Megan Neil
(Australian Associated Press)
The corporate regulator has signed off on new protections for small business borrowers after accepting the banking industry’s more conservative definition about when they apply.
The Australian Securities and Investments Commission and Australian Banking Association had been locked in a dispute about the definition of a small business, and therefore how far a revised industry code and its new protections extend.
ASIC has now approved the ABA’s new banking code of practice, on the condition that the small business definition is independently reviewed within 18 months of its July 2019 commencement.
ASIC said the code provided improved protections for small business borrowers and expanded the reach and impact of legal protections against unfair contract terms.
The ABA succeeded in having the code apply to small businesses with loans up to $3 million, compared to the $1 million limit under unfair contract legislation.
ASIC had favoured – and others including the small business ombudsman backed – the $5 million limit recommended by the code’s independent reviewer.
ASIC said the targeted review within 18 months will test the adequacy and application of the code’s small business coverage in practice and will occur well before a comprehensive three-year review.
The regulator will also collect quarterly data from the banks and financial complaints authority to monitor the extent of the code’s coverage of small business.
ASIC said at the current setting of applying to small businesses who borrow up to $3 million, the code will cover the considerable majority – between 92-97 per cent depending on the bank – of businesses in Australia.
It is the first comprehensive broad-based industry code ASIC has approved.
ABA CEO Anna Bligh said the approval process was rigorous and comprehensive, with a number of changes made to satisfy ASIC requirements.
The former Queensland premier said the code represented a stronger commitment to ethical behaviour, responsible lending, greater financial protection and increased transparency.
“Customers will see real tangible benefits, including more information about changes to their accounts, delay in offering add-on insurance products and simpler contracts, with fewer conditions for small business loans.”
Appearing before the banking royal commission in May, Ms Bligh said banks had to take on more risk with a small business loan and smaller lenders in particular feared a $5 million threshold would put them at a competitive disadvantage against the big four banks.
Banks were open to a trial at the $3 million threshold.
Banks with personal or small business customers will have to sign up to the new code if they want to remain ABA members.
Meanwhile, a survey by advisory group EY showed medium-sized businesses are worried about getting access to finance amid fears of a “credit crunch” as lenders react to the royal commission.
