NEWSLETTER / NOVEMBER 2015 /
Connecting and Supporting the Commercial Finance Industry Worldwide
Contents:
Welcome
John Gielen,
EUF Independent Chairman
2
The European Passport:
Should the requirements
be reviewed?
3
PRC Committee Update
4
Magdalena Wessel,
Chairman of the Legal Committee
Peter Mulroy,
Chairman of the PRC Committee
Supply Chain Finance 2.0:
are we ready for the next
level?
7
Diego Tavecchia,
Chairman of the E & S Committee
E-Invoicing and the
EUF
Andrzej Zbikowski,
EUF ExCom Member
9
The EU Federation
for the Factoring
and Commercial
Finance Industry
2
Welcome from
John Gielen
EUF Independent Chairman
Dear Members and Readers,
With the days becoming ever shorter and the heating having to be turned on, it’s time again for me to give you a
very warm welcome you to the Autumn Newsletter of the EUF!
It’s been a busy summer for us and some significant developments for the factoring Industry.
Perhaps the most dramatic change is the announcement of the union between IFG and FCI to create one
organisation which will represent four hundred factoring and invoice finance providers in ninety countries. With
both IFG and FCI key members of the EUF, this means we will be speaking even more clearly with one voice on the
issues facing our industry.
In this issue you will find Maggie Wessel talking about the challenges surrounding the European Passport for
financial services and details of the issues that need attention to address the anomalies the regulations contain.
Diego Tavecchia shares with us the latest thinking on the direction of Supply Chain Finance and helps to demystify
what it actually all means!
Peter Mulroy updates on the activities of the Prudential Risk Committee and in particular notes how there is a fast
flow of new regulatory proposals that the EUF is here to address in support of our Industry!
The European Factoring “White Paper” Project which is designed to help us demonstrate with hard facts the
reality of our Industry being a low loss form of funding is well under way. If you have not yet responded to it, I
encourage you to participate. The more responses we receive, the more compelling will be the conclusions and our
ability to lobby with regulators on the Industry’ behalf.
Andrzej Zbikowski reports on the very successful intervention by the EUF on behalf of the Industry in the creation of
standards relating to e-invoicing. Through our role in environmental scanning, we became aware that this process
was taking place and involved ourselves; this was a vital step as the standard setting group was unaware of factoring
and would completely have ignored our needs, something that would have created severe operational issues for the
Industry.
I recently spoke at the FENCA (Federation of European National Collections Associations) Conference in
Stockholm to introduce the work of the EUF. This organisation represents the interests of finance collection
organisations across Europe and they have some very similar issues and concerns to us. I was made very welcome
and participating makes it clear that building and maintaining close working relationships with like-minded
organisations is an essential part of presenting a coherent set of arguments to regulators and lawmakers. So I’m
pleased that we have created a new connection here in addition to our other relationships with groups such as
Eurofinas and Leaseurop.
2
I’d just like to remind you that the second EU Factoring and Commercial Finance Summit will take place on 28th
January 2016 in Brussels; if this is not already in your diary, I warmly invite you and very much encourage you to join
us there to participate in the debate, discussion and direction of our Industry in Europe.
With my best wishes,
John Gielen
Independent Chairman
The Legal Committee
The European Passport:
Should the requirements
be reviewed?
We are all familiar with the EU’s Four Freedoms, which
were introduced in order to promote the EU internal
market, also known as the EU Single Market. The right
of establishment and the freedom to provide services as
well as the free movement of capital are two of these
Freedoms, which have also greatly influenced the
evolution of the European factoring market.
Despite the fact that there is no harmonized European
financial supervisory regime for factoring, but that rather
every EU member states has different rules on e.g.
licenses, factoring companies (as part of the finance
sector) can under certain circumstances use the so
called European Passport, which issues from the
aforementioned freedoms.
The European Passport was originally introduced to
enable credit institutions and some other financing
entities, which are licensed and supervised in their
“home state”, to establish a branch/subsidiary or simply
provide their services in other member states of the EU,
without having to acquire the corresponding licenses or
supervisory permissions in all those other states. This
European Passport is based on Art. 18 para. 2 of
Directive 89/646/EEC of 15 December 1989 on the
coordination of laws, regulations and administrative
provisions relating to the taking up and pursuit of the
business of credit institutions, which is no longer in
force: It was first replaced by Directive 2000/12/EC,
which in turn was replaced by Directive 2006/48/EC,
which in turn was then replaced by the current Directive
2013/36/EU, also known as CRD IV. However, the
general conditions/requirements have largely remained
unchanged since 1989, especially the requirement that
“the parent undertaking or undertakings are authorised
as credit institutions in the Member State by the law of
which the financial institution is governed” is still there
(cf. Art. 34 of CRD IV).
A survey conducted amongst the countries represented
by the delegates in the EUF Legal Committee shows
that this requirement has been incorporated into the
MAGDALENA WESSEL
Chairman of the Legal
Committee
national laws of e.g. Italy, France, Spain and the UK
when implementing the European directive. This means
that a factoring company with its place of business in EU
member state A and a license from the financial
supervisory authority of that same state, but which is a
subsidiary of a credit institution, that has its place of
business and is licensed and under financial supervision
in EU member state B, cannot acquire and use the
European Passport to establish a branch or subsidiary or
simply provide their services in other member states of
the EU - such a factoring company will have to acquire
corresponding licenses or supervisory permissions in all
the other states EU member states where it wishes to
provide its services.
In contrast to this, a factoring company with its place of
business in the same EU member state and which is a
subsidiary of a credit institution with its place of business
and is licensed in the same member state, will have
access to the advantages of the EU passport.
Considering that financial supervisory laws have been
greatly harmonized over the last 20-25 years, and also
considering that due to the introduction of SSM and the
ECB’s financial supervisory functions, the European
national financial supervisory authorities are now
cooperating more closely than ever before, such
different results may be considered as slightly odd:
Factoring companies which are supervised and which
are subsidiaries of credit institutions are not allowed to
take advantage of the European Passport only because
they are affiliates of a credit institution is based in
another, i.e. in the “wrong” EU member state.
3
It seems that this is a consequence which was not
considered when the financial supervisory system and
regime was harmonized increasingly during the last
years. In order to live up to both the idea
of the Single Market (including its Four
Freedoms) as well as to the idea of the
SSM, a review of the requirements for
the application of the European Passport
should be considered.
The Prudential Risk Committee
Update
PETER MULROY
Chairman of the PRC
Committee
The Prudential Risk Committee (PRC) has been active these past
months, working on three important projects. With the continued
support of the EUF Legal Committee, this is what we have been
working on:
I. EBA/EC Discussion Paper for Evidence on the Impact of
the Supporting Factor
As reported in the letter issued to the EBA along with the European Commission (EC) in
October 2015, they raised questions in their respective consultations on the impact the
CRD-IV has had in terms of lending trends and conditions for SMEs. The consultation
focused on the capital reduction factor for loans to SMEs, the so called Supporting
Factor (S.F), introduced in the CRR. The SME supporting factor (SF) allows the factor/
bank to multiply an exposure to a SME by a factor of 0.7619, thus reducing the impact
on the capital requirement. The SF is available when the SME client is based in the retail
sector and the gross amount owed to the does not exceed EUR 1,5 million. So in
summary, the consultation paper was attempting to determine if this specific measure,
the SF has resulted in enhanced financing to SMEs.
The EUF made a number of proposals to the EBA/EC:
•
Keep the SF in place as it supports funding to SMEs by reducing the capital allocation
required under the CRR.
•
Enhance the SF by introducing the concept to weight the factoring exposure to a
client accordingly to the risk weight of the assigned debtor(s) instead of the risk
weight of the client/seller even in recourse operations
•
Enhance the SF by providing a lower, specific risk weight for factoring exposures, by
way of a cap or a cut-off on the applicable risk weight
•
Factors usually register recovery rates higher than other kind of asset-based facilities
due to the security offered by the assigned (or purchased) receivables. Therefore,
the risk weight applicable to corporates should recognize the lower risk of factoring
and be re-calibrated taking into account the lower LGD and calculating specific risk
weight applicable to factoring, by way of:
1. a cap on the applicable risk weight (i.e. factoring exposures are weighted up to
50%), or
2. a reduction of the applicable risk weight (i.e. factoring exposures are weighted 50%
less than the applicable risk weight)
•
Increase the liability factor. The SME outstanding balance limit to qualify is EUR 1.5
Million (in terms of exposure). Assuming the receivables have credit terms less than
90 days, that means the company could only be financed up to four times its balance,
or in this case EUR 6.0 Million in revenue. Frankly, not many factoring clients will be
eligible for the SF under this scenario, as most factoring companies offer their
services to companies whose receivables balance far exceeds the EUR 1.5 Million
threshold, thereby possibly rendering the SF irrelevant.
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The Prudential Risk
Committee
Update
PETER MULROY
Chairman of the PRC
Committee
II. CRD-IV: Impact of the Net Stable Funding Ratio
(NSFR)
As you may recall, the EUF had submitted a letter to the EC regarding the
adverse impact could have on the factoring industry (please refer to the
letter from the EUF dated 28 March 2014 to the EC). The letter focused
primarily on the impact of the liquidity coverage ratio (LCR), which was
designed to ensure that financial institutions have the necessary liquid
assets to survive a shock to the system in order to ride out short-term
liquidity disruptions. The impact of relying on a single source of liquidity to
fund a factoring company today is a relic of the past. The EUF is in agreement
that certain regulatory guidelines should be established for the overall
health of our sector. But the CRD-IV could force factoring companies to
abruptly modify their balance sheet, ultimately harming their business.
Factoring is defined in part by the fact that financial outflows are substantially
balanced by the customer/debtors payment inflows. Hence, liquidity risk
for a factor is greatly minimized. As the LCR focuses on short term liquidity,
this is certainly associated to the business of factoring, and as you know, the
industry received a derogation on the inflow cap for factoring companies
last year (and reported in the Spring 2015 edition of the EUF newsletter).
However, from the standpoint of long term, the EUF included a comment
on our concerns regarding the potential challenges the factoring industry
would face, especially the requirement to buffer our member’s balance
sheets with High Quality Liquid Assets (HQLA). As currently defined, factors
would not be able to meet the NSFR requirements without facing severe
financial constraints, and their objective would be to increase long term
funding with over one year maturities, while the average duration for
factoring portfolios is normally less than 90 days. As the NSFR is not
consistent with factoring, and taking into account the proportionality
principle, the EUF believes factoring should be exempted in full from the
NSFR requirements. The PRC will be working with Legal Committee and
EURALIA to prepare for the anticipated questions to be raised by the EBA
in 2016 and any feedback or comments you would like us to include would
be helpful in order to effectively lobby for its derogation.
* The picture is downloaded from European Commission`s Facebook page
*
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The Prudential Risk Committee
Update
III. Revisions to the Standardized
Approach for Credit Risk
As reported in the letter issued to the EBA on 2 April
2015, there is a growing concern of the proposed
regulation issued by the EBA and the BCBS of the
potential adverse impact from the recommended
changes to the standardized approach on credit risk.
The EBA proposal on materiality threshold of credit
obligation past due under Article 178 of Regulation (EU)
575/2013 in our opinion provides a restrictive approach
to identify past due exposures. Also, the above
mentioned BCBS proposal on revisions to Standardized
Approach provides a very likely increase in the risk
weight applicable to exposures to corporates. Highrated, large corporate companies will be weighted with
a Risk Weight (RW) which is 3 times higher than the
previous one (60% vs 20%); non-rated, smaller
businesses will be weighted not below 100% and up to
130%; companies with negative equity will be weighted
with a flat weight of 300%. This will result in a significant
increase in the amount of capital required for the whole
banking system. Furthermore, the EUF also believes
that the spread between the best weight (60%) and
the worst (300%) is too high. Moreover, the use of
only two risk drivers (revenue and leverage) appears
too simplified and not truly risk sensitive. The EUF
maintains that more risk sensitive drivers would be the
ones that allow the industry to assess the capability of
the enterprise to generate enough cash flow to repay its
debt. Lastly, we appreciate that the financial crisis was
in part caused by an overreliance on external credit
ratings. However, we demonstrated that external credit
reports and ratings are seldom used or taken into
consideration when taking risk in a factoring scenario,
mainly because most of our exposures are against
privately held companies that are unrated.
PETER MULROY
Chairman of the PRC
Committee
Based on the above, the EUF had advocated for:
•
the rejection of the proposed approach and the
confirmation of the current one based on external
ratings when existent and a flat (perhaps revisited)
risk weight for non-rated businesses or,
subordinately,
•
a mixed approach where external ratings keep
being used when appropriate, linked to the current
and less penalizing risk weights, while the risk
drivers combination will be used only for exposures
to non-rated businesses. In this case, however, we
recommend a re-calibration of the risk weights
aimed to reduce the spread between the best
weight (60%) and the worst (300%). The latter
should not be higher than 130% (the risk weight
applicable to the riskier class provided in the table).
•
the introduction of a specific approach for factoring
exposures, and in particular to allow the possibility
to weight the factoring exposure to a client
accordingly to the risk weight of the assigned
debtor(s)
Certainly the European authorities have kept the EUF in
general and the PRC in particular on our toes, with
numerous consultation requests.
The amount of
potential oversight is rather staggering and alarming,
but the EUF is here to ensure that our
voice is heard amongst the influencers
and decision makers so that the interests
of the receivables finance and factoring
industry are well defended!
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Supply Chain Finance 2.0:
are we ready for the next level?
In recent years, academics, corporates, banks and IT
provider have shown a growing interest in the topic of
so-called “Supply Chain Finance”. If the international
community has always agreed that Supply Chain
Finance merits growing attention from all the involved
actors, then the same level of agreement cannot be
achieved about what SCF actually is or encompasses!
Indeed, a lot of definitions have been proposed since
the concept of SCF has been introduced. I believe that,
for simplicity, one can group all the views about the
concept of SCF into two large categories: a factoringoriented vision, under which Supply Chain Finance
represents a mere synonym of supplier finance or
reverse factoring, so being a part of the larger “factoring
family”, and a supply chain-oriented vision, that follows
quite the opposite view and claims SCF represents a
wider group of financial techniques that may be
implemented within the relationship between the seller
and the buyer, not all of which require the involvement
of a financial intermediary, so that factoring and reverse
factoring are encompassed in this large portfolio. The
latter has been recently endorsed by the Global SCF
Forum (that, by the way, involves FCI and IFG among
others) in its Draft Standard Definitions for Techniques
of Supply Chain Finance.
In particular, the definition of the GSCFF states that
“Supply Chain Finance (SCF) is a portfolio of financing
and risk mitigation techniques and practices that
support the trade and financial flows in end-to-end
business supply and distribution chains, domestically as
well as internationally. This is emphatically a ‘holistic’
concept that includes a broad range of established and
evolving techniques for the provision of finance and the
management of risk”.
The factoring and commercial finance industry, being
deeply involved in the relationship between the buyer
and the supplier, has been pushed on the stage to lead
the development of SCF solutions and catch the market
opportunities that raise from the new (?) need of the
parties involved in a supply relationship: reverse
factoring has been put in place in most countries and
available figures collected by the EUF show - for the
responding countries, a constant growth of the supplier
finance operations in the firm of reverse factoring (or
confirming in Spain).
DIEGO TAVECCHIA
Chairman of the Economics
and Statistics Committee
However, whilst the above-mentioned larger definition
of Supply Chain Finance is shared also by the Supply
Chain Finance Community, the point of view of the
majority of the factoring and commercial finance
industry looks still sticking to a (perhaps more
reassuring?) factoring-oriented vision and the current
experts’ view is that the penetration of reverse factoring
in the global SCF portfolio is still very high and
approximates to at least 80% of the total.
It is important to notice that every action within a SCF
scheme is triggered by an event (an order, an issue of
invoice, an approval of invoice, a payment and so on...):
the possibility to track and control information, such as,
e.g., the status of an invoice, in a quick and reliable
fashion is kind of a prerequisite in order to make the
scheme to work efficiently and effectively. Therefore,
the development in e-invoicing and dematerialization
of communications within a technological platform that
allows to track and manage all the information about
the events occurring during a supply relation is
constantly accelerating the attention given to these
kinds of practice.
The increasing number of announcements by factoring
companies regarding “ground-breaking” agreements
with large buyers in order to facilitate access to finance
to their smaller suppliers, more and more often through
the use of a digital platform, suggests that the factoring
industry is quite able to keep the pace with this
accelerating demand from the customers.
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Whilst the industry is trying to implement the ideas put
forward by the SCF concept into actual examples and
schemes, and usually they are very much customized
and focus only on a selection of few, strategic suppliers
(leaving out the so called “long tail” of suppliers), the
discussion is already turning on the future evolution of
Supply Chain Finance, that is becoming known as SCF
2.0.
Supply Chain Finance 2.0:
are we ready for the next level?
DIEGO TAVECCHIA
Chairman of the Economics
and Statistics Committee
Again, there is discussion about the direction in which the supply
chain finance shall evolve in the (near?) future: the topic has been on
the agenda of the last Supply Chain Finance Forum in Amsterdam,
organized by the SCF Community. I could identify different views or,
rather, directions: i) standardization. As said, the current operations
are usually very much customer-driven or rather buyer-driven and
platforms are very customized. Standardization, by means of a
standard language that could help different platforms to
communicate, could foster the development of SCF solutions as, in
other words, the supplier will not necessarily need to use n-platforms
for n-buyers but will be able to use its own platform to manage all
relations. ii) inventory and resources finance. The increasing
transparency on every stage of the supply (“track and trace systems”)
could drive new ways of financing the inventory, potentially even
with the intervention of the providers of logistic services, or even to
forms of resource financing where the buyer provides the means to
fund the purchase, by its supplier, of the resources it needs to fulfill
the supply. iii) 2°-tier supplier financing, where the big buyer
intervention is not limited to its direct supplier but also extends to
the supplier of its supplier by way, for example, of a buy and sell
agreement accompanied by a reverse factoring scheme.
discussion on the world of Supply Chain
Finance is not over but rather intensifying now
that examples of practical solutions are more and
more common. The number of conferences and meeting on
Therefore,
this topic within the banking and commercial finance industry is in
turn increasing and actors are carefully watching the development of
technical solutions that can allow efficient information exchange and
increasing transparency to the benefit of all the parties involved. Yet,
technological developments must be accompanied by proper
attention on the legal side of the matter: commercial financing is
usually a form of secured lending and therefore to assure a proper
security on the finance remains of essence for the industry. One
should not forget that, currently, behind each practical example of
“Supply Chain Finance”, notwithstanding the degree of technical
* the
advancement, there is usually a factoring agreement with
supplier. From this point of view, the fragmentation of regulation in
Europe about formal requirements and different effects of an
assignment or pledge or purchase of receivables does not help.
There’s still a way to go.
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E-Invoicing and the EUF &
EUF Glossary
ANDRZEJ ZBIKOWSKI
EUF ExCom Member
E-Invoicing
Have you heard of the European Parliament’s directive 2014/55/EU?
Somehow I would not be too surprised if not. I’d imagine there are some
blank faces and shrugged shoulders… But this is a directive which has
major significance for the Factoring Industry, initially in the public
procurement arena but later I’m sure across the general factoring
environment.
It’s about setting standards for e-invoicing and the data that should be
contained in such documents.
The Parliament chose to delegate project implementation to CEN/CENELEC
and they in turn created a Project Team (PC 434) to address the lawmaker’s
requirements.
Through the EUF’s environmental monitoring, we became aware of this
project and it became rapidly apparent that this exercise could be highly
damaging to factoring because it completely failed to take account of the
needs of our industry, for example in terms of assignment and payee bank
details. In fact it turned out that we were completely out of the project’s
scope, nobody had considered us…
Fortunately we were able to become involved before these potentially
damaging decisions were confirmed and I’m delighted to say that through
our intervention, CEN PC 434 has changed the approach towards
factoring services. In the draft of the European Norm (EN) for the e-invoice,
we are now wholly in scope and fully supported in the “core” of the electronic
invoice. This is a resounding success!
The draft of the EN now defines fields where information on factoring
services may be provided: a text field for assignment clause, definition of
payee as a factor (name, ID number, legal registration identifier) and factor’s
bank account to receive payment (payment reference, payments means
type code, and bank account number of a factor).
After the implementation date of the EN, 31 March
2017, the standard will become mandatory for public
procurement and we hope that it will become a device
in common use across the board in B2B transactions.
As such it will make the use of factoring much easier
for all enterprises, which in turn should boost the scope
and attraction of factoring services across Europe.
In other words, “a victory from the jaws of defeat!” and a great example of
the benefit and value that the EUF can bring.
EUF Glossary tool enhanced!
In response to feedback, the table of terms for which there is a translation is
now available as a drop down menu, so instead of having to search for a
term you may not know, the text can be identified and selected from the list
of definitions.
The glossary can be seen at EUF web-site.
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EU FEDERATION FOR FACTORING AND COMMERCIAL
FINANCE
The EUF is the Representative Body for the Factoring and Commercial Finance
Industry in the EU; It is composed of national and international industry associations
that are active in the EU;
The EUF seeks to engage with Government and legislators to enhance the availability
of finance to business, with a particular emphasis on the SME community. The EUF,
acts as a platform between the factoring and commercial finance industry and key
legislative decision makers across Europe bringing together national experts to
speak with one voice.
EU Federation for Factoring and Commercial Finance
Avenue Reine Astrid 452
1950 Kraainem
Belgium
Tel: +32 2-772-6969
Fax: +32 2-772-6419
Email: [email protected]
Web: www.euf.eu.com