Australia’s banks are holding out against ASIC’s plans to extend protections for small business in the banking system to groups with debts of as much as $5 million, Australian Banking Association CEO Anna Bligh has revealed.
The ABA wants the limit to be $3 million but Ms Bligh told the banking royal commission on Thursday that her clients, the banks, are “distinctly uncomfortable” about extending it beyond that level.
Smaller banks are especially “uncomfortable” because they have less capacity to deal with the complexity of extending small business protection, she said.
The gap is wider than it appears at first glance because the banks want the $3 million to include the full level of the bank’s lending, whereas the $5 million ASIC is pushing would just be for the loan in question.
Small business loans have more consumer protections attached to them and some disputes involving them can be adjudicated by the Financial Ombudsman Service. Currently the limit for FOS involvement is $2 million in loans, but this will be increased under the new Banking Code of Practice being negotiated between the banks and ASIC.
For unfair contracts legislation to apply the current limit is $1 million and the banks are willing to take this to $3 million. But the $5 million aimed at by regulators is making the banks feel “cautious and wary”, Ms Bligh said.
The $5 million limit would change the banking dynamic in favour of some businesses who are able to fend for themselves, she said.
“What this does is shift some of the risk from the customer to the bank,” Ms Bligh said.
“Banks are of the view … that once a business gets into the $4 million and $5 million category … they’re more likely to be of a more sophisticated nature.”
There was danger in the proposed higher limit for small, or “junior” banks, she said. Some of the smaller banks have loan books that are predominately made up of loans below $5 million.
Were the higher limits to apply to them then the majority of their loans would be covered by the consumer legislation that would create extra complexity in dealing with their customers and planning, she said.
That will also worsen their position relative to the major banks who have proportionally far fewer loans in the small business category.
Earlier in this round of hearings the man asked to review the code for the ABA, Philip Khoury, told the commission he thought the $5 million threshold was reasonable.
“For most of the loans below $5 million we found that they were really aimed at the unsophisticated small business,” Mr Khoury 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.”
The code cannot be introduced until there is agreement between the two. Ms Bligh said the ABA had backed off in discussions over the new code and would come to a position after the “current hearings on small business” were completed by the royal commission this Friday.
ACCC manager of enforcement Scott Gregson also addressed the commission on the issue of unfair contracts. He said new legislation introduced in November 2015 was now being enforced. For the first year of its application the ACCC took a more educative role, explaining to companies how it should be applied.