Australia's alternative finance community has vowed to heighten transparency following criticism over Prospa's high interest rates, which caused the FinTech to scrap its initial public offering (IPO).
Reports in The Australian Financial Review on Friday (June 29) said that six alternative lending players have committed to sign a "code of lending practice," a move that garnered praise from the nation's small business ombudsman. Prospa signed the code alongside Spotcap, Capify, GetCapital, OnDeck and Moula, reports said.
The companies vowed to protect small business borrowers, disclose pricing and resolve any disputes fairly.
Unlike other codes that encourage businesses to voluntarily adhere to consumer-protecting ethics, Australia's code was developed by the Australian Finance Industry Association (AFIA), which will establish an independent committee to enforce it. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), FinTech Australia and The Bank Doctor also collaborated on developing the code.
The ombudsman first announced in March that it was working with The Bank Doctor and FinTech Australia to develop steps for the alternative finance market to protect borrowers. The group released a report that detailed "complex" loan contracts that "have the potential to be complicated and confusing."
With the code now in place, alternative finance companies are required to disclose all costs of financing and present borrowers with a standard pricing comparison document that includes "annual percentage rate" and "total cost of credit." The goal of this requirement is to provide a clear breakdown of costs for borrowers.
Lending platforms must also provide compliant mediation services and ensure compliant draft contracts.
While the ombudsman has been focusing on the alternative finance market for several months, the code of ethics coincides with backlash following Prospa's decision to nix its IPO. The company received a letter from the Australian Securities and Investments Commission earlier this month raising concerns about its high fees and interest rates. Days later, the company pulled back from IPO plans and vowed to adhere to the code by disclosing annual percentage rates.
Reports said the AFIA will choose the independent enforcement committee to review code signatories' compliance in the second half of the year.