Banking Royal Commission
After 69 public sittings, 7 rounds of public hearings and more media attention than a Royal wedding, the banking royal commission is wrapping up not long after this article goes to print. Commissioner Kenneth Hayne QC has heard numerous accounts of poor behaviour and wrongdoing by the big banks and financial advisors. He stated in his draft findings released in September that their behaviour has been largely driven by greed and the “pursuit of profit”. It is hard to argue against this position.
It was clear from very early on in the investigations that the banking royal commission needed to happen. Shocking revelations have come to light highlighting misconduct by the banks spanning several years.
It was clear the culture within these organisations was well below what customers expected and more than that, what they deserved and action had to be taken. Allegations included:
- Charging “fees for no service” to people who had passed away
- Households obtaining loans that were up to 9 times their combined income
- Known chronic gamblers being offered credit limit increases after pleading not to be
- Farmers forced to vacate their homesteads within a week following foreclosure,
A significant amount of the banks’ total revenue is derived from their lending portfolios, the largest of which is their residential property divisions. This raked in no less than $1.7 trillion in revenue last year. As a result, all lending practices have been under the spotlight specifically focused on breaches of responsible lending guidelines. The fallout being that lending policies for mortgages have already tightened quite dramatically. Coupled with other factors including increased supply, it has already caused a decline in the property market and has increased the difficulty for consumers in securing funding for home loans.
The question now is what will be the true impact of the final recommendations Commissioner Hayne passes down in February, not only on the financial services industry but ultimately the entire Australian economy?
What This Means for Small Business Lending?
There is strong hope from much of the language being used in the Royal Commission that it’s not all doom and gloom for small business lending yet. The way the industry regulators, namely ASIC, define small business is different to consumer lending on the basis that business owners are better prepared to navigate through the lending process and therefore have left finance in the SME market less regulated. The need to turn the sector upside down does not seem strong given it has been serviced well by bank, financial institutions and broker.
From the Commissioner’s interim report, it suggests that although the Commissioner has likened small business in many ways to the consumer market. He has also acknowledged that small business do not currently fall under the National Consumer Credit Act which imposes heavy regulations on lending practices. It would be an extremely controversial decision for this line in the sand to be shifted greatly. There will no doubt be some changes recommended which could impact on access to credit for small business owners, but heavy changes appear unnecessary and threaten overall economic stability too much.
Small businesses have a huge impact on Australia’s economy. It is estimated that there are currently more than 2.1 million small businesses trading in Australia. These businesses employ upwards of 7 million workers and generate approximately 35% of Australia’s gross revenue. The government could well cause business investment to stall and economic growth to dip if they impose tighter credit restriction and make funding harder to secure for small businesses.
The Rise of Alternate Lenders
Interestingly this focus on the major banks imperfections has already seen the public entertaining alternate lending options. Many experts predict that our heavy reliance on the “Big Four” for funding will now evolve. The general consensus is that the big banks are not seen as the safety nets they once were. In fact, customer’s trust in them is at an all-time low. In the past it has been the norm for small businesses to put all their “eggs in one basket” when it comes to finance. For example, they have overdrafts, asset finance, and credit cards through their bank. Small businesses will now have better options to widen the net and spread their debt across various lines of funding and lenders.
We have already begun to witness an increase of second and third tier lenders in the SME market, making access to funding options available that weren’t previously through the banks. The stigma that may have been attached to these types of lenders in the past is dissipating. Small businesses are viewing these lenders as more trustworthy and a good alternative to the banks. Technology has also made a big impact in this space. “Fintech” or online funding and transactional companies are becoming one of the fastest growing industries with a wealth of investment going into it.
Government Intervention to Increase Funding Access
Some of that investment is now coming directly from the Federal Government. They have announced plans to provide a $2 billion stimulus package labelled the Australian Business Securitisation Fund. The aim of this is to increase accessibility to funding for small businesses. The Commonwealth backed funds will be provided to smaller banks and other non-bank lenders so that they can in turn provide their small business customers with both secured and unsecured loans at a better cost than what they were previously able to due to their high cost of borrowing funds.
The Australian Growth Business Fund is a second planned initiative from the Government. This will look at allowing private funding from banks and superannuation funds to invest in small business startups as another way to improve access to funding for businesses across Australia.
Alternate lenders are better equipped to provide competition to the banks when they have access to cheaper funding lines. This will disrupt the market and give the economy a much-needed boost. If both these stimulus projects are implemented and managed effectively, this could have great benefit to many contractors in the earthmoving and construction industries.
At Magnolia Lane, we tailor finance solutions specific to your unique business needs. It is our role as your equipment finance broker to source the best possible rate for you. Through our accreditation with a suite of lenders, there really is no limit to what we can assist with. Contact us or get a free quote today and let’s grow together.