Banks split on code of conduct over small business

The Australian, June 1,2018

A rift between the big banks and second-tier lenders has held the sector back from agreeing on a toughened-up code of conduct with the corporate regulator, ­according to Australian Banking Association chief executive Anna Bligh.

Appearing before the financial services royal commission yesterday, the former Queensland premier said she hoped a long-running dispute with the Australian Securities & Investments Commission about who should qualify for protections as a small business under the code would be resolved through top-level meetings in coming weeks.

As revealed last week by The Australian, the ABA and ASIC have been in conflict since December over whether the limit for qualifying as a small business should be total borrowings of $3 million, as proposed by the ABA, or a single line of credit of $5m, as proposed by ASIC.

The $5m limit was first put forward by Philip Khoury, a former ASIC executive whom the ABA had hired to overhaul its code of conduct in 2016.

However, Ms Bligh yesterday told the commission smaller banks were fearful the $5m limit would put them at an extra disadvantage compared to the big banks because of the way the Australian Prudential Regulation Authority required risk to be calculated.

APRA allows only six banks — the big four plus Macquarie and ING — to use internal ratings to allocate risk to small business lending, and requires the rest to use its standard rate of 100 per cent. The ratings feed into calculations of how much capital banks must hold. “What you will find is on average, the IRB banks, their risk rating on small business loans averages somewhere around 50-60 per cent,” Ms Bligh said.

“So that means there’s quite a gap in the risk rating between the IRB and the standardised banks.”

She said some banks with small lending books did not do much lending beyond $5m.

“They might have one or two loans beyond $5m but for some of the smaller regional banks, $5 million takes them very close to their total business lending book.

“And they are very concerned about the prospect of having almost an entire loan book in their business lending that has significantly lower controls as proposed in the code than they currently have in their business book.

“Those banks that are subject to the standardised risk rating already feel at some competitive disadvantage,” she said.

Under the proposed new code, banks will be restricted in what action they can take against small businesses that make all their payments but breach so-called “non-monetary” covenants such as loan-to-valuation ratios. The inquiry has examined the issue of non-monetary defaults over the past fortnight, with CBA chief risk officer David Cohen admitting on Wednesday that their use to foreclose on loans fell below community expectations.

Ms Bligh admitted the new code would not entirely bar their use but insisted the new code ­contained “a number of new ­protections to small business”.

Meanwhile, Suncorp admitted it did not know if its contracts were unfair despite new laws designed to stop unfair contract terms for small businesses. The laws were passed in November 2015 and ASIC gave the bank a one-year deadline to remove any terms that could be considered unfair.

Suncorp executive general manager, lending, Steven Kluss admitted Suncorp had still not fixed some of its contracts even after spending more than two years reviewing them. “To say that they are unfair, I don’t know if that’s the case or not,” Mr Kluss told counsel assisting Eloise Dias.