Frances Russell-Matthews - Experian Australia Credit Services

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What’s next for small business lending?

Frances Russell-MatthewsHead of Legal and Company SecretaryExperian Australia Credit Services Pty Ltd

© Experian Public

Why is this a hot topic? The Parliamentary Inquiry into the banks says so – and is even more focussed on the outcome and how to get there than the Productivity Commission.

Aggressive timeline – mid 2018- for the creation of an open access regime for customer data. Goes further than Productivity Commission, by calling for banks to adopt specific technology which makes it easy for competitors to access account information. Banks should "be required to develop a binding framework to facilitate this sharing of data making use of application programming interfaces (APIs)".

4 © Experian Public,

The debate’s all about dataThe committee: " APIs present the largest number of benefits in terms of data security, data credibility and accessibility.”

Accountability, transparency and choice – Kelly O’Dwyer Industry “let down by self interest” – media release Feb 17

Start-up lobby group Fintech Australia- "If we can create an agreed standard that will stop banks using security and privacy as excuse for why they will not allow this to happen, then implementing it through APIs will make it seamless for consumers.”

Online business lender Spotcap Australia, backed the mandated API model and said "in an open data environment, we will begin to see more innovative financial products with transparent pricing structures.”

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Turning up the heat

August 2016 – Turnbull Govt directs Australian Small Business and Family Enterprise Ombudsman to enquire into adequacy of law to address “serious” concerns raised by the Parliamentary Joint Committee on Corporations and Financial Services in its report, Impairment of Customer Loans:

• about how banks treated some of their small business lending customers• advise Govt if further regulatory action needed

Aim: “to prevent small business lending customers being abused.”


Small Business Ombudsman Report

Kate Carnell reported this month:

"Across the board the contracts that were in place between banks and small [ and medium-sized] businesses … simply unfair.”

:”Banks have all the power [including] to revalue assets and do a range of other things that means that [business] loans can be defaulted even when [payments are made as] stipulated under the contract.“

Recommendation 3

The committee recommends that responsible lending provisions, including ASIC's monitoring under the National Consumer Credit Protection Act 2009, be extended to small business loans.


Which SMEs?

ASIC: ‘small proprietary companies’ – 2 of 3 characteristics: annual revenue < $25 million; fewer than 50 employees at end of financial year; and consolidated assets < $12.5 million at end of financial year.

Unfair contract terms protections (12 Nov16 on) - employs < 20 people at the time the contract is entered into (inc. casual staff employed on a regular or systematic basis).

ATO – annual revenue turnover (ex. GST) < $2 million

Fair Work Commission – < 15 employees

Aus Bureau Statistics – < 20

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The 3 steps of responsible lending• make reasonable inquiries about the consumer’s financial situation, and their requirements

and objectives

• take reasonable steps to verify the consumer’s financial situation; and

• make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries about consumer’s requirements and objectives and information obtained in the first two steps).

In addition, if the consumer requests it, you must be able to provide them with a written copy of the preliminary assessment or final assessment (as relevant) if made within 2 years of date of contract /quote : applies to credit providers or lessors, assignees, credit assistance providers.


Assessing affordability• Financial statements• Business bank account statements• Recent income tax returns• A statement from the person’s accountant setting out details of the consumer’s financial position• Business Activity Statements

Simple enough? Likely not.RG 209.42 A system that only measures the credit risk of the consumer, but does not assess the consumer’s capacity to meet their payment obligations, will not meet the responsible lending requirements (although such a system may provide a good prediction about the overall risk of default in the loan portfolio).

Automated decisioning tools and benchmarking are already challengeable as assessment tools (RG 209.41) –especially in an open access to data regime. They are guides only to “reasonableness” of decision made (RG 209.49)


And there will be more to considerTax integrity — improving the transparency of taxation debts

From 1 July 2017, Australian Taxation Office may disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage these debts. ATO does not currently provide this information.

Initially only to apply to businesses with Australian Business Numbers and tax debt of more than $10,000 that is at least 90 days overdue.

Driver: Businesses are expected to pay taxation debts in a more timely manner to avoid affecting their credit rating. (Subtext- credit providers are expected to take this into account.)

This measure is estimated to have a gain to the budget of $63.0 million in underlying cash balance terms over the forward estimates period. In fiscal balance terms, the cost to the budget is estimated to be $27.0 million over the forward estimates period.


Meeting objectives starts with understandingMaking reasonable inquiries about the consumer’s requirements and objectives starts with their understanding of the contract.

From 12 November 2016, the existing unfair contract term protections for consumers will be extended to cover ‘standard form’ (‘take it or leave it’) small business contracts fora financial product, or he supply or possible supply of financial services.

eg business loans, credit cards, client or broker agreements

Covers standard form contracts entered into, or renewed, on or after 12 November 2016, where upfront price payable under the contract does not exceed $300,000 – or $1 million if the contract is for more than 12 months. Interest payable is excluded from upfront price payable.

Excludes individually negotiated contracts & insurance contracts regulated under the Insurance Contracts Act 1984.


But there’s more to it

The needs of businesses are diverse. Businesses are diverse.

RG 209 Different business models and product types and the “type of activities” being undertaken is a consideration for lenders and their compliance – invert this.


If it all goes wrongEnforcement and Administration

The ‘one law, multiple regulator’ model commenced in January 2011. Consumer Affairs Australia and New Zealand (CAANZ) is currently reviewing the content of the ACL. CAANZ issued an interim report in October 2016, with its final report due in March 2017.

In parallel, Productivity Commission (final report expected any day now) is undertaking a study of the arrangements for administering and enforcing the ACL with following scope: 1) examination of effectiveness of the multiple regulator model in supporting a single national consumer policy framework, and to make findings on how model can be strengthened. 2) Terms of reference include commonwealth and state based regulatory collaboration and gaps, overlaps or inconsistencies in administration and enforcement, and strategic address of risk.

Out of this will come a more stringent enforcement regime.


Love all things to do with regulatory affairs….

What to do next…

Frances Russell-Matthews - Experian Australia Credit Services

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