'Blood, sweat and tears': Why Kate Carnell fights for SMEs

  • By Christine St Anne

Small business Ombudsman Kate Carnell is pushing the banks to shift from their ‘old worldly’ ways and embrace the needs of the small business sector.

After chalking up 15 years running a small business and eight years in federal politics including five years as Chief Minister at the ACT Legislative Assembly, Carnell (pictured), is relishing her role as Australian Small Business and Family Enterprise Ombudsman (ASBFEO).

Her experience in the cut and thrust environment of Canberra’s parliament house has certainly given her “a tough skin” to deal with strong personalities. She herself acknowledges: “I don’t fall into a dilemma like others may when people yell at me”.

It has also put her in a solid position to lead and negotiate with the big banks on a number of issues in the small business sector. To date, Carnell has achieved a number of wins. The banks have agreed to accept some of the recommendations pushed by the Ombudsman’s office.

This includes addressing unfair terms in small business contracts, an initiative led by both ASBFEO and the Australian Securities and Investments Commission. These contracts will now include a short summary of the key loan conditions. It’s about making the agreements easy to understand and written in plain English, a mantra, Carnell has consistently pushed for.

Pointing out to recent census figures which revealed that English is not a second language for a large portion of the population, she said this trend is also mirrored in the small-to-medium enterprise (SME) sector. Therefore, it is even more imperative that business contracts between banks and the sector are easy to understand.

“English is my first language and even I find those contracts jolly hard to understand”. Another important win, is the agreement with the banks to get rid of the majority of non-monetary default clauses for loan agreements of up to $3 million.

There was previously some argy bargy from the bank chiefs on what the loan size limit should be in removing non-monetary default clauses. Those concerns were aired at the Parliamentary Standing Committee on Economics Inquiry into the major banks in March.

Commonwealth Bank chief Ian Narev was prepared to commit to loan sizes of up to $1 million while Australia and New Zealand chief executive Shayne Elliott said that his bank would consider removing such clauses in loans contracts of up to $3 million. National Australia Bank unwavered in its refusal to remove the clauses from any small business loan agreements.

The banks have also agreed to extend the timeframe in refinancing agreements. This means that business borrowers will get 90 days’ notice on whether their loans will be renewed and this will be extended for the agricultural sector. As Carnell notes, given the seasonal nature of the “agri” sector, longer periods are imperative in refinancing deals.

We had a lot work to do on making small business loans fair. It involved a lot of meetings with the banks and the Australian Bankers’ Association

Carnell acknowledges that it has taken a lot of blood, sweat and tears to push for those changes.

“We had a lot work to do on making small business loans fair. It involved a lot of meetings with the banks and the Australian Bankers’ Association. Even the media played a role, where we were able to expose the behaviour of some of the banks particularly with the majors and the way they enforced those unfair contracts.”

In terms of outstanding work, Carnell is focusing on a number of priorities including “putting pressure on the banks” to extend the agreement to remove non-monetary loan defaults in loans of up to $5 million. She noted that it was a figure supported by the Murray Inquiry.

More recently, Phil Khoury, who was appointed by the banks to scrutinise their own code of conduct also backed the limit proposed. “Anything below $5 million is clearly an out-of-date concept that does not represent the true lending picture of Australia’s small businesses. Five million covers 98 per cent of loans to small business.”

That’s the dilemma for SMEs. Unless they own bricks and mortar or a house to mortgage against the loan, decent capital is hard to get

Another key priority for Carnell is access to capital. “SMEs are really finding it hard to get capital. Small business loans that some of the banks are focused on providing may be good for cash flow purposes but are not that different to a credit card loan. If you are buying a going concern or invest in a shopfront, new stock or new facility, a business won’t go far with just $50,000. That’s the dilemma for SMEs. Unless they own bricks and mortar or a house to mortgage against the loan, decent capital is hard to get.”

The fintech sector has emerged as an alternative source of funding for SMEs as highlighted in this edition’s cover story. The growth of market lenders is now providing a viable alternative to the banking sector and it is a trend acknowledged by Carnell. However, she wants to make sure that going forward, this industry will be in step with the interests of small business.

In June, the Ombudsman’s office struck a deal with FinTech Australia and SME finance expert Neil Slonim to conduct a survey with fintech small business lenders. “We recognised that the fintech sector is the next rung down from the financial lenders. We also recognised that they are bridging the gap in providing loans to SMEs and so we thought greater transparency was needed in that sector particularly around fees and other charges. The survey will collect information from fintech lenders that can shed light on some of these issues.”

According to Carnell, what is clear is that banks have not been adequately servicing the SME sector’s needs and fintechs have stepped in with new loan products to help fill that gap. “This is proving to be a very beneficial and cost-effective source of funding for SMEs. This research will help even more SMEs to invest in their growth and benefit from alternative lending products.”

Carnell also identifies the importance of data in helping SMES get access to capital particularly in the unsecured loan market. “Even though SMEs may have unsecured loans, they are still good businesses with solid experience”. She believes that banks need to move away from old world approaches when assessing the creditworthiness of SMEs.

“Banks have real time information now on how a business is progressing. They have access to point-of-sales information and information on cash flow and wages. It seems old worldly for banks to say it is it is too risky to lend against that cash flow when they can assess a business in real time. It’s not like the old days where you had to wait for the end of the financial year to make such a decision.”

It seems old worldly for banks to say it is it is too risky to lend against that cash flow when they can assess a business in real time

She does acknowledge that there is “a lot of good stuff” that the banks are doing particularly in the area of technology. Innovations such as the point-of-sale terminal Albert by the Commonwealth Bank and similar innovations at Westpac and the National Australia Bank are helping SMEs but the key issues confronting SMEs are still access to capital and clearer contracts and until those issues are resolved, it remains an uneven playing field for the sector.

“They are doing some good while ensuring they shift all the risk to the SME sector. It is not a balanced relationship like any good business relationship should be.” It’s fair to say that Carnell will continue to keep the banks to account with their small business relationships. She believes the parliamentary inquiries into the major banks have been effective in “keeping the banks honest” and raising community issues.

“With many members involved in these inquiries, it is always difficult to delve deep into the issues but they are making a good fist of it but it’s not the whole answer to keeping the banks to account,” she said.

The other answer is found in the Federal Government’s decision to set up a one-stop shop to settle financial disputes, a recommendation from the Ramsay Review. The review specifically recommended the formation of a single industry Ombudsman scheme for financial, credit and investment disputes to replace the Financial Ombudsman Service and the Credit and Investments Ombudsman.

“This initiative will really help small businesses get access to justice. Let’s be fair, when you have a problem with a bank, you can’t take them to court without being killed.” Although Carnell supports parliamentary accountability of the banks, she stops short of backing a royal commission.

“My concern is that a royal commission will take at least three years because let’s face it, there would be a lot of people who have felt led down by the financial services sector and would want to have their day at the commission. At the end of the day, all a royal commission can do is make recommendations. Only the government can act.”

That said, however, Carnell supports the issue of a royal commission remaining in the public debate. “It has to stay on the table. It is an opportunity for the banks to step up to the plate and fix the issues. If they push back on the issues then possibly a royal commission is the way to go.”

If banks push back on the issues then possibly a royal commission is the way to go

She would prefer to leave the issue of a bank levy to the government particularly as it is a revenue-raising initiative but concedes the bank tax in South Australia is an issue around competitiveness and will most likely not be legislated.

Outside of her role as Ombudsman, Carnell can be found kayaking or bushwalking with her husband. The chef enthusiast also bakes for her staff each week and enjoys watching a plethora of cooking shows. However, she is particular with her viewing, preferring to watch the masters – think Nigella Lawson - rather than “those competition shows” that pitch contestant against each other.

Carnell’s not one for arguments when it comes to culinary pursuits. It seems that she prefers to leave that to her current role, championing small business. “I love representing small business. Getting a better deal for them by working with the government and opposition. What a great job.”