02 Jul What changes can I expect from the new banking code of practice?

July 2019. The new financial year is upon us. And with that, the new banking code of conduct is in effect.

The code is only applicable to those who are deposit taking institutions. Most of these financiers would have surely asked for an extension. But by October you’ll see most of them would have made the switch.

List is below:

AMP

ANZ

Arab Bank Australia

Bank Australia

Bank of China

BOQ

Bank of Sydney

Bendigo and Adelaide Bank

Citi

CBA

HSBC

ING

Macquarie Bank

ME

My State

NAB

Rabobank

Suncorp

Westpac

You’ll notice a lot of the second tier lenders are not listed here. So for now they actually have a leg up on the above list. That won’t last long though. The general consensus is that the code will be legislated and eventually apply to all finance providers, big or small.

Most of finance provided in Australia is for home loans, and it’s not even close. So I won’t be summarising the whole code, but rather highlighting three points that in my opinion will most affect commercial solar financing.

The code however is actually pretty readable. Which makes sense as writing things “plain inglish” (see what I did there) is part of the code.

73. Before you accept a loan offer, we will give you a plain English document clearly setting out the key general terms and conditions of the loan.

So if you’re keen I recommend having a read over. It is available here.

On to the key points:

24. If you are entering into a contract for a banking service with us, then we will give you our: 

 a) terms and conditions; 

b) fees and charges; and 

c) if applicable, interest rates. 

We will do this before, or when, the contract is made. This information may be in separate documents.

The key part is point c. Interest rates will now be displayed on finance documents.

Some of you may be thinking “Weren’t interest rates always listed on the documents?”. Answer is no. On commercial contracts interest rates were never listed. If you don’t believe me go back and check.

Furthermore, this will not be the base rate, it will be the effective rate. Most brokers (including me) quote the base rate when asked what the interest rate is. This will soon change. So you may notice interest rates rising with repayments remaining unchanged.

This rule doesn’t seem to apply to the Equipment Rental product however. Since the Rental isn’t technically a loan, it doesn’t have interest. The maths behind repayment calculations is exactly the same as a “loan”, it’s just a loophole.

So some banks may still choose to add it in, we just don’t know yet. It all depends on your interpretation of the code.

51. If you are a small business, when assessing whether you can repay the loan we will do so by considering the appropriate circumstances reasonably known to us about: 

 a) your financial position; or 

b) your account conduct. 

Where reasonable to do so, we may rely on the resources of third parties available to you, provided that the third party has a connection to you (that is, to the small business). For example where the third party is a related entity of yours (including but not limited to your directors, shareholders, trustees, beneficiaries or related body corporates), or is a partner, joint venturer, or guarantor of yours.

The interest rate point may seem like the biggest change but I personally think it is this point. “Low-Doc” or “No-Financials” loans are a staple of commercial asset finance. Moving forward if you are not obtaining financials (point a) you will need to obtain some form of account conduct (point b).

Now the source of “account conduct” is up for debate at the moment. Right now you’ll see some asking for trade references (a reference from someone you transact with for business) and some asking for credit references (a reference from a previous lender).

Trade references are pretty easy; it seems most institutions are going to stop here. But asking for credit references can be tough. Lots of applicants have never had a loan before and as such can’t provide a credit reference. We have already seen these types of credit applications get pushed back because we just couldn’t get a credit reference. Doesn’t mean that the person is declined, just means we can’t use the low-doc.

Part 7. Guaranteeing a loan.

So no individual point here but rather a whole section. This section is more to do with home loans, as in asset finance we pretty much always get all directors / shareholders to guarantee, it’s just a requirement of the low-doc.

The changes you will see though will be mainly in the finance contract itself. This section surrounds issues like what guaranteeing a contract actually means and your responsibilities etc. So as a result you’ll see contracts becoming a lot “clearer”.

It may be a small change but it will probably lead to more customers questioning why they have to guarantee the contract. And from that perspective, nothing will change. The guarantee requirements have not changed, only the messaging around has.

So you may notice more complaints, but to be honest if a customer isn’t prepared to guarantee their own company, that is a red flag all in itself.