On 6 September 2016, the Minister for Small Business, the Hon. Michael McCormack MP, tasked the Australian Small Business and Family Enterprise Ombudsman with undertaking an inquiry into the adequacy of the law and practices governing financial lending to small businesses.
Consistent with other inquiries, the Ombudsman finds almost complete asymmetry of power in the relationship between banks and small business borrowers. This manifests itself in:
• extremely complex, one-sided contracts that yield maximum power to banks to make unilateral changes whenever they like and without the agreement of borrowers
• inadequate timeframes around key loan milestones that leave borrowers vulnerable
• misleading and conflicting signals between bank sales staff and credit risk staff which leaves borrowers vulnerable
• lack of transparency and potential conflict of interest in dealings with third parties involved in impaired loan processes, such as valuers, investigative accountant and receivers
• significant gaps in access to justice with nowhere to go except the court system, with borrowers having limited resources and banks having overwhelming resources.
Since the global financial crisis (GFC), 17 inquiries and reviews have been held and more than 40 recommendations made relating to small business and banking practices. Despite borrowers and stakeholders persistently raising the same issues, the banking industry has taken little action.
The Inquiry reviewed a selection of cases submitted to the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans. About a third of these cases were simply poor business decisions where the bank appears to have acted reasonably, a third a mixture of poor business decisions and poor bank practice and a third with very real issues where bank conduct is unacceptable and possibly unconscionable.
The recommendations raised in this report, which also support the initial findings of the Ramsay Review Interim Report, will address these issues going forward. For past cases, where there is a genuine concern, there needs to be a specific approach to seek a remedy which will allow these bank customers to put their case and to obtain compensation that is binding on the banks. The remedy needs to produce a capacity to come to a determination in a timely manner, without including lawyers and with a scope that is not limited to contract clauses.