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Response to the NSW Government Consultation Paper “Easy and Transparent Trading – Empowering Consumers and Small Business” Commercial & Asset Finance Brokers Association of Australia 2018
Response to the NSW
Government Consultation Paper
“Easy and Transparent Trading –
Empowering Consumers and
Small Business”
Commercial & Asset Finance Brokers Association of Australia
2018
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
in supporting small businesses to access finance. CAFBA would like to reinforce the following
points:
SME credit is different to household/domestic credit;
The hours of work that are provided by commercial brokers to their clients annually provides a genuine reason for trail income payments (work that is often required by virtue of APRA requirement APS 113);
CAFBA broker members are required to belong to both an ASIC-approved External Dispute Resolution Scheme and the CAFBA Code of Conduct, and CAFBA supports ASIC’s view that benefit can be derived when dealing with a lender, broker or intermediary that is a member of AFCA (Australian Financial Complaints Authority); and
Transparency is important to consumers but so is choice. Governments must avoid overregulating to the point of limiting consumer and small business options.
Further information on each of these points is provided in our submission. We would welcome
an opportunity to share and discuss our views with the NSW Government.
Yours sincerely,
David Gandolfo Kathryn Bordonaro
President Vice President
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
CAFBA SUBMISSION TO THE NSW CONSULTATION PAPER “Easy and Transparent Trading – Empowering Consumers and Small Business”
1. Background on CAFBA The Commercial & Asset Finance Brokers Association of Australia (CAFBA) is the peak national body of commercial and equipment finance brokers, whose prime area of business is the distribution of commercial equipment finance facilities to their clients. With over 700 members, in all states and territories, CAFBA is an important national voice in the Australian finance sector. CAFBA members know that providing Australian small businesses with access to finance is crucial to economic growth. Although brokers are commonly associated with home loans, CAFBA members work in a complex environment to provide a boutique service. Without the work of CAFBA’s professional members, many Australian small business owners would struggle to navigate the complexities involved with commercial equipment finance. CAFBA embodies the strengths of its members in a unified approach to dealing with financiers and legislators at a national level and regularly seeks the views of members. As an association, CAFBA provides the framework and support to professionally assist our members in their daily activities. This involves education and training, legislative and regulatory updates and forums where the members can interact and exchange ideas with their peers. CAFBA prides itself on being self-regulating and maintains strict membership standards on probity and continuing professional development. It is a condition of CAFBA membership that commercial equipment finance brokers must belong to an ASIC-approved External Dispute Resolution Scheme.
CAFBA is a member of the Council for Small Business Organisations of Australia (COSBOA) and
works collaboratively with the government, regulators, and business groups.
2. Introduction
The Commercial & Asset Finance Brokers Association has closely followed development of policy
in relation to access to finance and broker regulations. CAFBA believes that regulatory policy for
consumer finance is already well managed by existing State and Territory, and Federal
legislation. CAFBA members want to ensure that their role in supporting small businesses
around Australia to have access to finance is not overlooked or misunderstood.
CAFBA members are concerned that the recent Consultation Paper by NSW Fair Trading creates confusion about commercial and asset finance brokers and their important role in the Australian economy. But in particular it is felt that these areas are covered or are being covered by current legislation or inquiries that will address the NSW Government’s concerns. Adding another level of compliance will only create additional costs and the additional burdens on small business finance.
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
In respect to issues raised in Section 2.2, there is already a range of legislation which applies to
commissions and similar payments and the ways in which they are made. The main legislation
is:
• State and Territory Crimes Acts or Criminal Codes state the disclosure of payments &/or
commissions to avoid secret commissions
• The National Credit Code, which requires the lender to disclose to the consumer all
payments, including commission, whether made or received for the introducing
consumers or for financing goods and services
• The National Consumer Credit Protection Act also requires the disclosure of payments
made for the referral services for consumer customers, as well as payments received by
brokers.
We believe that the suggestions contained in Section 2.4 would have negative consequences for
access to finance for small business. In particular, recommendations of banning trailing
commissions may provide a disincentive to brokers working in commercial finance lending as
there is significant work completed over the long term which trailing commissions provide
remuneration for.
It is essential that the NSW Government appreciate that products offered to small business
differ greatly to consumer loans. An important point is that a commercial finance facility has a
defined purpose, eg to acquire specific equipment to be used in a business. The finance
requirement matches the equipment cost, so recommending a larger loan is not possible in
these circumstances, which is often the argument put forward for problems with residential
home loans.
This submission provides an explanation of the difference between personal and SME lending
and broking and shares our view on the importance of trailing commissions to commercial
finance brokers and the services they provide small businesses in NSW.
3. Differences between Personal and SME Lending and Broking
CAFBA would like to underscore the difference between personal, home, and commercial
finance brokers. We recognise that residential home loan brokers have been under pressure in
the media through the poor practice by some in other sectors. Despite this, commercial and
asset finance brokers are highly regarded in Australia due to their professional conduct. It is
essential that we work to maintain this.
CAFBA believes that the difference between household and domestic use and SME lending
needs to be both emphasised and understood. CAFBA upholds the right of all consumers and
every business to be protected from unjust practices and to have ready access to fair remedies;
however, there is a clear distinction between the needs of consumers and businesses when
seeking to borrow money.
In Australia, there are a number of key differences between personal finance, including
mortgages, and SME finance, including business lending. It is important to understand the
different prudential requirements and the rates at which businesses are able to secure loans.
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
The key differences are as follows:
While some terminology in commercial and consumer loans is similar, both the purpose and customer profile of commercial loans differ. The assessment and outcome for the customer is also quite different. In particular, the ongoing relationship between the banker or broker and the business customer is entirely different. This means that the way regulators examine commercial finance brokers must be separate to consumer brokers;
Small business finance is significantly more complex than a mortgage or other consumer loans;
Due to the complexity of operating a business, commercial loans are more difficult to obtain than a consumer loan (e.g. a mortgage);
Small business finance requires more ongoing attention to business progress, cash-flow management, issues in the market, fluctuations in demand and consumer sentiment amongst other issues;
Loans for small businesses may need to have a more custom approach than personal finance, requiring negotiated flexibility due to the nature of the business;
Banks can find business finance far more challenging to process, particularly when engaging with some sectors within small business, and can require support from a broker or other professional;
Assets used in small business finance can be uncommon;
There is the potential for banks to incur greater costs in originating and monitoring business loans, due in part to the complexity of the loans and compounded by the risk weighting of business lending (APRA APS 112);
Due to the risk weighting, banks consider business loans in a more in-depth way, examining a range of different factors before allowing a loan to proceed;
Significantly more information is provided for a business loan, particularly when larger amounts are considered;
APRA requires that Australian banks hold a higher amount of capital against business loans to allow for absorbing higher expected losses (ARA APS 113); and
Costs associated with business lending are included in the price of a business loan and are completed with a higher risk margin. A higher compliance cost, such as is required on consumer loans under NCCP requirements, would make small business lending even more expensive and prohibitive.
Many businesses in Australia have expressed frustration at the complexity and barriers that they
face when seeking a loan. It is essential that we allow small businesses the opportunity to
expand their businesses. The recent Finance Round Table convened by the Council of Small
Business Organisations of Australia and the Reserve Bank brought together various leaders in
small business lending and finance to discuss small business lending. The Round Table heard
from a range of businesses who had difficulty in accessing capital for start-up or growth. A key
area of agreement at the meeting was that small businesses understand that there are risks
involved with business and should be able to take on the risk of a loan to start or expand their
business. All business owners represented expressed frustration with their banks and with the
level of red tape that already exists.
The complexity and challenges within SME finance is a key reason why CAFBA member brokers
are so important in the current market. Commercial brokers provide a valuable and professional
service, supporting small businesses in Australia to apply for and gain finance that is essential
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
for their business. Brokers are able to help small businesses navigate the complexity of applying
for a loan and help to ensure banks understand the small businesses owned by our clients.
We note that in the 2017 Annual Report of the Financial Ombudsman Service (FOS) there were
no major issues with business finance, particularly in relation to finance brokers. The Report
highlights that in 2017:
There were 39,479 total disputes;
58 of these related to finance brokers (0.14%);
Of the 39,479 disputes only 10% related to business finance; and
Of the 3,947 business finance disputes only 39 involved finance brokers.
The FOS Report lists systemic trends that need to be monitored and in 2017, no systemic trends
reported related to the activities of commercial and asset finance brokers.
4. Reasoning Behind and Justification of Trailing Commissions in Commercial Finance
Business owners in Australia choose to engage a commercial or asset finance broker for their
business. It is because of the quality of work done by brokers that businesses choose to return
to them, time and time again. Trailing commissions support the work done by brokers over a
period of time.
The following points highlight justifications for trailing commissions.
Commercial finance can require quarterly, half yearly, or annual reviews of loan
facilities. This can take significant time to gather and analyse a range of complex
financial information for the benefit of the business. The trailing commission supports
the commercial broker to continue to meet their post settlement obligations.
Commercial loans have shorter loan terms and therefore the upfront commission alone
is often not sufficient to run a compliant, robust business model that delivers good value
to clients and lenders.
On a dollar for dollar basis, commercial mortgage brokers are paid less per $1m of
volume than home loan brokers. There is often an inverse relationship because as the
loan sizes increase, the percentage commission is often reduced. Average upfront and
trail commissions would decrease with increasing loan size. This would be true despite
the fact that larger loans are more complex, require a greater degree of care and
expertise, take longer to settle, are harder to attract, and require much more time
investment without the certainty of a return.
Removing or reducing trail payments would reduce the number of brokers in regional
Australia where there is the greatest need as the banks have disinvested in these areas.
Brokers play a vital role in these communities by connecting them to lenders that would
not otherwise have the distribution networks to reach them. In particular, brokers are
able to increase financial choices for SME’s in regional and remote areas. The likelihood
of better pricing outcomes and more suitable product solutions is also improved.
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
Margin creep is less likely to occur where there is an active commercial finance broker
representing the client.
4. Answers to Consultation Questions
CAFBA members have considered the questions posed by the Consultation Paper and have
developed the following short responses to the applicable areas of interest to assist the NSW
Government in their deliberations.
30. When should providers of a product or service be required to disclose financial incentives which would appear to bias consumer advice or recommendations? (2.2) CAFBA believes it already has an established process for its members to provide an information statement to clients at the beginning of the application for finance. Early communication leads to good outcomes and a well-informed client. The statement provided to CAFBA members for use is as follows:
COMMISSION DISCLOSURES INFORMATION
Amounts and Benefits We Receive As a broker, we may receive commission payments and other benefits from a third party for arranging and facilitating finance and insurance for you. Commercial Finance A financier may make payments to us for business introduced to the financier and/or based on the volume of transactions we introduce to the financier, and/or the extent to which finance agreements we introduce remain up to date in payments. Consumer Finance Consumer credit law has specific requirements for disclosure of commissions and like payments. We will set out the required detail in the transaction disclosure documents we must give you. In addition, the financier will include details in your loan contract. Insurance If insurance is arranged, details of the benefits we receive and the business providing them to us, will be set out in the Financial Services Guide we give to you before you accept the insurance. Other brokers We may also receive payments from other brokers because we have arrangements with them for the introduction of clients to a financier. Non-monetary benefits Not all benefits we receive are monetary and may include training, tickets, holidays or similar benefits. Amounts and Benefits We Pay In addition, we may pay amounts to third parties who refer you to us. These third parties may include other businesses with whom you are, or have been, dealing with, such as other broker or sellers of goods or services. For consumer finance, we will tell you about them in the transaction disclosure documents the law requires us to give you.
PO Box 576 Crows Nest NSW 1585 T: 02 9431 8656 E: [email protected] W: www.CAFBA.com.au
31. What information should a trader be required to disclose to a consumer when referring a product or service? (2.2) This information is provided in the above statement, which allows the client to be informed. 32. Do you agree with the preferred option outlined above? Would there be any unintended consequences of implementing this option? (2.3) Not applicable to our submission.
33. What industry sectors, other than financial services, feature commission selling that could lead to consumer detriment?
CAFBA has a process in place for its members that leads to good client outcomes. 34. What would be a workable solution to balance the needs of industry and consumers where trailing commissions impact negatively on the market? (2.4) It is CAFBA’s view that trailing commissions in commercial finance do not impact negatively to the commercial client, and provide an appropriate balance to satisfy the client’s ongoing requirements. This view is based on the data available, and in particular the negligible complaints received in this area by ASIC approved EDR schemes. It is currently a balanced approach where time poor SME’s receive assistance for the access to finance that allows them to achieve their economic goals.
