THE Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has welcomed legislation introduced into Parliament today, overhauling the insolvency framework.

The legislation tabled will make is easier for small businesses to restructure or wind up and are in line with the recommendations made in the Ombudsman’s Insolvency Practices Inquiry final report, released in July.

“These landmark reforms will be a game-changer for small businesses, particularly those that have been heavily impacted by the COVID crisis,” Ms Carnell said.  

“Instead of finding themselves on an express train to winding up with no control over the process, these changes will ensure small businesses will have the option to turn their business around, giving them a fighting chance to survive.

“Crucially, by moving to the ‘debtor in possession’ model, small businesses can restructure their debts while remaining in control of their business," Ms Carnell said.

“For those businesses that sadly need to wind up, the liquidation process will be simpler, faster and cheaper. 

“We know the pandemic, which followed a devastating season of natural disasters, has driven many small businesses to the brink.

“Modelling by Deloitte Access Economics estimated about 240,000 small businesses are at risk of failure.

“This is exactly why small businesses need to sit down with their trusted and accredited financial adviser for a viability assessment as a matter of urgency," she said.

“It is this critical first step that small businesses would be more likely to make if the government adopted our recommendation to establish a small business viability program, providing small business owners facing financial stress with a grant valued up to $5,000 to access tailored advice on the state of their business.

“Unfortunately small businesses with cash flow issues, compounded by falling revenue, may not seek out professional advice because it is deemed unaffordable. This could prove to be devastating for the business, staff and family," Ms Carnell said.

“Ultimately this legislation represents enormous progress and if passed, the new insolvency process will be available to small businesses from 1 January 2021.

“Crucially, this will give otherwise viable small businesses a chance to recover, preventing a wave of unnecessary insolvencies.”

www.asbfeo.gov.au

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THE Payment Times Reporting Bill 2020 and Payment Times Reporting (Consequential Amendments) Bill 2020, which are now before Parliament, will go a long way toward helping small businesses that are struggling with cash flow issues once it is passed, according to the Institute of Public Accountants (IPA).

“This legislation will bring greater transparency, requiring businesses with over a $100 million turnover to publish their policies including payment times,” IPA chief executive officer, Andrew Conway said.  

“The IPA’s submission to the Senate Education and Employment Committees highlighted a number of key areas to be addressed including the recommendation that legislation should prescribe maximum payment times, preferably 30 days or less.

“Without a prescribed period of time, there will be room for ambiguity or arbitrage which can be easily exploited by large businesses.  This reflects the ASBFEO’s review of payment times and practices in 2017," Mr Conway said.

“The legislation sets the path for a new regime of fairness in terms of payment times and practices.  This new environment should be reviewed within two years of the legislation to ensure the behavioural change that is a key objective of the legislation has been embedded in our society.

“The Bill prescribes the creation of a Payment Times Reporting Regulator which will be a senior executive employee in the Department.  As is the case with other regulators, we advocate that this role should be adequately resourced to instil the importance of the role and to ensure it is effectively meeting the requirements of the function," he said.

“We are, however, concerned that the Regulator can extend the reporting time with no limit to the extension.  This is far too broad and open-ended, and we recommend a prescribed time period, say, no more than three months.

“One of the most pleasing things about the proposed legislation is the penalty regime; we believe the penalties prescribed are of sufficient weight to drive the desired behavioural change.  Reputational risk should be a key driver of behavioural change.

“The IPA is also pleased that the focus in the legislation’s objectives is on ‘payment terms and practices’. In our view, you cannot have one without the other," Mr Conway said.

“Some large businesses use excuses such as inaccurate invoicing, missing invoices or make changes to contract terms and conditions – anything to extend payment times.  It is essential these practices change and if the legislation is successful in bringing this behavioural shift, then the flow-on benefits to small business will be realised."

www.publicaccountants.org.au

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THE new credit reporting laws will considerably affect the one in six Australians currently deep in debt, or anyone who has ever borrowed money in the past, according to the DG Institute.

On September 22, more than 4 million mortgages were uploaded to Australian credit files, something that always existed, but was never previously standardised. It is likely to create some outcomes that should be of concern to anyone who has ever borrowed money -- especially those who have ever fallen behind in their repayments.

“The entire Australian credit system is shifting towards comprehensive credit reporting, similar to the American model. This means that lenders are now able to share more credit information with credit agencies including Equifax and Experion to include in people’s credit reports,” said Dominique Grubisa, founder of DG Institute.

“People need to be fully informed that personal credit history, which the banks weren’t previously publishing, is now being uploaded publically to their credit file, which dictates their borrowing ability and interest rates.”

Comprehensive Credit Reporting was initially introduced in Australia in 2014, being the only country where it was not mandatorily implemented due to privacy laws. In 2017, then-Treasurer Scott Morrison strived to make credit reporting standardised. 

In 2018, the National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) bill was introduced to Parliament.

By 90 days after July 2018, 50 percent of Australian credit was to be uploaded as public information. The other 50 percent was to be uploaded the following year.

However, due to the federal election, this bill never formally became law, so Australia was still technically sitting on the voluntary 2014 law. Despite the lack of development, the banks published the information anyway, meaning all credit data is live, whether it is accurate or not.

With the large amount of data the banks have had to upload in such a short time period, mistakes are inevitable, according to Ms Grubisa.

She said Westpac had recently released a statement encouraging people to check that there had not been any fraudulent applications made in their name, and that if there has been a mistake, it will be fixed.

“This creates a window of opportunity to strike while the iron is hot, and take control of your credit report,” Ms Grubisa said. "The first step is to obtain a copy of your credit report to see where you stand. You can order it online through Equifax.

"If there are errors, you need to correct it. The errors give you scope to negotiate lower debt. A simple request could improve your score by 50-100 points. The Privacy Commissioner and the Financial Complaints Authority all have the power to award compensation to consumers for breach of compliance. The data is published anyway, so make sure you are in the best possible position.”

DG Institute has highlighted other facts consumers need to know about this new legislation:

  • Your credit history is not protected and can be sold to lending agencies.
  • The new credit reporting system publically shows your entire credit history, from any credit inquiry information, the credit type you applied for, and exposes your entire monthly payment history, as well as any overdue credit accounts, or missed repayments.

“With this new access to personal information, creditors are able to sell this data to external lending agencies, who then have the ability to bring down your credit rating, which can affect your borrowing power and leverage,” former debt collector and now manager of DGI Debt Management, Laurence Barlow said.

"Selling your data can be their primary source of revenue.”

Non-compliant lenders can make errors which lowers your credit rating.

“The system is flawed,” Mr Barlow said. “Many credit providers are feeding Equifax incorrect information. Out of the thousands of credit reports we read, it is rare to come across one that is error free.

"An error is non-compliance by the lender, for example, if you have a common last name, information can wrongly be uploaded to your report and lower your credit score. The average person is often unaware of errors which can implicate them.” He said this could allow the banks to charge an individual higher interest rates.

Your credit file is a business-to-business tool and can work in your favour if your credit report is clean and error-free," Mr Barlow said. "Your report is not necessarily a means to deny you credit, but for lenders to charge you more interest, which can be justified if your score is lower.

"It should be noted, that if you are even 15 days overdue with a repayment, it will stay on your score for two years, and the banks will claim in their rights to charge you higher interest for any loans. Payday loans can also lower your credit score, as well as missed payments through lenders such as Afterpay and Zip Pay. 

“DGI Debt Management, has developed a technology to detect compliance errors and hold debt collectors accountable," he said.

“With the help of our software we are able to look at your credit application and determine if you should have been granted the amount of credit in the first place. Errors give us leverage to negotiate down your debt and improve your credit score, which we have done for many clients. Now is the time to do this, especially while the banks are currently under the microscope.” 

www.dginstitute.com.au

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