The Banking Code of Practice (the Code) of the Australian Banking Association is a voluntary Code that all of the major banks and most of the smaller banks have committed to. The provisions of the Code are contract terms in the agreement between the participating bank and the customer. The courts have enforced the provisions of the Code as contract terms. Since its first publication in 1993 there have been a number of amendments and revisions, the last in 2021.

The Code reflects the guiding principles of the banks. These are trust and confidence, integrity, service, transparency and accountability.

Chapter 20 and the following Chapters of the March 2020 edition of the Code, as revised in October 2021, specifically deal with how banks are to deal with small businesses. The provisions cover how the banks will assist a small business in applying for a loan, when the banks will refrain from enforcing a loan to a small business, loan extensions and enforcement.

A small business is defined as:

• one that has an annual turnover of less than $10 million in the previous financial year;
• has fewer than 100 full time equivalent employees;
• has less than $3 million total debt to all credit providers.

The Australian Banking Association has prepared a new version of the Code. The Association has voluntarily submitted the new version of the Code to ASIC for approval.

The new Code will update the definition of small business to provide that the upper debt limit will increase to $5 million. This will result in a greater number of businesses having protection under the Code.

Other changes that will impact small businesses include that the conduct standard will change from “fair, reasonable and ethical” to “efficiently, honestly and fairly”.

Clause 49 of the present Code provides:

“If we are considering providing you with a new loan, or an increase in a loan limit, we will exercise the care and skill of a diligent and prudent banker”.

In the proposed Code this provision will be deleted, except that it will be retained for small business loans.

The proposed changes are important because more small businesses will have access to the protections offered by the Code. In addition, the importance of every small business is recognized by the retention of the prudent banker obligation in loan applications made by small business operators.

For the first time ASIC has opened the implementation of the new Code to public comment. On 17 November 2023 the ASIC consultation paper was released. Comments can be made on the consultation paper up to 15 January 2024. ASIC has indicated that it will make a decision on approval in the first half of 2024.

About the author:

Peter Jackson has advised small business owners in banking and finance matters for more than 40 years. Peter has conducted many court cases for small business owners and has drafted State legislation that offered a remedy to individuals whose property was sold at an undervalue.

Peter will contribute articles to the SBAA newsletter from to time relating to banking and finance issues to inform and assist members of the Small Business Association of Australia.

If any member of the Association would like to learn more in relation to the proposed new Code, is being affected by these changes or is in need of assistance in making a submission to ASIC, contact Peter Jackson or Costin Stan at FCW Lawyers.