Background to the review

The Code of Banking Practice came into effect on 1st November 1996. Since then, it has been updated and revised on several occasions, most recently through a comprehensive rewrite following the findings of the Khoury Review and the Hayne Royal Commission, as well as other subsequent reviews.

The Banking Code of Practice (2019) (the “Code”) is published by the Australian Banking Association (ABA) and sets out standards of behaviour that banks should follow in their dealings with consumers and small business customers. It includes specific protections for small businesses, including simplified loan documentation, greater notice of enforcement action and enhanced transparency.

The Code is the first substantive industry code to be approved by ASIC under the Corporations Act, and the ABA has sought and obtained approval for all subsequent changes to the Code. ASIC’s original approval of the Code was subject to the ABA agreeing to commission an independent review of the definition of ‘small business’ in the Code within 18 months of the Code’s commencement. Accordingly, in September 2020, the ABA appointed Pottinger to conduct an independent review of the definition of small business under the Banking Code of Practice. The definition is of fundamental importance to small businesses, as it defines whether any individual organisation qualifies for the protections that the Code provides.

Our approach to the review

The scope of our review was developed by the ABA in consultation with ASIC.  The objectives of our review were to determine whether, and if so how, the definition of small business should be updated, including consideration of a variety of important issues:

• The relevance of the criteria used by the definition, ie annual turnover, employee numbers and borrowings outstanding;

• The values used in the criteria, currently A$10m for annual turnover, 100 for full-time employee numbers and A$3m for borrowings;

• Whether the criteria should be applied at an individual entity or group level, as well as the definitions used to determine which related entities should be taken into account in defining a group;

• Whether the criteria related to borrowings should apply solely to the facility in question or to the aggregate of all outstanding facilities; and

• The potential impact of any proposed changes to the criteria and/or the values, both in terms of overall materiality in the context of the banking system and in relation to the practicalities of implementing any proposed changes.

​Importantly, whilst Pottinger was appointed by the ABA and the ABA has funded the review, under the terms of our appointment the banking industry has not had any influence over the findings and options identified by us, beyond its input as a participant in the review. Pottinger has acted independently and not in the interests of, or on behalf of, the ABA or its members.

To assess these issues, we have undertaken our own desktop research and analysis, taking into account data sourced from the Australian Bureau of Statistics, the Australian Prudential Regulation Authority and ASIC as well as a variety of other sources. We also considered the previous recommendations and observations on relevant matters made by the Hayne Royal Commission, the Khoury Review, the ASBFEO Inquiry into Small Business Loans and the Council of Financial Regulators.

In addition, we gathered perspectives from the public via a stakeholder questionnaire and consulted with a wide range of stakeholders

A copy of our report is available by clicking the cover image.  Our report sets out:

• A summary of our overall findings, recommendations and additional measures that could be implemented to support the Code

• Background on the purpose of our review, the framework we adopted for examining the issues and to engage with stakeholders

• Our findings from desktop research and analysis

• A summary of relevant matters raised by previous reviews

• An overview of the results of our stakeholder engagement exercise

• Our overall results and recommendations.

Thanks to data gathered by ASIC over recent years, we have been able to identify and present new information that provides further clarity on the number of businesses that benefit from the Code, as well as how this would increase as a result of our recommendations.