Small business loans and External Dispute Resolution Review

The Government has released the report of the Australian Small Business and Family Enterprise Ombudsman’s Inquiry into small business loans, and as a result of that report has expanded the terms of reference for the review of the financial system’s external dispute resolution and complaints framework (EDR Review). Background

EDR Review

The amended terms of reference include:

  • the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and
  • consideration of the merits and issues involved in providing access to redress for past disputes.

In order to fully consider the amended terms of reference, the Panel intends to release a separate issues paper on the additional matters.

The Government has provided a three-month extension to the initial reporting date of end March 2017 to enable the Panel to consider and consult on the issues contained in the amended terms of reference. The Panel will provide a separate report on the additional terms of reference by the end of June 2017.

Small business loans review

The Australian Small Business and Family Enterprise Ombudsman’s recommendations include:

  • Code of Banking Practice be revised to include a specific small business section, clarifying how breaches will be enforced;
  • For all loans below $5 million, where a small business has complied with the loan payments requirements and has acted lawfully, the bank must not default a loan for any reason. Any conditions must be removed where banks can unilaterally value existing security assets during the life of a loan or invoke financial covenants or catch-all ‘material adverse change’ clauses.;
  • Add a minimum 30-business day notice period to all changes to general restriction clauses and covenants (except for fraud and criminal actions) be added to give borrowers more time to respond and react to a potential breach of conditions;
  • For loans below $5 million, banks must provide borrowers with decisions on roll over at least 90 business days before loans mature, so borrowers can organise alternative financing. A longer period of time should be given for rural properties and complex businesses that would take longer to sell or refinance;
  • For loans below $5 million, banks must provide a one-page summary of the clauses and covenants that may trigger default or other detrimental outcomes for borrowers;
  • For loans below $5 million, banks must put in place a new small business standard form contract that is short and in plain English that meets the intent of the unfair contract terms legislation;
  • All banks must provide borrowers with a choice of valuer, a full copy of the instructions given to the valuer and a full copy of the valuation report;
  • Every borrower must receive an identical copy of the instructions given to the investigating accountant by the bank and the final report provided by the investigating accountant to the bank;
  • Banks to eliminate perceived conflict of interest when investigating accountants appointed as receivers;
  • An industry-funded one-stop external dispute resolution body, with a unit dedicated to resolving small business disputes regarding credit facilities of up to $5 million;
  • Banks must establish a customer advocate to consider small business complaints and disputes that may or may not have been subject to internal dispute resolution;
  • External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigative accountants and receivers, and to borrowers who have previously undertaken farm debt mediation;
  • A national approach to farm debt mediation;
  • ASIC to establish a Small Business Commissioner.
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