Contents: Towards a proper. The EU Federation for the Factoring and Commercial Finance Industry

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1 NEWSLETTER / MAY 2016 / ISSUE 11 Connecting and Supporting the Commercial Finance Industry Worldwide Contents: Welcome Erik Timmermans, EUF Chairman Making factoring accessible to everyone Françoise Palle-Guillabert, Vice Chairman News on the European General Data Protection Regulation Magdalena Wessel, Chairman of the Legal Committee Constant and stable growth Factoring in Figures Magdalena Ciechomska-Barczak, Chairman of the E & S Committee Towards a proper regulation for factoring Diego Tavecchia, Chairman of the PRC Committee 5 9 The EU Federation for the Factoring and Commercial Finance Industry

2 2 Welcome from Erik Timmermans EUF Chairman A warm welcome to our Spring Newsletter. Dear members and readers, This being my first newsletter as Chairman of the EUF, I first of all wish to thank the Past Chairman, John Gielen, who has steered the EUF since 2009 from a conceptual project to a strong and successful platform for cooperation for the European Factoring and Receivables Finance industry. What started as a project initiated by Kate Sharp (ABFA UK) and myself (then IFG), has grown into a truly representative voice for the industry in Europe. All 14 major national associations in Europe are represented in the EUF, which is now part of FCI, the single global association for Factoring. 97% of the Factoring industry is represented in the EUF, which gives full relevance to the platform when interacting with different stakeholders. Factoring & Receivables Finance is now on the table and on the radar of the EU Parliament, the EU Commission, the EBA and the ECB which gives us a window of opportunity to increase further awareness about our Industry and about its specific benefits. The Factoring Industry in Europe supports SME Lending, supports the real economy and therefore also employment and does this at a low financial risk for the financial system. Our recently published White paper on the Factoring Industry in Europe has demonstrated that the expected losses in case of Factoring Finance are up to 4 times lower than in the case of traditional non-secured Bank lending. The success of the EUF is a direct result of the efforts and the work behind the scenes from the technical committees and their respective Chairpersons. In this newsletter you will be updated on their activities. A special welcome to Magda Barczak (Polish Factoring Association) who is the new Chair of the Economics & Statistics Committee, taking over from Diego Tavecchia (ASSIFACT) who has become the Chair of the Prudential and Regulatory Committee. During the ExCom meeting in April, we have agreed to update this year the Legal Study on the different Factoring environments in Europe and to make an update on the White Paper next year. Our third EU Summit for the Factoring & Commercial Finance Industry will take place in Madrid on the 2nd of February 2017, of course with the support from the Spanish Association (AEF). Our last ExCom and Council meeting held in Brussels on 5th of April had to be reorganized into a mixture of physical and teleconference meeting, due to the difficult travel situation in Brussels after the events of March. For this reason, we have decided to organize a new networking meeting for all EUF member associations in Amsterdam on the afternoon of 19 September, followed by a dinner hosted by FCI and the ExCom meeting on 20th September. More information will follow soon. Together with the Vice-Chairman, Françoise Palle-Guillabert (ASF) I want to support the EUF in continuing its successful activities and make sure that the voice of the Factoring Industry is heard in Europe. I also believe we have to become more pro-active and start thinking about the possibility of harmonizing the legal and prudential environment for our Industry in Europe. The White Paper has provided evidence of the much lower risk involved in finance through factoring compared to bank financing. This lower risk should be translated in an adapted regulatory environment and lower capital requirements for factoring. But when talking with policy makers, we need to speak from the same page as an industry. I look forward to discussing these important topics with you in the near future! With every best wish, Erik Timmermans EUF Chairman 2

3 Making factoring accessible to everyone FRANÇOISE PALLE- GUILLABERT Vice-Chairman A glossary for microbusinesses At a meeting of the ASF s factoring committee in 2015, French factors produced an educational glossary for microbusinesses. As a group, they recognised the need to make the descriptions of their tariffs more understandable and transparent to microbusinesses. This initiative followed an enquiry carried out in July 2015 by the French Credit Ombudsman (médiation du crédit) and F. Villeroy de Galhau s report on business investment financing. Terminology has been simplified and standardised. The document was sent to the French business financing supervisory committee (l Observatoire du financement des entreprises) in December 2015 in two parts: a list of cost categories broken down into standard services, specific services and optional services, a Glossary containing explanations of the terminology used. Greater pricing transparency At the beginning of 2016, discussions are taking place on supplementing this glossary with information that would allow microbusinesses to aggregate their annual costs. The summary information will become more widely available within two years. These measures should make factoring a more attractive prospect for businesses, especially microbusinesses bearing in mind that France is the third largest factoring market in the world (behind China and the United Kingdom) and a number of French businesses feature in the top 10 list of European and world factors. 3

4 The Legal Committee News on the European General Data Protection Regulation MAGDALENA WESSEL Chairman of the Legal Committee In January 2012, the European Commission proposed a comprehensive reform of EU data protection rules, mainly in order to update and modernize the 1995 Data Protection Directive, which simply was not up to date anymore, especially with regard to certain technical developments, but also to enhance citizens rights and control over their personal data. Moreover, the Commission opted for suggesting a (general) regulation rather than a new directive, as a regulation is directly applicable in all EU member states without further implementation steps, thereby reducing fragmentation of laws and enhancing harmonization. It took more than 3 years for the European legislators to draft legislative proposals of a General Data Protection Regulation (GDPR) which could be used as a basis for the so called trilogue this 3-year process included several thousand amendments to different draft legislative proposals which were discussed in e.g. the European Parliament. The trilogue entails informal interinstitutional negotiations which serve to reconcile the Commission s, the Council s and the Parliament s positions or different drafts in order to clear the way for the adoption of a single legal act at a preferably early stage in the legislative procedure. In early December 2015, these trilogue negotiations had already come a long way, but were still ongoing, which is why the EUF issued a position paper to ensure that factoring and receivables financing will continue to be possible and feasible under the new EU General Data Protection Regulation (cf. euf.eu.com/news/newsflash/euf-position-paper-on-eugeneral-data-protection-regulation.html). Particularly the question of lawful processing of data was still an open issue. The EUF was therefore pleased to note that in the (preliminary and compromise) regulation text on which Parliament, Commission and Council agreed in mid-december 2015, data processing was inter alia considered lawful if it is necessary for the purposes of the legitimate interests pursued by the controller or by a third party, except where such interests are overridden by the interests or fundamental rights and freedoms of the data subject (art. 6 (1) f of the GDPR). However, the requirements on transparent information to be provided to the data subject by the controller are numerous and may well increase the administrative burden on both factoring clients and factoring companies, especially in B2C-relations and when owner-managed micro businesses are concerned, as the line between personal data of a natural person and data regarding the legal person is very thin in such cases. In April 2016, both the Council and the European Parliament adopted the GDPR (cf. consilium.europa.eu/doc/document/st INIT/en/pdf). Currently, it is probably only a matter of weeks until the final (and officially translated) version of the GDPR is published in the EU Official Journal. According to art. 99 of the DGPR, it will enter into force 20 days after its publication and shall apply two years from the date of its entry into force, i.e. from mid-2018 (most likely May or June 2018). Even though the GDPR will be directly applicable in all EU member states and (in contrast to a directive) no implementation into the member states national laws is necessary, it is very likely that in many, if not even in all EU member states a transposition process will take place, mainly to ensure that the national laws on data protection which already exist are compatible with or reference to the GDPR. During these legislative processes on the national level, member states can (and hopefully will) make use of certain opening clauses and options for national restrictions foreseen by the GDPR, e.g. for information rights in art. 23 of the GDPR. These clauses and options are a form of leeway provided to the EU member states by the GDPR, which is why the GDPR is a general regulation. Hence, interest groups and stakeholders on the member states national level now need to take over and deliberate on how to nationally transpose the GDPR with minimum negative impact on factoring businesses and the finance 4 industry as a whole.

5 EUF: The Economics and Statistics Committee Constant and stable growth Factoring in Figures MAGDALENA CIECHOMSKA-BARCZAK Chairman of the Economics and Statistics Committee The final statistics of the EU factoring industry for 2015 again show continued annual growth. The total turnover for EU countries in 2015 reached 1.47 billion euro, with a year on year increase of 5,43%. During the last 5 years, factoring turnover in the EU constantly grew at a compound annual growth rate of 7%. This sustained growth confirms the good condition of the factoring industry and its rising role in financing of EU companies. Comparing factoring annual rates of growth with real EU GDP growth, it can be seen that factoring has been growing regardless of the economic situation of the EU. *Exchange rates fluctuation biases were eliminated. 5

6 EUF: The Economics and Statistics Committee Constant and stable growth Factoring in Figures MAGDALENA CIECHOMSKA-BARCZAK Chairman of the Economics and Statistics Committee This was possible due to the fact that factoring is more often perceived by companies as an alternative to short term financing sources of funding. As illustrated in the graph below, during there was a decrease in the short term funding GDP penetration ratio while at the same time the factoring GDP penetration ratio grew. It is worth stressing that short term funding deteriorated in those years by an amount which exactly corresponds with the increase in factoring turnover. This is another proof of the strenghtening role of factoring as a flexible source of funding working capital needs. *Data for 2015 were not available on ECB website at the time of this newsletter publication. Analysis of GDP penetration ratio by country reveals that in nine countries GDP penetration ratio was higher than EU average see table below. 6

7 EUF: The Economics and Statistics Committee Constant and stable growth Factoring in Figures MAGDALENA CIECHOMSKA-BARCZAK Chairman of the Economics and Statistics Committee The EU factoring market is highly concentrated, with the top five countries in 2015 representing almost 80% of the total market. The main players were United Kingdom, France, Germany, Italy and Spain. Also the type of ownership is rather homogenous almost 91% of total EU factoring turnover was serviced by banks or companies owned by banking groups. The dominant type of factoring, according to EUF estimates, is domestic and it represents over 80% of total tunover. It has grown 6% y/y. But a higher growth rate was observed in international factoring, which in 2015 increased by 19% y/y. This reflects not only economic development of EU companies, but also development of their cooperation with new, international partners. 7

8 EUF: The Economics and Statistics Committee Constant and stable growth Factoring in Figures MAGDALENA CIECHOMSKA-BARCZAK Chairman of the Economics and Statistics Committee The main driver of growth in 2015 was recourse factoring with over 54% of market share. This type of factoring decreased slightly y/y while non recourse factoring has grown by 19% y/y. Each year factoring gains more clients. The estimated number of active relationships in 2015 increased by 4,5% y/y, reaching 171 thousand businesses. The estimated amount of funds made available to clients by European factors exceeded 168 bn euro, as at the end of Those advances were secured by assets valued at 251bn euro. This ratio between advances granted and security values reflects the low risk profile of factoring transactions. The statistics for 2015 show that clients are increasingly appreciating and valuing the benefits of a factoring facility. One of the key benefits is that it provides access to funding even for companies which have difficulties with obtaining bank financing. It is vital especially for SMEs. Another advantage of factoring is that it is a flexible source of business finance based on a clients sales growth, which can be also a tool allowing to spread debtor risk or to improve balance sheet structure. 8

9 The Prudential Risk Committee Towards a proper regulation for factoring DIEGO TAVECCHIA Chairman of the PRC Committee At the recent Annual Meeting of the EUF, I was appointed to take over the Prudential Risk Committee from Peter Mulroy. The PRC has been quite active in recent years and also highly effective in doing its job. A lot of work has been excellently done so far under Peter s leadership, yet a lot of work is still to be done to keep pace with the continuous news stemming from our very fertile regulatory ground. The factoring industry has recently been involved in the many changes that are taking place in the evolving prudential regulatory environment in Europe. Many institutions are issuing new or renewed regulatory pieces, creating some potential overlaps and certainly some confusion in the operators: among the international bodies that are active in this new wave of prudential regulation, one can count the EBA, the European Commission, the European Central Bank, the Basel Committee and the IASB. Topics touched in the consultative papers issued by such bodies have either a direct or indirect impact on the factoring and commercial finance industry, yet all of them will have consequences, significant in some cases. What follows is a review of the issues that could affect our industry. The EBA is currently issuing guidelines on the setting of the materiality thresholds for automatic past due detection and on the definition of default. Both of them will clearly affect the factoring industry, the first setting limits to the national discretion that will most likely increase the burden for factors operating in countries where late payments are the rule, and the latter proposing a specific proposal on how to detect past due exposures in factoring in order to harmonize the practice among EU. Consultations are over and the industry is looking forward with great interest to the publication of the final papers. Besides the EBA s efforts to harmonize rules among EU, prudential regulation is going to be changed root and branch during 2016, as the BCBS started an ongoing process in order to review the whole Basel framework. A first consultation paper regarding the revision of the Standardized Approach for credit risk, removing the reliance to the ratings provided by external agencies, has been released, commented and then overtook by a new proposal, which is completely different as it re-introduces a mechanism based upon the evaluation of the external rating agencies (with a potential negative override generated by an internal due diligence). Among the other news included in this second paper, I would highlight those regarding a preferential risk weight for SMEs (85%), which is good news for the industry, and a significant increase in the credit conversion factor for unconditionally cancellable commitments (from 0 to 50-75%), which is bad news. The EUF has again participated to the consultation asking for proper treatment of factoring, adopting the same principles already in force within the IRB framework, that provide preferential parameters and specific approaches for purchased receivables. The IRB approach itself is now being reviewed, through a consultative paper that actually provides some surprises, the first being the removal of the possibility to use internal ratings for some portfolios, namely large corporates and banks, for which in future only the SA option will apply. Directly related to the factoring industry is the decrease in the regulatory LGD parameter from 35% to 20% in the case of exposures secured through purchased receivables, and this comes along with an increase in the haircut to the nominal value of the outstanding receivables (from 20 to 50%). Such new parameters, applicable in the Foundation IRB approach, should generate a slight benefit for the industry with respect to the current situation, but what is most important to highlight, in my opinion, is the fact that the Basel Committee appears to be actually recognizing, at least to a certain 9 extent the low LGD nature of factoring and invoice discounting.

10 The Prudential Risk Committee Towards a proper regulation for factoring DIEGO TAVECCHIA Chairman of the PRC Committee Connected with the risk definition and parameters, one cannot forget the impending introduction of IFRS 9, which will change the risk perspective in accounting evaluations, taking into consideration the PD and the expectation about future losses for the impairment of the exposures. To make simple things difficult, the concepts of PD and risk referred to in the IFRS 9 does not fully coincide with the one used for prudential purposes. The European Central Bank will more and more become an important counterparty for the EUF, as it assumed responsibility of the supervision of the larger banking groups in Europe under the Single Supervisory Mechanism. Regarding the second wave of TLTROs, that will take place soon, the EUF, along with Eurofinas and Leaseurope, is currently struggling to assure that the discrimination between banks and financial companies showed in the first round will be removed in this second one. On the factoring side, another technical issue regards the fact that the reference to the balance sheet exposures could bring all non recourse purchase of receivables ( true sales ) to public administrations out of the scope of the TLTRO operations. Last but not least, the Anacredit project is stubbornly proceeding toward its implementation, although facing fierce resistance by some parts of the banking industry and even by some National Supervision Authorities. The PRC of the EUF will continue to monitor and react to, when appropriate, all these new ongoing initiatives in order to try to reach a fair and proper regulation for the factoring industry. * * * The picture is downloaded from European Commission`s Facebook page 10

11 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: