Australia Commission: Tighter Regulation Not The Right Move For SMB Lending Misconduct

The Australian government is taking major steps toward overhauling the nation’s banking industry amid revelations of misconduct by top financial institutions (FIs), but small businesses (SMBs) will see a limited impact from the initiatives, reports said on Monday (Feb. 4). Reuters said that Australia plans to introduce a new body to oversee corporate regulators in response to an independent inquiry into the banking sector.

The Royal Commission released its report on Monday with 76 different recommendations to address financial wrongdoings that have led to $43.45 billion in share value being wiped from top financial companies. Those recommendations include revamping focus on corporate regulators, and the establishment of a new oversight body.

During the more than two months of the Royal Commission’s hearing, regulators were accused of working too closely with the banks, leading to conflicts of interest. The inquiry established that regulators failed to adequately punish FIs when wrongdoing was discovered, either by issuing too-lenient penalties or none at all, the Royal Commission concluded.

Parliament will have to approve the implementation of those recommendations, but the government has signaled its support and intent to do so, reports noted.

“The price paid by our community has been immense and goes beyond just the financial,” said Australian Treasurer Josh Frydenberg. “Businesses have been broken, and the emotional stress and personal pain have broken lives.”

Reports pointed to several of the most recent scandals in Australia’s financial services world, including misconduct found within top wealth manager AMP Limited. The Royal Commission found that AMP had deceived regulators probing the firm over charging customers for financial advise it did not deliver. Commonwealth Bank of Australia, Westpac and IOOF were some of the hardest-hit firms in the Royal Commission’s report, Reuters said.

The report was published soon after Australian Competition and Consumer Commission (ACCC) Chair Rod Sims took the banking industry to task, urging for greater competition in the market and heightened consumer protections.

The Financial Times reported on Sunday (Feb. 3) that Australia’s top four banks — ANZ, Westpac, Commonwealth Bank of Australia and National Australia Bank — have a combined market share of more than 75 percent.

“Market economies only work properly if you have competition, and we have to make sure there is more in banking,” Sims told the publication. “We have to fix the cozy oligopoly. They have to feel under threat.”

Small Businesses

Consumer protections are in the spotlight as the Australian government cracks down on banking misconduct and a lack of competition. However, small businesses will not see any extension of loan protections under the recommendations of the Royal Commission.

“With some exceptions, I generally do not favor altering the rules that govern lending to small and medium enterprises,” said Kenneth Hayne, head of the Royal Commission, according to The Sydney Morning Herald reports Monday. He noted that the National Consumer Credit Protection Act language does not apply to small businesses.

“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,” he stated, adding that any further regulation in the SMB bank lending space is likely to lead to less bank credit available to small business borrowers.

The report did recommend, however, to simplify the “too complicated and too confined” definition of a small business in the 2019 Banking Code to one that includes businesses with up to $5 million (about $3.61 million USD) in annual turnover, and as many as 100 full-time employees. Currently, small businesses are defined under the legislation as companies with up to $2 million in turnover and up to 20 employees.

Last year, all Big Four lenders admitted to wrongdoing in their small business lending practices during the Royal Commission hearings. According to Hayne at the time, 11 percent of the 5,500 submissions that detailed alleged bank misconduct related to small business banking services.

Council of Small Business Australia CEO Peter Strong lent his support to the Commission’s decision to not recommend that the extension of responsible consumer lending laws be expanded to include small businesses, agreeing that doing so could restrict SMBs’ access to bank financing, said reports in The Australian Financial Review.