Big Banks Win As Labor Screws Small Business


Not yet 12 months old, the Rudd Labor Government looks like a headless chicken. Worse, a headless chicken lacking political courage.

As the Government treads water on workers’ rights, education, climate change, the Northern Territory Intervention, and security, Labor’s treatment of small business has fallen under the radar, but its actions sum to a substantial deficit. In the May budget, Labor cut small business programs, most of which had been initiated by the Hawke-Keating government. The Commercial Ready program subsidised innovative businesses, and was a rare, sophisticated well-run program with previously bipartisan support. Mentoring programs which offered management assistance were also cut. The Opposition claims that the cuts added up to almost $1 billion.

But the Government’s approval of the takeover of St George by Westpac last week is a turning point. In May, I highlighted the possible anti-competitive impact of a takeover, approved by the Australian Competition and Consumer Commission in August on clearly dubious grounds which in my view brought into question the Commission’s commitment to its brief.

The Treasurer approved the takeover on 23 October. The approval statement is a joke — the claim that it "takes careful account of the detailed assessments of the [ACCC]" highlights that it’s a con job.

Swan claims that "this decision strikes the right balance between enhancing the competitiveness and the strength of our banking system." No it doesn’t. It is a mortal blow to competitiveness for the indefinite future. Moreover, the emphasis on stability is unwarranted. The Australian second tier banks are not in trouble — least of all St George.

St George posted a stable $1.17 billion net profit for the financial year 2007-08. In spite of lower ratings from the discredited ratings agencies, St George continued to eat into the big four’s markets. Southern Cross Equities analyst T.S. Lim said in the Australian Financial Review, "If you look at Westpac, the retail banking hasn’t been very good. [The St George takeover] will rejuvenate the Westpac franchise." Who is saving whom? Swan gave the takeover the green light subject to some conditions — maintenance of the St George brand, branches, etc — which are trivial and meant to be broken. Moreover, there is no means to enforce these conditions.

Similarly, the Bank of Western Australia — now subject to an opportunist takeover bid by the Commonwealth Bank — is not in trouble. Its parent HBOS is in trouble, but that’s no reason for the authorities to tolerate a takeover from one of the big four.

Finally, in Swan’s statement there is no mention of the significant small business sector at all. These takeovers are a disaster for small businesses, whose traditional reluctant dependence on the major banks was just beginning to find an alternative in the second tier banks.

This decision doesn’t reflect well upon the three ministers involved in this decision. Both Swan and Bowen have on their desks information concerning the significance of an independent St George to the small business sector. Amongst other material, they have been apprised of disquieting results from a recent East & Partners survey; the following appraisal appeared in finance industry newsletter The Sheet on 14 October:

"East estimates that CBA/BankWest will hold 24.4 per cent of primary transaction banking relationships with small to medium business customers following the takeover and market leadership. Westpac/St George will hold 22.9 per cent, ranked third. NAB ranks second with 23.3 per cent of relationships and ANZ holds only 10.6 per cent of relationships.

"East has found that St George customers are increasingly frustrated at the imminent change of bank. Paul Dowling, principal analyst with East, said that a survey more than two months ago found that 60 per cent of St George business customers described the Westpac takeover as having a negative impact on their relationship with St George. He said around 60 per cent of that 60 per cent would look to change banks in the next 12 months, with about half of those looking to other regional banks. A follow up survey last week found that the percentage of disgruntled customers increased to 80 per cent, with 60 per cent of that group still looking to shift banks."

More significantly, Swan and Bowen are aware of malpractice claims made by small businesses against the major banks. They are aware of the lack of regulatory remedies to unconscionable or fraudulent conduct by the big four against their small business customers. And apparently they don’t care.

Coincidentally, a MYOB survey of small business quizzed respondents on the Rudd Government’s approach to their sector. The results were not good:

"When asked to rate the current performance of the Federal Government in helping the development of small business, 56 per cent of small business owners said it was a ‘poor’ or ‘very poor’ performance. This increased from 37 per cent in November 2007."

I’m surprised that the figure isn’t higher than 56 per cent. There are currently two Parliamentary inquiries into matters of profound concern for the small business sector. Submissions to an inquiry by the Joint Committee on Corporations and Financial Services into the franchising sector have highlighted the vulnerability of franchisees to franchisor abuse, sometimes with bank complicity. "Churning" is the most heinous of the practices whereby prospective franchisees are drawn in by misleading claims about prospects, forced into failure, and then replaced by the next gullible purchaser. Atypically, this regulatory impasse has received condemnation from federal backbenchers.

The second pertinent inquiry, conducted by the Senate Economics Committee, is examining the "unconscionable conduct" provisions (s.51) of the Trade Practices Act.

The Government’s response to these inquiries will test its intent regarding the small business sector. Both inquiries have been forced on the Government and both are a response to the manifest failures of existing legislation.

The Government has already shown its hand in response to the so-called "Birdsville" amendment to s.46 of the Trade Practices Act. In September 2007, Treasurer Peter Costello surprisingly accepted a belated amendment to s.46 from Nationals Senator Barnaby Joyce to a July Amending Act that promised substance to small business but gave it peanuts. Section 46 proscribes "misuse of market power". The Birdsville amendment attempts to redress predatory pricing by any "corporation that has a substantial share of a market" against small business competitors, suppliers or customers.

The sustained attack on the Birdsville amendment from the big end of town is now becoming hysterical. In an unseemly development, ACCC Chairman Graeme Samuel, who has demonstrated no concern for small business since his appointment in mid-2003, publicly joined the attack. The brains behind the amendment, University of New South Wales academic Frank Zumbo, has decried what he sees as a disinformation campaign.

Curiously, Rudd’s Government moved speedily to remove Birdsville from the Act. Labor’s legislative rollback has, however, been knocked back in the Senate. Liberal MPs, initially hostile to Birdsville, reversed their decision to support the amendment after a concerted lobbying of the Liberal Caucus by the foot soldiers of B.A. Santamaria’s slumbering National Civic Council.

The tolerance of the Westpac takeover of St George has reinforced and legitimised the big four bank’s indifference to an innovative banking sector with integrity. Labor created the Commonwealth Bank in 1911 to counteract the hated "Money Power". It has now become a captive to it.

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