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 In Business, Leadership

The banking royal commission has now concluded, with a final report released on 4 February 2019 outlining all the recommendations of Commissioner Hayne.

In short, the final report outlined four key questions that should be addressed by the Government when responding with policy. Hayne’s reasoning being that this will help create an environment whereby, as a small business owner, you can trust that;

  • Financial service providers are obeying the law
  • If they don’t, consequences will be enforced by regulatory agencies
  • No conflicts of interest for advisors, who will focus on your needs not their own
  • Culture and governance will be improved to ensure customers are put first

Read on to learn how specific recommendations may affect you as a small business owner.

Recommendation: No additional regulations for small business lending

Please explain?
It’s always been hard for small businesses to access finance, and consequently Commissioner Hayne recommended no changes in the rules around small business lending. He noted the potential costs of implementing these for lenders could lead to a reduction in credit availability for small businesses, and this would outweigh the possible benefits of treating small business owners as consumers under the legislation.

What does this mean for you?
It may take longer or become harder for you to borrow from your bank, as they may ask for additional information in order to satisfy their internal compliance requirements which may have changed as a result of the Royal Commission.

Consider using alternative lenders, like Prospa, who can provide small businesses with faster access to finance without the need for excessive documentation or putting your family home on the line as security in order to access funds.

 

Recommendation: Existing guarantor laws should remain the same

Please explain?
Lenders can require personal guarantees from owners or directors of a small business, which are essentially promises to pay if the business does not pay. Hayne did not favour any changes or additions to existing laws around guarantees. To some extent, this was done to avoid any reduction in availability of credit for small businesses that may accompany changes in law, due to the frequency with which guarantees are currently used for small business lending.

The Royal Commission uncovered a number of instances of banks mistreating loan guarantors, demonstrating care needs to be taken when requesting or accepting the role of a guarantor for any loan, including a small business loan.

What does this mean for you?
Read your loan contract and make sure you understand your obligations before you sign. Some lenders, including Prospa, won’t take a guarantee from someone unless they have an interest or involvement in the borrowing business. If you are the small business owner, make sure your guarantors also understand their obligations.

 

Recommendation: Make the ABA Banking Code ‘enforceable’

Please explain?
Hayne recommended the Australian Banking Association amend their Code to make it more ‘customer-centric’, and that it should be enforceable when laws are breached. These changes – including expanding the definition of ‘small business’ to include businesses with up to 100 staff or loans up to $5 million – will take effect from 1 July 2019.

Hayne also recognised the validity of other industry codes, including self-regulation, as a way of improving transparency and disclosure and guiding the right kind of behaviour by lenders.

What does this mean for you?
Alternative lenders have already developed an industry code and Prospa helped lead this initiative. The AFIA Code of Lending Practice provides a set of 8 principles by which online small business lenders must operate, and also requires lenders to deliver a loan summary in plain English, plus a pricing disclosure sheet to help you assess if a loan is right for your needs.

 

Recommendation: Potential changes to the way brokers are paid

Please explain?
The Report recommended changes to how brokers are paid, suggesting borrowers (including small business owners) pay their brokers directly for the service they have provided, rather than the lender including the fee in the product cost and paying the broker on your behalf. The Report also recommended removing trailing commissions on long term products like mortgages and insurance.

What does this mean for you?
Brokers and financial advisors play an important role in helping small business owners understand the wide range of financial options available to them, and provide advice on the most appropriate product. Many small businesses are not financially confident and rely on trusted advisors to provide this service. The importance of this service will remain, no matter how the fee is paid.

In terms of commission structures, it is likely that there will be no short-term changes to the current approach. Both major political parties have steered away from this specific recommendation, due to the key role financial advisors play in generating competition and providing choice within the market, including for small business owners seeking finance.

Find out more about Hayne’s 76 recommendations in the Royal Commission report here.

 

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

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