ASIC and small business
A speech by John Price, Commissioner, Australian Securities and Investments Commission, Vodafone National Small Business Summit 2018 (Sydney, Australia), 31 August 2018
CHECK AGAINST DELIVERY
Good morning. I am pleased to be here to join my colleagues in discussion with you today and I thank COSBOA for providing the platform for us to do this.
I will briefly cover our continued focus on illegal phoenix activity, complaints handling (including through the Australian Financial Complaints Authority), the new Banking Code of Practice, our ongoing work on unfair contract terms, and the latest on our registry services.
ASIC's small business strategy
At this summit in August last year, ASIC launched its Small Business Strategy for 2017-2020. It details our work with and for small business, which focuses on three key elements. These are:
- assisting small business through our registry services and providing information and guidance
- engaging with small business and other government bodies, to understand and respond to the challenges and opportunities faced by small business, and
- helping to protect small business through surveillance, enforcement and policy work, so that everyone is playing by the same rules.
In April of this year we published our key small business results in ASIC Report 571. Some of ASIC’s 2017-18 results are as follows:
- we answered more than 692,000 inquiries through our various registry communication channels, many of these are from small business owners;
- we attended at least 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.
Illegal phoenix activity
Part of ASIC's enforcement work involves tackling illegal phoenix activity. The unfair competitive advantage that operators get by engaging in this illegal activity has a significant impact across a variety of sectors. It 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.
In February, we launched a dedicated information sheet on the ASIC website about illegal phoenix activity. This is aimed at registered liquidators, small businesses and other stakeholders – I encourage you all to read it to find out more about how you can protect yourself and what you can do if you are concerned about illegal phoenix activity. You can also call the ATO's recently launched Phoenix Hotline.
I was pleased to see that only a few weeks ago, the government released draft legislation to tackle illegal phoenix activity. One proposed reform is the creation of two new phoenix offences. In addition, there is to be an extension of the existing liquidator powers to recover assets to cover illegal phoenix transactions. It is proposed ASIC will also receive new regulatory powers to recover property that has been transferred under an illegal phoenix transaction. This tool will be particularly important where a liquidator is complicit in or turning a blind eye to illegal phoenix activity. These supporting measures, if passes by Parliament, will assist with the quick and efficient recovery of property, for the benefit of all employees and creditors.
Complaints handling and the Australian Financial Complaints Authority
A key part of the financial services and credit laws in this country deals with how complaints and disputes are handled. This is very important because for consumers (including small business) dealing with disputes through the Courts can at times be slow, expensive and uncertain. I will discuss two things here today very briefly. First, how financial services and credit firms themselves resolve disputes internally and second external dispute resolution and in particular the new external dispute resolution (EDR) body called the Australian Financial Complaints Authority, or AFCA for short.
On internal dispute resolution, ASIC recently announced that we intend to set up a process of close and continuous monitoring of very large financial institutions by placing ASIC staff within those firms to get a better idea of what is happening on the ground. Part of this work is intended to look at how these firms handle disputes with their customers including small business. We will use this information as we draw up new guidelines on how we expect financial services and credit firms to deal with customers (including small business) who have disputes with them. We expect to consult on those new guidelines next calendar year.
On the external dispute resolution, from 1 November 2018, AFCA will replace the Financial Ombudsman Service (FOS), the Credit and Investment Ombudsman (CIO) and the Superannuation Complaint Tribunal (SCT).
For small businesses and primary production businesses, AFCA will mean significantly greater access to free and independent dispute resolution where a dispute can’t be resolved direct with a financial services or credit provider through internal dispute resolution. AFCA will be able to:
- accept complaints from small business about credit facilities up to $5 million, where previous access to EDR schemes capped the facility at $2 million, and
- award compensation of up to $1 million, or $2 million for primary producers.
This will mean that a greater proportion of small businesses will be able to access EDR services, reducing the number of businesses who had no option but to take a complaint through the court system.
Under the new dispute resolution framework, ASIC must approve the scheme rules and ensure the scheme operates in accordance with its statutory mandate and ASIC regulatory requirements.
Importantly, the new scheme introduces important reporting requirements including that the scheme must report serious contraventions and/ or systemic issues that they identify in the course of resolving consumer and small business complaints to ASIC and other relevant regulators, such as APRA and/or the ATO. This will help us do our regulatory work better.
Banking Code of Practice
Another important area of our work involves the new Banking Code of Practice.
The Australian Banking Association (ABA) arranged for the 2013 Code to be re-drafted, and submitted it to ASIC for approval. After extensive engagement with the ABA and further significant improvements to the draft Code, ASIC gave its approval in July 2018.
The new Code requires that all members of the ABA become subscribers to the Code as a condition of their ABA membership, and to comply with the Code from 1 July 2019. The relevant rules in the Code form part of the contract between the customer and the subscribing bank, and an independent monitoring body will be set up to administer and enforce the Code.
The new Code 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, and
- 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 has been given on the understanding that an industry-commissioned independent review of the definition of small business will take place within 18 months of the Code's commencement.
At the same time, ASIC will collect quarterly data from banks and AFCA to monitor the extent of the Code’s coverage of small business. ASIC will ensure that this data is published every six months to provide the public with ongoing transparency about the coverage of the Code.
ASIC has the ability to reassess at a future date whether our continued approval of the Code remains appropriate.
Unfair contract terms
Another area ASIC is helping to protect small business is in relation to unfair contract terms. We worked closely with Kate Carnell's office to ensure changes were made by the big four banks to their small business loan contracts. We also published and 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, with a focus on ensuring that:
- the banks' agreed changes have been retrospectively applied to small business loan contracts entered into or renewed from 12 November 2016, and
- particular contract terms are not relied on in a way that is unfair in practice. These could include things like specific events of non-monetary default and financial indicator covenants.
ASIC is currently reviewing the small business loan contracts of a number of other lenders, including fintech lenders, to examine whether their loan contracts contain the problematic terms outlined in our Report. We have informed these lenders that we expect that they will not use or rely on these terms against borrowers who have entered into or renewed contracts from when the legislation came into effect on 12 November 2016.
As some of you may be aware, ASIC recently received increased funding from the government for improving outcomes for small business in financial services.
ASIC's focus will continue to be on our ongoing work in relation to unfair contract terms in small business loan contracts. However, this additional funding will allow us to look at prioritising other matters for regulatory action where we identify conduct that is harmful to small business within our jurisdiction. As you all know, ASIC’s jurisdiction in relation to small business is limited to unfair contract terms and breaches under the ASIC Act such as misleading or deceptive conduct.
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.
Registry service improvements
The final area I would like to touch on is our improvements to the way we deliver registry services. In the last financial year, there were over 366,000 new business name registrations and over 244,000 new company registrations. We answered more than 692,000 enquiries through our various communication channels.
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. It was developed in partnership between ASIC, the Department of Industry, Innovation and Science (DoIIS), the ATO and Treasury. This service supports businesses to meet their obligations, and to avoid applying for registrations they do not need – saving users an estimated $40 million per annum.
Another way we are making it easier for small business is by working with Government to explore approaches to modernise the business registers administered by ASIC and the ATO. A whole-of-Government registry platform is being developed, to be administered by our colleagues at the ATO.
A modernised business registry will provide the backbone for transforming the way business interacts with government, making it simpler and faster to start, and run, a business. It will also provide opportunities to foster open data and more innovative uses of business data.
That’s all from me for now, I look forward to answering any questions you have as part of the Q&A session.