The Hayne Royal commission was a necessity to clean up some very poor practices within the banking, superannuation and insurance industries. But have the geese stopped laying their golden eggs? Are Australian consumers and business owners any better off following the banking clean up? Here’s some perspective.
An Increase In Regulation
There has been a massive increase in regulation in our financial system. The bureaucrats expected this to protect the consumer. From our perspective, the sad reality is that the vast majority of responsible consumer and small business borrowers are now facing unreasonably greater restrictions on access to credit (ie borrower money) and this is causing great frustration.
As the compliance costs of providing financial advice continue to climb it becomes less affordable for the people who need it.
Shadow Banks & Fintechs
Opportunistic and expensive ‘non-bank’ (shadow banks and fintechs) and less regulated lenders are entering the market and meeting borrower demand albeit often at a very high cost. Borrowers need to be far more astute and well-advised before taking on expensive debt.
There is much confusion about the term ‘responsible lending’ with the onus of responsibility now largely sitting on the banks and less so on the borrower. It’s in nobody’s interests for banks to lend to customers who cannot repay, however, rules and regulation have made it more difficult for banks to make sound commercial lending judgement.
The ‘Credit Squeeze’
The credit squeeze affecting the country’s two million small and mid-sized companies is a major problem for both the Reserve Bank and the government. Despite three rate cuts last year and with bank lending rates at historic lows, lending to small business is stagnant. These firms account for two-thirds of all private sector employment and access to finance is critical if they are to grow and create more jobs.
As the banks seek to reduce their risk of customer complaints they restrict their lending and reduce lending to marginal customers. Furthermore, some bankers argue that small business lending has become riskier. This is because banks have agreed to reduce their ability to call in loans and to remove financial covenants such as loan to valuation ratios (LVR) as triggers for default for most small business loans. While this change was well-intentioned, banks increasingly have to wait until the business actually goes bust before they can take action.
Small business lending has been choked because the regulator (ASIC) has tried to implement clearer distinctions between what is a business purpose and what is a personal purpose when it comes to lending. It’s just not that cut and dried. Most family-operated businesses run on very fluid cash flow which requires a close interrelationship between business and personal cash flow. We now have a situation where the banks have massively increased their demands to verify income and expenses across the board.
Access to credit is a vital ingredient for economic growth and employment growth. We are seeing an increase in genuine intent to lend from front line bankers, however, we still have a long way to go before most banks achieve alignment between their front line staff and their back-office credit managers.
Having a finance broker by your side will help you get the funding you need and deserve.