Last month, during the 55th FCI annual meeting, factoring entered a new era. The launch and release of three major initiatives that have taken years to achieve together will create a catalyst of significant change for the factoring industry globally. For the first time, the industry has launched three distinct yet essential milestones to help hasten the rise of factoring and receivables finance like never before.
Factoring Model Law (FML)
The purpose of the Model Law is to provide an instrument for States that want to introduce a new factoring law or update existing laws. The FML was first initiated in 2018 by certain World Bank representatives, who recognized the importance of a standalone Model Law on Factoring, especially for those emerging markets considering factoring in their countries. FCI sent a letter that same year to the UNIDROIT Secretary General, Mr. Ignacio Tirado, to offer FCI's full support and backing. The genesis of this model law can be traced back to the establishment of FCI.
The FCI Code partly inspired the UNIDROIT to develop the Ottawa Convention on International Factoring in 1988. The UNCITRAL Receivables Convention was released in 2001. And in 2016, the UNCITRAL Model Law on Secured Transactions was created to provide a functional, integrated, and comprehensive approach to all types of transactions that fulfil security purposes of all kinds of tangible and intangible movable property. However, there was a recognition that lacking an FML would hinder the factoring growth, especially in developing countries. The FML is envisioned to provide legal clarity to a comprehensive spectrum of factoring transactions, which would boost investor’s confidence and thus promote easier and greater access to credit, significantly benefiting SMEs. Mr. Ignacio Tirado and Mr. William Brydie-Watson from the UNIDROIT lead the launch of the new FML in Marrakech on 30 October. You may find the law on this link: https://www.unidroit.org/instruments/factoring-model-law/
The IFC/World Bank’s Factoring Regulatory Guide
Notwithstanding the growing demand for establishing a coherent regulatory framework, historically, guidance on the regulatory aspects has never been provided. In the past, FCI has submitted guidance papers on specific attributes that would benefit an economy in implementing a regulatory framework. However, the absence of a global regulatory guide was a hindrance, and the IFC/World Bank took it upon themselves to create a comprehensive regulatory guide on factoring to fill this gap while promoting coordination between the private law and regulatory regimes.
The main objective of this Knowledge Guide is to provide guidance on law reforms seeking to support receivables finance and thereby promote sound and inclusive access to credit in emerging markets. It indicates options and advances recommendations to establish a cohesive regulatory framework for non-banking financial institutions (factoring companies) to extend funds upon the transfer of receivables (factoring activities). The primary audience of this document includes policymakers and decisionmakers involved in the law reform process, such as officials at central banks, supervisory authorities, and governmental departments, including the staff of the World Bank and donor institutions.
This Knowledge Guide represents a point of reference for reforms and present and future harmonization projects pertaining to an area that is of critical importance for the attainment of inclusive economic growth and sustainable development. Knowledge Guide is divided into six sections and one annex:
- Section I: Examines the increasingly important role of factoring, including within supply chains, in facilitating access to credit for MSMEs.
- Section II: Main regulatory trends that are driving the demand for the establishment of a comprehensive regulatory regime for factoring.
- Section III: Guidance for policymakers and law reformers to establish a comprehensive legal and regulatory framework for factoring activities.
- Section IV: How factoring activities can be supervised under different governance models and indicates the authorization requirements for financial institutions to undertake factoring activities.
- Section V: Prudential regulation and indicates the key components of a prudential framework for factoring companies.
- Section VI: Conduct of business regulation applicable to factoring companies.
- Annex I: Template structure for a legislative instrument that combines within the same statutory instrument both private law and regulatory elements.
The publication will be ready for public dissemination once it is officially cleared, which is in progress.
The FCI Legal Study
To top it all off, in 2020, FCI approved launching an exciting new project to uncover the legal and regulatory mechanics for factoring worldwide. Since 2013, the European Federation for the Factoring and Commercial Finance Industry (EUF) has been conducting its unique comparative legal study for the factoring and commercial finance industry to cover 27 countries of Europe and six benchmark countries. In part inspired by the work of the EUF, FCI decided to expand the Legal Study to the other countries not covered in their study, to include all countries where FCI has membership. As a result, data was collected from 58 countries in addition to 33 countries of EUF’s Legal Study. The combined FCI-EUF Legal Study covering 91 countries is the most extensive and comprehensive receivables finance study that has ever been made.
The study took over two years to complete, and was very time-consuming as it required extensive work to answer detailed legal questions from our member countries. FCI thanks once again to all participants in answering this unique study. The combined work will now allow anyone access to a comprehensive understanding of the legal and regulatory framework set up in each of the countries FCI operates in today.
The study is available for free for FCI and EUF members. For the non-members that are interested in the study, it’s available for purchase at 750€ (this includes both the EUF and FCI Legal Study which covers 91 countries).