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Queensland Economic Advocacy Solutions

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Banking Royal Commission Long Overdue

November 30, 2017

For the best part of nearly a decade, the Queensland business community has been screaming out for a spotlight to be shone upon Australia’s major banks and the litany of complaints against their practices. Following the Global Finaincial Crisis the major banks virtually overnight became significantly more conservative in their business lending with resultant and unconscionable revised terms and conditions of available credit.

Unmistakably the major banks have a fiduciary responsibility to run their businesses in a manner that minimises risks that in turn delivers a profitable and strong foundation. However Queensland businesses were at a loss to understand why they were being singled out. They reveal a range of instances where banks have increased their risk margins for business loans and tightened their standards and terms for new loans through lower loan-to-valuation ratios (LVRs), stricter collateral requirements and higher interest coverage requirements. This tightened lending criteria threatened the ongoing viability of many businesses with plans for expansion shelved, downsizing, or in some cases the business ceasing to trade.

I understand that a bank’s primary focus must be to their shareholders but I also believe they have an economic responsibility to the Australian economy and are in a pole position to drive prosperity. Accordingly the news that the Turnbull Government will establish a Royal Commission into Australia’s banks and other financial services is long overdue.

Small businesses, as the Prime Minister stated, do have a right to be treated honestly and fairly in their dealings with banking. The Inquiry will consider the conduct of banks, insurers, financial services providers and superannuation funds. It will also consider how well equipped regulators are to identify and address misconduct. The proposed terms of reference can be found here: https://www.pm.gov.au/sites/default/files/media/terms-of-reference.pdf

What I will be specifically interested in are three things:

  1. Why has there not been a full pass through of previous interest rate cuts to small business and why do small businesses in particular pay significantly higher interest rates?
  2. Why are the lending criteria for small businesses far exceeding their risk profile?
  3. What can be done to promote switching?

The first two issues are clearly evident in the above graphs.  However in my view one of the biggest issues is also actually the solution and it's competition.  There is actually plenty of competition on offer but for true competition to be realised the barriers for customers to switch must be lowered and ideally removed in order to provide business customers with more opportunities to change providers if they choose to do so.

Interestingly despite the fix to ‘exit fees’ the level of fees and charges involved was never really the main issue – it is the time and resources required to go through the process of changing banks. For example, considerable time is incurred in administering direct debit and credit changes when transferring to another Bank. It is likely that the cost of resources involved in switching banks significantly outweighs the actual costs of fees and charges. 

A key question must be what can we do to fix the issue of switching……surely technology is getting to the point where businesses can have their own portable account details to spare them the hassle of all the direct debit and credit re-organising. My view is the Royal Commission should define the problem and in doing so encourage creative minds to come up with a solution.

I really do believe it is time for Australia to embrace the second tier of banks, and regional banks whilst not perfect have a considerably better track record. 

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