ASIC's perspective on small business
Speaking notes for an address by John Price, Commissioner, Australian Securities and Investments Commission at the Institute of Public Accountants National Congress, (Sydney, Australia), 2 November 2018
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Good afternoon, I am very pleased to be here today, and I thank the Institute of Public Accountants for providing the opportunity to speak about ASIC's work for small business.
I know that accountants are one of the most trusted advisers to small businesses. I also know that the IPA in particular has a strong focus on small business, not least demonstrated by the release of the 'Australian Small Business White Paper' only a few months ago.
Today I'll be focusing on issues that affect your small business clients and may affect you personally if you run your own business. Some of these topics will have relevance to the recommendations made in the White Paper, including cutting red tape, improving the financial capability of small business owners, cyber security, and access to finance.
Further, the Financial Services Royal Commission has highlighted the harms that unlawful and unethical conduct can inflict on investors, consumers, and small businesses. ASIC has an important role in driving the behaviours that will build and restore trust in the financial system, and so I will also give you an update on our work surrounding small business protections, including changes to the way that consumers and small businesses can have their financial disputes resolved.
ASIC's Small Business Strategy
But first, a general small business update. Last year at ASIC we released our 2017-2020 Small Business Strategy, which outlined our vision to assist, engage with, and help to protect small business in Australia.
In April of this year we published our key small business results in ASIC Report 571. Some of ASIC's 2017-18 results include that:
- we answered more than 692,000 inquiries through our various registry communication channels, many of these are from small business owners
- we attended around 149 meetings, events and small business presentations
- there were 66,789 views of the small business hub
- our First Business App has been downloaded 9,410 times to date.
Cutting red tape: Registry improvements
I'd now like to focus on the improvements we have been making to ASIC's business and professional registers. We know that for most small businesses, the key interaction they have with ASIC is through our registry service. We also know that the time spent by small business owners on complying with obligations and navigating multiple layers of red tape amounts to time taken from them to run their businesses. To that end, improving the way that registry functions is a major priority for ASIC.
Business Registration Service
In June of this year, the Business Registration Service was launched. It allows businesses to apply for multiple business and tax registrations at the same time through business.gov.au, in the first step towards a whole-of-government registrations platform. This service supports businesses to get up and running quickly, and to avoid applying for registrations they do not need – saving users an estimated $40 million per annum.
In the coming years it is proposed to move all our business and professional registers onto a single, whole-of-government platform that will be administered by our colleagues at the Australian Tax Office. This single registry platform will make it simpler and faster to start, and run a business, and it will also facilitate a more innovative use of business data.
Financial capability resources for small businesses
Now I'll tell you a little bit about our work in improving the financial capability of small businesses. We know that the IPA feels that this is a very important issue, and we agree that the ability to manage finances is integral to business success.
ASIC's MoneySmart website has a First Business online module, a resource designed to help people decide whether starting a small business is right for them. It includes information on business planning and support, insurance, record-keeping and tax.
Once the online module is completed, ASIC's First Business App then provides small business intenders with handy business information that they can carry with them. The First Business App includes checklists on requirements for running a small business, such as the necessary registrations, licences, tax and superannuation, as well as case studies on what could go wrong.
The small business hub on the ASIC website contains a host of information relevant to starting, running and closing a business, in the context of business owners' obligations under companies and business names legislation.
We regularly undertake engagement and outreach activities to actively promote these resources to small businesses and their advisers and we commend these resources to you and your clients.
Protections for small business
Illegal phoenix activity
Now onto protections for small business, which, among other things, includes our enforcement work. We have a particular interest in tackling illegal phoenix activity. The unfair competitive advantage that operators get by engaging in this illegal activity means that businesses that intentionally avoid paying debts like taxes and superannuation can charge a lower rate for their services, undercutting their honest competitors.
According to a recent report by PWC, illegal phoenix activity is estimated to cost the economy between $2.85 and $5.13 billion, with costs to businesses in Australia up to $3.17 billion each year. Last financial year, ASIC prosecuted 382 individuals for 734 offences for failure to keep books and records. Not keeping business records is often a classic indicator of phoenix activity.
ASIC is also part of the Phoenix Taskforce led by the ATO. The aim of this taskforce is to identify, deter and prosecute instances of illegal phoenix activity, and people that facilitate these activities. We work with 30 other federal, state and territory government agencies using a coordinated and strategic approach to tackle the issue. Our participation in the AFP-led Serious Financial Crime Taskforce also contributes to our work in this area.
Earlier this year, the Government released draft legislation that, if passed, will greatly assist us in tackling illegal phoenix activity.
Unfair contract terms
Another area ASIC is helping to protect small business is in relation to unfair contract terms. We worked closely with the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, to ensure changes were made by the big four banks to their small business loan contracts. We also published an ASIC Report which outlines the changes made to comply with the new laws in this area. As it stands, we are closely monitoring compliance with these laws.
As some of you may be aware, ASIC recently received increased funding from the government for improving outcomes for small business in financial services.
In particular, over the next two years, ASIC will prioritise the identification of appropriate cases to take to court in relation to unfair contract terms in small business loan contracts. I'd encourage any of you to contact us if you believe you have clear evidence of such cases.
A key part of the financial services and credit laws in this country deal with how complaints and disputes between financial services providers and their customers are handled. We have a role to play in the processes of both internal and external dispute resolution.
Internal dispute resolution
Internal dispute resolution is the first step to resolving a dispute, where firms must attempt to resolve disputes directly with the customer. We will soon be sending our staff onsite at major financial institutions to have a closer look at their dispute resolution processes. This deeper understanding will help us as we draw up new guidelines on how we expect financial firms to deal with customer disputes.
External dispute resolution
External dispute resolution is the next step, where small businesses and consumers can take their complaints if the they are not satisfied with the result of the firm's internal process.
Until recently, there have been three external dispute resolution schemes in Australia. To improve the process of external dispute resolution, a new body called the Australian Financial Complaints Authority, or AFCA for short, was recently established to replace the existing schemes. Yesterday AFCA began accepting its first complaints.
Importantly for small businesses, AFCA brings with it a greater access to dispute resolution because it operates under significantly higher monetary limits than its predecessors:
- AFCA will be able to accept disputes about credit facilities worth up to $5 million
- AFCA will also be able to award compensation of up to $1 million to small businesses, or $2 million for primary producers.
This means that more consumers and small businesses will be able to access free, fast and binding dispute resolution with their financial services provider, and will no longer need to be forced through the court system.
Banking Code of Practice
Another important area of our work involves the new Banking Code of Practice.
The new Code, commencing on 1 July 2019, includes some significant additional protections for small business borrowers. Some of the key protections the Code provides for small business lending include that:
- the Code contains rules about enforcement of small business loans, including limits on the use of 'non-monetary defaults' and 'financial indicator covenants'. Banks must generally also provide a reasonable time for the borrower to remedy a non-monetary default before taking action
- if a bank chooses not to extend a loan period, they must tell the borrower at least 3 months before the loan is due to be paid in full.
The Code currently applies to small businesses who borrow up to $3 million which will cover the considerable majority – between 92-97% – of businesses in Australia.
To ensure that the Code provides a high level of coverage of the small business sector, ASIC's approval is contingent on an independent review occurring within 18 months of commencement.
At the same time, ASIC will collect quarterly data from banks and AFCA to monitor the extent of the Code's coverage. ASIC will ensure that this data is published every six months to provide the public with ongoing transparency about the coverage of the Code.
Moving now to the issue of cyber security – or, as we like to frame it – cyber resilience. Cyber resilience is vital to all organisations operating in the digital economy, no matter how big or small, or in what industry they are operating.
ASIC last year published a report on research we conducted on the cyber resilience of firms in our financial markets. We found that, unsurprisingly, large organisations with access to specialist skills and resources demonstrate a relatively high degree of cyber resilience compared to small and medium-sized enterprises – some of which are just beginning to develop their cyber resilience.
We believe that developing policies and procedures to manage the threat of cyber risks are imperative to business success in the digital age. Just as important is having a plan in place for when things go wrong – setting out how the business will manage an incident such as a data breach, and how and when it will notify its customers.
Access to finance
I want to briefly touch on a few areas of our work that we hope will increase small businesses' access to finance, which as we all know is very topical at the moment.
Comprehensive credit reporting
The first is comprehensive credit reporting, or CCR. These proposed changes will require large banks and their subsidiaries to provide comprehensive credit information to credit reporting bodies, as opposed to only providing information about negative credit events.
CCR will ensure that a person's credit record shows their positive credit behaviour such as their repayment history, rather than only negative information, such as missed payments.
It will give consumers and small businesses more opportunity to recover from an adverse credit event, as negative information can be balanced out by an otherwise positive record. This will particularly benefit small businesses that operate as sole traders, where the financial health of the business and its owner are inevitably linked.
The second area is the new Open Banking regime, which will give consumers and small businesses the right to access banking data on their deposit and lending products. Once it is phased in from July 2019, Open Banking will help to address the informational advantage that is held by a small business's current bank, which reduces the ability of competing banks to offer a better deal.
For small businesses, having access to their own banking data will allow them to shop around much more easily to get the best deal on loans, and reduce the issue of losing data history when switching providers. Losing data can be a particularly significant roadblock, as small businesses often lack business planning documentation or have short financial histories, making it difficult for banks to assess their credit worthiness.
Crowdsourced funding for proprietary companies
Finally, a word on crowdsourced funding, or CSF. Parliament has passed amendments to the Corporations Act to allow proprietary companies or unlisted public companies to advertise on crowdfunding platforms. I understand that this is one recommendation made in the Small Business White Paper that has already been completed.
We have granted licences to crowd-sourced funding intermediaries and marketplace lenders to facilitate alternative means of financing for business. A CSF market in Australia is intended to provide an additional funding option for entrepreneurs to assist in the growth of their business, and provide additional investment options in start-ups and small businesses.
Well, as you can see there is plenty happening in the small business space at ASIC and as always, it has been a pleasure to speak with you today. I'm happy to take any questions.