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 and in his draft findings released in September he has stated that their behaviour has been largely driven by greed and the “pursuit of profit” and it is hard to argue against this position.
Although it took some time to eventuate due to plenty of political haggling it was clear from very early on in the investigations that this was an inquiry that needed to happen. There have been some shocking revelations come to light highlighting misconduct by the banks spanning several years.
From allegations such as 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, and farmers forced to vacate their homesteads within a week following foreclosure, 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.
A significant amount of the banks’ total revenue is derived from their lending portfolios, the largest of which is their residential property divisions which 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 and 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 does this all mean for small business lending?
Although it may be a little early to call 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. As it stands today 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. In large this sector has been serviced well by the banks, financial institutions & brokers that support it so the need to turn it upside down does not seem strong.
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 well have an 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 in excess of 2.1 million small businesses actively trading in Australia employing upwards of 7 million workers and generating approximately 35% of Australia’s gross revenue. In an attempt to improve lending guidelines by imposing tighter credit restrictions and making funding lines harder to secure for small businesses the government could well force business investment to stall and economic growth to dip.
The rise of the alternate lender
Interestingly this focus on the major banks imperfections has already seen the public entertaining alternate lending options and this is only set to further. 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 with customer’s trust in them at an all-time low. In the past it has been the norm for small business to put all their “eggs in one basket” when it comes to finance: ie. overdraft with their bank, asset finance through their bank, 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 provided by a range of 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 with these lenders being viewed as more trustworthy amongst small business and a good alternative to the banks. Technology has also made a big impact in this space with “Fintech” or online funding & transactional companies 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 who has announced plans to provide a $2 billion stimulus package labeled the Australian Business Securitisation Fund, with the aim of increasing 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.
A second planned initiative from the Government called the Australia Growth Business Fund 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.
By providing these alternate lenders with better access to cheaper funding lines, these lenders are better equipped to provide better competition to the banks thereby disrupting the market and giving the economy a much-needed boost. If both these stimulus projects are implemented and managed effectively (only time will tell on that one) this could have great benefit to many contractors in the earthmoving & construction industries.
Our role as a finance partner, is to source the best funding option for you, whether it be through one of the big banks or alternate (and trustworthy) second or third tier lenders. We are accredited with the full-suite of lenders to assist you. We would love to chat with you if you need any assistance with your finance arrangements or if you just are looking for someone to speak to about your business in general. At Magnolia Lane we pride ourselves on helping our clients grow and succeed. Please don’t hesitate to contact us on (02) 8287 3000 or email firstname.lastname@example.org.