06 Feb “Royal Commission Special Report”: Your Silver Lining (as a borrower)
Watershed moments in anyone’s lifetime are few and far between. Events and incidents that will be scribed in books and become source learnings for generations to come. The invention of the watt steam engine, the assignation of Archduke Ferdinand Francis and the Black Plague are to name a few.
The Royal Commission into Australia’s banking system may seem a little inferior in retrospect, but the impact and consequences on anyone who borrows money for mortgages or business alike will be truly felt.
The details of the Royal Commission have entertained readers through media releases this week and sprayed over free to air TV like the assignation of bygone era.
This dissertation from myself is not about its subject matter, but more about the consequences to mortgage holders, small business and the lending arena we all must participate in.
As the First Aid Kit harmonised in
“My Silver Lining”….
“Got to keep on going looking straight out on the road,
You can’t worry about what’s behind you or what’s coming for you further up the road.
Try not to hold on to what is gone, and try and do what is right from what is wrong,
Just try to keep on keeping on”
I am a Borrower, what does it all mean?
There are a few key elements to the Royal Commissions paper that will impact all borrowers. I will be brief and succinct.
- Definition of Small Business. (noting that small business is now being recommended as defined by having less than 100 employees or borrowings up to $5.0m. Albeit those parameters can capture big business too): For a period now, the banks have been reckoned with the task of amending their business loan contracts to small businesses in order to be less oppressive and one sided. These legislative changes will mean banks will naturally take on more risk as they give some of their contractual powers away for compliance sake. With more risk comes less appetite and only the highest performing credit risk rated small business clients will have the luxury of dealing with the banks. The rest will be solemnly cut loose into the world of shadow banking, and with little guidance, experience or defined strategy, these outcomes could be far from optimal.
- Finance Broker Model Destroyed: Finance brokers play a critical role within the borrowing community. They provide choice to borrowers when borrowers are not fully complicit with the offerings of all the lenders available in the market. How could they be when they are busy running their daily lives and businesses. Brokers provide competitive tension in a market where there is very little. Brokers provide visibility, transparency and market knowledge about lending so that borrowers can make informed decisions. And brokers bring lenders to remote and regional areas where lenders do not have the capacity to provide a presence across such a huge continent. Lenders were happy to pay brokers on a success basis. It was a variable cost business model and enabled them access to distribution without incurring huge overheads to do so. With the Royal Commission recommending that borrowers now pay for these services, they now fall into the hands of the major banks. Borrowers may not have the financial capacity to invest in professional credit advisors. Brokers, without remuneration, will disappear. “Other” lenders will lose access to their distribution. Brokers will become the unicorn of a bygone world where borrowers had access to competitive choice and banks competed for their business when brokers were involved.
- More Regulation = less Lending Creativity: Lenders are in the business of lending. Business owners are in the business of enterprise. They are also then in the business of borrowing for investment in growth and innovation. With liberty, both borrower and lender meet at the market to exchange money under contract. The greater the allowance for lending creativity, the more businesses can access funds to fuel their growth. Businesses take on funding risk to seek blue sky risk adjusted rewards. Banks do not seek blue sky reward, but instead pursue a controlled return for a controlled risk. Too much regulation inhibits creativity and tightens credit. Credit contraction based on simplified Economics 101, constricts economic growth, employment and productivity. Controls need to be in place. Yes. No one disagrees with this adage in the name of financial stability. But to what extent do banks become an extension of enterprise or government authority? Wherever we sit on the spectrum, we are moving towards a place of tighter credit. And without access to brokers, it is every borrower for themselves.
The Silver Lining
Robinson Sewell Partners are stoic and old school. We have all personally operated enterprise through the 90’s recession, The Dot Com crash, GFC and now a Royal Commission. We will not desert our cause. We will persist and we will continue to harvest incredible funding results for our agribusiness and commercial clients. The rules of engagement may have changed, but the fundamental lending protocols and financial relationships have not. Contact us and we will be most delighted to hear your story while we share our lending insights into the new world order.
This is also your silver lining.
We can help you find yours – uniquely.