It has been about 16 years since the last financial system inquiry and a lot has happened in that time
There have been advances in technology and financial structuring – not to mention unprecedented global economic crises – that have made financial services a super-dynamic space.
The recent final report by the Financial System Inquiry (FSI) provides an insight into how regulation may impact our clients in coming years.
SMSFs and borrowing arrangements
One of the huge changes over the past 15 years has been the growth in superannuation and SMSFs in particular.
Over this period we’ve seen an increase in SMSFs from about 187,000 funds in 2000 to more than 500,000 funds today.
What’s more, SMSFs now control more than $500 billion in assets, or nearly a third of the assets in the Australian superannuation system.
We’ve also seen innovation, particularly with the advent and rapid growth of borrowing within SMSFs to acquire residential or commercial real estate.
The rapid growth of these borrowing arrangements suggests that Australians, given the option, choose to align their retirement futures with property.
Unfortunately, it also appears that the FSI raised concerns about SMSF borrowing arrangements largely in response to this growth rate.
It would be a great shame if the recommendation were implemented in its current form as it would deprive Australians of a viable investment choice.
Further, the implementation of the FSI’s recommendation may, as highlighted by former treasurer Peter Costello, just end up moving gearing into more risky investment areas.
However, the federal government is still consulting stakeholders about the FSI’s recommendations.
More interestingly, in a recent speech Assistant Treasurer Josh Frydenberg acknowledged that while the inquiry recommended a complete ban on borrowing, the government would “need to continue to explore the full range of options in this area”.
This gives cause for optimism that we will end up with an optimal and balanced outcome, where SMSFs are still able to borrow but with additional conditions in place.
SMEs and access to finance
The focus on the SMSF space has, to some degree, diverted attention from some of the FSI’s findings about finance for small to medium-sized enterprises (SMEs).
A number of the FSI’s recommendations were proposed to reduce difficulties for SMEs seeking to access finance. In particular, there was focus on the impact of non-monetary default covenants on small business.
In a submission to the FSI, the Minister for Small Business, Bruce Billson, reflected that such covenants can be restrictive and limit the growth of small business.
In particular, covenants requiring regular financial reporting that can trigger the immediate repayment of the entire loan or attract high penalties can cause an otherwise strong business to hit the wall.
This is a key point that Liberty recognised almost a decade ago when we launched our long-term, fully amortising commercial loans that minimise the need for borrowers to provide periodic reporting and obtain extensions or roll-overs.
Products such as Liberty’s and others in the market offer small business borrowers the ability to obtain better funding certainty over as long as 30 years, providing the peace of mind to grow their businesses.
The FSI recommendation about onerous bank covenants suggested there was a lot more work to be done in this area, so relief may be some time coming.
The good news is that respite is available today for affected borrowers: brokers should be actively considering how fully amortising non-bank commercial loans could benefit their clients.
The FSI also considered submissions regarding the one-size-fits-all models used by banks, which often do not capture the individual circumstances of local business.
Submissions also focused on the propensity for some banks to quickly force small businesses that default on their loans into insolvency, instead of helping them to work through their difficulties.
These issues are symptomatic of a lack of a solutions-focused approach by many larger lenders.
Fortunately, there are lenders such as Liberty that are willing to approach small business borrowers with an open mind and provide solutions such as rapid finance for working capital and solutions for tax debts and business arrears.
The existence of solutions-based lenders such as Liberty promotes competition, adds diversity in the market and ensures better outcomes for borrowers … and we don’t need an inquiry to figure this one out.
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