Following on from Australian Broker’s initial report and the completion of the two-day public hearing into the major banks’ treatment of small business customers
, news has emerged that Ombudsman Kate Carnell has criticised Commonwealth Bank executives for ‘paying lip service’ to the bank’s small business proposals.
According to the Australian Financial Review
(AFR), these proposals, designed to provide small businesses with transparency around loan defaults and enforcement timelines, were deemed as unacceptable by Small Business Ombudsman Carnell, who stated that the conditions the bank placed on its commitment to give 30 days’ notice before taking enforcement action over a loan allowed the bank to go back on its word anytime it chose.
"The proposal is no good because there is a caveat to say, ‘except when it suits you’," Carnell said. "That's not all right. It's not acceptable. If you are going to give people 30 days, you have to give them 30 days."
It also came to light that although CBA agreed in principle with sharing the reports of investigative accountants with the loan owner, the major bank was unable to categorically guarantee that this was, in fact, taking place.
Group chief risk officer David Cohen and group executive business and private banking Adam Bennett represented Commonwealth Bank, with the latter delivering the bank’s opening address that included a commitment to remove financial covenants from loans of less than $1 million.
Carnell stated that the clauses, which in some cases had been used to trigger defaults even when repayments were being made, should not exist at all in business loans of any size, saying that they gave the banks carte blanche over the livelihood of the borrower.
"The contract should say that we are lending you money today but we may call the loan at any time, for any reason. If you do not repay the million we will take your security and your personal property, including your home and bankrupt you. Sign here. Because that's fundamentally what the contract says," Carnell said.
While Cohen didn’t agree with Carnell’s statement, he conceded that the covenants did not offer “a fair balance of power” between the bank and the small business borrower.
The criticism of CBA comes following a softer start to the public hearing. On day one Carnell questioned the suitability of the $1 million turnover cap that ANZ has in place as a definition of small businesses
The bank also agreed it would support proposals to send small businesses reminder notices six months out from the expiry of a commercial loan and at least three months’ notice when the bank decides not to roll over a loan.
Carnell stressed the importance of CBA taking a leadership stance on the issues raised and the banking code of conduct in the hearing, in light of the bank being the largest in Australia and therefore obligated to lead by example.
The ombudsman also expressed during the hearing that she was “disappointed” in the second largest major bank, Westpac’s lengthy and complex loan contracts, stating she “hoped for a little bit more” from the bank.
Like CBA, Westpac chief executive of business banking David Linberg also supported the removal of non-monetary covenants for new property-secured exposures of less than $1 million, and suggested reporting bank enforcement activity to the ombudsman every six months.
As 2016 – a year filled with countless banking controversies - comes to a close, the momentum for banking reform now appears to be fully underway. Carnell’s probing in this public hearing seems to suggest that significant changes may occur in industry practice as a result of this enquiry.