Banking News

ASBFEO threatens to legislate against onerous SCF terms

(12 February 2020 – Australia) The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) claims the government may have ‘little choice but to regulate’ the use of supply chain finance (SCF) after calling out financiers for pressuring suppliers to accept early payment offerings.

Small Business Ombudsman Kate Carnell says she will be forced to recommend legislation making payment terms longer than 30 days illegal unless corporates such as CIMIC alleviate  supplier payday lending schemes to blow out payment terms. Ms Carnell is pushing for small businesses to receive payment within 30 days or less as a minimum standard, monitored and enforceable under the Commonwealth Government’s Payment Times Reporting Framework.

Australia’s small businesses watchdog made the claims in a position paper published last week, which follows a review into the impact of SCF launched in Q4 2020. The paper says financing programs can help suppliers bridge the gap before they are paid while maximising working capital held by the buyer, effectively allowing them early payment at a discount. However, the ombudsman claims it has uncovered evidence of unacceptable conduct by both corporates and SCF providers. Some buyers are accused of artificially extending the amount of time before a supplier will be paid – sometimes by up to 90 days – before then offering earlier payment at a lower rate, in effect pressuring suppliers into signing up to SCF that may not be to their benefit. The paper also takes aim at the use of data analytics to shape financing offerings.

Despite the final report not due until the end of Q1 2020, the additional scrutiny has already resulted in a distinct response by Greensill, committing to stop providing its SCF services to corporates that use them to delay paying small suppliers. Two institutional enterprises have also agreed to adapt their SCF programs to the negative feedback tabled by SMEs. Rio Tinto and Telstra are restricting payment terms to 20 days for invoices up to A$10 million and A$2 million respectively. The ombudsman also argues some businesses are using SCF to strengthen their own cash flows, delaying payments to suppliers to force earlier and lower repayment.

The consistent definition of what a ‘small business’ constitutes has also be floated again to cover either any company outside Australia’s Top 100 by revenue or any firm with sub 100 FTE. Currently the definition arbitrarily applies to firms with sub 20 FTE. Echoing efforts in the US to improve transparency around disclosure, the ASBFEO calls for further review from the Australian Treasury and securities regulator as to whether SCF should be ‘a regulated financial product with coverage of rate setting’. The ASBFEO is consulting on its policy paper until February 28.

“In the past week, Telstra and Rio Tinto have moved to 20-day payment terms for SMEs and there is no reason why other big businesses can’t do the same. Australia’s big businesses have had more than enough chances to do the right thing, so if they can’t follow Telstra and Rio’s lead I will have no choice but to recommend legislation requiring 30-day payment terms across the board” Ms Carnell stated.

“When the Obama administration moved to 15-day payment times, a Harvard Business School study found that created 75,000 jobs and delivered an additional $6bn to US workers’ pay packets. That not only delivered jobs but also growth in people’s pay. The public service has been a bit remiss in not progressing this quickly.”

“They say you’ll have to legislate if you want us to comply, while their Australian offices say it has nothing to do with them which is really not good enough. The BCA’s supplier payment code had the opportunity to work but it hasn’t because companies have been pulling back from it or coming up with convoluted methods to not do it through limited definitions of what is a small business, or paying quickly but only in local postcodes” Ms Carnell added.