Small Business Still An Easy Catch For Lenders

BANKS have been keen to dispel the image of the much-feared visit to the bank manager, particularly among small business. But maybe the tarnished image of the all-powerful banker is not so far from the truth after all.

Bells have been rung and whistles tooted in the quest for business banking relationships. Westpac has hired 500 new business bankers in the past 18 months; at the same time smaller banks such as BankWest, Adelaide Bank, Bendigo Bank and Bank of Queensland have made headway against their larger rivals in forging business relationships.

Remember, after all, the hallowed status occupied in the national psyche by small business (before the armies of private equity came marching down the supermarket aisles): the notion that the real entrepreneurial boosters of the Australian economy are small businesses.

But what if these supposedly strong relationships between bankers and indispensable small business entrepreneurs are not built on a ground of mutual trust? What if, instead, small businesses face a quagmire of unclear regulatory responsibility and almost no protection from what the bankers' careful image primping has sought to dispel: good old-fashioned bastardry.

This is exactly the worst case facing small business, according to the arguments of one prominent academic and several small business "victims" of current regulatory settings.

There is "systemic malpractice" towards small business by banks, alleges a recent paper by an honorary associate professor at Sydney University, Evan Jones.

Jones has compiled a dossier of instances in which small business owners and farmers have lost their livelihoods and homes after disputes with banks.

The paper tells some heart-rending stories. But it also raises a broader question about regulation: if you have a business and believe that your bank manager has behaved negligently, dishonestly, or incompetently, where can you turn for help?

One option is the courts - if you fancy your chances against the legal clout of a multibillion-dollar bank.

Another option is what might be called tabloid television.

When Today Tonight ran the story "Bank bastardry" in the eastern states on January 4, the producer of the program, Frank Pangallo, had more than 100 viewers contact him with bank horror stories. Two of these viewers are settling out of court with National Australia Bank, Pangallo says.

But Jones says that, in general, there is little assistance given to small businesses and farmers if they come up against banking malpractice.

He argues that there have been some chastening scandals in Australian corporate history involving small business, and there should be a regulator with strong powers and the active will to monitor this key aspect of the economy.

Remember the scandal about foreign currency loans in the mid-1980s?

With interest rates towering, banks fashioned loans to small business borrowers in foreign currencies, particularly the Swiss franc, offering lower interest rates.

When the dollar nosedived in 1985, borrowers were suddenly burdened with a much greater debt than they started with - so a $1 million loan taken out in Swiss francs became a debt of more than $2 million.

Some borrowers gritted their teeth and took on the banks in court, with some notable successes for borrowers, particularly against Westpac. But most borrowers lost heavily.

And what is the regulatory framework for small businesses like today?

One port of call for small business complainants is the Banking and Financial Services Ombudsman. The ombudsman is a self-regulating body which considers complaints against the industry. Last year the ombudsman received 6326 cases.

But the ombudsman is strictly limited in what it can consider.

The ombudsman cannot consider cases in which the disputed amount is more than $280,000.

This seems pretty low: a couple of hundred thousand dollars in debt is just about a requirement to get into many Sydney bars these days.

And if the dispute took place before December 1, 2004, the amount must be less than $150,000. The ombudsman is also no help if you've already been to a court tribunal or other arbitrator about the dispute.

Otherwise, the borrower is directed to the Australian Securities and Investments Commission.

ASIC was given the regulatory responsibility to monitor unconscionable conduct in relation to financial products in the ASIC Act of 2001. This responsibility was broadened to include credit facilities in March 2002, with the definition of "credit facility" including small business lending.

But the key point here is that since ASIC received the provisions in relation to credit it has never used them to take on a major bank about small business lending.

And ASIC can act only on conduct that took place after March 2002, otherwise it would refer complaints to the Australian Competition and Consumer Commission.

The only regulator with the power to actually intervene in a bank's operations is the Australian Prudential Regulation Authority.

This is what APRA was called on to do in the wake of the currency trading scandal at the National Australia Bank, when, over a number of years, traders managed to conceal within the bank the loss of about $360 million.

But APRA is limited to ensuring whether financial institutions are managing their risk effectively. Monitoring the conduct of lending operations is just not its beat.

Given the lack of regulatory brawn in the area, Jones argues that "a regulatory impasse has ensued, with adverse implications for the vitality of the entrepreneurial class".

Part of the problem, Jones says, is that the complaints system about banks is geared towards the consumer, and largely neglects small business concerns.

So, for example, state offices of fair trading enforce a uniform consumer credit code that seeks to provide standards for consumer lending, however, these don't apply to business borrowers.

But the whole debate, of course, hinges on whether there are problems regarding bank lending to small business.

The chief executive of the Australian Bankers Association, David Bell, notes that the latest Banking and Financial Services Ombudsman's report did not find any systemic issue similar to the cases described in Jones's dossier.

An ASIC spokesman said: "ASIC may take action if the case is very serious or raises systemic issues." The inference is that these issues aren't systemic.

But Jones says that the cases he has looked at are in fact just the "tip of the iceberg".

And today, instead of having a robust system of regulation monitoring conduct on small business lending, what Jones describes are settings in which no single regulator provides the necessary muscle that small businesses manifestly require in some disputes with their much more powerful bankers. Small business - and the economy as a whole - is the poorer for this gaping black hole in regulatory responsibility.

Ross Gittins is on leave.