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The Commercial Asset Finance Brokers Association of Australia has welcomed the Productivity Commission’s draft report into competition in the financial system, but calls for POS exemptions to be revisited and for the regulator to “stop putting Band-Aids on a great big bleeding wound”.
Speaking to The Adviser after the Productivity Commission (PC) released its draft report into competition in the financial system on Wednesday (7 February), CAFBA’s vice president, Kathryn Bordonaro, said that the association welcomed the majority of the findings and recommendations related to SME lending.
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Ms Bordonaro noted that while she was still analysing the 640-page report, her initial reactions were that it showed “good in-depth knowledge and understanding of [SME lending] issues” and was “well researched”.
“My first reaction was that I was very glad to see that the report has kept a very clear line between home loan, consumer lending and SME lending,” Ms Bordonaro said.
“Quite often you see reports and responses from government departments and regulators where all credit is planted in one pot, and this report I would commend for recognising the different needs of those two separate markets, the different players that are in those industry sectors and keeping that very clear line.”
Ms Bordonaro noted that while the only mention of brokers in the draft report relates to mortgage brokers (and not commercial brokers), she said that “perhaps commercial brokers don’t get a mention because we haven’t had any problems in our sector”.
She elaborated: “We’ve very much flown under the radar because there is not a problem there that needs addressing. So, maybe that is why [commercial brokers] don’t get a mention in the report.”
Particularly commending the section referencing “the three Cs of credit” [character, capacity and collateral], Ms Bordonaro said that it was “refreshing to see that level of knowledge in a document”.
Touching on the PC’s draft recommendation to “improve weighting of SME loan risks”, Ms Bordonaro said: “We do think that the risk weighting does need to allow a credit provider to not just assess if there is a residential property attached to support the lending or not, because, if there’s not a residential property attached, it does not necessarily mean that that is a much-riskier lend.”
She added: “A lender should be able to look at the time that a business has existed for, the experience of the operators in that business, etc. There are so many factors that can make credit less risky separate from whether there is residential security attached or not.
“Allowing a lender to look at a client and delineate the risk factors is, from first reading, a positive.”
The CAFBA vice president added that “all of this comes back to the amount of capital that a lender needs to hold in reserve when they extend a business flow”.
Because this would have pricing implications for the lender, she added that it therefore becomes unattractive to be lending to the SME space, which reduces competition.
“If it becomes more feasible to lend to that space with skill and care and all the appropriate regulations in place, then if it opens up more lenders wanting to be in that space… And if there were more lenders in the market that had the ability to risk weight more appropriately, then we would probably see improved access to finance for the SME space. That brings competition, which is good for the end user and good for the SME space.”
Ms Bordonaro added that if competition was improved in the SME space, it could be a boon for commercial brokers.
“If we could increase those options for a customer, that is where the role of a good commercial broker comes into play because competition brings choice, but sometimes choice can be overwhelming. And that is why our customers use brokers because we are time-efficient for them.”
“Stop putting Band-Aids on a great big bleeding wound”
However, Ms Bordonaro did call for the commission to ensure that providers of consumer finance at the point of sale (POS) are bound by the same regulations and credit laws as brokers.
“They have focused in on the activities of the motor vehicle market and the sale of add-on insurance, and the report is supporting ASIC’s idea of putting a delay in between a consumer taking that insurance up and when it actually becomes effective.
“We don’t think that that is adequate. We still continue to believe that the point of sale exemption that has been provided to the motor vehicle market was supposed to be a temporary exemption. But many years later, the ‘temporary’ exemption is still in place and we see all these toxic circumstances coming out of that POS exemption.
“We just really want to ask why this exemption is still there. Take it away. Stop putting Band-Aids on a great big bleeding wound. Deferred sales model is just a Band-Aid; it’s not fixing the problem.”
She continued: “CAFBA believes that this should not keep falling through the cracks. You only need to look at the continuous cases that ASIC [is] now acting on coming out of that market, and so we just keep asking the question: Why is this sector exempt from the regulation that everyone else has to comply with?”
[Related: Association heads slam Productivity Commission findings]
