The perils of giving credit assessments for banks
Practitioners asked by lenders to provide written assurances about whether their clients have the financial capacity to service loan applications are placing themselves at serious risk, CPA Australia warns.
Tony Kaye | January 2020
Tightening of bank and other financier credit assessment standards has prompted a resurgence in accountants’ letters and capacity to repay certificates from lenders, whereby accountants are asked for their opinion on a borrower’s debt-servicing capacity.
Some lenders also seek declarations that a loan or lease will be predominately for business use.
The provision of such documentation is restricted to holders of an Australian Credit Licence (ACL) under the National Credit Act, or to individuals authorised to provide consumer credit advice under an ACL.
However, even when such restrictions are in place, CPA Australia recommends that practitioners do not provide declarations, especially when asked to assure that a client loan or lease will be predominately for business use.
The risks for practitioners
An incorrect declaration may be deemed to be a false declaration, which can not only be in breach of the Code of Ethics for Professional Accountants but also may have legal ramifications. This, in turn, may affect whether a professional indemnity insurance policy will cover practices.
Paul Drum FCPA, CPA Australia’s general manager, external affairs, policy and advocacy, says providing an accountants’ letter or a certificate relating to a business’s financial capacity to repay debt is highly risky, because it can shift the risk of credit assessment from the lender to the accountant.
Drum says that this practice by lenders is somewhat cyclical, depending on economic circumstances.
“For example, prior to the GFC [global financial crisis], they [lenders] had immediate 24-hour turnarounds on loans. They couldn’t lend enough money,” he says. “During the GFC, a lot of loans were called in because the credit risk was so high.”
More recently, loan conditions have changed with lenders’ appetite for risk severely diminished.
“That’s reflected in the behaviour of lenders and the re-emergence of this practice of – in certain circumstances – asking professional advisers to businesses whether they will assure the borrower can pay,” Drum says.
“We’re telling our members – and we have done for decades – ‘don’t make any such assurances’.
“It potentially puts accountants on the hook, depending on precisely what happens. It puts them in an invidious position because they want to help their clients in every way possible.
“They want their clients to have the loans, but it’s beyond the scope of their contractual arrangement.”
What to look out for
Absolute Accounting Services director Gavin Swan FCPA, based in Erina on the New South Wales Central Coast, says he has over time received numerous “templated” letters from lenders, effectively asking him to vouch for clients.
“It’s when they ask us for our opinion on whether the borrower can afford to repay the loan,” he says. “I’m not a credit assessor and don’t want to be held responsible.
“I’m always very cautious when I get a letter from a bank. You need to check the wording very carefully and don’t be afraid to change [it]. I don’t have problems with statements of facts, but I do have issues with making predictions.”
Drum adds: “As a matter of practice, we recommend not going guarantor for someone else’s loan. Banks should cease and desist in asking for this. I won’t say it’s a practise that is back with a vengeance, but there have been enough enquiries about it to raise concern.”
CPA Australia has a detailed reference guide for public practitioners covering the requirements of the National Consumer Credit Protection Act 2009, as well as guidance on accountants’ letters and capacity to repay certificates.