Royal commission reforms to “broken” banking code delayed as ombudsman urges scrutiny over get-out-of-jail clauses

Australian small business and family enterprise ombudsman (ASBFEO) Kate Carnell has called on corporate regulator ASIC to cast its eye over “get-out-of-jail clauses” in industry banking regulations as part of its consideration of a controversial banking royal commission recommendation.

A proposed expansion to the definition of ‘small business’ under the 2019 Banking Code of Practice has been waylaid by the prospect of a lengthy review after the Australian Banking Association (ABA) raised concerns with the Hayne-endorsed change earlier this year.

The proposed reform would see the definition of small business under the industry-written code — the principal document regulating small business dealings with the major banks —expand to include firms applying for loans of less than $5 million.

Under the current code, which came into effect on July 1, only firms with less than $3 million in total debt with all credit providers and less than 100 full-time equivalent workers are defined as ‘small businesses’.

Carnell says the current definition is “broken” and out-of-step with the Australian Financial Complaints Authority (AFCA)’s small business threshold, which already runs to loans valued at $5 million.

This creates a situation where a business not covered under small business protections within the banking code would still be eligible for AFCA redress as a small business.

“There’s this stupid gap where AFCA can take the complaints but somehow the voluntary code doesn’t apply,” Carnell tells SmartCompany.

“I get it will take a little bit of time to get enough information to make a call on just how many businesses will fall between $3 million and $5 million.”

The banks have argued about 97% of business lending falls within the current definition, but Carnell says the real issue is the current code defines the loan threshold as an aggregate of total debt across all credit providers.

“You can get to $3 million in aggregate pretty easily in a small business where you’re buying equipment, setting up stock and re-tooling,” Carnell says.

The ombudsman is calling on ASIC to use the extended 18-month timeframe to also consider in detail longstanding concerns about other clauses in the code, which afford banks considerable discretion in their dealings with businesses.

“We’ll keep pushing for the review to be more holistic … at least make it a productive 18 months,” Carnell says.

Amid longstanding concern that some businesses are falling through the cracks under the current code, Kenneth Hayne proposed expanding and simplifying the definition as part of the royal commission last year.

It was one of 76 recommendations for overhauling Australia’s banking sector, and one of ten to be implemented by industry.

The Treasurer outlined a roadmap for implementing the vast majority of royal commission recommendations by the end of 2020 yesterday.

The treasurer wrote to both ASIC and banking association chief Anna Bligh earlier this year urging them to get on with the job of implementing changes, including an expansion of the definition.

But consideration over whether to change the definition appears to have been folded into a planned 18-month review of the new banking code, rather than implemented separately as other royal commission recommendations are being.

ASIC approved an updated version of the Banking Code of Practice in the days before its July 1 implementation earlier this year, at the time flagging a second tranche of considerations to address other royal commission proposals.

A decision on those reforms is expected in the coming months, but an ASIC spokesperson has indicated the definitional change won’t be in the mix, citing March commentary from the Council of Financial Regulators (CFR), which supported the banking lobby’s view that the change should be delayed.

The CFR expressed concern the effects of already approved changes to the code had yet to be gauged, and more time would allow “sufficient information” to be gathered on potential changes to the definition.

“ASIC will in due course engage further with the ABA about the parameters of the independent review,” an ASIC spokesperson said in an emailed statement on Tuesday.

“ASIC’s approval of the Code was conditional upon an independent review being commissioned by industry, the results of which ASIC could then consider — together with quarterly data that we have already commenced collecting from banks about their small business lending — to determine whether we are comfortable that the current ‘small business’ definition in the Code covers an appropriate proportion of Australian businesses.”

The banking lobby expressed its concern with the proposed definitional change in February, arguing it could have a “material impact” on access to credit for small business borrowers.

On Monday, in response to the Treasurer unveiling his roadmap for implementing banking royal commission recommendations, the banking association said the industry is currently collecting data on the operation of the current definition.

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