Legal

Law firms unsteady on tech adoption

AUSTRALIAN law firms stand at a critical juncture in terms of technology choice and implementation – and it us likely to place the future of some firms in jeopardy.

The technology adoption pathways are unclear for most legal companies, according to a new report by Thomson Reuters Peer Monitor and Melbourne Law School. 

The 2017 Australia: State of the Legal Market report claims that, despite improvements in the large law firm market, all organisations must make “big strategic decisions” on how to deploy technology to ensure the best opportunities for future growth.

In adopting new technologies, law firms must decide whether to pursue a strategy of ‘exploit’ – to  leverage current strengths and capabilities to make their current core business as good as it can be – or ‘explore’ to leverage new exploratory and experimentation efforts that may bear fruit in the future. The other option is a hybrid approach.

“In an increasingly technology-enabled world with hypercompetitive markets, firms can no longer afford to stand still but instead need to make active choices,” senior fellow at Melbourne Law School and lead author of the report, Joel Barolsky said. “Firms must decide whether to be pioneers investing in experimenting with new technologies, or take a more cautious approach and wait to see which technologies take hold and what clients prefer.  

“Both paths come with their own risks and rewards. My personal view is that firms need to adopt both Exploit and Explore strategies to determine the best path forward,” said Mr Barolsky, who is also the principal at Barolsky Advisors.

The report is based on financial data drawn from the Australian offices of 18 major law firms, with analysis undertaken by Thomson Reuters Peer Monitor.

The market for large law firm services may have turned a corner in the 2017 financial year, according to the report. After four consecutive years of declining demand, the market returned to positive growth – but at a mere 0.1 percent.

Overall, the market showed growth in four key metrics: demand, worked rates, fees worked and utilisation – although none was greater than a single percent. 

“However, after contracting for most of the last decade, even this modest success may mark an important inflection point,” the report noted.

Corporate general and mergers and acquisitions (M&A) work, along with real estate practices, showed significant growth, while banking and finance had significant contraction in demand.

The very largest firms, referred to as the ‘Big 8’ generally outperformed their counterparts, with revenue growth averaging 1.6 percent, while other large firms declined 1.3 percent.

The Big 8 have widened the gap in utilisation, with the average QFE working 310 hours, or 20 more than their counterparts at other large firms. The picture with regard to rates is more mixed.  

Big 8 firms have widened the gap on worked rates – that is, agreed upon rates with clients – charging an average of $489 per hour, or $66 more than other large firms. However, with billed rates – the rates actually billed to clients – the gap has narrowed, with Big 8 charging an average of $423, or $48 more than other large firms.

According to Thomson Reuters Legal Australia strategic markets development leader Dean Corkery, the average firm decreased overall spend on direct and indirect expenses in the 2017 financial year.  

“Big 8 firms are still growing expenses, only at a slower rate,” Mr Corkery said. “However, other large firms are contracting both their direct and indirect expense spend. Technology and outside services represented some of the largest increases in spending.”

Despite the improving market conditions, the report cautioned that firms face increasing pressures from a combination of client demands, growing judicial and regulatory requirements, and evolving preferences of employees.  Technologies such as cognitive computing, mobile, client connectivity, software-as-a-service and the cloud, may help firms cope with these pressures and continue to grow profitability.

“The advent of new and emerging technologies brings challenges and opportunities to the legal sector,” Mr Corkery said. “Many firms have already started adding innovation as a key element in their business strategy to better respond to demands from clients and employees. Those that can successfully combine leadership, resources and agility in innovation are likely to come out on top.”

www.insight.thomsonreuters.com.au

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Big banks change ‘unfair’ SME loan contracts

AUSTRALIA’S ‘Big Four’ banks – ANZ, Commonwealth Bank, NAB and Westpac – have agreed to make specific changes, under pressure from business regulator ASIC, to unfair terms included in most small business loan contracts.

ASIC has worked with Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell to identify the problems which have devastated many small and medium enterprises (SMEs) over many years. 

“This reflects nine months of hard work by ASIC working with the big four banks to meet the expectations of the Unfair Contract Term legislation,” Ms Carnell said. “The banks’ initial underdone response to the legislation serves as a reminder that banks were once again trying to ‘game’ the rules and this erodes trust. 

“There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice.

“In meeting the law to cover individual loan contracts up to $1million the banks have agreed to extend the cover to small business total loan facilities up to $3 million which is a move in the right direction. Recent reviews have consistently raised that a small business loan facility of $5m is the correct benchmark. This remains a sticking point that will need to be addressed.”

Loan documents will no longer be able to contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.

The operation of the banks' indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.

Clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer – known as ‘material adverse change event’ clauses – have been removed. Banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.

Banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so. 

Ombudsman Carnell said the banks had all acted on ASIC and ASBFEO calls to change their practices although some have taken different approaches – and in some instances, gone further than the law requires – to address concerns about these clauses.

For example, NAB has taken an industry-leading position about the application of non-monetary default clauses, while the Commonwealth Bank will provide an industry-leading 90 calendar days notice for any changes to loan contracts that the small business customer does not wish to accept.

All four banks have limited the use of financial indicator covenants in small business contracts to certain classes of loans – for example, property development and specialised lending such as margin loans The banks have agreed that financial indicator covenants will not be applied to property investment loans.

The banks have also agreed that all customers who entered or renewed contracts from 12 November 2016 – when the protections for small businesses began – will have the benefit of the changes agreed with ASIC.

To ensure that the new clauses do not operate unfairly in practice, ASIC will monitor the individual banks’ actual use of these clauses to determine if they are in fact applied or relied on in an unfair way. ASIC will work with ASBFEO when assessing the results of this monitoring.

ASIC will publish more detailed information about the changes agreed with the big four banks so that other lenders to small business can consider whether changes to their contracts may be required.

“ASIC welcomes the significant improvements made by the banks to their small business lending agreements,” ASIC Deputy Chairman Peter Kell said. “The improvements have raised small business lending standards and provide important protections for small business customers.

“ASIC will be following up with other lenders to ensure that their small business contracts do not contain unfair terms, and we will continue to work with the ASBFEO on these issues.”

The four banks will shortly commence contacting all relevant small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans.

www.asic.gov.au

www.asbfeo.gov.au

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Groundbreaking whistleblower research project extended

THE second stage of the ground breaking research project Whistle While They Work, which is developing a strong information base on whistleblowing practices to inform protection law, has been strongly endorsed by the Australian Securities and Investments Commission (ASIC) which created the initial report..

The Strength of Whistleblowing Processes report, undertaken by a multi-university team led by Griffith University professor AJ Brown, and funded by the Australian Research Council (ARC), follows on from the ASIC-sponsored Whistling While They Work report. 

The Strength of Whistleblowing Processes report identifies the factors that influence good and bad responses to whistleblowing across a wide range of institutions.

This unique research project is the first to systematically compare the levels, responses and outcomes of whistleblowing in multiple organisations – across the public, private and not-for-profit sectors – and across international boundaries

ASIC Commissioner John Price said the project would provide a clearer basis for evaluation and improvement in organisational procedures, better public policy, and more informed approaches to the reform or introduction of whistleblower protection laws.

“The release of the new results provides an important new picture of where the strengths and weaknesses lie in current whistleblowing processes,” Mr Price said.

'This demonstrates firstly, the value of the project and of participating in it, but also why it's important that industry take a proactive approach to helping identify and adopt best practice, so that improvements in this area are well-informed and well-targeted on what's needed.”

This research project comes at a very important time and will provide a strong rationale for both industry and regulators to understand the importance of effective whistleblower programs within their workplaces.

“It will also progress our understanding of how these programs should be effectively embedded in large organisations,” Mr Price said.

“The ability for staff to speak up to its leaders and identify wrongdoing is a feature a strong organisational culture, including whistleblowers being heard, considered and appropriately dealt with.”

ASIC is officially encouraging Australian company officers and directors “to support this groundbreaking research”.

www.asic.gov.au

 

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Banks held to account on SME contract terms by ASIC and ASBFEO

SMALL and medium business leaders around Australia will be heaving a sigh of relief that the spectre of major banks enacting alleged predatory clauses in their loan contracts – which have seen many businesses scrambling to meet unexpected demands including cash payments to reduce loan levels even when there have been no payment defaults – are now officially on notice.

It was only after a sustained intervention by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC) that the big four banks finally took action to protect small businesses from unfair terms in loan contracts.

The complaints Business Acumen has logged include a successful Gold Coast business forced to sell a second industrial property – even though it had no payments in default at the time and was subject to a sudden and apparently arbitrary change in its loan-valuation ratio. Other cases have seen businesses forced to sell plant and equipment to meet bank demands for loan principle reductions, often resulting in unnecessary losses.

Following a round table hosted by ASBFEO and ASIC in April, the big four banks committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from November 12, 2016 will be protected from unfair contract terms. 

ASBFEO and ASIC have publicly raised concerns that lenders, including the big four banks, needed to lift their game in meeting the unfair contract terms legislation.

Commonwealth, ANZ, NAB and Westpac banks have committed to:

Remove ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract. 

Remove financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed. 

Remove material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer. 

Significantly limit the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower. 

Significantly limit the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.

The banks have agreed to contact all small business customers who entered into or renewed a loan from November 12, 2016, about the changes to their loans. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.

The banks have agreed to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances.

Some early bank moves have been to simply modify some of the wording in contracts – but  ASBFEO and ASIC have made it clear to the big banks that simply including the word ‘reasonable’ in contracts does not go far enough.

The ASBFEO, Kate Carnell, said her role was to consider the interests of small business and to ensure that the unfair contract term legislation was working across all industries. She said it was clear what ‘unfair’ means – to protect the interests of the advantaged party, in this case it is the banks, against the interests of small business.

“The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory,” Ms Carnell said.

ASIC deputy chairman Peter Kell said: "We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.

“It is important that the banks have committed to improving their small business loan contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”

From November 12, 2016, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law.

ASIC has released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) which gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.

www.asic.gov.au

www.asbfeo.gov.au

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‘Four pillars of trust’ support business tax transparency with ATO

RESEARCH by Thomson Reuters into Australian authorities’ new focus on transfer pricing and profit shifting has identified four key areas of focus for organisations in meeting the new requirements of the Australian Taxation Office (ATO).

Thomson Reuters managing director for tax and accounting, Ben Scull, said organisations must focus on four key pillars of trust to achieve “justified trust status as per the ATO’s new regulations. 

Mr Scull said in its bid to make Australian corporations comply with the international Base Erosion and Profit Shifting (BEPS) regulations, the ATO is working towards a ‘justified trust’ position, in which the community can be satisfied that large organisations are paying their fair share of tax.

“To achieve the required level of tax transparency, businesses must be able to provide fact-based evidence to support their tax position,” Mr Scull said.

“In an environment in which the ATO is pursuing a much more active compliance program, every business to which the justified trust program applies must be able to demonstrate it has a robust control framework in place to prove the assertions it makes about its revenue and expenses.

“While this sounds simple, the reality is much more complex. Businesses must focus on this consistently or risk heavy fines and penalties.

“Tax transparency and compliance is complex and, in a landscape of evolving regulations, becoming even more difficult to navigate,” Mr Scull said.

“Most organisations are unlikely to have the deep skill levels and expert knowledge on staff, making it crucial for affected businesses to partner with expert advisers. This will give them the best chance of compliance, helping them avoid heavy penalties.”

Mr Scull said Thomson Reuters had identified four key pillars to achieve justified trust: process, people, technology and data.

www.thomsonreuters.com.au

 

Panel:

FOUR PILLARS

Process

By implementing repeatable processes, businesses will be able to demonstrate consistency, one of the key elements of trust. To develop effective processes, businesses must first review the existing process steps, and identify and address gaps. They must be able to apply the same process across the organisation’s various locations and demonstrate a consistent output. There must be strong controls in place to ensure the process is reliably repeatable. Businesses should test the processes by doing practice runs before each process goes live.

People

People fulfil another key element of trust; congruity. This means ensuring the people responsible for tax compliance have the required skill sets in place, are involved in reviewing processes and technologies, and are suitably motivated.

Technology

Manual processes are inherently error-prone, so putting technology in place to automate aspects of the process can help deliver reliability, another key element of trust. Technology should enable process and controls, and include comprehensive tools for oversight and tracking.

Data

Using the wrong or outdated data can severely curtail an organisation’s ability to comply with tax regulations effectively. Being able to guarantee data integrity is another crucial element of trust. Doing so requires consistency of inputs. This extends beyond financial data to include all the information a business uses to make decisions or conduct operations.


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Proposed insolvency law reforms may fix Australia’s ‘broken’ system

THE creation of a ‘safe harbour’ from personal liability for company directors potentially facing claims during a formal insolvency process are one step in a reform process for Australia’s troubled business administration regime.

Business leaders have lamented the economic and personal damage caused by a succession of companies taken ‘too early’ into administration and lost to liquidation by directors fearful of Australia’s historic legal bias against recovering ‘temporarily troubled’ companies. 

There have been wide-ranging calls, in the wake of troubled voluntary administration cases such as Cubby Station and Arrium, for Australia to instate a form of the US Chapter 11 system which allows company directors to restructure companies while they are protected from action by creditors. 

Changes to the business environment in the wake of the Global Financial Crisis (GFC) and criticism of the high-cost methods of receiver-administrators have highlighted the problems. The norm has been a wholesale loss of wealth for shareholders, creditors and employees.

Australian insolvency practices have also been highlighted as stalling the technology start-up sector.

As part of the National Innovation and Science Agenda (NISA), Minister for Revenue and Financial Services, Kelly O’Dwyer released draft legislation in early 2017 and called for consultation on reforms to Australia’s insolvency laws.

Ms O’Dwyer said the legislation created a ‘safe harbour’ from personal liability for company directors and instituted a stay on ipso facto clauses during a formal insolvency process.

Ms O’Dwyer said the proposed safe harbour would apply to directors of companies undertaking a restructure and will protect them from personal liability for insolvent trading in certain circumstances.

“This will drive cultural change amongst company directors and encourage them to engage early with a plan for business rescue, to keep control of the company while the plan is executed, and to take reasonable risks to facilitate the company’s recovery, rather than placing the company prematurely into voluntary administration or liquidation,” Ms O’Dwyer said.

“The creation of a safe harbour creates necessary breathing room for directors to turn a company around rather than allowing it to fail for fear of personal liability. This will not only promote a culture of entrepreneurship and help reduce the stigma associated with business failure, but offers businesses a better chance of restructuring outside of a formal insolvency, which often produces significantly better outcomes for the company, its employees and its creditors.”

Ms O’Dwyer said the amendments would also make ipso facto clauses, which terminate or amend a contract merely because a company has entered into a formal insolvency process, unenforceable. Making these clauses unenforceable will give companies a greater chance to successfully restructure and may increase the likelihood of being able to sell the business as a going concern.

The Federal Government has also released a further explanatory document setting out the types of contracts and contractual rights which are expected to be excluded from the prohibition on the operation of ipso facto clauses. These excluded contract types and rights will be formalised through forthcoming regulations, with the prohibition on the operation of ipso facto clauses becoming effective on January 1, 2018.

The exposure draft legislation and explanatory statements are available on the Treasury Consultation Hub.

www.treasury.gov.au

 

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ARA applauds return of 'retail buyer' to STSOL.

THE Australian Retailers Association (ARA) is delighted the Department of Immigration and Border Protection (DIBP) has re-instated Retail Buyer to the Short Term Skilled Occupation List (STSOL).

The ARA has been leading the 'retail revolution' by proposing significant changes to the 457 visa program in a submission to the DIBP to ensure the longevity of Australian retail. 

ARA executive director, Russell Zimmerman said the ARA and its members had been working together to lobby the DIBP in not only adding, but re-instating essential retail roles to the STSOL.

“Today the industry received a big win for skill shortages in Australian retail as the Department has officially re-instated Retail Buyer as a key role required in contemporary retailing,” Mr Zimmerman said on June 30.

“The ARA have been the only retail industry body lobbying for further changes to the 457 visa program as many Australian retailers are constantly challenged by the availability of local talent to fill critical roles in the industry.”

While the ARA is concerned that Merchandise Planners, Merchandise Designers and Digital Commerce were not added to the STSOL, the ARA will continue to identify various mechanisms to address skill shortages in Australian retail.

“With retail being a huge driver in the Australian economy, the ARA will continue to work with the Government to ensure highly skilled visa holders in key retail categories are supported,” Mr Zimmerman said.

"The ARA have long been advocating for its members on skills shortages in the local labour market as skilled retail employees are an enormous asset to the industry.

“We will continue to work with our members and the Government to develop a more sophisticated and inclusive approach in identifying strategic retail occupations prior to any further reforms being implemented,” Mr Zimmerman said.

www.retail.org.au

 

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