Loan Tip: Lenders Requesting Letters from Accountants, Financial Planners and Lawyers

There is a trend where lenders are increasingly asking for letters or forms etc signed by accountants or financial planners – sometimes lawyers too.


Some requests that I have seen or heard of include


Letter to say client will use borrowed funds to invest in shares

Lenders don’t like to give a borrower access to large sums of borrowed money as they could spend those funds of sex, drugs and rock n roll and waste the rest. So, to shift the blame they often ask for a letter from an ‘accountant’.

The term accountant is vague, I think anyone can call themselves an accountant for starters, but they probably want a registered tax agent to write the letter (who may or may not be an accountant).

Advising on share purchase or sale is financial advice as shares are a financial product. An AFSL would be needed to give such advice (or be an authorised rep). Therefore, a more appropriate person to write such a letter would be a financial planner – someone licenced. But sometimes lenders specifically ask for ‘accountants’.

Should an accountant write such a letter? That is up to them, but it can be potentially dangerous as it might imply that they have advised the client on this.

An accountant writing “Johnny has informed me that he will use the borrowed money to invest in shares traded on the ASX” also seems to have little value to me. It would be just as good if the client got a letter from his or her mum saying the same thing.


A financial planner writing such a letter can also be risky too. Such a letter might imply financial advice has been given and this would generally only be possible where a statement of advice (SOA) has been prepared.


Letters concerning Companies trading

It is also common practice for a lender to ask for a letter from the borrower’s ‘accountant’ confirming that companies that the person is a director of are not trading or trading profitably.

Here is a copy of a recent condition on a loan pre-approval:

“Accountant letter confirming profitable trading; or confirming that company only

holds property and does not trade in its own right.”

How the heck would an accountant know whether a property is trading at a profit or not. They might have an idea that a property made a profit last financial year, but a lot could happen after that.

This request was for a client who had set up a new company after the end of the financial year and the company had not had to lodge a tax return yet or have appointed an accountant. So, the company’s future accountant probably would not know of the existence of the company yet.

Could they write a letter? Up to them.


Guarantees and ‘financial advice’

We have had issues in the past where there is a personal guarantee involved and lawyers have had to explain the guarantee to a person making the guarantee – this is generally straight forward (btw, I would never act as a lawyer in this instance if I was also the broker as a conflict of interest could be argued).

But often there is also a requirement for the guarantor to get their accountant to sign a proforma letter titles ‘financial advice’. What the lender really wants is for the guarantor to get advice on the profitability of the company they are guaranteeing the loan for and its ability to repay the loan.

But having the ‘financial advice’ wording scares a lot of accountants – and rightly so.

Financial planners generally won’t want to sign off on these either as they are generally not accountants or don’t know the financials of the company, plus the letters usually ask for accountants specifically.


Legal Advice

I once had an issue as a lawyer too. I had to sign a proforma letter after giving legal advice to a client about a guarantee. But the letter that had to be signed stated that the borrower and the guarantor were not to be in the same room when the advice was given. The borrower was a company with a sole director and the guarantor was that very director. To solve the problem I asked him to stand in the doorway so he was both in a different room at the same time and then I modified the proforma to comment on the guarantor being the mind behind the company.

 

Here's some solutions:

Letter to say client will use borrowed funds to invest in shares
Not a big deal if you take a reasonable approach. What lenders don't want to see is that you're borrowing a large amount of money for this purpose with no track record.
* Start small, most lenders have a cash out figure where they don't ask for too much info. Work with that and if successful, go back for more later.
* For larger amounts, demonstrate that you know what you're doing. An existing portfolio can help here.
* If you want a large amount of money, don't have the existing track record and haven't gotten financial advice, then WTF are you doing?

Letters concerning Companies trading
Happens all the time, I've even got a template for it which describes:
* Accountant has been working with the clients for x years.
* As of the last tax return, the company was trading profitably with no ongoing liabilities.
Never had a problem with this, most accountants are happy to do it for their existing clients if you make it easy for them.

Financial & Legal Advice
It's been a long time since a guarantor was asked to get financial advice but legal advice is fairly common. The biggest hassle I've seen recently is finding a lawyer that has the time to do it and doesn't charge an unreasonable amount (which is subjective).

 

Hardest of the lot now is a sophisticated investor cert. We are NOT allowed to issue them no way no how. And this is applying to more and more accountants. Our PI insurer says it must not be issued as they consider it involves elements of financial and credit advice.

ASIC needs to look at this requirement and its misuse. A recent media blitz by a new player is touting high risk debt securities to wholesale investors when they can access these certs but they dont mention that issue and just mention companies, smsfs etc. How can I issue that and not mention risk ? And yet that is financial advice and not accounting work. And likley needs legal advice on what "security" means. [Hint its not secured] Hence the insurer policy that I / we cannot issue a sophisticated investor certificate.

 

I was recently required to get a guarantor letter signed by a lawyer for a loan and was quoted $1200 for the advice. This was an unforeseen cost and also presented as a final hurdle after the loan was assessed which took weeks. I ended up getting it done for free by a friend but I would not want to go to a lender that imposes those requirements/additional costs in the future.

 

These start at $500 sonshop around

 

An email from the broker member association last week about this topic said:

Dear Member

In the past week, I have received a letter jointly signed by the CEOs of CPA Australia, the Institute of Public Accountants (IPA), and the Chartered Accountants Australia and New Zealand (CA ANZ) advising me of the current guidance they are giving to their combined estimated 240,000 accountant members in Australia.

The guidance that is being given through these associations to their members advises them not to complete requests for capacity to repay certificates, which are also known as an accountant’s letter and are requesting such requests for these to cease.

Noting not all accountant letters requested by lenders are the same, I sort further clarification on this from the associations whereby they further advised that accountants 'can, with their client’s consent, provide a statement of their client’s financial position or other factual information such as Business Activity Statements that can be verified’.

This means that in this instance, you should still be able to obtain accountant letters that are requested in this style of statement.

 

I received a wierd Pepper one. Its started with disclosure of accounting information. Then a follow up asked for a confirmation about the client assets & liabilities .....I stopped there. IMO the lender should assess borrower assets and liabilities.

 

How can an accountant, or anyone, know someone's liabilities? All they could do is ask and then say 'they told me they owe $100,000 - but I cannot verify if this is true or not!'

 

Open letter to Lenders
May 2023
To whom it may concern
Chartered Accountants Australia and New Zealand (CA ANZ), CPA Australia and the Institute of
Public Accountants (IPA) represent nearly 240,000 professional accountants in Australia.
Our members have collectively made us aware that as part of your lending assessment, it is common
for you to request the accountant of your potential customer to provide or sign an accountant’s letter,
declaration, or certificate.
It is our position that the determination of capacity to repay must be made by the lender. The lender
cannot ask applicants to engage third parties to determine their capacity to repay as part of the loan
application.
Importantly, we note that the Independent Review of the Banking Code of Practice 2021 (November
2021) recommended that:
The Code should clarify that a bank’s approval of a small business loan will not be dependent on a
third party (such as the small business’s accountant) certifying the capacity of the small business to
repay the loan1.
Further, where the finance is for consumer credit, the signing of such letters could be considered
providing credit assistance and may be a breach the National Consumer Credit Protection Act 2009. It
is also unlikely that these activities would be covered by the accountant’s professional indemnity
insurance cover.
Our members can assist in the lending process by providing factually verified information, with the
consent of their clients, such as prepared business financial statements, Business Activity Statements
and completed Income Tax Assessments.
We have now released joint guidance, resources and a template accountant’s letter that can be used
in specific circumstances only. We advise our members to only use this template when appropriate
and not any document provided by lenders or other third parties.
Importantly, professional accountants cannot provide any assessment, assurance or guarantees that a
client will have the ability to make the repayments should their loan be approved.
Yours sincerely
Ainslie van Onselen
Chief Executive Officer
Chartered Accountants Australia and
New Zealand
Andrew Hunter
Chief Executive Officer
CPA Australia
Andrew Conway
Chief Executive Officer
Institute of Public Accountants

see
https://www.cpaaustralia.com.au/-/m...tter.pdf?rev=e6206810722c4374a1e65d2d59e9b242

 

So, if I understood this correctly, there may not be any impact to the purchasing property through companies servicability strategy? All the accountant needs to do is verify if a company is 'trading profitably' in which the lender can then make their assessment on that fact?

 

We are able to confirm that tax liabilities are paid ie no arrears and all tax obligations have been lodged (we wont say met). If a client has a payment arrangement we will indicate this. ie it is factual information. Many lenders ask for copies of client tax accounts as a means of assessing lodgements are made and paid. If a matter appears serioues eg a known audit etc then I would likely advise the client I must disclose this. It is a contingent liability if the ATO or OSR note any concerns. It can be better to delay the bank application.
We can indicate a dormant entity has no known liabilities or does not trade. Very common for a trustee company. We generally then specifiy if the trustee has liabilities in its capacity as trustee of a trust. I wont say one and be silent on the other. I wont indicate the amounts involved. Lenders are usually well aware of that matter.
I have been asked to confirm client capacity to repay and will indicate this is not amatter we can advise on as it is their role to assess risk and we dont have appropriate credit licenses.

 

They are separate issues

 

Great insight Rolf, thanks for that. So it sounds like given there are only a few lenders left that will service in such a way that excludes liabilities of other companies for servicing (assuming they can that they can take care of themselves).

So once you buy a property with each of these lenders (2-3?) you would be capped out again regardless of the structures, and then no Tier1/Tier2 lenders would lend you anything as well? Sounds like it is getting significantly harder.