ASIC bows to banks on code of practice, $3m limit approved

Australian Financial Review July 31 2018

James Eyers

The banks have had a significant win after convincing the corporate regulator to approve its revised Banking Code of Practice, which will apply to small businesses who borrow up to $3 million.

This is lower than the $5 million level originally recommended by the small business ombudsman and the banks' own independent expert.

The new code, which has been a key focus during the Hayne royal commission, "represents a stronger commitment to ethical behaviour, responsible lending, greater financial protection and increased transparency," said Australian Banking Association chief Anna Bligh.

ASIC had considered a $5 million level of borrowing as the definition of small business but it appears chairman James Shipton has been convinced the $3 million level desired by the banks will protect enough businesses.

ASIC said the $3 million level will cover "the considerable majority" of businesses - between 92 per cent and 97 per cent - and it will also collect quarterly data from the banks to ensure that is the case.

It's the first time an industry code has been approved by the corporate regulator.

Ms Bligh argued in front of the royal commission in May that if the definition of small business was set too high at $5 million, the code would have captured sophisticated borrowers, and the added protections could limit the supply of credit, force up interest rates and put smaller lenders at a disadvantage to the big four banks.

The code forms part of the contractual relationship between banks and their retail and business customers. It is enforceable in courts and ombudsman schemes.

The code has also been strengthened since its initial draft, the ABA said. It will delay banks offering on add-on insurance products and require fewer conditions for small business loans.

The code's protections relating to unfair contract terms - limiting the use of so-called "non-monetary default" clauses, which give banks legal power to default a business when risk factors change - will apply to businesses who borrow up to $1 million.

The banks pledged to rewrite the code after an independent review released early last year by consultant Phil Khoury criticised it as a "complex tapestry of obligations" that was overly legalistic.

The banks will now begin training their 130,000 odd staff and will also have to change technology systems to implement new rules.

The banking royal commission is likely to make recommendations regarding the utility of the code, given the inquiry's terms of reference specifically ask it to consider the adequacy of self-regulation by industry codes.

Bank bosses said they were pleased the code had been approved and said it would strengthen transparency for customers.

"Westpac is pleased to see ASIC's approval of the new Banking Code of Practice," said Westpac chief executive Brian Hartzer.

"We have worked with the industry to completely rewrite the banking code which sets out the industry's key commitments and obligations to our customers.

"Westpac fully supports the new banking code which is one part of how we are strengthening transparency and relationships with our customers."

The new code will commence operation from July 1, 2019 and will be reviewed every three years.