Inquiries x 3: small business lending; external dispute resolution; financial ombudsman service

1. Inquiry into small business lending practices

The Australian Small Business and Family Enterprise Ombudsman will undertake an inquiry into concerns raised by the Parliamentary Joint Committee (PJC) on Corporations and Financial Services in its report, Impairment of Customer Loans.  That report, tabled on 4 May 2016, made a number of recommendations including this reference to the Ombudsman.

The Ombudsman will examine selected cases identified by the PJC in its report and, pursuant to terms of reference, provide advice to the government on whether further regulatory action is required.

As the Minister concedes, the government already has a substantial agenda of reforms for the financial system, focused on consumers, however the “Ombudsman will be able to identify through a forensic analysis if further reforms are needed”.

The terms of reference are that the Ombudsman should:

  • review a selection of the cases that have been identified by the PJC as unfair and ascertain whether there are any deficiencies in the regulation of authorised deposit taking institutions (ADIs, or banks etc) in lending to small business;
  • refer any matters identified in the review to the relevant authority for further consideration as necessary;
  • determine whether the regulatory deficiencies identified by the PJC, or additional deficiencies identified through the inquiry, are being addressed by subsequent government and industry reforms; and
  • recommend whether additional reform measures should be implemented (legislation, regulations, guidance and practices) to ensure products perform in the way they should, taking into account that consumers have a responsibility to accept their financial decisions, including market losses, when they have been treated fairly, and any impact on the availability and cost of credit to small business.

The Ombudsman is established under the Australian Small Business and Family Enterprise Ombudsman Act 2015. Section 42 allows the Minister to refer certain matters to the Ombudsman for inquiry, including ways in which relevant legislation, policies and practices might be improved to assist small businesses or family enterprises. An inquiry may involve public hearings.

Small business is defined to mean one with fewer than 100 employees, or with revenue of under $5,000,000: s 5. A family enterprise is simply a “small business operated as a family enterprise”: s 6.

A limited reporting time is given, 12 weeks, the end of November 2016.

Selected cases

The PJC Report notes that the committee selected four cases of consumer disputes with banks and formally referred those cases to ASIC for review in relation to relevant legislation, regulation and codes of practice: [2.88].  The committee noted that this was an unusual approach and it said that it did not intend to publicly identify those cases.  In response [2.90], ASIC informed the committee that overall, its consideration of those cases did not indicate breaches of the existing regulatory obligations on lenders administered by ASIC. The case studies related to business borrowers who obtained large commercial loans from banks and ASIC said it was difficult for it to offer a comment on whether or not the conduct of the lenders in these cases was unethical. ASIC’s regulatory role for commercial lending is limited, and relates to considering allegations of misconduct as opposed to judging questions of ethics. While the Committee accepted this, it said it is not acceptable that banks are not required to meet minimum professional and ethical standards, and to be held accountable to them.  It therefore recommended that the ASBFE Ombudsman should work towards the development of appropriate professional standards for the conduct of banks in relation to loans.

The PJC Report

The report makes some wide ranging recommendations, not all of which appear feasible or necessary, but consistent with the government’s approach of more laws and regulation.   It is also inaccurate in its statements of the law in relation to receivers and its explanation of the pending changes in insolvency law.

The Ombudsman need not be distracted by these problems in the more limited focus she has in her inquiry.

2. Review of external dispute resolution schemes in the financial sector 

The Ombudsman will provide interim findings to what is termed the Ramsay Reviewunder the chair of Professor Ian Ramsay.  It is examining the processes of the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal and the Credit and Investments Ombudsman, including the extent of gaps and overlaps between each of these bodies. It is also examining different models of dispute resolution. It is to report by March 2017.

3. Review of the jurisdiction of FOS

At the same time, there isreview into the FOS’s small business jurisdiction, at present subject to a $500,000 limit.

Co-ordination?

We all trust there is overall co-ordination of these inquiries, including in the context of numerous unattended to recommendations already made in earlier reports.

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