FSB response to BIS consultation on duty to report on payment practices and policies

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1 Business Finance and Tax Spur 1, 3rd floor Department for Business, Innovation and Skills 1 Victoria Street London SW1H 0ET latepayment@bis.gsi.gov.uk 10 February 2015 Dear Sir / Madam FSB response to BIS consultation on duty to report on payment practices and policies The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the above named consultation. The FSB is the UK s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is nonparty political, and with approximately 200,000 members, it is also the largest organisation representing small and medium-sized businesses in the UK. Small businesses make up 99.8 per cent of all businesses in the UK. They contribute 50 per cent of GDP and employ 60 per cent of the private sector workforce. The FSB supports the proposal for greater transparency on the payment practices of businesses. Late payment is one of the most serious issues affecting small businesses. Late payment volumes are continuing to increase, rising from 18 billion in 2008 to 46.1 billion in In part, this is due to the economic climate but it is also due to a wider cultural trend of large companies approach to their cash flow. Existing legislation and redress arrangements have thus far not instilled a responsible payment culture. The Prompt Payment Code reporting requirements are an important measure to drive change, but more needs to be done on a wider front. We recognise the intent behind the recent letter from the Minister, The Rt Hon Matthew Hancock MP, to FTSE 350 businesses asking them to sign up to the Prompt Payment Code. However, to drive and deliver tangible cultural change in business to business payment practices as set out in the FSB response to the 2014 BIS consultation Building a responsible payment culture, it must be mandatory for all FTSE 350 businesses to sign up to the Prompt Payment Code, and abide by its terms. Transparency is needed to tackle more than late payments. Businesses should also evidence their payment practices by publishing: Payment terms, and their compliance record in a prominent, separately defined section of the Annual Report. Where available this should be over the preceding three years to show the trend in payment practices; and Their explanation when their payment practices have included, not only payment beyond agreed terms, but also : Flat fees pay to stay Also known as supplier assessment charges or supplier investment payments, these are flat charges which companies levy on suppliers either as a requirement to be on a supplier list, or packaged as an investment into hypothetical future business opportunities. It is often indicated that non-payment will result in de- 1 of 10

2 listing. New research has indicated that more than a quarter of a million (260,000) businesses could be facing so called pay to stay charges after five per cent of businesses surveyed said they had been asked to make a payment by a customer or face de-listing. Excessively long payment terms In 2011 the EU issued a directive requiring all businesses to pay their suppliers within 60 days, or face interest payments on money owed. However, the UK implementation of the directive allows businesses to agree longer terms provided it is not unfair to the creditor. This has led to many companies insisting on payment terms of 90 or even 120 days. In effect this becomes an interest free loan from firms in the supply chain to large companies with excessive payment terms. Discounts for prompt payment Prompt payment discounts are arbitrary discounts big firms give themselves for paying early or even just on time. For example, a firm that has agreed to pay 120 days following receipt of an invoice may also apply an automatic discount of 3% if they pay on or before the 120th day. Retrospective discounting balance sheet bonuses Some firms seek to apply retrospective discounts to outstanding money owed to a supplier. This involves the company effectively changing the terms of the contract signed with the supplier after a contract has been agreed. Methods used to extract these vary, but include threats of de-listing, withholding payment, marketing contributions and previously un-agreed discounts applied to specific volumes of business. Transparency is also needed on what the maximum payment terms are. It is fundamental that payment practices are benchmarked against the requirements set out in the EU Directive, including the maximum 60 day payment term for private businesses. Without a benchmark as a reference point small businesses are disadvantaged by not being able to compare payment terms against this. It also makes it difficult to define what is a fair or a grossly unfair payment term. From the perspective of a large purchaser, and that of small businesses, the term grossly will mean different things. The majority of small businesses would define grossly unfair as: Outside set contract terms More than 30 days Unilateral change to payment terms, in particular those with little or no notice Retrospective discounts or demands Challenging invoices just before payment term ends Asking for upfront payments to be part of large firms suppliers list Transparency will help drive a cultural change. However, cultural change can only be embedded if it is supported by the Boards of businesses and cascaded throughout the organisation. To embed cultural change the Prompt Payment Code should be a central and explicit part of the assessment of the Board s remuneration package and commitment should be evidenced by making this information a matter of public record, for both investors and suppliers to assess. While the consultation focuses on the needs of suppliers, having access to reports on payment practices and policies is equally important for private retail investors to be able to make informed investment decisions. To achieve this, the Board should report on the business s payment practices at shareholder meetings. 2 of 10

3 Response to consultation questions Question 1: Do you agree that the reporting requirement set out in this document is clear and easy to understand? The reporting requirements set out in this document and the draft legislation are necessarily detailed to evidence payment practice. The FSB suggests the report template is supported with clear guidance. Question 2: Do you agree that the reporting requirement should effectively only cover payments related to business to business contracts? The reporting requirement should only cover payments relating to business to business contracts. There is a lack of accessible, timely, and practical protection for small businesses contracting with other business and resources need to be focussed on addressing this. The imbalance of power between consumers and businesses is already acknowledged by Government and there are well established protection measures in place for consumers. Question 3: Do you agree that we should be excluding financial services contracts? If yes, which financial services should we exclude; and how should we define them? It is not clear what is meant by financial services contracts for the purpose of this consultation. As it stands, the Small Business, Enterprise and Employment Bill at 3(2) states a contract is a relevant contract if (a) it is a contract for goods, services or intangible assets (including intellectual property). Whilst some financial services contracts cover intangible assets, for example, the fee on a loan, and could fall within the definition of a relevant contract, there has been no evidence put forward of a trend or culture in poor payment practices on financial services contracts that cannot be addressed through established measures. Careful consideration is needed on whether other contracts should be included within the reporting requirement. Question 4: Do you agree that the reporting requirement should extend to (a) large UK companies, (b) large LLPs and (c) all quoted companies? Question 5: Do you agree that the Companies Act provides an appropriate threshold of whether a private company or LLP qualifies for an exemption from reporting? The reporting requirement should extend not only to large UK companies large LLPs, and all quoted companies but also to large companies doing business in the UK even if they are not UK registered. This will : Give small businesses confidence to approach new customers. Put all large businesses on a level playing field and avoid giving some types of business a competitive advantage over other types of business should they not face the same reporting requirements and levels of transparency. Question 6: Do you agree that businesses should be required to provide individual and nonconsolidated reports on their payment practices? 3 of 10

4 There needs to be greater transparency on the payment practices of businesses so the suppliers, the shareholders, and the investors are informed on the financial health of the business before they make a decision to do business or invest. Suppliers and investors need clear information about the individual customer/company they are looking to supply/invest in, rather than at a group or parent company level. The FSB agrees that reports should be provided at an individual company level to provide a clear picture of where there is acceptable and poor payment practice within a business group. Where a report is provided by a parent company it must clearly state the payment practices of all subsidiary companies. This approach will ensure a level playing field between both individual and consolidated business groups. Question 7: Do you agree that businesses should report on (a) their standard (b) their maximum payment terms, and (c) any changes to these over the last reporting period? Should the report require information on whether suppliers had been notified or consulted on this change in advance? The report should include standard, longest, average, and maximum payment terms, changes to these over the past three years (where information is available), and whether suppliers had been notified or consulted on this change at least three months in advance so they can adjust their cost base. A thorough consultation period is necessary and the changes should be openly shared amongst all the company s affected suppliers, and a forum provided for suppliers to comment anonymously. Additional force could be given to such a forum by allowing the suppliers to vote for the changes, thereby helping to square the imbalance in negotiating powers. The content of the report should be aimed at giving suppliers and investors the information they need to make informed decisions about the payment practices of firms they are entering into business with or investing in. However, the imbalance of negotiation power will not be rebalanced by suppliers understanding what to expect, in particular the standard and maximum payment terms when negotiating contracts with large businesses. The imbalance of power comes from large businesses not having any commercial, regulatory, or moral requirement to negotiate because they hold substantial portions of small suppliers markets. This may be especially true at the sub-national level, where regional and local markets might be dominated by few firms. Suppliers can only try to change payment terms if the business customer is willing to negotiate. Late payment legislation is based on remedy rather than preventing the breach. Legislation addresses the issue after the fact and it leaves the supplier having to find alternative cash flow or ways to stay solvent until payment is made. The business customer has had, in effect, supplier credit with no bank fees or administrative burden unless the supplier takes legal action. Small businesses have been left to absorb the costs of this practice for too long and they should not have the burden of having the onus of taking action against large businesses. The report should inform industry regulators of the standard of payment practices. This would give industry regulators a better understanding of the functioning of the market place and help them to identify where additional oversight, intervention for poor practices, or regulation is required. 4 of 10

5 Question 8: Do you agree that this report should be a mandatory requirement for all companies in scope? The FSB welcomes mandatory reporting for all businesses in scope, as we argued in our January 2014 consultation response. Mandatory reporting will provide a clearer picture of industry behaviour within markets, better enable regulators to identify where greater scrutiny of business practice is required, and help suppliers and investors to assess the financial health of the business. The use of standardised reporting will assist businesses to compare the payment practices of customers and make informed decisions on the potential legal and financial costs of entering a contract with them. As commented on Question 7 above, greater transparency on its own is unlikely to alter the imbalance of negotiating power where the business customer holds a significant portion of the suppliers market. To embed cultural change the Prompt Payment Code should be a central and explicit part of the assessment of the Board s remuneration package and commitment should be evidenced by making this information a matter of public record, for both investors and suppliers to assess. While the consultation focuses on the needs of suppliers, having access to reports on payment practices and policies is equally important for private retail investors to be able to make informed investment decisions. To achieve this, the Board should report on the business s payment practices at shareholder meetings. Public procurement can be an important influence on behaviour. Procurement policies of the potential supplier should weigh heavily in the final decision. The FSB would argue that suppliers should be members of the Prompt Payment Code before bidding for public contracts. Failing that, the procuring body should publish an explanation of why a public procurement contract was given to a bidder whose payment terms do not meet the requirements of the Prompt Payment Code. The explanation should set out how the terms of the public procurement contract will ensure these payment terms are not continued through the supply chain. Question 9: Do you agree that the reporting requirement should specify when the clock starts on the payment period? Do you agree that date of invoice is a suitable point to start the clock on payment? The reporting requirement needs to be consistent to enable suppliers to compare between businesses and for businesses to benchmark themselves against their competitors. The reporting requirement should specify when the clock starts on the payment period. The FSB agrees that the start date should be the invoice date as this is the legal date for VAT purposes. Question 10: Do you agree that a metric of invoices paid beyond terms should be included in this report? If yes, should this be for (a) proportion of invoices (b) value of invoices (c) both the proportion of invoices and the value of invoices? Question 11: Should a business have to report on the average time taken to pay invoices? Does this add a valuable counter balance to the proportion of invoices paid to terms? 5 of 10

6 Question 12: Would metrics demonstrating how many invoices are paid in (i) 30 (ii) 60 and (iii) 120 (iv) over 120 days be valuable to suppliers? If yes, should this be for (a) proportion of invoices (b) value of invoices (c) both the proportion of invoices and the value of invoices? The report metrics should identify changes in payment terms and should include invoices paid beyond terms by the proportion and value of invoices; and average and longest time taken to pay invoices; and how many invoices are paid in 30, 60, 90, 120, over 120 days by the proportion and value of invoices. Question 13: Do you agree it that it would be useful for the report to include additional information, in narrative form, to give suppliers an understanding of a firm s wider payment? FSB Comment A clear statement in the report, on specific issues, would assist suppliers and investors to understand the payment practices of the firm, ideally in accord with strengthened and more comprehensive best practice guidelines set out by the Prompt Payment Code. The statement should include an explanation for payment practices that do not meet the Prompt Payment Code requirements. The report should be easy to access and assess so as not to introduce a time cost to suppliers nor a disproportionate administrative burden to the businesses within scope of the reporting requirements. The report should include: How much interest the business has paid over the past three years, split year by year. This would give some confidence to small businesses to complain if payment were late by showing that the buyer does pay interest; and Why the businesses contract terms have changed, and/or are greater than 60 days and how this aligns with Prompt Payment Code requirements. Question 14: Do you agree that it would be beneficial for a business to report on their existing dispute processes? Businesses should publicise their dispute resolution process and the number of disputed invoices within their dispute resolution process. In particular, the dispute resolution process should highlight when the dispute could be taken to an independent third party for resolution, such as a regulator or arbitrator. To be of benefit to suppliers, however, it would be preferable to highlight this information on invoices rather than on group accounts. Few suppliers would refer to that document in the first instance should they seek such information. This information should be assessed by the appropriate industry regulator, where one exists. Question 15: Would it be helpful for the Government to provide a definition of a disputed invoice in the report? Defining, or setting common criteria for, a disputed invoice would provide certainty for both parties on when the dispute resolution process would start. Consistency in the definition is necessary so suppliers can assess businesses on a level playing field with their competitors, when reporting disputed invoices. Question 16: Have you experienced companies disputing invoices as a way of delaying payments? Do you see a role for Government intervention on this issue, and if so, what is it? 6 of 10

7 Small businesses have experienced late challenge on invoices and where appropriate the FSB will provide these case studies to Government. Government has a role in intervening to stop companies disputing invoices as a way of delaying payments. This issue could be resolved by legislating that a challenge on an invoice can only be within, for example, two weeks of date of invoice, whereas currently there is only a requirement to pay within 30 days unless otherwise agreed. As well as the late challenge on invoices, many companies are routinely exceeding agreed terms, or changing terms retrospectively to allow them to miss agreed payment dates as in the experience of a small business, They said, they could not pay before the 10th of the month and that they are a big firm and that s how they operate. The onus has to be on the customer to take responsibility to clear all invoices within the 60 days under the prompt payment code. Question 17: Do you agree that a business should report on whether they offer e-invoicing? Should this disclosure include any further information or simply be a tick box disclosure? The FSB believes it is a commercial decision for businesses to offer e-invoicing. Suppliers have to deal with multiple software systems and absorb their associated costs. It should remain at the discretion of the business to promote this to customers. Government should use voluntary e invoicing for tier 1 contractors and pass this use of technology down their supply chains. This could act as an exemplar to the private sector and change behaviour in business to business contracts. Question 18: Should businesses report on whether they offer supply chain finance? Should this disclosure also include the payment terms and average cost of this finance, or simply be a tick-box disclosure? Businesses should report when they offer supply chain finance, which has been used to justify extensions to payment terms 1. The report should also include the payment terms and average cost of the supply chain finance, and any restriction placed on the supplier using supply chain finance from an alternative provider. Question 19: Do you agree that a business should disclose whether it is a signatory of a Code and which code they belong to, if any? The FSB agrees businesses should disclose when they are signatories to a code, both in their annual reports and on their communications with their suppliers, for example by featuring their membership prominently on their invoices. Industry selfregulation through codes is more likely to be effective when signatories to a code benefit from their compliance. This is only possible if suppliers can identify the businesses that are or are not signatories to a code and then make an informed decision on who to contract with. A supplier needs to know that a business is a signatory to the Prompt Payment Code to have confidence in the payment practices and to have a process to raise a complaint about payment practices that do not meet the requirements of the Prompt Payment Code of 10

8 Question 20: Do you have concerns about the practice of some suppliers having to pay to be included on supplier lists? If yes, why? As part of FSB research, businesses were asked to give examples of the most common poor payment practices they had to deal with including paying to be included on supplier lists. Also known as supplier assessment charges or supplier investment payments, these are flat charges which companies levy on suppliers either as a requirement to be on a supplier list, or packaged as an investment into hypothetical future business opportunities. It is often indicated that non-payment will result in de-listing. This practice is a demand for money from small businesses without any guarantee of getting a contract for the supply of their goods or services and it needs to clearly legislated against. We are also not aware of such payments accruing interest when on deposit with the large company therefore in effect, an interest free loan. It is difficult to establish the overall number of businesses affected by these practices, however recent FSB research found that five per cent of businesses surveyed said they had been asked to make a payment by a customer or face de-listing. 2 Question 21: Do you think that Government should take any action with respect to supplier lists, through this reporting requirement or otherwise? If so, what? The requirement that suppliers have to pay to be on a customer supplier list impedes the functioning of the market by acting as a barrier to entry. Small businesses that do not pay to be on a customer supplier list are not able to compete for business with that customer. Paying to be on a supplier list also carries with it an opportunity cost, as the monies could have been employed elsewhere in the business. Whilst customers might want to identify and use preferred suppliers, this should not be dependent on the supplier: paying a charge to be on the supplier list or being assessed before being put on the supplier list 3 or having to invest in hypothetical future business opportunities Contract law and current arrangements are still clearly insufficient to tackle these practices. Government should consider legislating to make these practices illegal. Question 22: Do you agree that companies should report every three months covering at least the whole three month period? The FSB agrees that reports should be provided every three months, with figures set against historic performance to provide a view as to whether payment practices are improving Unless this is a usual requirement under an ISO accreditation within specific industries for example, automobile and aerospace. In all other cases this should never be used to protect market share of large businesses or exclude small ones from tendering/supplying. 8 of 10

9 Question 23: Is a 30 day period enough time after the end of a quarter to provide a report of this nature? This is probably sufficient. Question 24: Do you agree that companies reporting dates should be aligned with their financial reporting cycle? The FSB agrees that a proportionate approach should be taken to reduce unnecessary administrative burden on businesses within the scope of reporting requirements. It therefore makes sense to align reporting with existing internal reporting timetables. The main concern is that regular and accurate reporting takes place. Question 25: Do you agree that this reporting requirement should not be included in a company s annual accounts but instead have to publish it on their website? If yes, do you think it would be useful for the information to also be released alongside the publication of a company s annual accounts? Every means should be used to publicise this information to the benefit of suppliers and investors. Until there is reliable broadband connectivity it is even more important that reports are not only placed on websites. The reporting requirement as a minimum should be: Published in a prominent, separately defined section of the Annual Report. Where available this should be over the preceding three years to show the trend in payment practices, and Published on the company s website either on, or via a link on, the home page, and Accessible via a link from the Prompt Payment Code web page. The report would be duplicated so there should be limited additional administrative burden. All reporting businesses should use the same icon for the reports so the location of the report is easily recognisable to suppliers and investors. Question 26: Is The Gazette an appropriate online resource for companies without a website to use for reporting? If no, are there more suitable alternatives? For the reports to be of benefit they need to be accessible to suppliers. The Prompt Payment Code list of signatories should include a link to any website the company uses to host the report. It would be surprising if a large business did not have any website. Further, it is not clear how the Gazette can be the online resource used by the company. The FSB understands the Gazette is used for insolvency notices and it is against the law to take on a new supplier that is knowingly trading when insolvent. Is it the intention to change the purpose of the Gazette? Question 27: Do you agree companies should be asked to report consistent with open data principles, if so what should these be? Question 28: How could we make this data as accessible and useful as possible? 9 of 10

10 To enable businesses to understand the payment practices of different businesses, all reports should be (a) consistent and (b) provide the level of detail on payment practices, necessary for suppliers to decide whether or not to supply a company. The use of open data principles should assist with the consistency and accessibility of the data on the websites of different customers. Question 29: Do you agree that a company director should be responsible for signing off each report? A company director, ideally the CEO, should be responsible for signing off each report to ensure the report is factually correct and that the business can be held liable for mis-reporting. Internal controls should include compliance with the code being an integral part of the assessment of Board s remuneration package by shareholders. Question 30: Do you agree that breach of this requirement should be sanctionable by a criminal offence? The penalty should act as a deterrent to any breach occurring, and to underline the importance of providing accurate, transparent information to suppliers and investors. The penalty should be proportionate to the seriousness of the breach. This approach is consistent with the existing treatment of other similar reporting requirements and it follows the precedent of the Companies Act Question 31: Would you find guidance in complying with this reporting requirement helpful? If yes, who should produce this guidance? The reporting requirements set out in this document and the draft legislation are necessarily detailed so as to evidence payment practice. The FSB suggests the report template is supported with clear guidance. The Prompt Payment Code should provide this guidance. Question 32: What comments do you have on our draft Regulations? There should be an opportunity to comment on the Regulations after they have been revised to reflect the outcome of this consultation. The FSB will continue to inform BIS work on this issue and is happy to provide further information. Please contact Erin Flood, Policy Advisor, at erin.flood@fsb.org.uk if this would be helpful. Yours sincerely Mike Cherry National Policy Chairman 10 of 10