The country that gave the world Lex Greensill is taking a close look at supply chain finance (SCF).

Australian lawmakers last week held hearings in a parliamentary inquiry into how SCF affects small businesses and whether providers need to be more tightly regulated.

The inquiry was spurred by the collapse of Greensill, the UK-headquartered SCF firm, in March this year. But it also follows a scathing assessment last year by a small business watchdog which described how large buyers were forcing suppliers to choose between using an SCF provider – which takes a small slice of the amount due – or face lengthy waits for payment.

Lawmakers on the parliamentary committee on corporations and financial services heard from two SCF providers, Octet and Fifo Capital, and the Council of Small Business Organisations Australia, during the July 28 hearing.

The inquiry was described as a preliminary attempt to work out whether a much bigger parliamentary probe in the financing practice is needed. The committee is expected to make a decision this week.

Steve Georganas, a member of parliament from the opposition Labor party and the committee’s deputy chair, tells GTR that he and some other members of the committee support establishing a “full-blown” inquiry. “There are things… that I think need further investigation,” he says.

“Has this type of lending, which is so intricate, surpassed the government’s staying up to date with what’s taking place and what should be in place to make sure that it’s regulated like any other lending business?

“There’s a whole range of unfair competition that we would want to dig into, to be sure that there’s no unfair contracts etc. being imposed on [suppliers].”

During the inquiry, no lawmaker proposed any specific regulatory reforms. Much of the hearing was taken up with the SCF providers explaining industry concepts and business models to the committee members.

Peppered with questions on Greensill, which also operated in Australia, Octet’s managing director Clive Isenberg and Fifo Capital’s chief executive Wayne Morris described the firm as an outlier whose financing of so-called “future receivables” and over-reliance on insurance are not replicated across the industry.

Both argued against significant new regulation of the sector. Isenberg said SCF techniques are “critical not just for the Australian supply chain, but for the world, and to go and just over-regulate would be very unnecessary”.

But he suggested that the government consider banning a practice allegedly used by some reverse factoring providers, whereby a security charge is taken over a customer’s entire receivables book – or occasionally even the entire company – without the customer’s knowledge.

Octet’s submission to the inquiry said the company is concerned about small suppliers being forced into SCF arrangements by big buyers.

Octet and Fifo Capital said they supported the disclosure of SCF arrangements in buyers’ financial statements. Isenberg said payments deferred beyond 120 days, which he described as the longest acceptable period under Australian industry norms, should be classified as debt.

The international accounting standards body, and its US counterpart, are both planning changes that would require SCF to be disclosed in financial statements.

Labor decries ‘whitewash’

Isenberg also told the hearing that understanding of SCF practices in Australia is generally poor.

Paul Scarr, a senator from the governing Liberal party, said many of the examples raised during the hearing of suppliers being treated poorly by buyers appear to occur when small businesses “just don’t understand what they’re getting into”.

The committee’s chair, Andrew Wallace, told the Australian Financial Review last week he was “very surprised at how hard it was to get people to appear” before the committee and there was a “concerning reluctance” to give evidence.

Wallace read out an email from Mark Scholem, the head of government and external affairs for GFG Alliance in Australia, in which the company “respectfully decline[d]” to give evidence because its suppliers do not use SCF.

GFG, a group of companies controlled by UK tycoon Sanjeev Gupta, owns the Whyalla steelworks in South Australia. Greensill was a top lender to Gupta’s business, which has had to scramble for alternative sources of financing since the financier’s demise.

“GFG Alliances’ Australian operations do not use supply chain financing,” the letter says. “We understand that from August 2019 to January 2020, five suppliers of our Whyalla operations used a facility with a third-party financier. It was for very small sums and immaterial under our funding structure. We have no other exposure and are therefore not able to provide the committee with meaningful comment and respectfully decline to participate.”

Two senior Labor lawmakers described the hearing as a “whitewash”. They argue that former Australian foreign minister Julie Bishop, a Liberal, who was a senior adviser to the Greensill board and lobbied the government on behalf of the company, is being shielded from scrutiny. She received an annual salary from Greensill equivalent to US$600,000, according to the Financial Times.

“This committee needs to hear from Greensill Capital and Ms Bishop so it can truly understand what regulatory improvements must be made to the operations of supply chain finance in Australia,” Ed Husic, the shadow industry minister and Andrew Leigh, the shadow financial services minister, said in a joint statement.

The committee is also likely to call the financial regulator, the Australian Securities and Investments Commission, to give evidence on SCF, regardless of whether it proceeds to a full inquiry, Georganas says.