ABA, ASIC at loggerheads over the definition of ‘small’ business

Australia’s banks remain locked in a dispute with the corporate regulator over a new industry code of conduct.

Former One Nation senator Rod Culleton speaks to media outside the financial services royal commission in Melbourne. Picture: Aaron Francis

Australia’s banks remain locked in a dispute with the corporate regulator over a new industry code of conduct that has been running for at least four months.

As it kicked off another fortnight of public hearings, the financial services royal com­mission yesterday heard the Australian Banking Association last month produced a new version of its proposed code of conduct, beefing up customer protections from a draft produced in December. However, in order to have the force of law, the code needs approval from the Australian Securities & Investments Commission, which has yet to occur.

Only one industry code has ever been given teeth by earning ASIC’s blessing — a Financial Planning Association document dealing with the relatively narrow issue of charging customers ongoing fees. The dispute between ASIC and the ABA is believed to centre on whether the limit for a customer being regarded as a small business should be $3 million worth of credit, as the banks desire, or the higher figure of $5m recommended by the man who reviewed the code for the ­industry. ASIC is believed to have put discussions with the ABA on hold after learning the royal commission would focus on the issue this month.

Yesterday morning, as the commission began publicly probing bank lending to small business before a packed public gallery that included former One Nation senator Rod Culleton, the ABA publicly released its most recent draft of the code.

The man who the ABA hired to review the code, former senior ASIC executive Phil Khoury, told the commission he only learned a new draft existed when royal commission staff told him about it on Friday night. Mr Khoury, a principal at governance consultancy Cameron Ralph Khoury, began overhauling the banking code in July 2016, at about the same time as the ABA appointed former public service commissioner Stephen Sedgwick to overhaul the scandal-prone industry’s remuneration structures.

His review was released on February 20 last year and the following month the ABA accepted — in full, part or principle — 90 of his 99 recommendations.

This number increased to 96 after former Queensland premier Anna Bligh became chief executive of the ABA in April last year.

A draft code was submitted to ASIC for approval in December last year, but it is believed that the regulator continues to push for the higher $5m number.

Mr Khoury said his review recommended a $5m limit, but “the industry came back with a new proposal for defining small business, fairly early in the piece”.

His proposal also differed from the industry’s because the $5m number he proposed related only to the line of credit under discussion, while the banks wanted their $3m to take in all credit from all providers.

“Industry indicated they weren’t happy with it — they thought it was too high,” he said.

The banks also wanted to restrict the definition of small business to those with a turnover of less than $10m a year. “Industry at that point were pretty keen to rein in the definitions,” he said.

He said the new draft of the code produced last month picked up another of his recommendations — a limit on full-time employees of 100 — but retained the industry’s $3m limit and the turnover test.

“It’s significantly different,” he said.

He said there was a lot of variation in loans made to small ­businesses.

“But for most of the loans below five (million) we found that they were really aimed at the unsophisticated small business,” he said.

“It doesn’t take very long, looking at examples of small business loan files, to see that the zeros can come on quite quickly without changing whether a small business is a sophisticated operation or not.

“There were many that were really targeted at the classic small business, unsophisticated operator, but significant amounts of money involved.”

Asked why he thought the banks pushed for their $3m limit, he said he and his team “understood the banks’ position was ­really based around their current practices”.

“We heard evidence that they structure internally different divisions or sections of the bank, largely on the strength of the amount of money involved,” he said.

Banks also raised the prospect that if protections for small business were increased “the availability of loans would reduce and potentially the cost would increase”.

Counsel assisting the commission, Michael Hodge, QC, said this set of hearings would not examine farm lending, which will be the subject of a future session.

However, it is to look at the CBA’s dealings with borrowers from Bankwest, which was forcibly sold to Australia’s biggest financial institution as its parent, HBOS, teetered during the 2008 financial crisis.

Mr Hodge said the next two weeks of hearings would examine three big issues: whether responsible lending rules that apply to consumer lenders should be extended to cover small businesses; when does pulling the plug on loans become unfair, unconscionable or fall below community standards; and how banks and regulators have responded to calls for higher standards and laws against unfair contracts.

Of 633 public submissions dealing with small business — about 11 per cent of the total — a “large number” raised concerns about credit approval processes, he said.

“Many of the submissions identify concerns about loans or other credit having been provided to small businesses without the relevant financial services entity first undertaking a proper assessment of the viability or profitability of the small business, and its capacity to service the credit product on offer,” he said.

He said some submissions also raised concerns about personal guarantees given over the home as security for a business loan — an issue the commission returned to later in the day when it heard from a blind woman whom Westpac allowed to pledge her house against a loan taken out by her daughter to buy a franchise.

Other issues raised in public submissions included the treatment of small business during finance renewal and loans being put in default for breach of non-monetary conditions such as maintaining a certain loan-to-valuation ratio.