Supply chain finance misuse flagged to government

The review assessed the effectiveness of the Act and by extension the Payment Times Reporting Scheme (the PTRS), in meeting their objectives following its commencement in 2021.

It found that not only was the Act and the PTRS not functioning as intended, its overall objectives were “fundamentally unrealistic.”

Not only did the final report of the review suggest that the overall objectives of the Act (to make payment times information publicly available in order to “enable small businesses to make more informed decisions about potential customers”) had not only not been met, it found that the PTRS was “a poorly functioning reporting scheme”, held back by requirements in the Act that imposed unnecessary regulatory burdens on reporting entities, compromised the effectiveness of the regulator, and limited the accuracy and accessibility of the data.

For example, the large number of reporting fields and data quality issues involved have resulted in poor data quality, the final report found, with payment times reports not being as accessible or as useful as they could be.

Moreover, there was no empirical evidence of a significant improvement in the payment terms and times of large businesses in respect of their small-business suppliers. For example, since the PTRS started, the proportion of small-business invoices paid within 30 days had increased by less than 5 percentage points from 62.9 per cent to 67.6 per cent and the proportion of invoices paid beyond 60 days had fallen by 1 percentage point from 8.7 per cent to 7.7 per cent.

The review also found that awareness of the PTRS by small businesses was extremely low (estimating that less than 1 per cent of Australia’s 2.5 million small businesses had accessed the dashboard) and suggested that the reported information should aim to “put reputational pressure on large businesses to improve their payment terms, times and practices”.

It therefore suggested a government or non-government entity should be given “explicit responsibility to name and shame poor payers and praise fast payers publicly” to improve performance and that an established regulator of business activity “with a strong reputation for enforcement” be given regulatory oversight “in order to motivate high rates of compliance with the PTRS and further demonstrate the strength of the government’s commitment to improve payment times for small businesses”.

Supply chain finance should be monitored

While supply chain finance can allow small-business suppliers to access working capital without the time and cost of applying for finance, the review warned that supply chain finance should not be used to offset extended payment terms.

Indeed, review chair Dr Craig Emerson said he was “concerned about the potential for some large businesses to coerce small-business suppliers into accepting payment via supply chain finance”.

“Large businesses that do not pay their small-business suppliers quickly are using their market power to obtain a cash flow advantage over small-business suppliers, regarding them as a cheap source of finance,” he said, warning that some are making inappropriate use of supply chain finance (where a business undertakes or agrees to pay small-business invoices or arranges for a third party to pay small-business invoices, earlier than the payment terms in exchange for the small-business supplier accepting discounts on the payments).

While less than 3 per cent of reporting entities were found to currently use supply chain finance, the use of supply chain finance “should be closely monitored,” according to Dr Emerson.

The report read: “The review is concerned about instances where small businesses are coerced by large businesses into using supply chain finance.”

The review also suggested that gaps in the Australian Consumer Law result in small businesses not clearly being protected from unfair payment-related practices.

As such, one of the proposed reforms calls on the government to “prohibit unfair conduct by large businesses relating to the payment of small-business suppliers in potential new unfair trading practices provisions in the Australian Consumer Law”.

Dr Emerson clarified that this unfair conduct could include very late payment times, deliberate withholding of payments, “predatory use of supply chain finance” and “other undesirable practices adversely affecting payments to small businesses”.

However, he shied away from recommending mandatory maximum payment times to small businesses, citing complexities in finding an appropriate time frame and “unwarranted government intrusion into contracts” among large businesses.

Dr Emerson continued that if larger businesses were mandated to pay for goods or services rendered in a certain time frame, it could further exacerbate the abuse of supply chain finance.

“[A] large business would be incentivised to pressure its small-business suppliers to accept payment via supply chain finance, thus avoiding an interest or civil penalty,” he explained.

“It would be a perverse outcome if small businesses were obliged to bear a cost in order to be paid within a mandated time frame. To mitigate this, penalties would need to apply for inappropriate use of supply chain finance.”

In total, the review puts forward 14 recommendations, encompassing 23 actions for government, that aim to result in a “comprehensive overhaul” of the operation of the Act and the administration of the PTRS to make it more effective, user-friendly and “good for the economy”. These cover three main topics:

• Overhauling the Payment Times Reporting Scheme, by clarifying objectives, simplifying who needs to report and what needs to be reported, improving the accessibility of information, and addressing constraints on the effectiveness of the regulator
• Leveraging the importance of reputation to large businesses, by publicly reporting worst and best payers and incorporating small-business payment times in environmental, social, and governance (ESG) obligations.
• Supporting a culture of prompt payment in Australia, through reforms that go beyond the Act and extend to unfair contract terms, unfair business practices, e-invoicing, and government procurement.

The government has said it will now review the recommendations, with Julie Collins MP, the Minister for Small Business (and the Minister for Housing and Homelessness), stating that she has asked the Treasury to “immediately proceed with actions that require only changes to existing guidance materials and operational processes”.

“These will reduce the regulatory burden on reporting entities in identifying their small-business suppliers and help improve the quality of reported data,” Ms Collins said.

[Related: Payments times review welcomed, ombudsman says]