Peter Strong: Why we can’t put access to finance in the hands of regulators

Treasurer Josh Frydenberg recently accused major financial regulators of hampering Australia’s recovery from the COVID-19 recession with what can be seen as an intervention in policymaking.

And he sees their actions as virtually tying lenders in red tape which will inhibit lending to those small businesses that are ready to grow or innovate or get into manufacturing or all the above. And, of course, create jobs.

The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) are the main contenders for ‘stick in the mud’ regulation, and the Australian Financial Complaints Authority (AFCA) is seen as over-zealous in its pursuit of lenders over credit decisions and conditions.

The reality is that, for small business people, access to finance has nearly always been too difficult and time-consuming.

It has reached the point where, prior to COVID-19, good healthy successful businesses were being forced to go to more expensive second-tier lenders, unconventional sources, families or even overseas to get the finance they need for projects or for expansion.

Research conducted some years ago, pre-royal commission, showed that bank employees often found the paperwork associated with business loans onerous and confronting, and a lack of proper training added to their indecision. This inhibited their ability to properly assess and recommend approval of business loans.

There has been a debate about who or what is at fault, and why it appears to be more difficult to get a loan in Australia.

Is it the boards of banks that unnecessarily make life difficult for their staff to lend?

Is it APRA that makes life difficult for the banks?

Is it the giant presence of the banking royal commission looming over the whole finance sector like a dark personification of a great nemesis?

Is the finance sector stuck between the Scylla of the fear of another royal commission and the Charybdis of retribution from the previous royal commission?

Now, without the emphasising rhetoric, just why is getting a loan difficult?

Also, why do we have one set of rules for traditional finance processes and a different set for the (not new anymore) fintechs?

Why are the costs to small businesses of the buy-now-pay-later (BNPL) payment processes so high when compared to the costs of eftpos, credit cards and debit cards?

Small businesses have only now achieved a more reasonable cost of sales using cards via least cost routing and now face increased costs with BNPL — costs that cannot be recovered from consumers for some reason.

The difficulty of getting a loan is compounded by the higher interest rates charged by fintechs as compared to traditional loans. It is easier to get a loan at a higher rate due to less red tape. That seems anti-intuitive?

We know that the banks want to lend to viable small businesses. We know there are impediments. We know consumer advocates are up in arms about any easing of regulation on loans.

We know the regulations and the fear from lenders of retribution and public shaming of individual bank employees are holding back loans to small businesses. 

The challenge for consumer advocates is they need to know the difference between consumer loans and business loans.

Making it harder for businesses to get loans does not help businesses or the economy, and therefore, does not help the consumer.

Regulations need to be fit-for-purpose and not designed to stop any negative outcomes. The only way to stop bad outcomes is not to lend money.

Lending to businesses will involve risk (as COVID-19 has shown we cannot always predict the future) and businesses pay for that risk with rates higher than consumers. 

The red tape that is also ignored is that imposed on the business lending brokers. These brokers are essential to help businesses get the funds they need from the right source and on the best terms.

The reputable brokers are members of associations such as CAFBA which has strict rules with which members must comply, including constant refreshing of their knowledge and skills.

These business loan brokers save the business person time they can spend on the business or with their families.

The brokers will get the best deal for a business using a range of finance access points including bank loans, fintech, state and federal government grants and so forth.

Our regulators need to ensure that the rules are fit-for-purpose and do not force businesses overseas to get the funds they need to make our economy healthy.