Tag: ASBFEO

Fintech Code For Small Business Lenders

Today Kate Carnell, the Australian Small Business & Family Enterprise Ombudsman (ASBFEO), Danielle Szetho, CEO of the industry association Fintech Australia (FA) and theBankDoctor.org published a detailed report on improving transparency in the fintech business lending sector.

This is an excellent piece of work, and will reinforce the legitimacy of SME lending from Fintechs, which from our analysis is growing fast, as the major banks continue to fail in their support of the SME sector in Australia.

The key resolutions are:

  • FA and its industry working group will consult with stakeholders to develop a Code of Conduct by June 2018 to cover unsecured business loans by fintech balance sheet lenders.
  • FA and its industry working group will work with the ASBFEO to ensure they comply with 
the Unfair Contract Terms legislation.
  • by June 2018 FA and the industry working group would agree on a common set of plain 
English key terms and conditions to be highlighted in a summary page in all loan 
agreements.
  • ASBFEO will facilitate a discussion between fintechs and the Australian Financial 
Complaints Authority to explore alternative external dispute resolution services in 
early 2018.
  • ASBFEO will work with the FA to ensure they comply with the Unfair Contract Terms legislation.
  • theBankDoctor.org will write an education piece, in conjunction with ASBFEO, specifically for SMEs to help them understand the “ins and outs” of borrowing from a fintech.

I asked TheBankDoctor Neil Slonim what was the most significant outcome from the report:

“The biggest challenge now is for the the fintech lenders to actually work together to meet the commitments agreed upon. It will not be an easy task given the large number of participants (around 30) and the fact that their business models can be quite different. Compounding this is the fact that not all lenders are members of the industry association Fintech Australia so there is only so much FA can do. The final sentence in Kate Carnell’s foreword is telling … I will keenly monitor progress against the resolutions in this report”

Neil also provided some background on the initiative:

This collaborative and ground breaking project has been twelve months in the making and represents a line in the sand on industry self regulation which is needed to ensure this rapidly emerging sector fulfils its potential of becoming a significant source of funding for Australian SMEs.

I started researching fintech business lending some three years ago when I recognized these lenders could help the large number of businesses unable to access bank funding. These SMEs typically want to borrow less that $250,000 and lack property which could be offered as security.

Through the use of technology, fintech business lenders can make a real difference to small businesses but access to funding is one thing, understanding all the terms and conditions is another. It is almost impossible to make apples with apples comparisons between the wide range of offerings, especially in relation to the total cost of borrowing where annualised rates of interest can range from 14% pa to 80% pa. I figured that if someone like me with 30 years experience in business finance struggled with this, what hope do time poor and often financially unsophisticated SME have?  So I decided to conduct a survey of fintech business lenders to help SMEs answer three simple questions:

1. Is this the right product for my needs?
2. Do I know exactly what it is going to cost?
3. Do I know that I can’t get a better deal elsewhere?

But as an unauthorized, unelected and unpaid SME advocate, my capacity to get lenders to participate in the survey was limited and then any findings would be unenforceable anyway. That’s when I reached out to Kate Carnell and Danielle Szetho who willingly agreed to conduct this joint project.

Fintech Australia brings its authority and membership base although not all fintech lenders are members of FA and lenders, whether members of Fintech Australia or not, operate different business models and have diverse views. One of the most telling responses in the survey was that lenders were evenly divided on the question of the adequacy of the current level of industry transparency and disclosure. This provides an insight into the challenges of self regulation.

I applaud the lenders who have embraced this opportunity to drive self regulation. With initiatives like the Glossary of Terms, which is published as an appendix to the report, fintech lenders are now setting standards for other non-bank lenders to follow.

Kate Carnell and her team have been constructive and collaborative in helping fintech lenders reach agreement on areas in which more can be done to improve transparency and disclosure.  As the banks have learned, Ms Carnell is a no nonsense champion of the small business sector and she can be relied upon to follow up on her commitment to “keenly monitor progress against the resolutions in this report” .

I am pleased our work has brought the issue of transparency and disclosure in fintech business lending clearly into the public arena and look forward to continuing to work with all parties to enable these lenders to become significant, transparent and trusted alternative sources of debt finance for Australian SMEs.

Yes, SME’s ARE Getting The Damp End of the Stick from the Banks

An inquiry into small business loans by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell, has found the big four banks consistently engage in practices that have caused significant harm to some small business customers. The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

This report confirms what our SME surveys show – small business has an unequal relationship with their banks, have difficulty getting the finance they need on fair terms, and find that lenders bully them especially in times of hardship. That said, SME’s often are unable or unwilling to shop around to get better deals, and feel trapped by the current arrangements. You can a video on our analysis here, and get the free copy of the DFA report here. SME’s are a critical engine in the economy, and current banking behaviour towards them is a brake on growth.

The ASBFEO report has made a significant number of recommendations.

  • Strengthen the Australian Bankers’ Association’s six-point plan;
  • Code of Banking Practice be revised to include a specific small business section, with the Code to be approved and administered by ASIC;
  • No defaults on loans below $5 million where a small business has made payments and acted lawfully;
  • A minimum 30-business day notice period for potential breach of contract conditions;
  • A minimum 90-business day notice period for bank rollover decisions for loans below $5 million (longer for rural properties and complex businesses);
  • Banks required to provide a one-page summary of loan default triggers;
  • Banks to put in place a new and clearly written small business standard form contract;
  • Borrowers be provided with a choice of valuer, vauler instructions and valuation report;
  • Borrowers be provided a copy of instructions given to investigating accountants and the subsequent report;
  • Banks to eliminate perceived conflict of interest when investigating accountants appointed as receivers;
  • An industry-funded one-stop external dispute resolution body, with a unit dedicated to resolving small business disputes regarding credit facilities of up to $5 million;
  • Bank customer advocates be made available to consider small business complaints;
  • External disputes resolution schemes be extended to include disputes with third parties appointed by the bank and to borrowers who have undertaken farm debt mediation.
  • A national approach to farm debt mediation;
  • ASIC to establish a Small Business Commissioner.

The ASBFEO inquiry – completed in just over three months – investigated the circumstances surrounding a number of cases of alleged small business mistreatment by the banks, and concluded loan contract arrangements between banks and small businesses, put the borrower at a distinct disadvantage.

“Fundamentally, what we’ve found is that small businesses who take out a loan, do so under the impression that if they keep up their payments, they will stay out of trouble.  The reality is that this is not the case; that the clauses contained in standard small business loan contracts give banks an inordinate level of power over the borrower, who has zero ability to do anything about it,” Ms Carnell said.

“Basically, the terms in these contracts allow the bank to take action to protect itself from financial risk, by inflicting added demands on the borrower.

“For example, banks may conduct a new valuation on the assets securing the loan.  Now if the value is found to have fallen, the borrower faces significantly increased – and potentially unmanageable – loan costs.  Banks also have the power to unexpectedly call in the loan, and demand repayment in an unrealistic timeframe.

“So what ends up happening is that through no fault of their own, small businesses could quickly find themselves in default, even though they’ve made each loan payment, on time, every time.

“The banks argue that they don’t use these contract clauses, however our inquiry found this is simply not true; that banks do in fact utilise these clauses, much to the surprise and heart-break of their small business borrowers,” she said.

Ms Carnell said the ASBFEO report outlines recommendations that can be implemented – many in a short timeframe – to help alleviate the vulnerability of small business borrowers when entering contracts, while not impacting on the financial viability of the banks.

“The cases we examined during our inquiry highlighted the glaring need to ensure small business bank customers are provided with simple standard contracts that are written in plain English and that get rid of the clauses giving banks all the power,” Ms Carnell said.

“It’s also clear from the cases we looked at, that current thresholds governing small business external dispute resolution are insufficient, so we will certainly support work in establishing a mechanism to provide timely and affordable access to justice for cash-strapped small businesses,” she said.

Ms Carnell said the ASBFEO will publish six monthly scorecards on the progress banks are making in response to the recommendations contained in the ASBFEO report.

“Since the GFC there have been 17 inquiries and reviews that have produced more than 40 recommendations over the years, relating to the small business sector.  Despite this, the banks have consistently failed to implement changes to address persistent problems” Ms Carnell said.

“Frankly, the banks take ‘kicking the can down the road’ to new levels.  This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible.  This report is a living document; it’s only the beginning of our work in this area,” she said.

Ms Carnell said she hopes that as industry leaders, the four major banks will seize the opportunity to be exemplars for change, saying the ASBFEO has already secured varying levels of in–principle support from the banks on a range of issues.

“While there’s certainly a lot of work to be done, it’s important to give credit where it’s due, with the big four banks committing – albeit to varying degrees – to make changes in a number of problem areas identified during our inquiry process,” Ms Carnell said.

These include amending the Code of Banking Practice to provide greater small business protections, the creation of customer advocates and improved transparency on valuations.

Background:

On 6 September 2016, the Minister for Small Business, the Hon. Michael McCormack MP, tasked the ASBFEO with undertaking an inquiry into the adequacy of the law and practices governing financial lending to small businesses.

The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

Throughout the inquiry process executives from the four major banks were summonsed to attend public hearings, with the ASBFEO using its Royal Commission-like powers to compel banks to produce required case documentation.  The inquiry also heard evidence from bank customers during private hearings, and considered the findings of previous inquiries and reviews.