5.1 The lending framework

I will begin by explaining why I do not favour extending the provisions of the NCCP Act to small businesses.

As I said in the Interim Report, the responsible lending provisions of the NCCP Act do not apply to lending for business purposes.[1] In particular, the provisions of section 128 of the NCCP Act prohibiting an ACL holder from entering a credit contract with a consumer without making an assessment that the credit contract will not be unsuitable for the consumer do not apply. Nor do the hardship, pre-contractual disclosure, price regulation, and enforcement provisions of the National Credit Code. I explained in the Interim Report that the policy choices that have been made to limit the application of this regime reflect recognition of the need to ensure that small businesses have access to reasonably affordable and available credit.[2]

That said, there are some important provisions that do apply to small business lending. A number of protections within the ASIC Act that apply to consumers also apply to lending to small businesses. These include the prohibition on misleading or deceptive conduct in relation to financial services[3] and on unconscionable conduct in connection with the supply or possible supply of financial services,[4] as well as the implication of particular warranties into contracts for the supply of financial services[5] and the unfair contract terms regime,[6] which I discuss in some detail in the chapter of this Report concerning insurance. In addition, there are a number of general law principles that supplement this framework.[7] And the chief protection for small business borrowers has for some time been, and remains, the Banking Code, to which I will return.[8] Among other things, the Banking Code provides that, if a lender is considering providing a borrower ‘with a new loan, or an increase in a loan limit’, the lender will ‘exercise the care and skill of a diligent and prudent banker’.[9]

As I said in the Interim Report, the evidence and submissions provided to the Commission did not reveal any great appetite to change this lending framework.[10] The submissions received by the Commission following the Interim Report were consistent with this trend.[11] I do not consider this surprising: extending the responsible lending obligations in the NCCP Act would likely increase the cost of credit for small business and reduce the availability of credit. I am not persuaded that the benefits to be gained in individual cases from applying the NCCP Act to small business outweigh the overall costs of taking that step. I therefore do not consider that the NCCP Act should be amended to extend its operation to lending to small businesses.

In the Interim Report, I also raised a number of questions about how banks practically discharge their obligations under the Banking Code when lending to small businesses. One question related to the inquiries that a diligent and prudent banker should make when deciding whether to offer or extend a line of credit.[12] Other questions related to how banks discharge their obligations to assess whether small businesses will be able to repay a loan.[13] The Commission received a number of submissions from banks about the steps that they take to discharge these obligations. Having reviewed those submissions, I do not consider that it would be useful to prescribe any particular approach to be applied by all banks in respect of the discharge of these obligations.

Recommendation 1.9 – No extension of the NCCP Act

The NCCP Act should not be amended to extend its operation to lending to small businesses.

[1]FSRC, Interim Report, vol 1, 162.

[2]FSRC, Interim Report, vol 1, 163.

[3]ASIC Act ss 12DA, 12DB, 12DC, 12DF.

[4]ASIC Act ss 12CA, 12CB.

[5]ASIC Act s 12ED, read with the definition of ‘small business’ in s 12BC(2).

[6]ASIC Act Pt 2 Div 2 Sub-div BA.

[7]FSRC, Interim Report, vol 1, 164.

[8]FSRC, Interim Report, vol 1, 164.

[9]2019 Banking Code cl 49.

[10]FSRC, Interim Report, vol 1, 164. These submissions were generally consistent with the submissions made to Mr Khoury: see Philip Khoury, Independent Review Code of Banking Practice, 31 January 2017, 49 [8.4.2].

[11]See, eg, ABA, Module 3 Policy Submission, 8; ANZ, Module 3 Policy Submission, 3–4 [16]–[22]; ASBFEO, Interim Report Submission, 4; ASIC, Module 3 Policy Submission, 2–3 [4]–[7]; CBA, Module 3 Policy Submission, 4–6 [17]–[19]; NAB, Module 3 Policy Submission, 5–6 [16]–[17]; Westpac, Module 3 Policy Submission, 1 [2(c)], 2 [5], 4–6 [16]–[20].

[12] FSRC, Interim Report, vol 1, 334.

[13] FSRC, Interim Report, vol 1, 334.