Annual Review 2022–23

Between 1 July 2022 and 30 June 2023

3,807 complaints received
42% resolved at Registration and Referral stage

Small business complaints received 

Percentage of small business complaints resolved at Registration and Referral stage 

Top five small business complaints received by product

Product

2018–19 ¹

2019–20

2020–21

2021–22

2022–23

Business loans

847 

1,544 

1,419 

1,441 

1,347 

Business transaction accounts

313 

507 

641 

800 

1,002 

Commercial property

146 

221 

230 

276 

374 

Business credit cards

128 

207 

192 

201 

304 

Commercial vehicles

 62

145 

101 

120 

153 

 

Top five small business complaints received by issue

Issue

2018–19 ¹

2019–20

2020–21

2021–22

2022–23

Service quality

93 

170 

300 

389 

309 

Unauthorised transactions

 127

176 

194 

185 

299 

Financial firm failure to respond to request for assistance

166 

320 

326 

282 

268 

Denial of claim – exclusion/condition

93

160 

227

172 

225 

Claim amount

 97

142 

130 

131 

200 

3,701 complaints closed
Average time to close a complaint: 112 days

Small business complaints closed

Average time to close a small business complaint in days ²

Stage at which small business complaints closed

Stage

2018–19 ¹

2019–20

2020–21

2021–22

2022–23

At Registration

594 

1,143 

1,250 

1,316 

1,546 

At Case Management

399 

1,253 

2,030 

1,008 

1,183 

At Rules Review

388 

752 

568 

629 

424 

Preliminary Assessment

79 

376 

342 

261 

210 

Decision

39 

409 

522 

439 

338 

 

Time taken to close small business complaints

Time

2018–19 ¹

2019–20

2020–21

2021–22

2022–23

Closed in 0–30 days

407

780

624

771

 827

Closed in 31–60 days

530

1,079

903

942

 981

Closed in 61–180 days

543

1,556

1,509

1,331

 1,240

Closed in 181–365 days

19

449

488

392

 374

Closed in in more than 365 days

0

69

1,188

217

 279

 

¹ AFCA commenced on 1 November 2018. The 2018–19 financial year covers an 8-month period (from 1 Nov 2018 to 30 Jun 2019). Year-on-year changes between 2018–19 and 2019–20 have been calculated pro rata using monthly averages.

² This excludes complaints that were inactive for an extended period, for example complaints that were paused because the financial firm was insolvent or due to court proceedings, and complaints that were previously closed and re-opened.

About AFCA’s small business jurisdiction

AFCA defines a small business as an organisation with fewer than 100 employees when the alleged act or omission by the financial firm happened. 

A small business can be an individual (such as a sole trader), partnership or a company (whether a primary production business or otherwise), including in a trustee capacity. We will consider complaints from not-for-profit organisations or clubs that aren’t registered charities. If they carry on a business, it must have fewer than 100 employees. 

An incorporated trustee must be carrying on a small business unless it is a self-managed superannuation fund (SMSF) or Family Trust. If those do carry on a business, it must be a small business. 

AFCA can’t consider some small business loan complaints arising from COVID-19 relief measures received after 25 April 2020. The AFCA Rules were amended following the issue of a notifiable instrument made by the Australian Government Treasurer on 24 April 2020. 

AFCA small business complaints are handled by two dedicated Case Management teams and specialist ombudsmen.

Key insights

  • Complaints by small businesses to AFCA increased slightly in 2022–23, up 9% from 3,490 to 3,807.
  • We have not seen the expected increase in financial difficulty complaints despite small businesses experiencing increases in interest rates and other cost rises, including for utilities.

The top three most complained about issues among small business complaints in 2022–23 were service quality (309 or 8%), unauthorised transactions (299 or 8%), and financial firms not responding to assistance requests (268 or 7%).

We also saw more complaints involving interpretation of loan terms and conditions, expiry and interest rates including claims of incorrect application of rates or representations around rates. The main product type involved continues to be business loans. There has also been an increase in recent years in denial of insurance and exclusion of claims in insurance.

Over the financial year, AFCA closed 3,701 small businesses complaints. The average time for each was 112 days, up from 105 last year. The additional time taken to clear cases is indicative of the increasing complexity of these complaints. 

We closed 1,546, or 42%, at the initial Registration and Referral stage and 1,183, or 32%, at Case Management stage. We had only 338, or 9%, reach the Decision stage.

Happy mature couple meeting with advisor at home

Case study – Small business lending

Background

The complainant guaranteed two business loans provided by the bank.  The loans were provided to separate companies controlled by the complainant and her husband. 

The complainant and her husband incorporated the companies before the loans were made and caused each of them to enter into separate asset purchase agreements.  Under those agreements, each company purchased a retail business in neighbouring suburbs of a large city.  The complainant was a shareholder of each company and her husband was the sole director of each company.

The bank provided loans to each company, to assist them acquire business assets. Each company provided personal property security to the bank, and the complainant provided a guarantee for the loans, with a mortgage of her residence in support. The complainant’s husband managed the business operated by each company.

However, each business did not go well and after 18 months each company sold their business at a loss.  The complainant and her husband alleged each vendor (of the original businesses sold to each company) breached their non-compete obligations and commenced competing businesses nearby. Each company commenced court proceedings against each vendor, but with no success.

The complaint

The bank required repayment of the loans and called on the guarantees. The complainant said that if the bank had complied with its obligation under the former Code of Banking Practice in force when the loans were made and the guarantee provided, and properly assessed each loan, then it would not have provided the loans and so her guarantees should not be enforced against her.

The complainant said the bank should have done more due diligence on the vendors.  She also said the bank owed her a fiduciary duty to ensure the loan proposals and asset purchases were reasonable.

The bank said the cause of each company’s loss, and so the cause of the complainant’s guarantee being called on, was the vendors of the relevant assets.  It was the poor behaviour of those vendors that was the cause of any loss.

AFCA investigated the complaint

As a subscriber to the former Code of Banking Practice, the bank was required to exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods to the loan application, and in forming its opinion the loan could be repaid.  It owed this duty to the borrower and also to each guarantor.

In advance of the asset purchases, the complainant obtained, from each vendor, financial statements for each business for the year ending 18 months earlier, along with interim management-prepared sales figures for each business for the nine months prior to the sale.  The complainant’s husband passed that financial information on to the bank.  The complainant’s husband also prepared cash flow forecasts for each business, which were reviewed by his accountant, and then provided them to the bank.

Each borrowing company had no financial history given they were incorporated immediately prior to each loan and business purchase.  The bank reviewed the financial information from each vendor, the cash-flow forecasts from the complainant, as well as the personal history of both the complainant and her husband.  The complainant’s husband had previously been operating a business, but not a retail business of this type.  This was a new venture for him.

AFCA reviewed the bank’s analysis of each loan proposal and concluded that the bank did not assess each loan proposal with sufficient due care and skill under the ‘diligent and prudent’ lender clause of the Code of Banking Practice.

AFCA reached that conclusion because:

  • The borrowers were new bank customers, seeking an aggregate amount of over $1 million.
  • They were purchasing a business that was a new type of business for them.
  • They sought to borrow 100% of the purchase price, relying solely on the cash flow of each business for repayment (even if they had a security property in support, via the guarantees).
  • The cash-flow forecasts were not accompanied by key assumptions.
  • The gross margin in the forecasts was higher than in the prior sales figures, without an explanation. The bank should have questioned the complainant’s husband as to why he thought he could achieve the gross profit margin increase (when he had no prior experience in the business type).
  • Similarly, sales figures increased in the forecasts; whereas, salaries remained the same.
  • There were other discrepancies, including that the opening stock figure for one year was carried forward from the opening stock figure for the prior year.

There were other errors and discrepancies in the bank’s credit memorandum.

AFCA concluded that while the bank should have carried out some assessment of the proposed asset purchases, the primary obligation to conduct due diligence on the asset purchases rested on the complainant and her husband, not on the bank.  The bank did not owe the companies, or the complainant and her husband, a fiduciary duty.  Rather, AFCA concluded that the bank’s obligation was to exercise a greater degree of care and skill than it did when assessing if the companies in question here could each repay their credit facilities.

AFCA concluded that even though there were a number of reasons the business failed, the guarantor still had a loss caused by the bank.

Findings and outcome

AFCA decided that the bank did not comply with the obligation it owed to each company to diligently and prudently assess their loan applications.

That was an obligation the bank also owed to the complainant, as guarantor, under the wording of the relevant Code of Banking Practice. As the loans should not have been provided by the bank, AFCA concluded that the bank should not be entitled to rely on the guarantee from the complainant.

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