The article is taken from FCI In-Sight Newsletter February 2022, written by Peter Mulroy, FCI Secretary General.

FCI and the factoring industry experienced one of the worst years ever recorded in 2020 due to the pandemic, witnessing a drop of nearly 7% in global volume that year. However, 2021 marked an unprecedented turnaround. We expect to report an almost double-digit increase in global factoring volume, in part influenced by the significant growth in global GDP and the fast rise in inflation. This is the good news for our industry, and based on the reports we are hearing in the 1st quarter of 2022, we believe this growth will continue, not as strong but still quite ahead of the global 20-year growth rate of 7%. But based on some reports, including a recent presentation I attended with an economist from Coface, we may see a slowdown in the 2H2022, due in part to a rising interest rate environment, the evaporation of the government stimulus that has certainly had a stimulating effect on global GDP last year, and elevated risk as a result of financially stressed companies no longer having a government lifeline. No one really knows the impact of the withdrawal of the stimulus support provided by governments globally, and with this boom/bust cycle we have experienced so far due to the pandemic. The time is ripe for potential fraudulent behaviour to increase over the next two years.

On this note, we also see some concerns in the Credit Insurance sector. As you know, FCI and the credit insurance associations ICISA and Berne Union meet every year with senior executives from the credit insurance market to discuss the issues facing the industry. The good news is claims are at historic lows. But again, as economies become more self-reliant and begin to repay massive government stimulus debt, either directly or via increased taxation to pay for it, we can expect a boomerang effect on business in some capacity. We also saw the disquieting impact of the Greensill bankruptcy, raising the veil on unsavoury business practices within the industry, and some regulatory bodies have responded in kind. We are already seeing some questions raised by the European authorities on questions relating to fraudulent invoicing, questioning whether banks can continue to enjoy reduced capital treatment if policies incorporate wording that does not protect the insured from fraud risk, including at the seller level.

The intended aim of such questioning seeks to ensure that any credit protection contract which can, in the event of fraud of the obligor, be cancelled or of which the extent of credit protection can be diminished shall not be considered unconditional. However, we believe the proposal as currently drafted requires further clarification and an investigation into its potential impact on credit insured invoice financing. Credit insurance protects against non-payment of receivables related to the specific trade(s) of goods or services. While a lending institution is expected to have performed reasonable and appropriate due diligence, it is still possible that despite all best efforts, financing may be provided for an invoice that turns out to have been fraudulent (fraud committed by the counterparty of the lending institution). As the invoice is fraudulent, no specific or identifiable trade has occurred, which is the essential requirement of a credit insurance policy. Without an object of insurance, indemnification of the loss would stand outside the policy terms.

As we all know, in most factoring agreements covered by credit insurance policies, the “obligor” should be identified as the buyer, not the seller/client. FCI has supported the development of a response to the European Banking Authority (EBA) on this matter with the EUF. We hope that such a response will help pave the way back to a more normalized environment. BTW the “conditionality” of credit insurance policies is not a new phenomenon. The UK Prudential Risk Authority, even before this Greensill crisis, raised similar concerns about credit insurance and risks posed to the industry. Thankfully due to the efforts by FCI and other trade associations who reacted quickly to this UK regulator, the matter was resolved.

Lastly, the new Definition of Default (NDOD) in the EU has had some unintended consequences, requiring banks and bank subsidiaries to report on questionable “defaulted” exposures in non-recourse factoring transactions, which in some cases were due to issues stemming from the commercial particularities of factoring and not due to actual risk of default based on non-payment by the client’s debtors. We are still waiting on the response from the EBA on the industry’s efforts to find a rational compromise, as the regulation has unintended consequences that had not been expected due to their lack of understanding of the industry.

The last and most important influence I see in 2022 is the rise in Digitization, E-Commerce, and Blockchain. FCI is seeing a significant sea-change in the application of technology impacting our industry. It is altering the way many members do business. I can compare it to the first digital age at the turn of the century, which significantly impacted automation and increased efficiencies in the factoring space. This period in this pandemic age is no different but has many other applications and potential influences for good in our industry.

Considering the severe environment brought on by COVID-19, we have managed quite a turnaround. Even with some of these influences mentioned above, we are still quite bullish and expect the industry to continue on a solid trajectory for the foreseeable future. However, as we have seen with the recent geopolitical challenges in Eastern Europe, the future is hard to predict!