From 18 August to 29 September 2023, AFCA invited members, consumer groups, industry bodies and other stakeholders to submit feedback and questions during consultation on its draft Approach Appropriate to Lending to Small Business.
This page provides a summary of the consultation, the feedback and questions raised and AFCA’s response.
About Small Business lending complaints
Small Business Lending complaints are made by an eligible small business about credit provided to them for business or investment purposes (other than investment in a residential property by an individual), such as business loans, overdrafts, lines of credit, leases and other loans. Complaints can also be made by guarantors of small business loans under certain circumstances. AFCA's Lending to Small Business Approach explains how we consider these complaints, including:
- the types of small business complaints we can consider under AFCA’s Rules
- how we assess if a financial firm’s credit assessment was appropriate
- how we consider industry codes, regulatory guidance and good industry practice in our decision making
- how we determine a fair outcome where a firm has provided an inappropriate loan, and
- how we calculate loss and determine how much compensation should be paid.
AFCA’s Approach to Lending to Small Business
Consultation Feedback Report
AFCA has now carefully considered all feedback received from our stakeholders and is grateful for their input. You can read a summary of the feedback received and AFCA’s response further below. You can also read our full response in AFCA’s Consultation Feedback Report. AFCA would like to thank all stakeholders that participated for providing valuable feedback during the course of this consultation.
About the consultation
AFCA issued a consultation paper and draft Approach to Appropriate Lending to Small Business on 18 August 2023 with the consultation process running from 18 August to 29 September 2023.
AFCA adopted a new consultation approach designed to be responsive to all stakeholder needs including Government and regulators, consumer groups, industry members and peak bodies. With this new approach, AFCA shared information through diverse channels and provided flexibility in terms of stakeholder feedback opportunities and engagement options. AFCA published a range of resources online, hosted engagement meetings, roundtables and a public webinar. AFCA is mindful that not all stakeholders have the time and resources to provide full written submissions, so AFCA also considered single-issue feedback and comments received in emails and during meetings.
6 weeks of public consultation
310 registrations to our public webinar
1,026 views of the new approaches consultation website
84 attendees at roundtables
17 full submissions made to AFCA
6 stakeholder groups consulted: Government, regulators, consumers and consumer groups, industry members and peak bodies
Lending to Small Business Submissions
We received a total of 17 formal written submissions, including 15 non-confidential submissions from a number of different stakeholder groups. All non-confidential submissions have been published on the AFCA website here. After reviewing all submissions, AFCA met with a number of stakeholders to further understand their feedback and explain any proposed changes to the Approach in response.
Consultation response
Consultation feedback summary
We received a range of feedback on our proposed Lending to Small Business Approach. The key feedback themes are summarised below. You can read more in AFCA’s Consultation Feedback Report.
Following feedback, we have provided greater clarity in the published Approach about:
- how the type of financial firm, type of credit product and the distribution channel impacts what would be appropriate to consider when making the assessment to provide a small business credit product
- the factors we take into account when assessing if a financial firm has met its obligations and recognition that those obligations can vary depending upon the type of financial firm and type of credit product
- how we consider Industry Codes, including when a financial firm is not a signatory, and how we assess good industry practice
- how the process of assessing a loan to small businesses differs from lending to consumers.
Using the term “appropriate lending”
Consultation feedback
- Many stakeholders were supportive of AFCA using the term “appropriate lending” to describe the obligations that we will consider when assessing a small business lending decision.
- Some stakeholders asked for clarity about the term to ensure it was not interpreted to mean the Approach was creating new obligations.
AFCA response
In response, we have:
- updated the title of the Approach to make it clear it is our approach to all small business lending complaints
- defined what AFCA means by the term “appropriate lending” which we have continued to use in the Approach
- clarified the term does not create new obligations
- added more information about how we assess the different obligations that may apply to different financial firms and types of credit product.
Identifying the obligations that apply to a financial firm
Consultation feedback
Stakeholders provided positive feedback the Approach provided valuable guidance about how AFCA considers the different obligations that may apply to a financial firm when providing a small business credit product.
Industry stakeholders requested:
- more information in the Approach to clarify the obligations owed by a small business lender are different to those owed for consumer lending under the National Credit Act
- clarity that the Approach recognises firms have flexibility in the method and process they use to assess credit products.
AFCA response
In response, we have:
- added content clarifying AFCA assesses complainants against the particular obligations owed by a particular financial firm and the Approach is not intended to create new obligations
- made changes to clarify the Approach is technology neutral and does not prescribe or require firms to use any particular method or technology in their assessment process.
Industry Codes
Consultation feedback
A number of stakeholders requested we include more guidance about how we apply Industry Codes, including our expectations where a financial firm is not a signatory to a code.
AFCA response
We have improved this section by:
- adding a link in the Approach to our published factsheet about our approach to Code obligations for credit providers
- including more references to particular Industry Codes in our examples to illustrate our approach.
Assessing good industry practice
Consultation feedback
Stakeholders requested further information about what is meant by ‘good industry practice’ and how AFCA determines what it is, including how we may consider Industry Codes when assessing good industry practice.
AFCA response
We have added more information about how we may consider good industry practice and clarified how we consider Industry Codes when assessing good industry practice, in accordance with our Rules.
Factors AFCA may consider relevant to credit assessments
Consultation feedback
A key theme for stakeholders was the potentially prescriptive nature of the lists in the consultation draft Approach (the list of factors that AFCA may take into account when considering if a credit assessment was appropriate and the list of common circumstances that may arise in the credit assessment process that could require further inquiry). The lists were developed in response to earlier requests for AFCA to provide more detail about how we assess the appropriateness of credit assessments.
Stakeholders asked us to amend these sections to clarify each factor is not mandatory for every credit assessment.
AFCA response
In response, we have changed the way we present this information to make our intention clear by:
- replacing the list of factors with principles that may be relevant in a credit assessment
- adding several examples to illustrate different types of information or circumstances we may consider relevant to a credit assessment
- adding examples to illustrate common circumstances where a financial firm may need to make further inquiries.
Moving to examples makes it clear that what is required in a particular case will depend on the type of financial firm, credit product and the origination channel used.
How we determine fair outcomes and calculate loss
Consultation feedback
Stakeholders requested we:
- adopt a narrower approach to assessing loss
- take into account the costs incurred by a financial firm when assessing loss
- provide further information about how it calculates a ‘fair amount for benefit of use’ for a commercial lease.
AFCA response
We have made changes to section 4 of the published Approach in response to this feedback including:
- adding information about circumstances where we may consider waiving the principal amount borrowed including where there is financial abuse
- amending examples to clarify the obligations that apply to the particular financial firm
- clarifying how we calculate loss in the example relating to a commercial lease.
We have otherwise maintained our approach to calculating loss and determining fair outcomes, which is consistent with common law principles and allows us to do what is fair in all the circumstances in accordance with our Rules.
Continuing to seek your views
The AFCA Lending to Small Business Approach was developed in response to calls from stakeholders to provide clarity around AFCA’s existing approach to these complex complaints, and to ensure consistency in AFCA decisions and other complaint outcomes. To ensure it is meeting the needs of stakeholders and is not producing any unintended outcomes, we intend to check in on the operation of the Approach in 2024. We will provide more information about the format of this review closer to the time.
