Contents: The EU Federation for the Factoring and Commercial Finance Industry. Connecting and Supporting the Commercial Finance Industry Worldwide

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1 NEWSLETTER / APRIL 2018 / ISSUE 15 Connecting and Supporting the Commercial Finance Industry Worldwide Contents: Welcome Françoise Palle-Guillabert, EUF Chair The EUF Legal Study 2017 is now out Magdalena Wessel, Chairwoman of the Legal Closing the regulatory gap in the Rome I regulation Magdalena Wessel, Chairwoman of the Legal Preliminary 2017 figures factoring market on a growth path Magdalena Ciechomska-Barczak, Chairwoman of the Economics and Statistics Addressing non performing loans: a non-issue for the factoring industry? Diego Tavecchia, Chairman of the PRC The EU Federation for the Factoring and Commercial Finance Industry

2 2 Welcome from Françoise Palle-Guillabert Chair EUF Roadmap Dear Reader, First of all, I m very happy to introduce the Spring Newsletter as new Chair of the EUF. It s an honour to represent this association which is a source of expertise within the Factoring and Commercial Finance industry and a reference for key legislative makers across the European Union. For the year to come, Factoring and Commercial Finance industry will have to deal with major prudential and legal issues as well as changes in their external environment. On the prudential side, the industry will have to engage with European decision makers in the coming months on significant topics such as NSFR, Anacredit, NPL, Basel III, Rome 1, SMEs definition CRR is under permanent review and currently we seek to make sure that factoring is explicitly mentioned, beside Trade finance, in the adaptations of the NSFR duly included by the European Commission in its CRR revision proposal. Anacredit, the European Central Bank database, is another main challenge for those factors under the status of credit institution with new heavy reporting constraints. On their side, financial institutions are not currently in the scope but seem to be threatened to be included later on. Another issue is more and more underlined by European authorities: among the industry actors, prudential framework is not evenly applied, depending on status, jurisdiction, size. It is to expect that EUF will also have to participate to this emerging debate. In larger economic and political perspectives, the environment of Factoring and Commercial Finance industry is currently impacted by significant disruptions: digitization with the emergence of new client relationships, new processes, new players Increasing awareness of corporate and social responsibility, the evolution of international trade, and more accurately Brexit that challenges the European governance framework. But what does finally appear is that changes are necessary to move forward! Disruptions can be transformed into opportunities: renewed offers, enhanced risk awareness, set-up of a new factoring model. And constraints can be overcome: a European status for factoring companies could lead to lower solvency requirements and comfort the recognition of short term specificity and credit insurance. In this context, my mission as chair of EUF is to help Factoring DNA to be clearly identified as secured short-term financing product committed to the real economy and employment in Europe. The update of the EUF White Paper will certainly help for that purpose. The European Factoring and Commercial Finance market represents 2/3 of the world market, the challenge is to protect the know-how and expertise of European professionals. We must work with the legislative makers across the European Union with this goal in mind. It s a collective task that awaits us and for which the expertise of EUF is a real asset! I know that I can rely on and trust all the members of the Executive and among them the two Vice Chairs, Fausto Galmarini and Josep Selles to help me to cope with all these exciting challenges. Kind regards, Françoise Palle-Guillabert 2

3 The Legal The EUF Legal Study 2017 is now out! MAGDALENA WESSEL Chairwoman of the Legal In 2011, the EUF for the first time published a legal study, entitled Factoring, Receivables Finance & ABL A Study of Legal Environments Across Europe This was the update of a comparative law project which had originally been started by the UK s ABFA (now UK Finance) and the international association IFG (now FCI) in After a few years, it was clear that an update to the 2011 edition would be required. Therefore, a second and updated edition of the EUF Legal Study was published in 2013, containing changes to the answers for inter alia Greece and Slovakia. As a few years can be a very long time in the world of lawyers, where amending only two or three words in one set of laws can lead to a whole world of legal concepts and views collapsing, the EUF decided in 2016 to update its legal study a third time. Now, this new update has been finalised and the result is now available through the EUF website in the form of the EUF Legal Study This new and updated version of the EUF Legal Study contains not only updated answers from a large majority EU member states, but moreover, the questionnaire which forms the basis of the study has been revised by the EU Legal and supplemented with further questions. All in all, the questionnaire now contains well over 40 questions on the legal framework for factoring companies in the different EU member states as well as in five non-eu countries (Norway, Switzerland, Russia, Turkey and the USA). The updated EUF Legal Study also contains an updated introduction and an equally updated elaborate and detailed Summary and Conclusion -section, the latter giving an overview of the major differences and parallels between the various legal systems and their treatment and views of factoring and receivables financing as portrayed in the answers contained in the Legal Study. Due to the fact that the questionnaire on which the Legal Study is based has been extended, a direct comparison of the answers provided in the 2013 edition and now in this updated 2017 edition has not always been possible. Nevertheless, the Summary and Conclusion - section provides an insight into some changes that have taken place since the last edition in The updated EUF Legal Study is unique in that it provides an overview of the legal framework for factoring in all EU member states as well as five other important non-eu countries. The answers to the questionnaire on which the EUF Legal Study is based have been written by knowledgeable persons from within the factoring industry who have drawn from both their expertise and their experience. Furthermore, the internationally renowned law firm Clifford Chance was involved in the review of the answers provided, in order to ensure an even higher level of quality of the responses and the Legal Study as a whole. EUF members can download the updated EUF Legal Study 2017 from the members only -section, while both members and interested third parties can purchase PDFcopies from the EUF through its 3 website.

4 The Legal Closing the regulatory gap in the Rome I-regulation MAGDALENA WESSEL Chairwoman of the Legal For a number of years, the EUF has repeatedly pointed out a regulatory gap in the Rome I-regulation on the law applicable to contractual obligations, namely that it is unclear which law is applicable to the third party effects of assignments, particularly in cases of multiple assignments of one and the same receivable. Several times over these last years, it seemed likely that the EU Commission would within short present a legisltative proposal to fill this regulatory gap, e.g. when it in 2011 mandated the British Institute of International and Comparative Law with composing a research study on article 14 of the Rome I-regulation and the third party effects of an assignment in the conflicts of laws. However, this research study did not result in a palpable legislative proposal from the EU Commission in the following years. It is only now in March 2018, approximately seven years later, that the EU Commission finally has released a proposal for a regulation on the law applicable to the third-party effects of assignments of claims, together with an impact assessment to which stakeholders can provide their feedback until May, 7th, This proposal (document COM(2018) 96 final) is available online at: EN/ TXT/?uri=COM%3A2018%3A96%3AFIN Prior to its current proposal, the European Commission published a report on the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person in 2016 (cf. EN/TXT/?uri=CELEX:52016DC0626) and in April 2017, it launched a public consultation on conflict of laws rules for third party effects of transactions in securities and claims (cf. finance-2017-securities-and-claims_en) to which also the EUF issued a response. Based on this preparatory work, the EU Commission has now come forward with a proposal for a regulation on the law applicable to the third party effects of assignments of claims which is mainly aimed at closing the aforementioned regulatory gap in the Rome I-regulation. Over the last years, the EUF has advocated for the law of the assignor s habitual residence or centre of main interest to be applicable to the third party effects of assignments of claims, both in position papers, responses to consultations as well as in personal meetings. In article 4 paragraph 1 of its current regulation proposal, the EU Commission states that the general rule to be applied in such cases is based on the law of the assignor s habitual residence. Only in two exception cases contained in article 4, paragraphs 2 and 3, there is to be the possibility of using the law of the assigned claim (in cases of cash credited to a credit * institution account or claims arising from a financial instrument such as a derivative contract) or for the assignor and the assignee to choose the law of the assigned claim (in cases of securitisation). Hence, the general rule contained in article paragraph 1 will be applicable in particular to cases of 4

5 The Legal Closing the regulatory gap in the Rome I-regulation MAGDALENA WESSEL Chairwoman of the Legal cross-border factoring where it is unclear which law decides on the third party effects of the assignment. This shows that the EU Commission has been convinced by the EUF s line of arguments and follows the EUF s point of view, also referring to both the factoring industry and different EUF publications in its current proposal - a very positive development in this issue and another EUF lobby success. Of course, the EUF will now have to ensure that this positive first legislative proposal is not amended negatively or watered down by the EU Parliament and/or the Council in the following legislative process over the coming months. Therefore, the EUF Legal will keep a watchful eye on this legislative proposal and also consider giving feedback on it to the EU Commission. * * * The picture is downloaded from European Commission`s Facebook page 5

6 The Economics and Statistics Preliminary 2017 figures Factoring Market on a growth path MAGDALENA CIECHOMSKA-BARCZAK Chairwoman of the Economics and Statistics The EU Federation for Factoring and Commercial Finance has collated preliminary 2017 turnover results for the EU factoring market. Responding countries represented c 97% of the total, and EUF is awaiting final detailed statistics. Factoring turnover in 2017 for EU countries exceeded 1,6 trillion euro, with a year on year increase of 8,5%. Factoring volume has increased for a 9th year in a row, confirming its role as a key financial resource supporting companies growth. This year s increase was higher than the 6 years market compound annual growth rate. 6

7 The high level of concentration shown by the EU factoring market remains unchanged, with the top five countries in 2017 (United Kingdom, France, Germany, Italy and Spain) representing 76% of the total EU market. The table below shows detailed information about factoring turnover by country, together with year on year growth rate, GDP penetration and market share. 7

8 This year s GDP penetration ratio was slightly higher than last year s (10,6% comparing to 10,4% in 2016), and there were again wide variations between countries. The lowest GDP penetration ratio was in Luxemburg (1%) and the highest in Portugal (19%). Factoring is growing regardless of the economic situation of the EU this is especially visible when comparing factoring annual rates of growth with real EU GDP growth. This performance confirms the growing popularity of this form of funding, which in addition to speeding up cash flows, also provides additional benefits for entrepreneurs, including the outsourcing of sales ledger management, information about customers credit worthiness, protection from bad debts (in case of non-recourse factoring) and when needed professional collection services. Significantly, factoring can provide access to funding even for companies that have difficulties obtaining traditional bank financing. The type of ownership is more and more homogenous almost 94% of total EU factoring turnover was serviced by banks or companies owned by banking groups (92% in 2016). 8

9 The dominant type of factoring was domestic, representing 78% of total turnover. Compared to the previous year, the structure of turnover remains unchanged. THE DOMINANT TYPE OF FACTORING WAS DOMESTIC, REPRESENTING 78% OF TOTAL TURNOVER 9

10 It is significant that preliminary statistics shows that the structure between recourse vs non-recourse factoring also remained unchanged. Both types of factoring grew at 8% year on year. 10

11 The estimated amount of funds made available to clients by European factors exceeded 220 bn euro, as at the end of 2017, with a year on year increase of 9%. Advances were secured by assets valued at 280bn euro. The ratio between advances granted and security values (79%) reflects the low risk profile of factoring transactions. Security values grew 7% year on year. In 2017 average funds granted per client was 1,2M EUR, 8% higher than in 2016, and the average turnover per client in 2017 was 9M EUR, 6% higher than in The average advance per client shows that the risk exposure of European factoring companies remains low, regardless of growing turnover. 11

12 The total number of active clients in 2017 was 181,998 (a slight increase of 1%), but nonetheless the compound annual growth rate of clients number in last 6 years was still almost 3%. In conclusion, data collected by the EU Federation for 2017 shows that factoring is developing much faster than the EU economy and this is because it has become a recognized source for business finance. FACTORING IS DEVELOPING MUCH FASTER THAN EU ECONOMY 12

13 The Prudential Risk Addressing non performing loans: a non-issue for the factoring industry? DIEGO TAVECCHIA Chairman of the PRC Lately, there has been much noise about the volume of non performing loans (NPLs) held by European banks. Many institutions are addressing the issue; in recent years, the ECB has established a long-lasting narrative about the importance of reducing NPLs, while the European Commission affirmed that reducing NPLs was a key imperative to pave the way to a true Banking Union and a Capital Market Union. The Commission in particular is sparing no effort in order to achieve the goal of relieving the NPL burden from the banks balance sheets, which is seen, among other things, as a hindrance to lending to businesses. In general, it is difficult to disagree with the common sense behind the statements and the actions taken by the European institutions against NPLs. However, it is useful to underline some key concepts: 1) The extent to which NPLs are a concrete issue varies from Country to Country. Ratio of non performing loans and advances (Source: EBA). Greece, Portugal, Italy, Bulgaria for examples, show a NPL ratio that is dramatically higher with respect to most EU Countries, while the weighted EU average is 4%. Among the most relevant economies, Italy in particular show an above 10% NPL ratio despite a significant drop from 16% in 2015 to 11% at the end of ) NPLs are not a real issue for factoring The factoring industry is not subject to prudential regulation everywhere, and where it is regulated, it is with different degrees of intensity. Therefore, the industry lacks a proper and common estimate of the NPL ratio across Europe. Although there are not homogeneous rules to detect NPLs, thanks to the EUF white paper, we know that normally credit risk is significantly lower for factoring than traditional banking. Comparison of the cost of risk between factoring and banking (source: EUF White Paper). Roughly speaking, the ratio between banking NPLs and factoring NPLs is about 4:1. 13

14 The Prudential Risk Addressing non performing loans: a non-issue for the factoring industry? DIEGO TAVECCHIA Chairman of the PRC 3) but the current policies intended to fight against NPLs could backfire if applied to factoring without proper correctives Although this excellent picture of the actual risk borne by factoring companies, as we already wrote in previous editions of this newsletter (see Spring 2017), the industry is facing an issue related to the very definition of default and NPL: the 90 days past due rule, which is intended to operate as a backstop for the credit institution to recognize default, simply doesn t work in factoring. In the EBA s perspective, provided by its guidelines about the definition of default, the 90 days rule will be tightened even more than before for late payers in trade relationships. Late payments are largely used by European businesses (in some Countries in particular) as a way to balance net working capital in contexts where delay in payments is the normal, starting from the public sector. Therefore, the practice does not necessarily recognize a significant increase in the credit risk of the past due receivables, and the accounting of provisions follows the historical patterns of losses for this particular bucket, which is, needless to say, extremely limited and close to the performing loans risk. In this perspective, the factoring industry is clearly impacted from the calendar provision approach (of course, to the extent it is actually applied to the factoring companies). The combination of a tightened rule to detect default (as provided by EBA), which will most likely increase dramatically the amount of automatically recognized NPLs (in particular among public debtors), and of accounting provisioning based on the vintage of the defaulted exposure (as provided by ECB and EC) will be particularly detrimental in some EU Countries, with the potential outcome of transforming a non-issue into a concrete issue that will exacerbate the problem instead of relieving it, with strong impacts on the stability of the factors profit & losses and on the availability of credit to businesses. If the European institutions will not undertake the needed correctives to take into account the factoring peculiarities, this could eventually materialize as an unintended consequence of the policy decisions being debated. 13

15 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 Kraainem Belgium Tel: Fax: info@euf.eu.com Web: