Banking Royal Commission and Small Business
With great fanfare, the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released to the world on the 4th of February. The government response to the report was released at the same time.
My initial reaction to the report was one of being underwhelmed as well as being particularly disappointed in any real focus on the superannuation collection process. Then I looked at the detail. I am still underwhelmed but there were some good outcomes worth mentioning. I will come to superannuation later.
The report highlights in my opinion that the banking system itself isn't broken, which is of course good news. It is a fact that the majority of the current laws are sound but, and it is a big but, there is a need to ensure that the laws and rules are enforced better.
A couple of the key recommendations include: that the NCCP Act (National Consumer Credit Protection Act) should not be amended to extend its operations to lending to small business; and to change the definition of a small business in the banking code to a loan less than $5m for a business with less than 100 full time equivalent employees.
These recommendations are crucial to our sector. It is difficult enough to get finance at present which I elaborate on and that difficulty has been compounded by a definition that limited what support could be provided.
While the findings and recommendations may be considered tame, they provide welcome relief for small business owners in that they don't provide a catalyst for a further tightening of credit and lending practices, with pain already being felt by small to medium businesses in gaining access to credit. What I am hearing from those in the finance sector is that money for small business dried up about a year ago. Businesses that had good business plans and good profits seeking funds to expand found it much more difficult to get those funds.
It used to be that when negotiating a loan, a bank would apply a Loan to Value Ratio (LVR) of around 70% to good businesses but that has now dropped to 30% and lower. This means, as an example, that a business with $100,000 worth of assets would have been able to borrow up to 70% of the value of the asset which is $70,000 but now they will only be able to access $30,000 at best. That makes it much more difficult to grow and if this continues it will become a full-on credit squeeze. Credit squeezes are never good for economic growth.
I know of another business that turns over more than $25m a year and has been around for 20 years and is very successful. They were seeking a loan to fund a new production (they are a multi-media production company) and could not get that loan in Australia. The CEO flew to England and, with the same business plan, got the money he needed. This is a crazy situation and we were very concerned that the findings of the Royal Commission might make this situation worse. Thankfully the Commission didn't make it worse but I'm not sure they fixed the problem.
So, for me the two key messages from the Royal Commission are that: there is a clear need for regulators to pick up their game and enforce the existing laws, and banks must change their culture to ensure that the valid needs of their customers are put ahead of shareholders.
The main regulators of banks are the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). We have been particularly critical of APRA over the years as we believe they have been far too 'laissez-faire' in their approach to small business lending.
Mind you we shouldn't forget that it was APRA that helped manage our way through the Global Financial Crisis (GFC) a few years ago. Perhaps APRA, as a result of being seen as 'world's best practice' by other countries then suffered a severe bout of hubris and thought they were beyond reproach and indeed superior to the rest of us. But now they have been bought back to earth with a thud. No more living in an ivory tower on past glories for APRA. They now need to spend more time down on the streets finding out what is going on and seeking comment from those with skin in the game.
As for ASIC, they are a hot and cold organisation. There are parts of ASIC and people in ASIC who I have worked with for many years who get the needs of small business and have achieved a focus on those needs. Disappointingly there are other parts of ASIC who are completely disconnected from the small business community or worse still have a very 'left' attitude and believe that all businesses are bad, particularly those in the finance sector. We know there are some bad businesses and bad people out there but treating all people and all businesses as bad only ever helps the corrupt and hinders the good. There has now been a change in ASIC with more commissioners and deputy Chairs who get the need to work with the small business community.
The report is surprising however in its lack of anything ground breaking for small business when it comes to recommendations. Perhaps that reflects what COSBOA has said all along that the banking system in Australia was not broken.
What the Royal Commission did highlight was the arrogance and elitism of the biggest institutions in the banking and superannuation systems which caused severe and unnecessary pain on a small but still significant number of innocent people. Those businesses that were forced into bankruptcy and those families that suffered have been victims of poor regulation as much as from a complete lack of concern from the most senior management of wealthy institutions. They must be compensated.
There was also, disturbingly, the collection of fees by banks for 'non-service' or from deceased people which amounted to over $750m. This can't be discounted as a series of mistakes but more as a systemic failure from management that (subconsciously?) turned a blind eye to a good source of income. Once again we have to look at how they got away with this behaviour. How did the boards of management, the directors, not see what was happening? There were junior employees in the banks who must have been aghast at what they saw but felt helpless to do anything.
I note there has been a few directors, and a CEO and Chairman, who have resigned in shame and perhaps there should be a few more. Whoever the regulators and the bank directors are in the future they must make sure banks are transparent and honest in all their dealings.
So, we come to superannuation. We have been concerned for many years with the nature of the collection process for superannuation and the behaviour of superannuation funds. The Royal Commission received a submission from COSBOA but seems to have totally ignored our concerns.
Currently, employers are required to collect and distribute the superannuation accrued by its employees. We believe the collection system is flawed and is open to corruption and abuse. For many years we have called for employers to be removed from the collection process and for superannuation to be included in PAYE payments made to the Australian Taxation Office (ATO) by employers. This would create many benefits for stakeholders in superannuation. This would create greater certainty for employees on where their contributions are located. It would give the owner of those funds greater say in where their retirement funds are invested. It would save the superannuation funds substantial administration costs, this could be as much as one billion dollars a year. Unclaimed funds would be managed by the government. Non-payment of superannuation funds would not be a major problem as the ATO has a strong history of managing GST and PAYE payments.
Disappointingly the superannuation funds do not support removing businesses from the collection process. They do however complain that businesses do not comply with the system and billions of dollars of peoples' funds are not collected or remitted. We have a solution to the problem that is valid and is still rejected by the funds. Why would they reject a solution that saves them administrative costs, provides better certainty for workers and makes business easier? We believe the reason is that too many organisations, unions and industry groups, are making an income from superannuation process and are not interested in finding a workable feasible solution.
The misconduct comes from the behaviour of funds who threaten employers with legal action even though the fund has no proof that any money is owed. They have a 'guess' that money might be owed and so threaten the business person with legal action unless they pay the money or tell the fund there is no funds outstanding. When challenged the CEO of one fund stated that 'we have to look after our members and we don't know if they still work for that employer, so we have to send the letter of demand." When I asked why they don't contact the member instead there was no reply. The administration of the funds involves bullying and threatening of innocent small business people when that is unnecessary. It should actually be easier to contact their member. As an example of the lengths the funds will go to scam employers I copied to the Royal Commission the below comments from a bookkeeper for a small business on letters received from Retail Employees Superannuation Fund (REST).
"For this particular client we use the ATO Clearing House for superannuation payments. Everything is up to date so I was taken aback when I received this very threatening letter. I contacted REST as I initially thought it may be some kind of scam letter. They advised that yes, this employer number was my client, that there were 2 employees that had previous payments made on their behalf and that REST engages Industry Funds Credit Control (IFCC) to chase up outstanding payments. She also advised that REST had no record of engaging IFCC to chase my client up for any outstanding funds. She also confirmed that the 1800 number listed in the letter was correct and I should give them a call to find out what it was in relation to. I did that and was advised that they had tried to call me on the 17 June and since I had not responded, their next step was to send out this letter. I asked them how they came to the figure of $26,573.28 as needing to be paid within 7 days - she advised that it was just 'an estimation'. I asked, based on what - considering the 2 people that had been paid was somewhere in the total amount of $120 & $2000 for the period of their employment. She couldn't explain or justify their estimation."
The fact that a superannuation fund or its collection agent would just estimate an amount and then start legal action is unprofessional but also dishonest. An amount of many thousands of dollars that has cents included in it is hardly an estimation. If a bank were to behave in a similar way there would be a place to go and complain but with superannuation no agency seems to have responsibility. This is a very common story in superannuation collection.
The Royal Commission failed with its lack of response to superannuation collection scam.
There are many other recommendations that should have good outcomes for small business owners when it comes to the Banking Code and enforceable code provisions and we acknowledge the government's swift response and support of the recommendations. We also acknowledge the ALP's support for the report. We of course need to continue to study the detail for any unintended consequences including the continued difficulty for small businesses to access finance due to the reaction, perhaps over reaction, of bank management.
There are other points worth noting, one is the predominant role played by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell and her staff. They have influenced this report in many positive and realistic ways. Ms Carnell completed a report on banks interaction with small business and has helped develop very positive changes in the Banking Code of Conduct - well done and thank you.
The other point is that the final report was written in language that can probably be understood by people which is a nice surprise. Most reports and legal documents consist of gobbledygook and nonsensical phrases that are boring and don't inform the average person. This report is a good change and a 'best practice' for future reports.
Finally, I hope that the banks in particular have learned that they must treat people, including small business people, with respect and not let greed, poorly framed KPIs or a general lack of care of the impact on people's private lives prevail. They also need to consider the impact on people's health by decisions made by computers or by bank staff who are remote from the community and therefore no longer connected to reality. We are sure that without quality regulation of the highest order, banks will quickly go back to poor practices. To that end we support the recommendations that will strengthen ASIC and APRA. We hope they use that strength wisely - judiciously where needed and with force when required.
by Peter Strong