Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: Final Report Recommendations

The central task of the Commission was to “inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations”.

More than 10,000 complaints about financial services entities from members of the public were submitted using the Commission’s web form alone.

While the system of recommendations is critically important to the financial system as the whole and access to credit and banking services more specifically for business, some key recommendations that directly relate to small and medium enterprises are listed as follows. 

Recommendations: Banking - lending to small and medium enterprises

Recommendation 1.9 – No extension of the National Consumer Credit Protection (NCCP) Act 2009 (Cth) 

The NCCP Act should not be amended to extend its operation to lending to small businesses.

Recommendation 1.10 – Definition of ‘small business’

The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.

Recommendation 1.11 – Farm debt mediation

A national scheme of farm debt mediation should be enacted.

Recommendation 1.12 – Valuations of land

APRA should amend Prudential Standard APS 220 to:

• require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and

• provide for valuation of agricultural land in a manner that will recognise, to the extent possible: – the likelihood of external events affecting its realisable value; and – the time that may be taken to realise the land at a reasonable price affecting its realisable value.

Recommendation 1.13 – Charging default interest

The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disasters.

Recommendation 1.14 – Distressed agricultural loans

When dealing with distressed agricultural loans, banks should:

• ensure that those loans are managed by experienced agricultural bankers;

• offer farm debt mediation as soon as a loan is classified as distressed;

• manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;

• recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and

• cease charging default interest when there is no realistic prospect of recovering the amount charged.

Recommendations: Financial advice

Recommendation 2.1 — Annual renewal and payment regarding ongoing fee arrangements

The law should be amended to provide that ongoing fee arrangements (whenever made):

• must be renewed annually by the client;

• must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and

• may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.

Recommendation 2.10 – A new disciplinary system

The law should be amended to establish a new disciplinary system for financial advisers that:

• requires all financial advisers who provide personal financial advice to retail clients to be registered;

• provides for a single, central, disciplinary body;

• requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and

• allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.

Recommendations: Insurance

Recommendation 4.7 — Application of unfair contract terms provisions to insurance contracts

The unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act. The provisions should be amended to provide a definition of the ‘main subject matter’ of an insurance contract as the terms of the contract that describe what is being insured. The duty of utmost good faith contained in section 13 of the Insurance Contracts Act should operate independently of the unfair contract terms provisions.

Recommendation 7.1 — Compensation scheme of last resort

The three principal recommendations to establish a compensation scheme of last resort made by the panel appointed by government to review external dispute and complaints arrangements made in its supplementary final report should be carried into effect.

General comments made by the Commissioner

When it comes to small and medium enterprises, the Commissioner noted that he does not generally “favour” altering current rules that govern lending to SMEs as many of the provisions within the NCCP did not apply to lending for business purposes.

“In particular, the provisions of section 128 of the NCCP Act prohibiting an Australian Credit Licence holder from entering a credit contract with a consumer without making an assessment that the credit contract will not be unsuitable for the consumer do not apply. Nor do the hardship, pre-contractual disclosure, price regulation, and enforcement provisions of the National Credit Code. I explained in the Interim Report that the policy choices that have been made to limit the application of this regime reflect recognition of the need to ensure that small businesses have access to reasonably affordable and available credit.”

But he did highlight some provisions that do apply to small business lending, particularly those protections within the ASIC Act that apply to consumers as well as small businesses including

(i) “the prohibition on misleading or deceptive conduct in relation to financial services,

(ii) unconscionable conduct in connection with the supply or possible supply of financial services,

(iii) the implication of particular warranties into contracts for the supply of financial services, and

(iv) the unfair contract terms regime (especially as it relates to insurance).”

Moreover, the Commission noted that he believed the protection for small business borrowers outlined within provisions of the Banking Code to be adequate, such that “if a lender is considering providing a borrower ‘with a new loan, or an increase in a loan limit’, the lender will ‘exercise the care and skill of a diligent and prudent banker’”.

The Commissioner stated the evidence and submissions provided to the Commission did not reveal any great appetite to change this lending framework on the basis that “extending the responsible lending obligations in the NCCP Act would likely increase the cost of credit for small business and reduce the availability of credit. I am not persuaded that the benefits to be gained in individual cases from applying the NCCP Act to small business outweigh the overall costs of taking that step. I therefore do not consider that the NCCP Act should be amended to extend its operation to lending to small businesses.”

He further noted that he believed the definition of a small business in the Banking Code to be too “complicated” and “confined”:

“As it stands, satisfying the three-part test requires: annual turnover of less than $10 million, fewer than 100 full-time employees, and less than $3 million total debt to all credit providers (including amounts undrawn under existing loans, any loan being applied for and the debt of all of its related entities that are businesses)”.

Instead, the Commissioner favours the definition put forward in the Khoury Review, whereby the Banking Code would consider small business as “any business (or group) employing fewer than 100 full time equivalent employees, where the loan applied for was less than $5 million”.

The Commissioner noted he was satisfied with the current arrangement regarding third party guarantors supporting loans of SMEs.

Regarding matters relating to extending loans or continuing terms of a continuing loan the Commissioner stated that he considered appropriate the provision within the Banking Code that “lenders must give three months’ notice of their intention not to renew a loan to a small business borrower who is not in default”. He stated he did not favour “imposing any obligation on lenders to renew a loan or to renew it on particular terms”.

Finally, in relation to distressed agricultural loans he recommended that lenders offer timely farm debt mediation at the point at which the loan is classified as “distressed”. Further, if complemented with rural financial counselling services, “early farm debt mediation should allow wider and better choices for the lender and borrower about servicing, and ultimately repaying, the loan”. He pointed to the issue of there being only four states (including Queensland) that have legislated for farm debt mediation, and proposed a single national legislated scheme dealing with farm debt mediation by states.