RC brings banking code quarrel to light

Appearing before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, CEO of the Australian Banking Association (ABA) Anna Bligh and senior executive leader and regional commissioner at ASIC Michael Saadat revealed that the institutions have “one last big issue” to resolve before the code is approved.

Following a review of the code by Phil Khoury, managing director of Cameron Ralph Pty Ltd, the ABA agreed to implement 96 of the 99 recommendations made in “some form”.

However, the code has been updated once again, with the royal commission highlighting this week that a new draft version had been sent to the Australian Securities and Investments Commission (ASIC) in April 2018 for approval.

The new version amends the definition of a “small business”, with the term equating to a business with fewer than 100 full-time equivalent employees (as suggested by Mr Khoury in his review), an annual turnover of less than $10 million and less than $3 million (rather than the originally stated $5 million) in total debt.

However, ASIC’s Michael Saadat told the commission on Friday (1 June) that after receiving feedback from stakeholders, the regulator has deemed the $5 million total debt figure more appropriate.

“We [ASIC] haven’t made a decision about that, but the main part, the main area of feedback back or concern that we have raised with the ABA relates to part C of the definition, which is the $3 million figure,” Mr Saadat said.

“The reason we’ve identified this as an area that we’ve raised with the ABA is because the independent review of the code recommended that the definition be set at $5 million, and $5 million for individual facilities.

“There have been other stakeholders that have also argued quite strongly for a $5 million definition, and because our objective is to make the code as good as it can be.”

Mr Saadat noted that ASIC and the ABA have made progress in their negotiations but are yet to resolve this “last big issue”.

“Certainly the discussions that have happened with the ABA since December last year have reflected the fact that we wanted the code to improve in a number of respects, and they have made improvements in response to the feedback we have given them in many of those areas, but this remains the last big issue for us to resolve,” the ASIC regional commissioner added.

Ms Bligh, however, noted that member banks are wary of the $3 million limit and would feel “distinctly uncomfortable” with a $5 million debt total, claiming that non-majors, in particular, are concerned that they may be at a competitive disadvantage to the major banks.

“Banks, in making a determination about managing their loan book, have to take on more risk in taking on a small business loan and they still feel a little uncomfortable, I would say, at the $3 million [total], but they are willing to go to that,” the ABA CEO said.

“They feel distinctly uncomfortable at the $5 million, and that is more true of some of the non-major banks, or banks that are smaller regional Australian banks, who have smaller loan books, who feel that not only will they be exposed to a high degree of risk with such contracts, but that because of the size of their loan book that will put them and the nature of their loan book at a competitive disadvantage against the four major banks.”

Ms Bligh added that the ABA would agree to a two-year trial of a total debt limit of $3 million, with a view of raising it to $5 million if some of ASIC’s concerns are not realised.

Further, Mr Saadat noted that the regulator was waiting for the royal commission’s third round of hearings to conclude before making a determination.

The third round of hearings, which focused on lending to small and medium-sized enterprises, concluded on Friday, 1 June.

The hearings considered the conduct of several of the leading banks in respect of their dealings with small and medium enterprises, in particular in providing credit to businesses.

[Related: ABA updated Code of Banking Practice]