During the third round of hearings on Monday, which focused on small business lending, the commission heard from witness Philip Khoury, who reviewed the Code of Banking Practice for the Australian Banking Association.
During his review, undertaken between December 2017 and April this year, Mr Khoury considered the protection of guarantors under the code and learnt of the significant risks associated with parents and family members guaranteeing business loans.
“What was the particular issue that was raised with you?” asked senior counsel assisting Michael Hodge QC.
“Really, guarantors offering up their guarantee without understanding the risks,” Mr Khoury said.
“In the extreme end, this could be a product of abuse, elder abuse, familial abuse. In fact, even the guidelines that the banks have put together for this alert bank staff to the possibility of coercion in obtaining guarantees for for someone else’s loan. So, this was clearly an issue.”
Mr Khoury said that “it is very clear” that some people were wanting to help family members or associates and getting themselves into a “highly risky position” that they were not clear about because of their goodwill.
The commission will be taking the spotlight to loan guarantees as it continues to probe misconduct in the small business lending space.
The commission was told by a number of consumer advocacy bodies, including Legal Aid offices, of examples of the effect on family members of small business lending issues, particularly parents guaranteeing small business loans for their children using their homes as security.
“In such situations, there are questions to be asked about whether guarantors fully understand the risks associated with providing the guarantee once the business gets into financial difficulty,” Mr Hodge said.
Banking code jargon under scrutiny
During his review of the banking code of conduct, Mr Khoury expressed concern over its use of language.
“There were some risks in the way the code operated at the moment on responsible lending because it didn’t actually spell out the sorts of tests or work that a bank would need to do to be a diligent and prudent banker, so we thought the code could helpfully do that in plain English,” Mr Khoury said.
“We were also concerned about guarantors,” the witness continued. “So, it was put to us by a number of people and we were unable to find real evidence for this — that banks were relying too heavily on the presence of a guarantor’s assets and not doing sufficient homework on the underlying sustainability of the business loan.
“The argument was that the banks were happy because their risk was attended to by a mortgage over someone’s house or some other kind of asset and were not being as diligent as they ought to be around the assessment of the loan, underlying loan itself.
“So, again, we wanted to do some work around the guarantor provisions because we think that’s, you know, a particular vulnerability.”