The second round of hearings from the royal commission into financial services confirmed what many have previously told SmartCompany: once a decision has been made by a big bank, most SME owners have little power to dispute the issue.
When senior assistant counsel Michael Hodge QC wrapped up proceedings at the end of last week, the prospect of putting more red tape on bank lending processes seemed unlikely.
He found some of the conduct alleged through the hearings could be breaches of banks’ legal obligations, but overall, the banks had not show themselves “too willing” to lend to SMEs and there wasn’t a need to put more restrictions on how financial providers lend to small businesses.
This might not necessarily be a bad thing, with small business groups saying it’s already difficult enough for smaller operators to secure bank finance without tough new measures being put in place.
However, the royal commission has uncovered several different types of disputes and difficulties when it comes to SMEs dealing with financial institutions.
Here are five types of concerns raised throughout the hearings.
The royal commission heard how 2,800 businesses were caught up in a glitch in CBA’s systems that meant they were charged double the 16% interest rate on their overdraft accounts.
This meant business overdrafts were being hit with interest of more than 30%, without customers being notified of the glitch.
The problem was first identified in 2013, but the commission heard customers were not actually told about the error or repaid the amounts owed to them until March 2017, with the bank delaying the admission in order to avoid having to discuss it during parliamentary hearings into the banking sector.
Small Business Ombudsman Kate Carnell was highly critical of the bank’s explanations of the issue during its Royal Commission hearing session, saying there was no “heartfelt apology” and observing the bank clearly believed this significant error didn’t need to be immediately addressed.
Customer Bradley Wallis took out a loan worth more than $500,000 from the Bank of Melbourne to buy a bed and breakfast business, but the royal commission heard the bank classified this as a residential loan when it should have been a commercial property loan arrangement.
This caused significant issues in 2017 when Wallis tried to get a valuation on the property and restructure the loan after the business didn’t work out.
The bank ended up having to reclassify the loan from residential to commercial, but it made the customer place $100,000 in a locked term deposit account to cover a shortfall caused by the initial misclassification of the loan.
The way banks have been making decisions about debt repayment terms was also front and centre of the royal commission hearings.
Business owners shared stories of making big financial decisions in order to settle debts with banks, but said the game changed on them part way through the process due to the bank making a completely unexpected decision.
For example, former Pie Face franchisee Marion Messih shared the story of taking our a $360,000 business loan with her brother and sister-in-law through Westpac to buy a Pie Face franchise. The trio found it impossible to make money through the store and ended up abandoning the business.
Messih said she sold an investment property worth $750,000 to repay her part of the loan. She said Westpac agreed to this, but after the sale of the property, the bank said it was taking cash from the sale to settle the entire amount of the business loan, even though Messih was only actually liable for one portion of this, with her brother and sister-in-law liable for their portions.
She said the change of heart by the bank “clearly shattered” her, as she was unable to service her debt and to pay off her mortgages, as she had planned when selling the property.
The practice of banks making decisions about assets and loan terms even when loan repayments have been met was also highlighted throughout the hearings.
In one case, Commonwealth Bank-owned Bankwest admitted it was probably in the wrong when it ended up seizing and selling a pub business owned by two brothers in New South Wales in 2016, despite them having made repayments on their $1.2 million business loans.
Brendan Stanford told the commission of the serious emotional and financial hardship his family faced after Bankwest sold their Hunter Valley hotel for $525,000. The business had hit challenging times, but he and his brother were making good on their loan repayments despite having entered into a payment plan with the Australian Taxation Office.
The Commonwealth Bank admitted in the hearing of the case that it was not fair in its processes during this case, including when it turned up to complete a report on the business but then would not share the contents of this with the business owners, despite sending an invoice of close to $10,000 for completing the review of the company’s performance.
Other business owners told the commission stories of banks changing their minds after plans had been put in place for significant financial transactions, like property sales, to happen in order to reduce loan debts.
NAB client and owner of National Music, Ross Dillon, told the commission he had decided to sell his family home in 2015 at the bank’s request, in order to use a portion to reduce his company’s debts. The plan was to reinvest about $300,000 from the sale into his business.
However, after selling the property for $2.25 million, NAB called Dillon and said it would be taking the entire amount from the property sale to settle his debts.
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