Code of Banking Practice: small business review by Financial Services Royal Commission

The latest draft version of the Australian Banking Association‘s new Code of Banking Practice was analysed at the Financial Services Royal Commission on 31 May 2018.

The Code sets out the banking industry’s key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services. The Code applies to personal and small business bank customers.

The revised Code will provide small business customers with longer notice periods around changes to loan conditions or a bank’s decision whether to renew a loan facility, as well as simpler contracts. It also deals with enforcement of a loan against a small business for non-monetary defaults.

It is a condition of ABA membership that member banks with a retail presence are required to sign up to the Code.

What is a small business?

The Australian Banking Association’s CEO Anna Bligh gave evidence about the Code focussing on the new small business Part 6 and its definition of a small business.

The ABA’s draft says:

“A business is a “small business” if at the time it obtains the banking service all of the following apply to it:

a) it had an annual turnover of less than $10 million in the previous financial year; and

b) it has fewer than 100 full-time equivalent employees; and

c) it has less than $3 million total debt to all credit providers — including:

i. any undrawn amounts under existing loans;

ii. any loan being applied for; and

iii. the debt of all its related entities that are businesses.”

A restricted definition of small business will limit the protections offered by the Code to a smaller number of businesses.

The 3 tier definition, including a total debt limit rather than an individual loan limit, could also make it difficult to determine whether the Code applies to a business.

Ms Bligh argued that a wider definition could limit the availability of credit for small businesses.

She proposed a 2 year trial of the restricted definition.

Currently the unfair contracts law applies to contracts between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.

The Australian Small Business and Family Enterprise Ombudsman has recommended that the Code small business protections should apply to all loans below $5 million. Background.

What is the duty of bankers?

The draft Code says “If we are considering providing you with a new loan, or an increase in a loan limit, we will exercise the care and skill of a diligent and prudent banker.”

The Commissioner has asked for bank submissions to address the content and scope of this duty.

ASIC’s response

ASIC has been asked to approve the Code which means it must meet the criteria for codes in the financial services sector set out in section 1101A Corporations Act, and ASICs regulatory guide 183, including in relation to compliance monitoring and enforcement. The revised Code has not yet been approved by ASIC.

ASIC and the ABA are to meet to resolve ASIC’s concerns.

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