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Standing Committee on Economics
27/11/2019
Banking Amendment (Rural Finance Reform) Bill 2019

BROWNE, Mr Geoff, Lead Ombudsman-Small Business, Australian Financial Complaints Authority

CARNELL, Ms Kate, Ombudsman, Australian Small Business and Family Enterprise Ombudsman

CROSTHWAITE, Ms Kerren, Assistant Secretary, Financial Policy and Farm Business Support Branch, Department of Agriculture

DAVIDSON, Mr Jerome, Director, Policy, Australian Banking Association

HORDERN, Miss Alexandra, Director, Advocacy, Australian Small Business and Family Enterprise Ombudsman

LANDIS, Ms Fiona, Director, Government Relations, Australian Banking Association

LATHAM, Dr Craig, Deputy Ombudsman, Australian Small Business and Family Enterprise Ombudsman

STANDEN, Ms Sally, First Assistant Secretary, Rural Policy and Farm Performance Division, Department of Agriculture

Committee met at 11:05

CHAIR ( Mr Tim Wilson ): I declare open this roundtable public hearing of the House of Representatives Standing Committee on Economics as part of its review of the Banking Amendment (Rural Finance Reform) Bill 2019. I welcome representatives of the Australian Small Business and Family Enterprise Ombudsman, the Australian Financial Complaints Authority, the Department of Agriculture and the Australian Banking Association as well as members of the public and the media.

On 22 July 2019, Ms Sharkie presented the Banking Amendment (Rural Finance Reform) Bill 2019 to the 46th Parliament. Ms Sharkie is not being rude; she's presently in the chamber. The bill seeks to amend the Banking Act 1959 to impose certain obligations and requirements on authorised deposit-taking institutions in relation to loans of up to $5 million to small primary-production businesses. On 25 July 2019 the Selection Committee referred the bill to the House Economics Committee for consideration. The committee resolved to conduct a roundtable public hearing to examine the bill.

I remind you that, although the committee does not require you to give evidence under oath, the hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Would each of you like to make an opening statement of up to three minutes before we proceed to questions?

Ms Landis : I'd be very happy to do that. Thank you for the opportunity to appear at today's inquiry. The ABA supports many of the objectives set out in this bill to help small primary-production businesses with variable income that are susceptible to changing circumstances. To assist the committee's deliberations on the bill, we would like to draw attention to a number of relevant developments since the bill was introduced in 2017 and since the report of the small business ombudsman's small-business loans inquiry was delivered in December 2016 that we believe go a substantial way to addressing many of the issues raised in the bill.

Firstly, a new Banking Code of Practice, approved by ASIC, came into effect from 1 July this year. The code provides safeguards and protections for individuals and small businesses, including agribusinesses. It complements the law and, in some areas, sets higher standards than the law. Customers seeking to enforce the code can rely on it in complaints to AFCA or can enforce through the courts, if they choose, as provisions of the code are incorporated into contracts with banks. We note that the government is currently preparing legislation to introduce an enforceable codes regime, which will ultimately give parts of codes the effect of law.

Part 6 of the new banking code is entirely focused on small-business lending and contains obligations setting out what customers can expect from their bank through the loan application process, including specific events of non-monetary defaults, the provision of reasons banks wouldn't approve a loan and obligations around providing customers with copies of valuations. Guidelines associated with the code also cover relevant matters such as the provision of copies of reports of investigative accounts and insolvency practitioners.

Further, the ACCC last week authorised changes to the code proposed by the ABA. These changes implement recommendations of the financial services royal commission, which include, among other things, a new ban on the charging of default interest or default fees to farmers on drought or disaster affected properties. These changes will come into effect from 1 March next year in a new version of the code. It is important when making any new laws or regulations that we strike the right balance between keeping the flow of credit open to small agribusinesses and protecting customers. We're happy to talk to in more detail about how the above developments relate to the provisions in the bill, and to take any questions. Thank you.

CHAIR: Thank you. Mr Davidson do you wish to add anything?

Mr Davidson : Ms Landis was on behalf of the ABA.

CHAIR: Ms Standen?

Ms Standen : No.

CHAIR: No. Ms Crosthwaite?

Ms Crosthwaite : No.

CHAIR: Mr Browne?

Mr Browne : Yes, I will, thank you. Thanks for the opportunity to be here today. The Australian Financial Complaints Authority, or AFCA, is the new independent ombudsman scheme for the financial sector. We commenced on 1 November 2018, replacing the Financial Ombudsman Scheme, the Credit and Investments Ombudsman, and the Superannuation Complaints Tribunal. As at 30 June 2019, AFCA had 37,400 members. All financial firms that hold an Australian Financial Services Licence, an Australian Credit Licence or Registerable Superannuation Entity Licence are required by law to be members of AFCA. Our membership includes authorised deposit-taking institutions. Where an individual or small business has a complaint about an AFCA member, they can bring this to AFCA. We work with both parties to independently resolve the complaint, using conciliation and negotiation methods and, if that isn't successful, by making a determination. Our service is free for consumers and small businesses to use, and our determinations are binding on the financial firms involved.

Our role is to look for a fair outcome of the complaint, and we can award significant compensation for financial losses that may have been suffered. ASIC is responsible for overseeing the effective operation of the dispute resolution scheme, which includes setting standards for internal dispute resolution, IDR, and oversight of AFCA. AFCA is governed by a set of rules, the AFCA rules, approved by ASIC in accordance with the Corporations Act 2001. Those rules set out our jurisdictions and procedures, what we can and can't deal with, and bind our members contractually.

AFCA supports reforms to raise standards of conduct in the financial services sector and ensure that all consumers of financial services are treated fairly. We define small businesses as an entity having employees up to 100. In our first 12 months of operation we received 3,913 small business complaints, which was 5.3 per cent of total complaints received in that period. We record information about small business complaints, which include complaints by primary producers. Unfortunately, our current records do not include the detail needed to determine how many of those small business complaints relate to rural finance.

In examining the bill, we're focussed on subclause 37E(4) which refers to external dispute resolution, being an external dispute resolution body. It requires ADIs to inform borrowers of their external dispute resolution rights in certain circumstances. We certainly acknowledge the importance given in that subclause to the role that EDR plays in the financial sector. Subclause 37E(4) requires ADIs to give borrowers information about their EDR rights when they're given notice of events, referred to in paragraphs (a) to (c).

The AFCA rules determine customers rights to EDR by specifying the complaints we can consider. We have a very wide jurisdiction to consider complaints arising from loans. Our rules also make clear that AFCA may also consider a complaint by a primary producer about issues unresolved after a farm debt mediation. However, our rules exclude certain matters from our jurisdiction. There are mandatory exclusions, set out in Rule C.1. For example, Rule C.1.3 requires AFCA to exclude a complaint about the assessment of the credit risk posed by a borrower, or the security for a loan, unless the complaint is about maladministration in lending, loan management, or security matters, or the variation of a credit contract as a result of the complainant being in financial hardship.

Subclause 37E(4) requires EDR information to be provided with three types of notices, but not with all of the notices included in the bill. There is no requirement to provide EDR information with notices under 37E(1) or 37E(2). So consideration, we think, could be given to extending subclause (4) to apply in a broader range of circumstances.

Australian financial service licence holders are required by law to have an internal dispute resolution process, and be members of AFCA as an EDR scheme. ASIC's regulatory guide 165 provides guidance on complaint handling obligations of financial firms, including requirements to inform customers about their EDR rights if a complaint has not been resolved through IDR. The AFCA rules reflect and operate consistent with RG 165. AFCA supports subclause 37E(4) as a measure to ensure small businesses are aware of their external dispute resolution rights. It may be appropriate to consider extending the requirements of that subclause to inform small business also of their internal dispute resolution rights. Thank you.

CHAIR: Ms Carnell, would you like to make some comments?

Ms Carnell : Thank you very much. I have just some brief comments. We support this legislation, as it very much reflects the recommendation of our inquiry into small business loans, which was done on behalf of the government, on referral from the small business minister at the time. It also reflects a lot of the changes in the new ABA code of conduct, but it codifies those and better reflects our inquiry into small business loans recommendations. So it takes the ABA code a step further and, of course, codifies it. There are just a couple of issues, some of which Geoff has already run through, in terms of referral to AFCA.

We believe that this bill could be extended to include all small businesses. We believe that, although this bill is important for rural and agricultural small businesses, it is also really important for small businesses more broadly, and at the very least small businesses outside major capital cities—although we would say all small businesses fall into this category. We are pleased that the figure of $5 million is used as the basis of the maximum loan covered by this legislation. You would be aware that the banking code only goes to $3 million, so it excludes a range of small business loans. We are pleased with the exclusion of unilateral valuations and the inclusion of good faith in this space.

We would like to raise a couple of issues that need to be possibly addressed or kept in mind. Where the legislation suggests that the cost of valuations should be borne by the ADI and not the small business, it would be important to make it clear that the small business still has a right to see those valuations. At the moment, the small business pays for the valuation, and we've had an ongoing argument that, because they pay, they should be able to see it. Of course, that hasn't necessarily been the case in the past. If the ADI is paying, we are concerned, if the bill doesn't state quite clearly that the small business has a right to see that valuation, that might not occur.

The other issue that we would like to raise is the issue of the interface between this bill and unfair contract term legislation. There is due to be a regulatory impact statement on changes to the UCT released in the very near future and it is important that, when we look at changes to the UCT, they reflect—if this bill is passed—this legislation. As you would be aware, there is a range of issues in UCT that interface with this, particularly in unilateral changes to contracts.

There are a couple of minor issues, such as making sure that the definition of 'meeting' includes teleconference or other approach that doesn't require face to face. As we would be aware, a lot of the people covered by this legislation are in pretty remote parts of the country and it would be unfair for an ADI to suggest that any meeting had to be face to face. But, apart from that, we think this is a good step forward. Does anybody got anything—is that all?

CHAIR: I haven't run one of these before, where it is a bit more discursive. So I will just allow people to ask questions and answer et cetera. But I will kick off. If I understand correctly, the banks oppose the current legislation. Is that correct? Is there a means or mechanism by which there could be a basis that you could support it if amendments were made?

Ms Landis : We don't oppose it. We support the intent of what is raised in the bill, but we believe many of the issues raised are captured in the code. So we think that that work is being responded to and dealt with through that process.

CHAIR: Are you saying it's unnecessary or—

Ms Landis : Superfluous.

CHAIR: What are the bits that you don't believe are covered in the code that could be potentially included in the legislation which wouldn't be a problem from your perspective?

Ms Landis : There are a couple of clauses raised in the code. An example might be something like a requirement to meet with a customer six months prior to any changes to a loan. There are some very prescriptive clauses in there that we think require further debate and consideration, but many of the other clauses in there, we believe, are captured in the code. We also believe very strongly that, given—

CHAIR: I need articulation of that. Which ones do you think need further exploration and what are the issues of exploration that are required?

Ms Landis : I think this committee should further consider why we would want to have such prescriptive legislation for some of those conditions, and that example I gave is probably the most notable one. Are there others that we would—

Mr Davidson : Another one was the reference that Ms Carnell made to the valuation clause. In the code, we have taken up the recommendation that we prescribe that banks have an obligation to give customers who have paid for a valuation a copy of that valuation. We haven't prohibited banks from charging for valuations, so that's an area where we differ to what's in the bill, nor do we support a provision that would say that banks are prevented from charging people for valuations. Valuations are a critical part of the business of providing credit, and sometimes, when customers ask a bank to do something, such as grant a loan, a necessary part of that process is to have a valuation undertaken. For the bank to charge for that, we believe, is reasonable. But, by and large, we think most of the provisions in the bill are covered in the code. I think, to some extent, Ms Carnell seems to accept that, although she raised the spectre of codification. I would reiterate what Ms Landis said in her opening statement on that point, which was that the government is currently working on an enforceable codes regime which will have the effect of making at least some provisions of codes effective as law, so that's—

CHAIR: But coming back to your view that it's unnecessary, there's an issue around the valuations component that you think isn't captured but is a problem in the way it's currently drafted; is that correct?

Mr Davidson : Yes, there are a few differences like that. There are a few little things that we wouldn't support, but we support a lot of the provisions, as is demonstrated by the fact that we have put them in the code.

CHAIR: We'll leave aside for another day the question of why they were done. What I'm really trying to get to the bottom of is this: is there a problem with the bill where, if you remove the issues around what might already be covered in other legislation or proposed in other legislation, and is adopted—sorry, the bells are ringing and I have to go. We will suspend the hearing until we're back.

Proceedings suspended from 11:22 to 11:42

CHAIR: The point I was getting to was this: I get the stuff you think is already in the code and I get the fact that, with some of the things covered in other legislation, what it's going to cover is contestable. The principal question is: what are the bits that you don't agree with? And is the basis on which you don't agree with it how it is currently worded or is the basis on which you don't agree with it that you don't want it? If it's the former, then what change do you need to address the concern or do you just want to delete it?

Ms Landis : Can I just make a broader point here before my colleague might talk you through the detail. We have been through a royal commission. We've got 76 recommendations. We've got 40 pieces of legislation coming up over the next few years, one of which is an enforceable codes regime. I think it is incumbent upon us all to consider the impact of the ones on foot before moving towards passing new ones. That is the really important point—

CHAIR: I understand, Ms Landis; I get that point. A lot of legislation is going to come before the parliament now and into next year. I completely agree. That's why—

Ms SHARKIE: Potentially.

CHAIR: Potentially—I can't prejudge what the parliament does. I agree with all of that. I agree that some of the matters are covered by that legislation. The question I've got is: what are the bits that are the problem? And is the problem the fact that they're being put in the legislation or is the problem the way the legislation is worded?

Mr Davidson : It's a bit of both. There are some substantial things in it and there are some points where there's just a difference of wording in the code in this bill. In terms of substance, I suppose the biggest one might be the bit around the threshold—the $5 million—that I think Ms Carnell referred to. So the 2019 code increased the threshold in terms of credit exposure up to $3 million for small businesses under the code. There was a question mark—in fact, the royal commission recommended an extension to $5 million loan size. We have considered that very, very carefully at the ABA. We think it's a very important issue, so much so that we engaged with the Council of Financial Regulators on it to look very carefully at the issue. We made a public statement on it in March this year, recommending that we hold off on changing that into the code and, consistent with the condition that ASIC put on the approval of the code, that we undertake, or organise, an independent review, within 18 months of the start of the code of that threshold point. It's a matter that's been looked at very carefully and has gone through the Council Of Financial Regulators who recommended that we keep it at $3 million. That is something that we would not agree with at this stage, pending the independent review that we organise.

Ms SHARKIE: Chair, thank you for allowing me to be part of this committee and visit. I'm not part of this committee, and economics is not my strong point; however, I have a rural electorate and I have many people whose home is also their workplace because it's a farm. If they live in the centre of a regional community on a 1,000-square-metre block, they have a range of protections. If they're out on a farm just two kilometres away on 50 acres, they don't have those protections. I think you've talked about the code, but it's voluntary, isn't it?

Mr Davidson : We have now made subscription to the code a mandatory requirement for membership of the ABA for all banks that offer retail services. In terms of ABA membership, it's no longer voluntary. As I previously mentioned, there's also in this context work being done on an enforceable codes regime that was recommended by the royal commission. We're not sure exactly what that's going to look like, but it's going to get parts of codes—the effect of law. So, again, that takes away an element of voluntarism. The threshold point around subscription to the code is, from our members' point of view, taking care of that being a condition of the membership.

Ms SHARKIE: I'll go to Ms Carnell. We've talked about these issues more broadly and the vulnerability of people in the rural sector. Could you expand a little on your thinking on the bill.

Ms Carnell : As I said earlier, we support the bill. We'd like it extended to small businesses generally, and particularly small businesses in rural and regional areas. But I'd just like to pick up the ABA on this for a moment. The dilemma we've got with the code—and we've had these discussions at length—is that in the legislation it has areas like: it requires ADI to provide a 30-day business notice period when it intends to exercise a power of general restriction covenant. That's fine. That's good. That's what's in the bill. That's in the code. Except that then there's the next para in the code that says:

We may give you a shorter notice period, or no notice period, if:

a) based on our reasonable opinion, it is necessary for us to act to manage an immediate risk.

So the dilemma for us, even with the changes already to the code, is that there is still a range of capacity for the banks not to do what's in the code. So the 30 days is there, but there's a capacity not to. And that's the concern. It's absolutely true that the negotiations we've had with the ABA have addressed some of our issues in this area, but not really for a whole range of others. It's also true that the code doesn't have a requirement for good faith on termination. It requires 90 days, not good faith but the legislation does that. We think good faith is a really important part of these sorts of transactions. For us it does give primary production businesses greater surety that their needs and requirements will be managed in a reasonable fashion. Did you guys want to follow-up on anything?

Dr Latham : Just generally, the detail that it provides does flesh it out, certainly, and goes further than what the code does as well, in many instances.

Ms SHARKIE: It's certainly been the experience in my community that there are two sets of protections: you have protection if you are on a residential property, but if it's your home and it's on a large property and it's also where you conduct a family business—and for many it's been for generations—you don't have the same protections. The purpose of the bill is to provide those protections.

Ms Carnell : It's certainly true that consumers are covered by the NCPP Act. They've got a lot of protections in terms of consumer protection, and businesses don't. And farms are businesses. We haven't supported extending consumer law to small businesses, for a whole range of reasons—that would potentially cause more problems to small business—but giving small businesses these extra protections to this extent seems reasonable. Again, a range of things in these bills are already in the code and were certainly part of our recommendations. It's just that the code still misses out on some important bits and has some what we call get-out-of-jail clauses.

Ms SHARKIE: Thank you.

CHAIR: Dr Leigh?

Dr LEIGH: I will cede to my colleagues.

CHAIR: Dr Aly?

Dr ALY: I've got a question about the definition of 'small business'. I know that the royal commission recommendation was that the banking code should apply a definition of 'fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million,' but the new banking code says that it is those that have borrowed up to $3 million. I also heard a couple of different applications and definitions of 'small business' here. What are the implications and applications of this bill, given that there seems to be a lack of unification around what a small business definition is.

Ms Carnell : There is unification, apart from the ABA code. AFCA covers loans up to $5 million. The royal commission said $5 million. We've said $5 million. The code covers up to $3 million. The ABA made some comments about that a minute ago, but the ABA code isn't even $3 million; it's 3 million aggregate. If you think about farmers, there's every chance that they will have multiple loans—for the tractor or whatever—which would make it pretty easy to edge ahead of $3 million aggregate. We're not talking about individual loans. AFCA looks at loans up to $5 million, and that's what we're recommending.

Dr ALY: Why is the code different? Why is there a differentiation there?

Mr Davidson : In terms of the aggregate—the total credit exposure, as we call it—the code's been that way for quite a long time. The CFR recommended that that be the approach, rather than a loan amount approach, when they looked at this matter. So, until our review, that's the way we think it should stay. Again, we have increased the threshold to $3 million in the latest code.

Dr ALY: But why not the $5 million that was recommended by the royal commission?

Mr Davidson : Again, we did consider that very carefully. We spoke very carefully to our members, and we engaged with the Council of Financial Regulators, who recommended that the amount stay at $3 million, pending the ABA establishing an independent review of that amount within 18 months.

Ms Landis : If I can just expand on that, the Council of Financial Regulators released a public statement when they met in March earlier this year. The context of that discussion was around tightening availability of credit at the time. So, although they considered it a very important issue, what they said was that the changes in the banking code were so significant that they thought at that current time the definition should stay the same, pending a review at the end of 2020 to determine whether that definition should still say the same or not.

Dr ALY: But your definition is really based on the aggregate borrowed, right? Does your definition look at the number of employees? Because the recommendation that the ABA, 'Amend the definition of small business in the banking code so the code applies to any business or group employing fewer than 100'.

Mr Davidson : Yes.

Dr ALY: So that applies in your code as well?

Mr Davidson : Yes. There's three limbs in the code to the definition, which is that the business has an annual turnover of $10 million or less, fewer than 100 employees, full-time equivalent—

CHAIR: Is that the bells?

Dr ALY: Is it a division?

CHAIR: Oh, that's a quorum.

Dr ALY: It's a quorum.

Dr LEIGH: Do you want to do the subcommittee thing, just in case, before you suspend?

CHAIR: Yes. I'll nominate a chair. Dr Aly, you'll be Acting Chair in the absence of the Chair or Deputy Chair. I have to go. Is everyone happy with that?

Dr ALY: Yes.

CHAIR: So it's a subcommittee of Dr Aly, Dr Mulino and Ms Sharkie. Is everyone happy with that?

Dr MULINO: Yes.

Dr ALY: Yes.

Ms SHARKIE: Yes.

CHAIR: So you can continue.

ACTING CHAIR ( Dr Aly ): Great. Thank you. Sorry for that disruption. Please continue.

Mr Davidson : The third limb of the definition goes to the total credit outstanding, which is currently $3 million.

ACTING CHAIR: Okay. The bill would fix this? Would this bill give some certainty and surety around the definition of 'small business', or not?

Ms Carnell : No.

ACTING CHAIR: No.

Ms Carnell : What it would do is give people in primary production businesses the confidence that they were covered, that they would be protected, if they had loans up to $5 million. But that's why we're saying we'd love it to be extended to small businesses more broadly, but it's a step in the right direction.

ACTING CHAIR: Okay. I just have one more question, and that is around the bill's requirement—around valuations and audits, and who bears the cost of valuations and audits. Ms Carnell, if I can just clarify—you said that currently the small business pays for the cost of the valuation audits, but they don't have access to them?

Ms Carnell : In the past—in a lot of the cases we've looked at—have been situations where the small business has paid for the valuation but the ADI hasn't been willing to release that. In the code, it improves that situation to a scenario where, if the small business pays for the valuation, they should have access to the valuation. The concern with the bill is that what the bill says is that the small business won't pay for the valuation, and we're concerned that that—based upon the way the code's worded—would mean the small business wouldn't have access to the valuation because they haven't paid for it.

ACTING CHAIR: So the issue—if I can try and put any finger on it—is the difference between the bill and the code?

Ms Carnell : Okay.

ACTING CHAIR: So the solution is either change the bill or fix the code?

Ms Carnell : The new code does give small businesses who have paid for the valuation a capacity to see the valuation.

ACTING CHAIR: But only if they have paid for it.

Ms Carnell : Only if they have paid for it.

ACTING CHAIR: And the bill says that the ADI must pay for the valuation, which according to the code then means that the borrower doesn't get to see it?

Ms Carnell : Would not have a right to see it.

ACTING CHAIR: Would not have a right to see it.

Ms Carnell : That's right.

ACTING CHAIR: From the ADI's perspective, does this have a differential impact on smaller banks if they have to bear the cost of valuations and audits? Is there a differential impact between on big banks and small banks or small lenders, small ADIs and big ADIs?

Mr Davidson : I suppose to the extent that regulatory costs generally are a bigger burden for smaller banks than larger ADIs, yes.

ACTING CHAIR: Thank you. They're all of my questions.

Dr MULINO: I really have only one topic, and that's the benefits of codifying some provisions that are currently in a code that is mandatory for membership of the ABA but which is not, in a sense, enforceable at the moment. My understanding is that there was an issues paper released on measures to make the code enforceable and that the government is expecting to introduce legislation by 2020 on that. Is it fair to say that that legislation may make parts of the code enforceable?

Mr Davidson : If I can take a step back there. We would say that the code currently is enforceable in a couple of ways. A customer who feels that a bank has breached the code can go to AFCA, and AFCA has a broad remit to take industry codes into account in deciding what is fair in that case. In addition, in the banking code there is a provision that makes all the code provisions incorporated into contracts with customers, so the customer will also have a contractual right enforceable in courts of law. The enforceable codes regime will add a layer on top of that. It will take at least a subset of the most important code provisions—and we don't yet know exactly the extent of that—and give them the effect of law, so that, if an ADI breaches that provision, they'll also be breaching law, and I understand that will be likely to attract a civil penalty, as well as another statutory right for customers to take a complaint against a bank.

Dr MULINO: One of the key differences between the current enforceability mechanisms and adding that layer of legislation would be that you might find that some provisions attract a civil penalty if there's misbehaviour?

Mr Davidson : Yes, and it would strengthen things. Statutory enforceability is a step above contractual enforceability.

Dr MULINO: So what is unclear at this point is which provisions of the code will be covered by that piece of legislation.

Mr Davidson : That's correct.

Dr MULINO: Apologies if this is on the public record and I missed it. Did the ABA make a submission with its preferences as to which parts would be enforceable?

Mr Davidson : Yes, we did. We didn't specify particular provisions. We outlined a set of principles that we thought were important to take into account in the regime. For example, we said that we didn't think that you should create parallel regimes where there was already a regime in place. For example, things like responsible lending and a couple of other guiding principles like that should be in the legislation. Consistent with the recommendations of Commissioner Hayne, it will be for ASIC ultimately to determine when it's approving codes, in consultation with the body that's seeking the approval, to establish what's going to be deemed to be a statutorily enforceable provision.

Dr MULINO: But based on the principles you outlined, do you think some, most or all of the provisions outlined in this bill would be captured or is it hard to distil it down at this point?

Mr Davidson : It's hard to say because we've made our submission but we don't know exactly what is going to make its way into the legislation. Also it's going to depend on the attitude that ASIC takes.

Dr MULINO: I'm thinking more based on your principles. Like if you had your way—

Mr Davidson : We would keep it to the most important provisions—for example, provisions where, if they were breached, damage would clearly be caused, and that kind of thing.

Dr MULINO: Would that include these kinds of measures?

Mr Davidson : It would include some of them.

Dr MULINO: It would be interesting to get a sense, and you can take this on notice. An argument raised earlier was that we are going to get this enforceability regime. Obviously, we don't know what is in it until the government provides it to us, but it would be interesting to get a sense from you as to what you think should be in the enforceability regime, if, in fact, it has been raised as a possible added layer of protection that's in the pipeline.

Ms SHARKIE: At some stage event, eventually.

Dr MULINO: I think the current plan is June 2020.

Mr Davidson : I understand that Treasury may release exposure legislation as early as the first quarter of next year.

Dr MULINO: Mr Browne or Ms Carnell, do you have any observations you would like to add to that?

Mr Browne : I'll just confirm from that, an AFCA point of view, if we are dealing with a complaint by a code member against a code member, we do look at the code very closely. Our view is, if you sign up to the code, it is contractually binding, which it is now. The resolution of that dispute will have regard both to the contractual terms but also the code.

Ms Carnell : I suppose we always look at it, because our job is to focus on small business, and the legislation in front of us is a bird in the hand. Better support and protection of small businesses, particularly in rural and regional areas, for agricultural businesses, when they're going through a pretty tough time, is pretty important, so we'd focus on what we've got in front of us and not look at something that might happen late next year.

Ms SHARKIE: We are still waiting for the small credit contracts legislation that is protection for consumers. We must be up to year three by now, since the exposure draft. I'm just adding that. It concerns me deeply when we see these things eventually, one day, maybe—

ACTING CHAIR: Mr Falinski, do you have any questions?

Mr FALINSKI: Thank you for coming today. You're all doing an excellent job.

ACTING CHAIR: I'll take that as a comment, rather than a question.

Ms SHARKIE: I was going to ask one more question, particularly of Ms Carnell and Mr Browne. Given the drought that we're currently going through at the moment and the downturn in many regional communities because of the drought, are you seeing an increase in challenges from people's experience with banks, in particular?

Ms Carnell : That would be you, Mr Browne.

Mr Browne : It's probably a little early. I said earlier that we don't have good data at the moment on rural finance as part of our small business dataset, but we are working to address that. Our experience is that the impact of drought is usually dealt with by the financial firm for a significant period of time before it escalates to the point where a complaint comes to us or goes through farm debt mediation. Yes, we are well aware of the traumas out there, but we haven't seen an avalanche of complaints on that topic, as far as I'm aware.

Ms Carnell : And we haven't either. I think the banks have announced some pretty reasonable approaches to manage this crisis period, but it's what happens then that is the really big issue.

Mr FALINSKI: What do you mean by that, Ms Carnell?

Ms Carnell : During the actual drought—

Mr FALINSKI: I understand what you mean. When you say 'what happens then', what is that supposed to mean?

Ms Carnell : It's going to take a lot of time for a lot of these businesses to be up and running again and be in a position to really be able to manage their—

Mr FALINSKI: I understand that. What are you suggesting?

Ms Carnell : That's when we will be relying on the code rather than the special provisions—

Mr FALINSKI: What part of the code will you be relying on and what are you trying to prevent?

Ms Carnell : We are trying to prevent banks foreclosing on businesses in rural and regional areas rather than working with them to help turn them around. Now, there are going to be some banks—

Mr FALINSKI: Don't borrowers have contractual obligations?

Ms Carnell : They do, but the contracts include the code. What we're saying is—

Mr FALINSKI: What part of the code says the borrower doesn't have to comply with their contractual obligations?

Ms Carnell : The code is included in the—

Mr FALINSKI: But what part of the code says that a borrower doesn't have to or is no longer obligated to—

Ms Carnell : There are areas of the code—and, remember, the code is the ABA's code, not mine, and we have some issues with the code—that require businesses to be given six months notice. What this legislation does, which we like, is it requires good faith negotiations with regard to termination. That's not in the code. We think good faith is really important—

Mr FALINSKI: So what does good faith mean?

Ms Carnell : Do you want to talk about good faith under the law?

Dr Latham : It's a general concept meaning that you come there with good intention—

Mr FALINSKI: What does that mean?

Dr Latham : and engage properly and openly with the other person.

Mr FALINSKI: Right—and? What does that even mean?

ACTING CHAIR: There's a legal definition.

Mr FALINSKI: Sorry, what did you say?

Dr Latham : I'm not quoting the law, here. I'm giving you my view of what 'good faith' actually means.

Mr FALINSKI: I understand.

Dr Latham : It's just that you come—

Mr FALINSKI: But it sounds to me like what you guys are arguing for is that a borrower signs a contract and then we can start having a discussion about whether it's possible to apply that contract or not.

Ms Carnell : No.

Mr FALINSKI: So where am I misunderstanding that, Ms Carnell?

Ms Carnell : We're looking at a piece of legislation, in front of us, at the moment, which puts in place a range of the recommendations that we put forward in our inquiry into small-business loans, many of which the government agreed to. They've been picked up in the code—or at least, some of them have been picked up in the code—but what this legislation does is codifies them and takes them to a next stage.

Mr FALINSKI: Why are we introducing law if it's already been adopted in an enforceable code?

Ms Carnell : It's a voluntary code.

Mr FALINSKI: No, AFCA just said it's an enforceable code.

Ms SHARKIE: No, it's not.

Mr FALINSKI: Didn't I just hear the chair of AFCA say—

Ms Carnell : They take it in account.

Mr Browne : We take the code into account as part of the contractual terms.

Mr FALINSKI: I'm sorry, the evidence that you just gave—while I was sitting here—was that these codes are now legally enforceable. Did I misunderstand that?

Mr Browne : They are read into the contracts of the member firm.

Mr FALINSKI: So they are legally enforceable?

Mr Browne : They are contractually enforceable.

Mr FALINSKI: So why are we introducing a law—

Ms Carnell : As I read before, the code has some interesting bits in it, which have get-out-of-jail clauses. It makes a code like a code rather than like legislation. It says, 'We will do this unless it suits us—

ACTING CHAIR: Sorry, I have to suspend the hearing for a division.

Proceedings suspended from 12:12 to 12:31

ACTING CHAIR: We will resume. Do you have any more questions?

Dr MULINO: No.

ACTING CHAIR: Do you have any more questions, Ms Sharkie?

Ms SHARKIE: No.

ACTING CHAIR: I do want to make one point before we close—and thank you so much for your patience, with us running in and out. Having had a look at the bill, I did clarify that the bill does require the ADIs to give a copy of the valuations and the audit reports to the borrowers, so I guess that resolves the question we discussed earlier.

Ms Carnell : It does, except the code—

ACTING CHAIR: The code doesn't—

Ms Carnell : If the person doesn't pay for it, there's no requirement under the code.

ACTING CHAIR: In that case, would the bill override the code?

Ms Carnell : Yes, the legislation would override the code.

ACTING CHAIR: Given that there are no more questions, I think it's appropriate for us to now conclude the hearing and let you all go about your busy days—

Ms SHARKIE: Sorry, Acting Chair. I understand that the secretariat has now opened the website for submissions. Is that correct? I just wanted those attending today to know about that. My understanding was, from conversations prior to this meeting, that the website was going to be changed to allow for the accepting of written submissions, with an end date. Those attending might wish to know that.

ACTING CHAIR: We can look at that. I thank everybody for attending and for your patience. I declare this public hearing closed.

Resolved that these proceedings be published.

Committee adjourned at 12:33