A recent Parliamentary Joint Committee review into bank conduct with borrowers in financial difficulty has resulted in two very different recommendations from the Labor and Liberal Committee members.
While both sides agreed that there is a “persistent pattern of abuse of the almost complete asymmetry of power in the relationship between lender and borrower” the Liberal Committee members recommended addressing the issue through regulation of small business lending, while the Labor Committee members saw the need for further investigation through a Royal Commission into the banking sector.
Here is what you need to know about the recommendations of the Committee:
1. The Committee did not just recommend the extension of existing retail lending laws to small business
They recommended the extension of the existing responsible lending obligations to small business but with a twist – a borrower would be able to effectively choose to waive the protections afforded by responsible lending.
Unlike previous initiatives, the Committee did not recommend extending the National Credit Code to small business. What they have proposed instead is that nationally consistent loan contracts be developed with cover sheets summarising the borrower’s obligations and the consequences of a breach.
2. They involve ‘FOFA-style’ laws for small business lending
The Committee propose a number of ‘FOFA style’ laws for small business lending including a prohibition on conflicted remuneration and a duty to act in the best interests of a small business customer for all bank staff and officers.
This is despite the absence of any ban or duty in respect of retail customers under current laws and, the enormous difficulties experienced by the financial sector in implementing similar laws in the more limited “financial advice” context.
3. All ADIs will need to adopt an industry code
The Committee propose that all ADIs must adopt either the Code of Banking Practice or the Customer Owned Banking Code of Practice. Although most Australian ADIs have already adopted the Code, no foreign ADIs have, and the recent rise in Code related claims may give those to which it currently doesn’t apply cause for concern.
4. Banks will be prohibited from “profiting” on defaulting and impaired loans
The Committee is proposing to legislate to limit the default fees a bank can charge. If a bank decides to charge additional fees or interest in respect of a default, then this will require further disclosures in the loan contract. Presumably the new legislation would apply in addition to the existing common law provisions regarding penalty fees.
5. Enforcement-related implications
For banks, receivership remains a powerful enforcement option. It is widely used by banks and other secured creditors to take control of assets and businesses for the purposes of sale. The Parliamentary Joint Committee report is yet another proposal for reforms affecting receivership. It adds to sections of the Productivity Commission report released in December 2015 which included a proposal that the use of receivership be the subject of a separate inquiry.
The joint committee proposes bolstering duties of receivers to market assets and to strengthen powers of ASIC to enforce breaches by receivers. There are related recommendations to increase scrutiny of remuneration charged by receivers and insolvency practitioners generally.
This is a developing area of reform which we will continue to monitor closely.
Where to from here?
Since the parliament (and the Committee) were recently dissolved, we will have to wait until 2 July to find out whether to expect fundamental changes to the regulation of small business lending or a Royal Commission into the banking sector.