PC calls on government to monitor SME finance, flags broker rem

The 1,000-page report, which was sent to government in nine volumes on 7 February 2023 and publicly released on Friday (17 March 2023) builds on the first inquiry report, Shifting the Dial, which was completed in 2017.

In the 2023 report, the PC touches on competition in business lending and broker remuneration but only makes a particular recommendation on the former.

More oversight of SME finance

The report outlined that the uptake of innovative new product lines and processes for businesses can be costly to finance and noted that, for many small businesses and start-ups, access to external finance could be crucial to adopting new approaches. 

“Australian businesses frequently report access to external financing as a barrier to innovation,” the report read, suggesting that one in five businesses (19.7 per cent) reported such problems in 2019–21, increasing to almost 30 per cent when considering only the firms engaged in innovation.

“Small businesses, in particular, typically do not have assets to use as collateral for debt finance, and unsecured finance may not be available … or may attract a higher interest cost, reflecting the increased risk for the lender.”

The PC inquiry went on to flag that Australia’s prudential rules for lending to SMEs are “more stringent than international standards, which partly explains the relatively lower availability of capital for SMEs — particularly for loans not secured by property” (as found in a Productivity Commission report in 2018).

“Changing the underlying prudential requirements for SME business lending would significantly improve SME access to finance,” the report continued, adding that changes to capital adequacy requirements for authorised deposit-taking institutions that commenced in January 2023 could support banks’ SME lending going forward.

“In particular, the risk weights applied to SME lending that is not secured by property have been lowered from 100 per cent to 75 per cent for lending less than $1.5 million in size, and 85 per cent for lending above this amount,” the report continued, which the PC suggested could “facilitate more access to finance by SMEs and more readily enable business uptake of innovation”.

While highlighting that Australia’s SME lending market is evolving as new lenders and loan products emerge and “the diffusion of overseas innovations in the use of data and AI opens up new ways for many SMEs to access finance”, including lending against intangible assets (such as invoices and other expected receipts) and on an unsecured basis, the PC said that the relatively small funding market for newer lenders in Australia could constrain lending to SMEs via these channels.

While it said that recent government initiatives — such as the Australian Business Securitisation Fund (ABSF) — have sought to expand the pool of capital available to these lenders through securitisation, the PC ultimately said that it was too early to say what impact the APRA changes and ABSF have had on SME lending.

Recommendation 5.1

As such, the PC has put forward a recommendation that the government should “monitor the effects of APRA’s changes to capital requirements and risk weights for loans to small and medium enterprises (SMEs) that are not secured by property, and the activities of the Australian Business Securitisation Fund, to understand whether they are having the desired impacts on SME lending”.

“This monitoring may require more detailed and comprehensive data collection on business lending, for example by APRA, as existing datasets are relatively aggregated and typically do not capture SME lending by smaller lenders (which new market entrants tend to be),” it said.

“Adjustments or further responses could be required if barriers to SMEs accessing finance remain.”

Broker commission and clawback structure revisited

While the PC inquiry does not put forward any particular recommendations around mortgage broking, the report does mention its issue of broker remuneration in passing.

The PC rehashed some of its findings from its 2018 review of broker remuneration when discussing competition in the home loan market.

The inquiry report read: “In some cases, regulation has yet to catch up with developments that reduce the benefits of competition for consumers. For example, incentive structures for brokers in the home loan market, which include trail commissions and ‘clawback’ of commissions, create conflicting incentives ...

“These structures — with their associated reduced benefits of competition for consumers — remain in place, following the abandonment of a slated ACCC review.”

Despite this mention, the PC has not made any recommendations to the government on changing broker remuneration.

Commenting after releasing the inquiry, Productivity Commission chair Michael Brennan said: “Our report shows how productivity policy is central to a modern economy.

“Through significant consultation and investigation, the Productivity Commission has made a series of recommendations we believe will stack the odds of productivity growth in Australia’s favour.

“Concentrating on five key themes can make a real difference.

 “These are:

• Building an adaptable workforce
• Harnessing data, digital technology and diffusion
• Creating a more dynamic and competitive economy
• Efficiently delivering government services
• Securing net zero emissions at least cost

“The reform recommendations put forward by the Commission … will help Australia overcome its productivity predicament.”

Releasing the five-year inquiry report, federal Treasurer Jim Chalmers noted that the former Coalition government “did not fully implement any of the recommendations of the last five-yearly review”.

He continued: “This report shows that productivity flatlined under our predecessors during the wasted decade and Australians are paying a price for that.

“The report is almost a thousand pages long across nine volumes. It makes 71 recommendations across 29 reform directions …

“While we won’t be taking up every idea, or progressing those suggestions which conflict with our values and priorities, our work is aligned with the five themes and we are progressing, in some form, more than two-thirds of the 29 reform directives outlined in the report, and methodically working through the specific recommendations.

“At least 36 of these 71 recommendations involve state and territory governments in part or in full — and I’ll be discussing these with my counterparts at our next meeting in June.”

[Related: Remove trail, says final Productivity Commission report]