Changes to bankers’ codes of practice were watered down in the face of bank objections, the banking royal commission has heard.
Philip Khoury, a consultant and former officer with corporate watchdog ASIC, was appointed by the Australian Banking Association in 2016 to review the code of practice for small business lending in a process that went through to April this year when a final draft was released.
The code would be enforced by ASIC once it is created. But to date it has not been implemented.
The draft deals with how small business is to be treated by banks as a result of their not being covered by consumer protection laws demanding responsible lending that apply to personal loans and mortgages.
Mr Khoury recommended the definition of a small business loan covered by the code should be widened from $3 million to $5 million.
“We thought that might extend coverage by 10,000 or 20,000 businesses, a small effect,” he told the commission.
After putting his recommendations to the banks he was told “the industry wanted $3 million”.
When the final draft appeared in April this year (it was only showed to Mr Khoury in recent days) his recommendation was ignored and the wording was actually more restrictive than existing wording.
“It was significantly different to what we recommended,” he said.
“The $3 million [in the new draft] applies to all credit provided to the business [not just the loan in question] and that makes a big difference.”
The new code also includes a turnover test restricting its application to businesses with less than $10 million turnover the previous year.
“We thought that would be too difficult for the banks to administer,” Mr Khoury said.
Falling within the small business size limits allows the business to be protected by rules for small business loans and allows external dispute settling processes to be used.
The code also includes a weaker set of protections for guarantors of loans than Mr Khoury recommended.
We were concerned about guarantors.”
The concerns included banks being too quick to draw on guarantees when a loan went into default rather than to first chase the assets of the business person who borrowed.
The royal commission had received submissions pointing to the dangers of elder abuse and family abuse with parents being pressured to go guarantor for their children’s businesses without fully understanding the implications they faced.
Mr Khoury’s recommendations included a clause that would have allowed guarantors who had not been given complete information about the nature of the guarantee to be released from the guarantee they had given if the banks drew on it.
But this was not included in the final draft.
“The banks were very opposed. They felt it could have been gamed by some customers,” Mr Khoury said.
The final draft also allowed for guarantors to contact the bank to limit the guarantees they had given after the loan was taken out. But there were significant exclusions from this.
“It looks as if there’s enormous discretion for the banks,” Mr Khoury said.