From July 1, new banking rules may help your company navigate financial challenges or secure a better loan deal.
To help you stay in the loop, Hub Southern Cross member GOVLAW is shedding some light onto what the changes mean to you.
Many successful companies have had to deal with a financial crisis as an inevitable ‘learning experience’ in their growth story. Think, Steve Jobs returning to Apple to take it from near bankruptcy to billions in just over a decade.
The rules which govern small and medium-sized business lending from mainstream banks are about to change.
From July 1, new banking rules (the 2019 Australian Banking Association (‘ABA’) Code of Banking Practice (‘Code’)) comes into force.
Understanding these changes can help Hub members navigate financial storms, to continue their growth story.
The good news in the new banking rules is that the revised code includes new protections for borrowers (when borrowing from ABA member banks):
• New loan contracts will have more limited “non-monetary default clauses”. These are clauses which can put the loan into default, for reasons other than missing repayments. These previously gave banks wide powers to take enforcement action, even where loan repayments were up to date.
• Banks will have to provide a reasonable time for the borrower business to remedy a non-monetary default before taking enforcement action unless there is an ‘immediate risk’.
• If a bank chooses not to extend a loan at the end of its term, they must give the business at least 3 months notice.
• The loan contract must be written in plain English, not ‘legalese’.
How does the Code work?
All ABA member banks will be required to subscribe to the Code as a condition of their ABA membership and the relevant protections in the Code will form part of the banks’ loan contract with your business.
Is my business covered by the Code?
Hub members with total loans up to $3 million (including related entities), turnover of less than $10 million per year and fewer than 100 employees may be considered a “small businesses” and thus covered by the new Code.
According to ASIC, the Code will cover the considerable majority – between 92-97% – of businesses in Australia.
However, both the Royal Commission into financial services and the Australian Small Business Ombudsman have argued for a higher threshold of loans up to $5 million, to increase coverage of the Code and the borrower protections for capital intensive businesses.
If the Code does not help your situation, your business may still be able to argue some clauses of the loan were ‘unfair’ following the criteria set out in legislation. However, these protections only apply for smaller loan sizes, up to $1 million.
My business is facing financial challenges…
If your business has or is close to breaching the loan covenants you may wish to seek professional advice. Beyond the loan contract, other important issues may also come into play, such as Directors’ liability for insolvent trading.
From July 2019, the new Open Banking regime is being phased in, starting initially with the Big Four banks and limited account types. Open banking will eventually give all customers improved rights to access and share data on their deposit and lending products.
Open Banking will help to address the informational advantage that is held by your business’s current bank, which reduces the ability of competing banks to offer a better deal based on their credit assessment of your transaction data.
Andrew Fernbach | Lawyer, GOVLAW
GOVLAW provides legal and compliance advice to businesses in the financial services and gambling sectors. This includes helping business negotiate compliance issues or seek exemptions from regulators such as AUSTRAC, ASIC and APRA. We can assist with annual reviews and compliance audits.
Our approach values innovation and plain language communication about what can be complex regulatory environments.