What Does The New Banking Code Of Conduct Mean For Small Business?
“On 1 July 2019, a new Banking Code of Practice (‘the New Code’) came into effect for Australia’s banks. The New Code is designed to better ‘protect’ individuals, small businesses and guarantors when dealing with their banks.
There was a lot made of the bad behaviour – unethical and immoral – following the Banking Royal Commission last year (the formal title being the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry).
So, what does the New Code mean for small businesses?
Under the New Code, a small business is one which has an annual turnover of less than $10 million, has less than 100 employees, and has a total debt of less than $3 million. Some relevant parts of the New Code that apply to small business include:
· The bank is required to tell you what documentation they need to process a loan application, and they will tell you how long it will take to process the application.
· If a loan application is declined, the bank may tell you why (meaning they might, or they might not).
· Loan contracts will be written in ‘plain English’ and will be less complicated.
· Slightly longer time frames will apply for when the bank advises small businesses that they are in default, and that the bank intends to call in the loan.
· Details will be made clear surrounding when a bank can act to recover a loan, and when they can’t.
· A ‘fair and transparent’ process will apply when a bank is appointing external insolvency practitioners and property valuers (although the New Code does not go into any detail to explain what is a ‘fair and transparent’ process).
The New Code (as was the case with the previous code) is voluntary, and a bank needs to sign on and agree to be bound by it. That said, for the first time, for a bank to have membership with the Australian Bankers Association (which is important to the retail banks – they do need to be a member) – agreeing to the New Code is a compulsory pre-condition of membership. So that’s good I suppose.
The New Code is written by the banking industry, so let us be very clear here, the New Code is not a substitute for small businesses taking responsibility for their affairs and taking steps to fully understand the terms of any loan or contract or facility document issued by a bank.
The New Code is not designed to make banks responsible for acting in the best interest of small business (the customer) - not by any stretch of the imagination is this going to be the case.
My advice is that Small Businesses must remain vigilant when dealing with banks, and should obtain advice from their banking lawyer in relation to all aspect of any loan or contract with a bank, at the very least this should include advice on:
· Obligations of the borrower;
· Personal exposure of the borrower and all associated parties;
· The extent of exposure of personal assets;
· Security required;
· What will be a ‘Default’;
· What rights the bank has in the event of a Default, and what rights the bank doesn’t have in the event of a Default;
· When the bank can call in a loan, and when it can’t (for example, the New Code has a mandatory 30 day notice period, but there are exceptions!);
· When a bank can appoint an external insolvency practitioner, and what must occur before, during and after this process;
· When the bank can appoint a valuer, who is required to pay for the valuer, and what happens with the valuation;
· What is a ‘fair and transparent’ process during the appointment of an insolvency practitioner and/or valuer.
The New Code might be a step in the direction to better protect individuals and small businesses, but it has a long way to go.
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Tracey Mylecharane - Solicitor
Tracey Mylecharane has more than 12 years experience in legal practice and has been involved in numerous matters with clients who have experienced hardship and difficulty with their banks - this has ranged from simple advice and guidance, to assistance lodging complaints through the ombudsman system, to representing clients in court against banks.