FSI – SME’s Little To Cheer About

Continuing our analysis of the FSI Report, we have been looking at comments and recommendations relating to SME’s. Australia’s SME’s are a critical though undervalued sector of the economy, accounting for some 3 million business, and 5 million jobs. We hoped there would be substantial focus on initiatives to kick-start this sector (given the growth mandate in the terms of reference), but we were largely disappointed. The Inquiry has noted that SMEs have few options for external financing outside the banking system compared with large corporations. In part, this reflects unnecessary distortions, such as information imbalances and regulatory barriers to market-based funding . But the key SME-related recommendations are collected in an appendix and are not really convincing.

A number of the Inquiry’s recommendations are designed to reduce structural impediments to SMEs’ access to finance. Such impediments include information imbalances between lenders and borrowers, and barriers to market-based funding. Other recommendations would help reduce costs for SMEs and support innovation.

The Inquiry encourages industry to expand data sharing under the new voluntary comprehensive credit reporting (CCR) regime. More comprehensive credit reporting would reduce information imbalances between lenders and borrowers, facilitate competition between lenders, and improve credit conditions for SMEs. Although CCR relates to individuals’ data, personal credit history is a major factor in credit providers’ decisions to lend to new business ventures and small firms.

The Inquiry supports a facilitative regulatory regime for crowdfunding, while recognising the risks involved.  A well-developed crowdfunding sector would give SMEs more funding options and increase competition in SME financing. The Inquiry supports Government’s current process to graduate fundraising regulation to facilitate securities-based crowdfunding. Government should use these policy settings as a basis to assess whether broader fundraising and lending regulation could be graduated to facilitate other forms of crowdfunding, including peer-to-peer lending.

Information imbalances, among other factors, have led to numerous and onerous non-monetary terms in some lending contracts. The Inquiry supports Government’s current process for extending consumer protections for unfair terms in standard contracts to small businesses. Although such protections would not prevent unfair terms in non-standard contracts, the Inquiry believes this approach may improve broader contracting practices. The Inquiry also encourages the banking industry to adjust its codes of practice, to require banks to give borrowers sufficient notice of an intention to enforce contract terms and give borrowers time to source alternative financing.

Recommendations to reform the payments system would benefit SMEs. The Inquiry’s proposals to lower interchange fee caps would reduce the fees paid by all businesses and reduce the difference in fees paid by small and large businesses. As technology evolves, greater access to data and innovations in data use are likely to benefit all businesses, particularly SMEs. For example, more extensive access to quality datasets would improve business decision making. Globally, payment providers are developing new ways to assess SMEs’ creditworthiness and extend credit to SMEs. The Inquiry recommends that the Productivity Commission review how data could be used more effectively, taking into account privacy considerations.

The Inquiry considers that financial system innovators which challenge the existing regulatory structure should have better access to Government, and that Government and regulators should have greater awareness and understanding of financial system innovation. This would enable timely and coordinated policy and regulatory responses to innovation. The Inquiry recommends that Government establish a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, consisting of senior industry, Government, regulatory, academic and consumer representatives.

Better targeted tax settings for start-ups and innovative firms would facilitate innovation. Simplifying the tax rules for Venture Capital Limited Partnerships, and streamlining Government administration of the regime, would reduce barriers to fundraising. More flexible access to research and development tax offsets could help reduce firms’ cash flow constraints, particularly for new ventures. These issues should be considered as part of the Tax White Paper process.

We are disappointing that there is no commentary on the relative capital buffers for mortgages compared with SME lending. There was an opportunity to recommend a tweak, so make SME lending more attractive relative to mortgage lending. Currently many SME’s have real issues getting funding, as highlighted in our recent SME report. The FSI acknowledges “particular sectors of the economy, such as small and medium-sized enterprises (SMEs) or rural businesses, do not have sufficient access to funding” but have not addressed this concern.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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