of hardship. That said, SME’s often are unable or unwilling to shop around to get better deals, and feel trapped by the current arrangements. You can a video on our analysis here, and get the free copy of the DFA report here. SME’s are a critical engine in the economy, and current banking behaviour towards them is a brake on growth.

The ASBFEO report has made a significant number of recommendations.

  • Strengthen the Australian Bankers’ Association’s six-point plan;
  • Code of Banking Practice be revised to include a specific small business section, with the Code to be approved and administered by ASIC;
  • No defaults on loans below $5 million where a small business has made payments and acted lawfully;
  • A minimum 30-business day notice period for potential breach of contract conditions;
  • A minimum 90-business day notice period for bank rollover decisions for loans below $5 million (longer for rural properties and complex businesses);
  • Banks required to provide a one-page summary of loan default triggers;
  • Banks to put in place a new and clearly written small business standard form contract;
  • Borrowers be provided with a choice of valuer, vauler instructions and valuation report;
  • Borrowers be provided a copy of instructions given to investigating accountants and the subsequent report;
  • Banks to eliminate perceived conflict of interest when investigating accountants appointed as receivers;
  • An industry-funded one-stop external dispute resolution body, with a unit dedicated to resolving small business disputes regarding credit facilities of up to $5 million;
  • Bank customer advocates be made available to consider small business complaints;
  • External disputes resolution schemes be extended to include disputes with third parties appointed by the bank and to borrowers who have undertaken farm debt mediation.
  • A national approach to farm debt mediation;
  • ASIC to establish a Small Business Commissioner.

The ASBFEO inquiry – completed in just over three months – investigated the circumstances surrounding a number of cases of alleged small business mistreatment by the banks, and concluded loan contract arrangements between banks and small businesses, put the borrower at a distinct disadvantage.

“Fundamentally, what we’ve found is that small businesses who take out a loan, do so under the impression that if they keep up their payments, they will stay out of trouble.  The reality is that this is not the case; that the clauses contained in standard small business loan contracts give banks an inordinate level of power over the borrower, who has zero ability to do anything about it,” Ms Carnell said.

“Basically, the terms in these contracts allow the bank to take action to protect itself from financial risk, by inflicting added demands on the borrower.

“For example, banks may conduct a new valuation on the assets securing the loan.  Now if the value is found to have fallen, the borrower faces significantly increased – and potentially unmanageable – loan costs.  Banks also have the power to unexpectedly call in the loan, and demand repayment in an unrealistic timeframe.

“So what ends up happening is that through no fault of their own, small businesses could quickly find themselves in default, even though they’ve made each loan payment, on time, every time.

“The banks argue that they don’t use these contract clauses, however our inquiry found this is simply not true; that banks do in fact utilise these clauses, much to the surprise and heart-break of their small business borrowers,” she said.

Ms Carnell said the ASBFEO report outlines recommendations that can be implemented – many in a short timeframe – to help alleviate the vulnerability of small business borrowers when entering contracts, while not impacting on the financial viability of the banks.

“The cases we examined during our inquiry highlighted the glaring need to ensure small business bank customers are provided with simple standard contracts that are written in plain English and that get rid of the clauses giving banks all the power,” Ms Carnell said.

“It’s also clear from the cases we looked at, that current thresholds governing small business external dispute resolution are insufficient, so we will certainly support work in establishing a mechanism to provide timely and affordable access to justice for cash-strapped small businesses,” she said.

Ms Carnell said the ASBFEO will publish six monthly scorecards on the progress banks are making in response to the recommendations contained in the ASBFEO report.

“Since the GFC there have been 17 inquiries and reviews that have produced more than 40 recommendations over the years, relating to the small business sector.  Despite this, the banks have consistently failed to implement changes to address persistent problems” Ms Carnell said.

“Frankly, the banks take ‘kicking the can down the road’ to new levels.  This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible.  This report is a living document; it’s only the beginning of our work in this area,” she said.

Ms Carnell said she hopes that as industry leaders, the four major banks will seize the opportunity to be exemplars for change, saying the ASBFEO has already secured varying levels of in–principle support from the banks on a range of issues.

“While there’s certainly a lot of work to be done, it’s important to give credit where it’s due, with the big four banks committing – albeit to varying degrees – to make changes in a number of problem areas identified during our inquiry process,” Ms Carnell said.

These include amending the Code of Banking Practice to provide greater small business protections, the creation of customer advocates and improved transparency on valuations.

Background:

On 6 September 2016, the Minister for Small Business, the Hon. Michael McCormack MP, tasked the ASBFEO with undertaking an inquiry into the adequacy of the law and practices governing financial lending to small businesses.

The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

Throughout the inquiry process executives from the four major banks were summonsed to attend public hearings, with the ASBFEO using its Royal Commission-like powers to compel banks to produce required case documentation.  The inquiry also heard evidence from bank customers during private hearings, and considered the findings of previous inquiries and reviews.