B2B Payments

Australia Launches Small Business Insolvency Probe

The Australian government will be launching an investigation into insolvency practitioners amid rising criticism and allegations that unfair practices pushed small businesses (SMBs) into collapse.

Recent reports in ABC News said the Small Business and Family Enterprise Ombudsman is launching an inquiry into the insolvency industry after a previous probe into the general financial services industry failed to address the issue. Ombudsman Kate Carnell announced the new inquiry, noting these concerns.

“Unfortunately, the banking royal commission wasn’t asked to look at the role of insolvency practitioners, and that was a missed opportunity,” she said in a statement. “We know there is a very low success rate in restructuring Australian businesses under external administration, and the impact of the insolvency process is often devastating for the small business owner.”

Reports said more than 8,000 SMBs fell into administration last year.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness,” said John “Wacka” Williams, who will chair a reference group as part of the inquiry. Reports noted that Williams played an instrumental role in the earlier financial services royal commission. “This inquiry is essential to see if any systemic improvements can be made,” he added.

The probe will focus on the current inquiry system as it pertains to small businesses, and will assess transparency of these processes and costs related to an array of industry practitioners, including advisors, valuers and administrators. It will also examine how a small business insolvency might lead to bankruptcy for a business’ owners.

Previous Findings

An inquiry into the sector, launched in 2016 by the Ombudsman, found some questionable practices among banks that may have unfairly pushed a small business into insolvency. In one-third of the cases reviewed, the Ombudsman found “very real issues where bank conduct is unacceptable and possibly unconscionable.”

Carnell explained, “Small business owners felt they had lost control of their business, and in cases where the business was wound up, they felt the process was poorly managed. This new inquiry will identify areas where practices can be improved, and recommend changes to the system to achieve fairer outcomes for all parties involved.”

The inquiry was met with some criticism, however. According to the Australian Restructuring Insolvency and Turnaround Association (ARITA), the inquiry as “naive.”

“By the time the vast majority of small business[es] reach a decision to appoint an insolvency practitioner, they are generally well beyond saving,” said ARITA CEO John Winter in a statement.

Similar Scrutiny In The U.K.

Banks’ role in small business insolvency services has similarly faced high-profile scrutiny in the U.K., most notably in the Financial Conduct Authority’s (FCA’s) review of the Royal Bank of Scotland’s (RBS’) Global Restructuring Group (GRG).

Various investigations found evidence of wrongdoing by RBS, resulting in calls for stricter rules and stronger protections for small business borrowers. However, the case also shed light on the limitations of government regulators to address such wrongdoing. Criticism against the FCA mounted following its decision to not issue fines against RBS.

“Our investigation has found that GRG clearly fell short of the high standards its clients expected, but it was largely unregulated, and so our powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited,” said FCA CEO Andrew Bailey in a statement in June.

Earlier this year, the U.K. Treasury’s Asset Protection Agency (APA) also faced criticism and allegations that it influenced GRG’s strategy, which regulators said included tactics to force small businesses into administration. According to BBC reports in January, the APA had a hand in some “decisions that determined business customers’ fortunes.”

RBS denied those allegations.

——————————–

Latest Insights:

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. In the November 2019 AML/KYC Report, Zillow’s Justin Farris tells PYMNTS how the platform incorporates stringent authentication without making the onboarding and buying experiences too complex.

TRENDING RIGHT NOW