This year FCI asked contributors from across the globe to provide their perspectives as we emerge from the pandemic on three key topics; Regulation, Digitalisation and Risk. The contributors are:

• John Oliver (JO), Head of Client Management – Open Account Products including some thoughts of Thorsten Hoeffken Head of Open Account Products, Barclays Bank Plc, United Kingdom
• Stefan Wagner (SF), Managing Director – ABN AMRO Asset Based Finance, Germany
• Christine Chartier (CC), Managing Director – SCF, Banque Nationale du Canada, Canada
• Gavin Tarr (GT), Head of Debtor Finance – First National Bank, South Africa

Can you provide an update on the impact of regulation that affects the industry in their region?

JO: The UK has seen two primary regulation changes that have impacted the overall Receivables product offering.
1. The requirement to move away from Libor has impacted primarily our Large and Global clients, where facilities were linked to LIBOR. However, the vast majority of our receivable facilities in the UK will be against Base Rate, so no impact has been felt.
2. From 1st December 2020, HMRC became secondary preferential creditors in insolvency processes, changing the order in which repayments are made. Creditors are grouped into categories, and the following is a broad outline of the order of repayment:
– Secured creditors with a fixed charge
– Preferential creditors - company employees
– Secondary preferential creditors – HMRC only, regarding the taxes mentioned above.
– Prescribed part – a sum set aside for unsecured creditors
– Secured creditors with a floating charge
– Unsecured creditors
While this change has not impacted the UK Factoring or Confidential Receivables products that we provide where we have either purchased the receivable or have a Fixed charge, it has impacted our UK Asset Based Lending products where we are secured via a Floating charge and so appropriate reserve structures have been implemented which has generally restricted client’s availability.

SW: Overall, the European Union, factoring companies, and banks are affected by constantly new regulatory requirements: This is often a race against time to comply with banking regulations (sometimes set with short timelines). This requires continuous investments, mostly in IT and process adaptations. You hardly meet anyone in our industry who is not struggling with the mere volume of regulation. However, it needs to be understood that regulation is made to protect customers and create a stable and safe financial industry, which means that it leads to a better and safer environment for our industry. We become less vulnerable to a crisis and more transparent and reliable to customers. My advice is to embrace regulation and use it to make your company better for clients, employees, shareholders, and society. But it is not forbidden to be critical, of course. Especially in Europe, we see regulation targeting a consistent and harmonised approach for the banking industry. Unfortunately, the execution of regulation in the different European countries can differ a lot, creating competitive differences and complexity, which a more standardised and harmonised approach could avoid. We welcome the ECB and other local regulators working on a standardised approach. It is also essential that smaller industries such as factoring are not overlooked in a coherent regulatory approach with the specifics and differences. In this context, it is necessary to stay in dialogue with regulators and strive for the best approach.

CC: The Canadian financial industry is highly regulated through multiple dedicated bodies. Banks in Canada are supervised by various regulators, with the Office of the Superintendent of Financial Institutions (OSFI) responsible for prudential regulation and financial stability and the Financial Consumer Agency of Canada (FCAC) accountable for consumer protection and market conduct. The Financial Consumer Agency of Canada (FCAC) monitors and supervises financial institutions and external complaints bodies regulated at the federal level. These entities include banks and federal credit unions. Trust and loan companies.
Every province and territory has one or more bodies to regulate financial institutions under provincial responsibility. These institutions include securities dealers, credit unions, caisses populaires, and other financial institutions that are registered or incorporated at the provincial level.
The activities of banks and foreign bank branches are limited by the Act, which sets out the types of business that a bank or foreign bank branch may carry on, the types of investments that may be made, and, for banks, the types of transactions that the bank may enter with related parties. Notably, banks and foreign bank branches are limited in their capacity to deal in securities, act as fiduciary, and distribute insurance products.
To carry on business in Canada, a bank or a foreign bank branch must obtain approvals from the Superintendent of Financial Institutions (the Superintendent) and the Minister.
Foreign banks may establish a presence in Canada by establishing a representative office with the Superintendent’s approval. However, these offices are highly restricted in the types of activities that they can carry on in Canada. They are prohibited from carrying on a banking business in Canada. Instead, they can only act as a marketing office and referral conduit for Canadians who wish to carry on business with the foreign bank on a cross-border basis.
In summary, regulations in Canada are stable and quite exhaustive, leaving the industry in a secure environment (which was positively tested in 2008-9).

GT: While the Greensill case study has led to many questions around the viability of Reverse Factoring schemes, I expect that accounting treatment and transparency will be foremost of mind as we advance. In South Africa, Reverse Factoring schemes are fairly textbook in nature and often anchored by large public companies subject to high governance levels, so there has not been any change in approach or fallout with respect to Reverse Factoring schemes.
There is an increasing focus and regulation on the protection of information. This has led to some discussion around interpretation in receivables programs, specifically non-disclosed programs. Information and data are a vital component in risk assessment within receivables programs, and we have a robust credit bureau infrastructure in South Africa that enables the receivables industry. In other sub-Saharan African countries, this infrastructure is not as mature and does present challenges in growing the receivables market.

How is technology and digitalisation changing the Factoring industry in your region? Did you see an acceleration, what kind of change did you see in the last 24 months, and what do you expect from the future?

JO: The UK has seen a significant move towards digitalisation with many institutions moving towards data extraction technology with the aim of
– Improving user experience
– Increased fraud controls
– Remote auditing
– Reduction in travel time to and from clients
– End-to-end automation to reduce costs
The pandemic accelerated technology adoption, with solutions being found to allow the continuation of lending with remote assessment. We have found that multiple Fintech providers are introducing new technology to solve elements of the facility journey. However, to date, no party is providing a full end-to-end solution for all client sizes, and coupled with the integration of technology to bank legacy systems, the implementation timelines will to a degree, mask the pace at which adoption is being undertaken.

SW: Digitalisation is making substantial progress in the factoring industry. We see the development in client solutions with improved or even new client propositions and internal processes at the same time – which of course, in turn, benefit the speed and quality of service to clients. New developments are often started in fintech, but also, the established factoring companies and banks are meanwhile speeding up with their developments. We often see that it is most successful when fintech and factoring companies/banks join forces, allowing them to combine their knowledge and experience to create the best solution.
Digitalisation is driven from different angles. One driver is the constant cost pressure that the banking industry has faced for many years based on several reasons. At the same time, digitalisation enables us to improve data analysis to benefit both the financial service and the client. This is required both from customer service and a regulatory perspective, including data and IT security. The most important element of digitalisation should be to create products and processes that fit the different needs of customer segments, may their focus be on simple, transparent, and inexpensive solutions or structured deals also require advice and complex processes.

CC: Fintech seems to be making inroads with smaller companies, using a financial platform where a client will input the information required and get access to a factoring limit quickly. These are growing in number and size, but it is not easy to assess at this time how competitive (pricing, structure, securities, etc.) they are in the marketplace. Besides the arrival of several small Fintechs, we didn’t see much technological impact in the past 12-24 months.

GT: There is continued momentum in the "Rise of Fintechs," Realistically, we would expect to see that trend continue. Many fintechs seek to solve points of inefficiency and/or poor client experience in legacy systems, often within a very narrow scope. In isolation, they look great and would suit a smaller bespoke offering but for the solution to existing within a larger, more complicated offering is where the fintech offering can fall short. The answer for larger banks and organisations, in my opinion, is to work on the core IT architecture, making it flexible enough to interface seamlessly with the fintech, but at the same time preserve the governance and manage the overall risk of the underlying products or programs. This is easier said than done, but I know this is a journey, not an event, so it is vital to ingrain this thinking into your strategy, culture, and way of doing business.

How are you foreseeing risks in the new environment? What effect do you see?

JO: As expected, there has been a general upward trend in insolvencies throughout 2021 and into 2022, with Jan 2022 only exceeded by Nov 2021 since the lockdown commenced. Dec 2021 to Feb 2022 indicated a temporary stabilisation in insolvencies. However, March has seen a further acceleration. We are seeing a general increase in client utilisation, and with global inflation and a necessity to start to repay Government funding, we will likely continue to see insolvencies increase.

SW: Risk is developing in line with all other developments in modern society. Needless to say that evaluating financial credit risk has always been a core competence in our business. The more dynamic development is taking place in other areas.
Operational risk, IT security risk, sustainability risk, and nonfinancial risk have moved much more into the focus of attention based on substantiated reasons. This follows the technological progress made in business and geopolitical and societal developments. These risk types are also very much in the focus of banking regulation and highly relevant for our clients. Our responsibility is to address, identify, and evaluate all risk elements in all areas of our business, our products, processes, or our relations with clients and suppliers. In a modern financial service company, this responsibility can, of course, not just be left to risk departments, it is as much the responsibility of commercial departments. Therefore, all parties involved must be in constant dialogue about identifying risk and the actions to mitigate and manage it. Dealing with risks should not be seen as a threat or a burden. It is, at the same time, an opportunity. We can provide our customers with better advice and better solutions based on superior risk knowledge, benefiting our business model.

CC: Risk will continue to fluctuate according to the economic cycles. The current strategy from central banks to curb inflation may have a backlash effect that could turn the European and possibly global economies into a recession in 2023. This would impact credit risk on the buyer side, which could dampen the insurers’ appetite and affect business globally. The ongoing and late Covid-19 outbreak in China could also increase and extend the problems in the supply chain and delay the return to normal flow and prices on that side.

GT: I believe that the importance of operational control should receive more airtime, specifically in Reverse Factoring schemes and generally in all receivables programs. There is often much focus on financial and credit rating, yet the real failure often happens due to a fraud event or poor governance. Despite all the innovation and changes in receivables finance over time, successful firms and programs are always underpinned by a robust operational framework. In many ways, it is vital to keep an eye on these basic principles through the current and future cycles of innovation and growth.
It is often tempting to let go of the basics in receivables finance at times like these, but quite honestly, the opposite is imperative. Given the consistent macro shocks to the global economy over the last few years (Covid, pockets of civil unrest, destructive weather patterns, military action, and the like), many great opportunities exist for receivables programs to fund companies as economies recover globally. Stakeholders will have expectations for finance houses to capitalise on these opportunities. With these opportunities and innovative fintech channels, the winners will be those companies that still tick the boxes of risk and governance principles that are tried and tested within the industry.

JO: Thank you for your interesting replies, we can see some common situations but also different ones around the globe.