Speaking to Mortgage Business, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell said that the rise of alternative lenders was a welcome move given the current small business “credit squeeze”, but added that the non-bank sector needed to grow with the appropriate mechanisms and support systems.
The ombudsman said: “Lending in the SME space is actually declining when it comes to the banks. And it is declining because the major banks – over the last 18 months or so – have really clamped down on lending to small businesses where there isn’t significant equity on property.
“So, if a small business doesn’t have significant equity in property, then the capacity to get a loan from a bank is very low, really.”
The ASBFEO added that, with property prices coming down in several of the major cities, the banks were looking at lower loan-to-value ratios and are being more risk averse in anticipation of a further decline in property prices.
“So, you put all those things together, and you’ve got the start of a credit squeeze in the SME space.”
Ms Carnell noted that this has, however, “opened up opportunities for other lenders in the area”, such as non-bank lenders, adding: “Competition is something we would applaud, but that comes with some other challenges.”
Self-regulate or risk ‘heavy-handed’ legislation
The Australian small business ombudsman suggested that one of the challenges of the alternative finance sector was the relative lack of oversight and regulation when compared to the banking sector.
While APRA was granted reserve powers to respond to developments in non-ADI lending that pose a risk to financial stability last year, non-bank lenders in the SME space are not subject to consumer law or the National Consumer Credit Protection Act.
Ms Carnell said: “You could argue that the level of regulation for those entities is very low. Now, that creates potential problems in the marketplace if there are cowboys.
“I think it is a real challenge for the industry now to self-regulate and self-regulate aggressively and quickly. If the industry doesn’t step up to the plate, I think government regulation will happen. And I hope we don’t get that far because government regulation, by its very nature, will be heavy-handed and it will get in the way of the sort of innovation that we want to see in this space.
“Government regulation and innovation do not tend to work well together. And we want to see innovation… like the Afterpay’s, the Zip’s, the huge growth in online lenders generally. This is all fantastic at creating competition in the marketplace.
“So, the message to the industry is that if you don’t step up to the plate and create the level of transparency, methods of being able to compare products, complaints mechanisms and all the sorts of things that consumers expect, government will step in.”
The Australian Small Business and Family Enterprise Ombudsman noted, however, that work has been going on in the industry to try and self-regulate and provide these tools.
Ms Carnell helped develop the Online Small Business Lenders’ Code of Lending Practice with the Australian Finance Industry Association (AFIA), thebankdoctor.org and FinTech Australia, which has so far seen seven signatories commit to its rules.
Capify, GetCapital, Lumi, Moula, OnDeck, Prospa and Spotcap have committed to integrate the code in their contracts, which aims to promote high industry standards of service, provide a benchmark with respect to the disclosure of comparable financial information to borrowers and support compliance with legal and industry obligations.
The code also requires entities that sign it to have an internal disputes resolution approach and have an eternal dispute resolution entity, i.e. the Australian Financial Complaints Authority.
The signatories also provide small business owners with comparative pricing from the lenders, detailing “clear and concise” outlines of loan summaries before they are accepted, and evidence of code-compliance and fairness for their loans.
Ms Carnell said: “It’s been great to see in the biggest seven balance sheet lenders in the fintech space sign a Code of Practice, so there is some real progress happening. It means that the people that deal with those particular companies will have upfront, transparent information. They have the comparison tool now as well, an easy method to be able to compare different products online.
“It’s a great way for small businesses to really get their heads around how fintech lenders work, what they cost, and there is a complaints mechanism if things go wrong. Now that is really good. That is exactly what should happen.
“But there are many more than seven fintechs, and there are lots more lenders than balance sheet lenders and many more products than balance sheet products.
“So, while the ‘big seven’ is a really good start, if that doesn’t become much more pervasive, and over time cover more points, then, at some point, the government will be under pressure to regulate.”
Ms Carnell made the comments to Mortgage Business ahead of her speech on regulation in the fintech sector at the AltFi Australasia Summit, which will be held in Sydney today (15 April).
[Related: Hayne proposes industry codes become law]
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.