Lenders put practitioners in the due diligence hot seat
Loosening lending rules in tough economic times may encourage creditors to further rely on “capacity to repay” certificates. Should accountants be complying with these requests?
Susan Muldowney | January 2021
Chris Edgar CPA, general manager Edgar Accounting in Melbourne, says he “nearly fell off his chair” when a lender asked him to verify whether a client’s future earnings would be affected by COVID-19.
“How could I possibly know this?” Edgar says. “I’ve heard of colleagues being asked by lenders to project 10 years out for a client’s future earnings. The banks are basically including accountants in the risk assessment of clients and that’s putting us at risk.”
“Accountant letters” and “capacity to repay certificates” are used by some lenders to assess a borrower’s ability to service a loan before they approve it.
Download the related fact sheet: Accountant’s Letters & Capacity to repay certificates
The Australian Securities and Investments Commission [ASIC] warned more than a decade ago that the certificates essentially shift the risk of credit assessment from the lender to the accountant.
Pressure to sign off on financial details
As small business funding from mainstream lenders becomes harder to access, and proposed legislation seeks to unwind responsible lending rules for banks, practitioners may face more pressure to sign off on financial details they cannot verify.
CPA Australia has been advising members against signing these documents since the implementation of the National Consumer Credit Protection Act 2009.
If the finance is for consumer credit, for instance, signing the certificates could be considered a form of credit assistance and may be a breach of the Act if you are not an authorised credit representative.
While there is an exemption from the licensing provisions for registered tax agents in their ordinary course of activities, ASIC Regulatory Guide 203: Do I need a credit licence? specifically states that these activities must involve providing a certificate or assessment about whether a consumer will be able to meet their financial obligations under a credit contract or consumer lease.
Professional indemnity issues
Given this, it is unlikely that signing these certificates will be covered by professional indemnity (PI) insurance.
“Every practitioner wants to help their clients get a loan, but you have to draw the line somewhere because, at the end of the day, anything you sign off on is taking the risk away from the bank,” Edgar says.
“Your PI insurance might not cover it and you don't want the headache of a lawsuit.”
Edgar has seen examples of lenders asking accountants to verify the ongoing income of a client’s spouse and whether a client’s car would be used predominantly for business purposes.
“Unless I'm driving that car myself, I can only take the client’s word for it,” he says. “We normally won’t have any evidence to support what a client may say about their future earnings, so why are the lenders asking for an accountant’s letter? To shift the risk from them to us.”
Keddie Waller, head of public practice and SMEs at CPA Australia, says the certificates are a means of offloading a lender’s due diligence obligations to accountants.
Waller explains that the certificates often confirm that the accountant has explained the loan and its terms and conditions to the client and that they have assessed the client's ability to repay the loan.
“It is unreasonable for a lender to expect it is the responsibility of a third party, being the accountant, to explain the terms and conditions of a loan product that [they] have nothing to do with,” she says. “We've been having discussions with the ABA [Australian Banking Association] about these certificates and requests for more than a decade.”
Loosening lending rules
Accessing loans can be tougher for small businesses in the current economic climate and the federal government’s proposed legislation to unwind responsible lending rules for banks aims to help speed up loan approvals.
The proposed changes have been referred to a parliamentary inquiry and submissions are due to close on 3 February 2021.
If legislated, banks and some non-bank lenders will only be controlled under APRA’s prudential lending standards, with the responsible lending obligations and ASIC’s guidance for compliance also removed.
“We are worried that this reform has the potential for lenders to rely on accountants’ letters, capacity to repay certificates and other third-party certifications even more.
“We have made a submission [to Treasury] strongly recommending there should be an explicit obligation that mandates the determination of capacity to repay must be made by the lender and that the lender cannot ask applicants to engage with third parties to determine their capacity to repay as part of the loan application, she adds.
Edgar says some practitioners are facing additional pressure to sign certificates in what is, by anyone’s standards, a volatile economic environment.
“They may be concerned about losing a client if they don’t sign them,” he says. “They may just get overwhelmed by the pressure being put on them and sign off on things they shouldn't sign off on.
“With regards to the risks involved, the banks don’t care – brokers want their commission, and the client understandably just wants the loan approved. All these factors result in accountants being put in a very difficult position that could have serious ramifications later on.”
Waller stresses that accountants should only sign off on things they can factually verify.
“Our advice is to support your client through the loan process by only providing things you can factually verify such as cash flow statements, balance sheets, profit and loss statements,” she says.
“Don’t expose yourself to the potential risks of signing these documents. Leave the due diligence to the lenders, it’s their responsibility.”