Okay, now it’s getting ridiculous. The Banking Royal Commission has exposed some appalling behaviour by the banks, but not every poor decision of a customer is the bank’s fault. If an elderly parent goes guarantor for a loan there can be consequences if the loan is not repaid. That’s what going guarantor entails. If a couple on a modest income borrows a million dollars to buy properties and can’t service the loan, what is the bank supposed to do – say it’s alright, keep the money?
When the government of the day responds to the Royal Commission’s findings and recommendations, it will be under pressure to remedy every hardship case and to legislate to ensure none arises in the future. That pressure is unlikely to come from the Commission itself, since the submissions of counsel assisting so far seem reasonable and responsible. Rather, it will come from the media covering dissatisfied complainants and from the political party that is in opposition at the time.
How do I know? For a time in the previous Labor government I was Minister for Small Business, Competition Policy and Consumer Affairs. From the outset I was under pressure to change the Franchising Code of Conduct to favour franchisees that had fallen out with their franchisors. Some of the franchisee grievances were legitimate; many others were not. Regardless of the merits of each case, the voices of the disgruntled franchisees were heard all around Parliament House while the 95 per cent of franchisees who were gruntled had no voice at all.
The Abbott-led opposition demanded changes to the Franchising Code of Conduct to appease the disgruntled and to show it was sticking up for small business against powerful franchisors and the horrible, anti-business Labor government.
For seeking to protect the viability of a franchising model that had allowed thousands of Australians to go into small business, I was accused of siding with big business against the little Aussie battlers.
Heavy-handed regulations, I argued, could make the model too risky for franchisors. I refused to succumb to the Coalition’s pressure to insert an ill-defined obligation on the parties to act in good faith towards each other. The Labor cabinet backed me.
But the incoming Abbott government inserted a good-faith obligation into the Franchising Code of Conduct. It is an obligation not defined in either the relevant act or regulations, but determined by past and future judgements of various courts.
We will never know how many actual and prospective franchisors will conclude that the franchising model has become too risky, and correspondingly how many franchising businesses close shop or never start up. But the Coalition won’t care since it will have gained a few votes and lost none.
Obviously the franchising system has had its own problems more recently, including those that have led to the under-payment of wages to staff, but these remain a minority. And they clearly were not averted by the shiny new obligation on the parties to display good faith towards each other.
The parallels with banking are obvious. If politicians move to protect borrowers who have made poor commercial decisions in the hope of gaining favourable media coverage and electoral support for siding with the little people against the rapacious banks, the banks will reassess the risk of small-business and small-investor lending. They will either increase interest rates to cover the extra risk, or reject many more applications, or both.
As I have argued, bank boards and CEOs who incentivise staff to behave badly should not be surprised when they behave badly. But bank lending is a risky business and, if ventures don’t work out, even where small business owners or investors have done their due diligence and tried their best to succeed, there can be financial consequences for failure. Banks should not be expected to compensate their customers by forgiving loans.
The Banking Royal Commission has a long way to run and seems to be performing well, identifying egregious behaviour, unconscionable conduct and even criminality. The worry is not with the Royal Commission but with the feeding frenzy it is generating, and the disposition of parliament to oil every squeaky wheel at the expense of the many more wheels silently carrying riders towards their life’s goals.