Supply chain finance and extended payment terms are under the regulatory microscope

What is SCF and why is it attracting so much attention?

SCF is a term that covers a range of different products provided by banks and other financiers, the most common of which is "reverse factoring". This typically involves a large business (the Buyer) entering into an early payment program with the supply chain finance provider for the payment of its suppliers, in exchange for which the suppliers effectively sell their receivables to the financier. A discount will be applied to the face value of the invoices depending on how early the payment is made to the supplier.

SCF can create more certainty around payment times and allow suppliers to leverage the usually strong credit rating of the Buyer to access a far less expensive form of finance than would otherwise be available to them (such as through overdraft and credit card facilities, for example). However, regulatory concerns have been raised that in some cases SCF is not being provided as a genuine choice for suppliers and is effectively operating to extend payment times.

As a result of those concerns, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) recently conducted a review of SCF activities, a new Payment Times Reporting regime has been introduced and the Australian Competition and Consumer Commission (ACCC) has made it clear that ensuring small businesses receive the protections of the competition and consumer laws is a regulatory priority.

Recommendations made by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO)

The ASBFEO produced its Supply Chain Finance Review Final Report in March 2020. That Report made a number of recommendations, including:

• introducing a consistent definition of "small business" for the purposes of payment times legislation and unfair contract terms (UCT) legislation (note that the definition of small business contract is set to expand and change with recently announced reforms to the Australian Consumer Law);
• legislate for a 30 day maximum payment term for small business suppliers;
• SCF providers to ensure that the product is only being provided to companies that have a maximum payment time of 30 days in respect of the invoices to be financed in respect of small business suppliers;
• Australian accounting standards to be clarified in respect of the use of SCF and guidelines to be provided in relation to disclosure; and
• the ACCC and the Australian Securities and Investments Commission (ASIC) should further consider the application of the competition and consumer law and financial services law (respectively) in the context of SCF.

A new Payment Times Reporting regime has been introduced

The new Payment Times Reporting regime, which is aimed at addressing extended payment terms and imposes obligations on large businesses to report on their payment terms and practices (including SCF) in relation to small business suppliers, will commence on 1 January 2021.

While this regime doesn't require small businesses to be paid within a specific period, it is aimed at increasing transparency around the payment practices and performance of large businesses and a new regulator – the Payment Times Reporting Regulator (the PTR Regulator) – has been established to administer the scheme and will have wide-ranging powers to monitor and enforce compliance with the Payment Times Reporting Act 2020 and the associated Rules. In doing so, the PTR Regulator has the power to:

• publish details of non-compliant businesses in the Payment Times Reports Register;
• monitor compliance and investigate non-compliance;
• require businesses to conduct audits; and
• issue penalty infringement notices.

There will be a transition period of 12 months where compliance and enforcement actions will not be taken by the PRT Regulator. The intention of this grace period is to allow reporting entities the opportunity to establish their internal reporting function and build the capability to report efficiently and accurately, without the risk of inadvertently triggering a penalty or enforcement action. The Government has further indicated that following the initial grace period, there will be a graduated approach to enforcement starting with education and raising awareness, followed by working with companies, and then application of penalties as a last resort.

SCF is on the ACCC's radar

Following on from the ASBFEO's recommendations, the ACCC issued a statement on 24 November 2020 in which it confirmed that the ACCC has been looking into issues raised by extended payment terms and reverse factoring, including by engaging with participants under a particular SCF program under which the Buyer had reportedly unilaterally extended its payment terms from 30 to 65 days. As a result of that engagement, an SCF provider recently announced that it had taken action to cut its services to Buyers with supplier payment terms of 30 days or more in relation to SME suppliers.

The ACCC also indicated that they will continue to monitor the use of SCF and the extension of payment terms in small business contracts to identify conduct that raises concerns under the Australian Consumer Law, especially the provisions relating to unfair contract terms and unconscionable conduct.

…and don't forget about unfair contract terms!

The definition of what constitutes a "small business contract", which must comply with the UCT laws in the Australian Consumer Law and the ASIC Act, is about to significantly expand and allow more small businesses to avail themselves of the protections in the UCT laws. And this isn't the only change – in particular, potentially large multi-million dollar civil penalties will be introduced and the Court will be given greater and more flexible powers to impose remedies (not just declare the UCT void and unenforceable).

While it is not yet known when these changes to the UCT laws will be introduced, draft legislation for consultation is expected in early 2021 and so it is now more important than ever to consider whether you are providing standard form contracts to small businesses and, if so, whether those contracts may fall foul of the UCT provisions.