The Australian Finance Industry Association (AFIA) has released a Code of Lending Practice for AFIA Online Small Business Lenders. It contains best practice lending principles to standardise transparency and disclosure in relation to the unsecured small business loans they offer.
Further consultation with key stakeholders including ASIC and small business owners will now take place and the Code, Charter and pricing disclosure tool will be fully operational and enforceable by 31 December 2018.
The Code is intended to ensure small business owners can clearly identify if a small business online loan from a lender compliant with the new Code, is right for their needs, exactly how much it is going to cost, and if it is the best solution available to them.
The Code is binding on Code Compliant Members of the AFIA Online Small Business Lenders Group when they provide Online Small Business Loans.
Online Small Business Loan means a loan where:
(a) the finance is provided (or to be provided) for a purpose that is wholly or predominantly a business or commercial purpose and where the National Credit Code is not applicable to the finance provided (or to be provided); and
(b) the finance provided (or to be provided) is Unsecured or is secured by a guarantee.
For the avoidance of doubt, the following types of finance, or any arrangement of a similar nature, are not an Online Small Business Loan for the purposes of the Code:
a) equipment finance in which the lender has an interest of any kind in the financed goods or equipment;
b) a rental agreement or instalment purchase agreement;
c) an operating lease;
d) a finance lease;
e) invoice financing of any kind; and
f) a factoring arrangement or finance facility.
The loans are typically short term (3-12 months) and the majority of finance is below $100,000.
The six signatories to the Code are Capify, GetCapital, Moula, OnDeck, Prospa and Spotcap. The signatories have reaffirmed their commitment to meet all current legal and regulatory requirements and added an additional layer of transparency and disclosure that is not currently being provided in the market.
Key elements agreed in the Code include:
- The introduction of a standard pricing comparison document providing key metrics that will allow customers to compare the cost of unsecured loans from the signatories (including the total repayment amount, APR, simple annual interest rate);
- An easy-to-understand loan summary;
- A glossary of key terms in accessible language that applies directly to online small business loans;
- Signatories must attest their compliance with the Code on an annual basis.
To ensure effective enforcement, the Code will be supported by a Charter focused on governance including its monitoring, review and enforcement processes.
AFIA will appoint a Code Compliance Committee (CCC) as an independent governing body to monitor and enforce the Code. The Code, Charter and the disclosure tool will be fully functional by no later than 31 December 2018, by which date all signatories have committed to being fully compliant.