Legally

Legally, sole traders and unlimited partnerships do not usually have to prepare financial statements and have lower regulatory requirements for their businesses. The tax return includes a basic view of profit or loss, but there is no necessity to prepare a statement of financial position. Therefore, the proposed requirement for all self-employed persons and non-incorporated business applicants to produce a minimum of four year’s financial account drawn by a qualified, independent accountant is not a regulatory requirement.

However, this segment of customers presents higher risk to the banking organisation as compare to wage earning individuals. It is by nature that they have less certainty of regular income. They may be able to project their future income reasonably accurate but banking organisation knew that the figure projected is not guaranteed. History recorded that in 2009, it is estimated that approximately 75% of start-up business fail in the first five years.

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In view of that, XYZ Bank’s management team proposed the requirement to produce minimum four years’ financial accounts drawn by qualified, independent accountant. Apparently, in order to mitigate the risk that this segment of customers might default, XYZ Bank practise ‘Mortgage Lender Overlay’.