The first four rounds of hearings of the Banking Royal Commission have shown us some pretty unflattering insights into aspects of the banking industry that most of us never knew existed, practices that should never have happened, and bank execs falling on their swords accordingly.
Quite rightly, a Royal Commission seeks to find what’s “wrong” and doesn’t pay any attention to what’s actually “right”, so its content and the subsequent headlines tend to give an impression that ALL is wrong. Without that balance, the good outcomes and good practices don’t get a mention, so a lot of financial service customers could be excused for feeling like they’re getting terrible outcomes all of the time when, frankly, they’re not.
The reason for this is that the term “financial services” is just so diverse and covers home loans, corporate lending, insurance and financial planning and investments, and an endless multitude of specialist areas of each. I’ve personally specialised in commercial finance for over 30 years, but like any other specialist, the other disciplines in my field require very different knowledge and skills and are as foreign to me as they are to anyone else.
This was particularly highlighted to me during Round 1 of the Commission, when “brokers” were blamed for upselling consumers into bigger loans, pushing up the cost of mortgages, and not acting in their customers’ best interests. Some of the criticism of brokers came from the same banks who covet broker-introduced home loan business and virtually outsource their sales function to that channel. Other witnesses highlighted poor customer outcomes due to failures in broker education and training, and simply bad lending practices.
As a career broker, I’m disappointed in the people who have allowed those practices to proliferate in the consumer space. And to their credit, the leadership of the relevant finance and broking bodies in the consumer space were addressing the issues they inherited well before the Royal Commission commenced.
But over in my world – commercial finance – we have a much better story to tell, as highlighted in the third round of the Commission.
The third round, dealing with commercial finance, focused on contract terms, non-monetary defaults, and how banks deal with hardship provisions – all aspects of lending that come into play after the loan is established. The process of creation of the loan, in over half of cases arranged through a commercial broker, didn’t rate a mention. And in an enquiry focused solely on market failures, no mention means no failure.
As the President of CAFBA, The Commercial & Asset Finance Brokers Association of Australia, which is the peak professional body of Commercial Finance Brokers, this is extremely pleasing but it’s no accident. In my ten years on the CAFBA Board we’ve been single-minded in our focus to make commercial finance a profession through a stringent set of minimum probity standards and a constantly evolving process of education and training.
At an industry level, the distinction we have consistently been making is that the issues highlighted by the third round of Royal Commission hearings are very different to problems associated with residential home lending and consumer car finance raised in the first round, and even though some of the terminology is similar, virtually every aspect of the loan type, purpose, costing and outcome is entirely different. The brokers are also very different.
Independently of the Royal Commission, the Financial Ombudsman Service (FOS) publishes statistics on all disputes that it handles. In its 2017 full year report, it reports that
That was 34 complaints against commercial finance brokers to be precise, in a $300+ Billion industry, and while we aim for great outcomes and zero complaints, we’re in a highly emotive industry where money and personal outcomes are involved, so the 0.09% complaint rate suggests we’re on track and far out-performing the banks’ own direct channel against whom we compete with their own products.
Quantum Business Finance, of which I am a Partner, is a leader in commercial finance and is equally proud of its 10 year record of excellent client service and outcomes and its extremely high client retention rates, both of which are reflected in its large collection of independent industry awards and in hard statistics.
In the 2018 Financial Year, Quantum group settled just over 5,500 commercial loan facilities, equating to just over $540 Million in volume. That’s just one year, but since commencing in 2009, Quantum has never once been referred to FOS for any matter at all. Not one client, not one reference to FOS. Of tens of thousands of loans covering billions of dollars, our market failure rate has been, quite literally, zero. And we’re very proud and protective of that!
At an industry level, why does this matter?
Because failures in the consumer loan space, like those described in Round 1, have led to prescriptive lending guidelines and tightening of regulation in that market that we simply can’t afford in the commercial loan space. Finance is an enabler, and access to finance is critical for your business to grow, prosper, employ and to create wealth.
Despite this, there has been much talk lately of those same consumer-style lending provisions being extended to small business lending. Much of this talk has been based on industry rumour and commentator opinions. In all of my discussions with the Government the consistent message is that this is not being entertained, as the government understands this would inhibit access to finance for small business, and subsequently inhibit economic growth.
There are 2,000,000 small businesses across Australia employing 4.8 million Australians. What those businesses want is the ability to run and grow their business, without regulators or consumer groups telling them how they need to do it.
Thankfully, Treasurer Scott Morrison agrees, as he said in Parliament on June 27th this year:
It’s important, though, as we look at those recommendations, as we go through this very important process that we want our banks to keep lending to business, to keep lending to farms and to be cognisant of how reliant our economy is on the extension of that capital. We do not want this process to result in a restriction of capital flow, whether it’s into the farming sector or whether it’s into the manufacturing sector or the services sector. We don’t want to see a constriction of that. What we want to see is a more effective, more efficient and free-flowing practice from banks to ensure that they can support the growth in the economy, which they were doing during the global financial crisis. One of the reasons we survived that crisis was particularly because the banks continued to lend.
Hopefully we can look forward to similar sentiments from Royal Commissioner Hayne when he makes his interim and final recommendations, but the lack of failure in the commercial lending space is reflected in the remarks of Counsel Assisting, Michael Hodge QC, in his closing comments to the Commissioner in Round 3.
“Can I turn then to the first topic, which is responsible lending. And Commissioner, as we foreshadowed in the opening, one of the overarching questions that you will need to question is what obligations in relation to responsible lending, if any, ought to apply in relation to small business lending? Should the obligations in relation to small business lending differ from the obligations that apply with respect to consumer lending? For reasons we will expand upon in a moment, Commissioner, our submission is that the answer that you ought to arrive at is that no additional statutory obligations should be imposed with respect to the making of loans to small businesses …….”
David Gandolfo is the Director of finance broking firm, Quantum Business Finance. Having been in the industry for over 30 years and as a business owner himself, understands the financial issues facing companies.
David’s market expertise is highly accredited through his industry experience advocating for business as President of the Commercial Asset Finance Brokers Association, and Deputy Chair of the Council of Small Business Organisations of Australia.
Find out more by visiting: www.quantumbusiness.com.au