Date posted: 5/02/2019

How the Royal Commission impacts small business and farming clients

Small business and farming clients will need advice on redesigning their business strategy and some may consider diversifying to attract new income streams

In brief

  • Some CAs may be in a position to help their small business clients seek redress for wrongdoing identified by the Royal Commission, working hand in hand with legal advisers to help quantify losses
  • Small business clients can look forward to the establishment of an industry funded, forward looking compensation scheme of last resort
  • Some CAs will play a future role in assisting their farming clients work through new national farm debt mediation processes recommended for loans classified as distressed

Avoiding a credit drought

Treasurer Josh Frydenberg was careful to preface the Government's response by saying that, in undertaking the reforms, the Government would ensure that the financial system continues to provide consumers and small businesses with access to credit and other affordable financial services.

Exactly how it would do this was not spelt out.

At a practical level, lending institutions may well look to CAs to do even more to support their SME and rural clients loan applications with expert analysis and forecasts.

Helping small business access to redress

Some CAs may be in a position to help their small business clients seek redress for wrongdoing identified by the Royal Commission, working hand in hand with legal advisers to help quantify losses.

The Treasurer's response said he would go beyond the Royal Commission's recommendations by:

  • paying around $30 million in compensation owed to almost 300 consumers and small businesses for the unpaid determinations of the Financial Ombudsman Service and the Credit and Investments Ombudsman
  • establishing for the first time an industry‑funded and forward looking compensation scheme of last resort to be administered by AFCA as recommended by the Royal Commission
  • expanding the remit of the Australian Financial Complaints Authority (AFCA) for a period of 12 months to accept applications for disputes dating back to 1 January 2008 (the period covered by the Royal Commission) for disputes that fall within AFCA's thresholds. The aim is to ensure that consumers and small businesses that have suffered from misconduct but have not yet been heard will be able to take their cases to AFCA and have them considered and
  • strengthening oversight and transparency of financial entities' remediation activities by enhancing AFCA's role in the establishment and public reporting of firm remediation activities.

Compensation scheme of last resort (Recommendation 7.1)

Small business clients can look forward to the establishment of an industry‑funded, forward‑looking compensation scheme of last resort (CSLR). The CSLR will operate as a last resort mechanism to pay out compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour or a determination from the Australia Financial Complaints Authority but are unable to get the compensation owed by the financial firm, for example because the firm has become insolvent.

The timing for the establishment of the CSLR as part of AFCA is unclear.

Insurance commission-based businesses and mortgage brokers

The business models of insurance commission-based businesses and mortgage brokers will suffer because of the Royal Commission's conflicted remuneration recommendations. Note however that the Government's response to the mortgage broker recommendations are not on all fours with Hayne's recommendation.

In the commotion surrounding the recommendations, it is easy to overlook that those impacted are often small businesses. Clients in these sectors will need advice on redesigning their business strategy and some may consider diversifying to attract new income streams.

Farming clients (Recommendation 1.14)

Some CAs will play a future role in assisting their farming clients work through new national farm debt mediation processes recommended for loans classified as distressed.

There will also be some accounting challenges in identifying when the charging of default interest should cease "when there is no realistic prospect of recovering the amount charged".

Rural CAs will be delighted in Commissioner Hayne's recommendation that, when dealing with distressed agricultural loans, banks should ensure that those loans are managed by experienced agricultural bankers whose goal will be to seek the best outcome for both the bank and borrower, with enforcement (foreclosure) "the worst".

CAs specialising in solvency may however question whether the Commissioner has it right when he says banks providing farm finance should "recognise that appointment of receivers or any other form of external administrator is a remedy of last resort".

This may not be popular, but CA ANZ believes there will always be some situations where early intervention for any business which is clearly uneconomic is desirable for all concerned.

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