Banks would have to bluntly warn parents planning to guarantee their children's business debts that they risk losing their home, and that many small businesses end up failing, under proposals to the royal commission.
After the commission last month delved into parental guarantees of business loans, Bank of Queensland (BoQ), Legal Aid NSW and the Finance Sector Union (FSU) backed changes to ensure guarantors were making informed decisions when putting their home on the line.
However, the major banks are resisting further change, arguing current laws and the industry's revamped code of conduct give guarantors enough protection, with one suggesting further change could make it harder to get a loan.
A key issue examined in the royal commission's small business hearings was the risk that family members - particularly those who are elderly or vulnerable - do not always understand the risks they are taking when they agree to guarantee a loan to a loved one.
Currently, banks must encourage guarantors to seek legal advice, and guarantors are protected by parts of the law including a ban on unconscionable conduct. In his closing remarks earlier this month, senior counsel assisting Michael Hodge questioned whether these were adequate.
BoQ responded that it "may be desirable to take additional steps" for some guarantors. Such steps could include a longer cooling-off period for guarantors, and requiring banks to give out plain-English fact sheets setting out the risks.
"Additional steps may be appropriate where a lender holds a reasonable belief that the guarantor may be suffering some form of vulnerability," BoQ said in a submission. "Additional steps may also be appropriate where a guarantee is solely supported by an asset that is the guarantor’s principal place of residence."
Legal Aid NSW, which represented elderly disability pensioner Carolyn Flanagan after Westpac tried to enforce a guarantee by possessing her home, said current legal protections were complex and "inadequate."
It said banks should have to assess whether the guarantor could afford to repay the loan, especially if they would face "hardship" if the bank called on the guarantee, and the bank should give this assessment to the guarantor's solicitor.
"The information provided to the solicitor and guarantor could also include a warning about the number of businesses that fail in the bank’s experience, where possible," Legal Aid NSW said.
It supported a seven-day cooling-off period from guarantors, rather than three days, in the banks' new code of conduct.
No need for more protections, banks say
However, the major banks that dominate small business lending rejected calls for further legal protections for guarantors.
National Australia Bank, the country's biggest small business lender, said there was no need for further changes, saying the industry's new code of conduct required banks to take "extra care" with vulnerable customers.
Requiring guarantors to get legal or financial advice would make little difference because guarantors were often motivated by "love and the desire to assist their loved one", NAB said.
Commonwealth Bank said requiring banks to recommend guarantors seek independent legal advice was "sufficient". ANZ Bank and Westpac also said current laws and bank policies in this area were appropriate.
Martin North, who runs consultancy Digital Finance Analytics, said about 5 per cent of small business loans were guaranteed by a third party, such as a parent, especially for franchise businesses and those in construction.
The FSU said an "aggressive sales culture" in banks meant there was little incentive for bankers to make sure the guarantor is properly informed, and banks should have an obligation to make sure guarantors genuinely understand the risks they are taking.This article was first published by https://www.smh.com.au/
Author: Clancy Yeates