Small Business, Enterprise and Employment Bill

Written evidence submitted by the Asset Based Finance Association (SB 13)

EXECUTIVE SUMMARY

1. The ABFA represents the invoice finance – often known as factoring and invoice discounting – and wider asset based lending industry in the UK and Republic of Ireland. The industry specialises in the provision of working capital to the real economy, and particularly to smaller businesses. The industry has supported UK businesses for over 50 years. Further information about the industry and the ABFA is included at the end of this paper.

2. The ABFA strongly supports the objectives of the Bill to enable business and industry to thrive and grow, and to encourage greater transparency.

3. In particular, the Bill includes some potentially significant measures aimed at facilitating access to finance for UK businesses; empowering businesses to use their assets to increase access to a wider range of finance options and providers. The ABFA was pleased to contribute to policy development in these areas in preparation for the Bill and welcomes their inclusion within it.

4. This paper provides further detail on the ABFA’s views on Part 1 of the Bill that relates to Access to Finance. It also includes additional comment on other areas of the Bill, as appropriate.

PART 1 – ACCESS TO FINANCE

Assignment of receivables (Clauses 1 and 2)

5. The ABFA strongly supports this section of the Bill that will allow regulations to be made to restrict the effect of ‘ban on assignment’ clauses within business to business contracts for the supply of goods or services, as far as they relate to the debts that arise under the contracts.

6. Such contractual clauses are an onerous and unnecessary restriction on the freedom of a business to use one of its most significant assets - the debts owed to it by its customers as represented by its unpaid invoices - to access finance. These measures will benefit small businesses and the wider UK economy, and will bring the UK into line with many other jurisdictions around the world.

7. The effect of such contractual clauses can be particularly egregious in the context of other poor payment practices such as the imposition of extended payment terms. Post-detailed consultation later this year, the ABFA urges government to set a clear commitment to, and timetable for, the presentation of robust and effective regulations.

8. On the basis that such contractual clauses in themselves constitute an undue restriction, the ABFA believes that the implementing regulations would be more appropriately approved under a negative resolution procedure rather than the affirmative procedure currently set out on the face of the Bill.

9. In future, the ABFA would like to see government go further and take steps to address other restrictive contractual clauses that can prevent SMEs from accessing appropriate forms of finance. These include the use of ‘pay when paid’ clauses (already outlawed in the construction sector) and unquantified liquidated damages clauses.

10. These types of practice, including ban on assignment, work to effectively pass payment risk down the supply chain to the smaller businesses that are least able to manage it effectively This has serious impacts on the ability of those businesses to access the finance they need.

11. Invoice finance is generally provided by the assignment of debts owed to a client business (by their customers) to an invoice finance provider who would provide immediate payment to the client business. In a factoring arrangement, the invoice financier would then collect the debts owed themselves and in an invoice discounting arrangement the client business would continue to collect the debts owed but would effectively be doing so on behalf of the financier.

12. The presence of ban on assignment clauses within a contract can restrict the ability of the supplier of goods or services from assigning the debt that arises under that contract. In some circumstances this can present an absolute barrier to that supplier accessing invoice finance, in others it can reduce the quantity of finance that can be provided and/or increase the costs of providing that finance. Either way, there is a negative impact on the business seeking finance which would often be an SME and, in most cases, would be an ‘S’.

13. It should be emphasised that the Clauses in the Bill are specifically targeted at addressing restrictions on the assignment of the debt that arises under a contract, not the delivery of the contract itself.

14. In most circumstances it is of course legitimate to seek to prevent the assignment of the delivery of the actual contract itself – Company A contracts Company B to supply widgets with a legitimate expectation that Company B will do so itself rather than get another party to fulfil the contract. These measures will have no impact on the rights of the customer in that respect. However there is no legitimate reason why Company A should be able to place restrictions on Company B from using its own assets (the debt that is due to it from A) to access appropriate forms of finance.

15. As noted above, the use of ban on assignment clauses must also be viewed within the wider context of poor payment practices, lengthening payment terms and the disparity in power between large customers and smaller suppliers. With suppliers often having to wait longer than ever for payment, the effect of such clauses can be even more egregious.

16. Such restrictions are often found in standard form contracts drafted by large customers in both the private and public sectors; it is notable they are far less frequently seen in circumstances where the contracting parties are more ‘equal’ in terms of negotiating power.

17. The negative impact of ban on assignment is recognised internationally and by taking action in this area the UK is following international standards of best practice. The USA’s Uniform Commercial Code (UCC) has long rendered such clauses ineffective and similar steps have been taken in Australia, New Zealand, Canada and numerous other jurisdictions.

18. The negative impact is also recognised in numerous international agreements, including the United Nations Convention on the Assignment of Receivables in International Trade and also the International Institute for the Unification of Private Law (UNIDROIT) Convention on International Factoring. In addition, steps to address the impact of such clauses are likely to be included in the Model Law on Secured Transactions which the United Nations Commission on International Trade Law (UNCITRAL) is currently drafting.

19. The Law Commission’s 2005 report on Company Security Interests recommended the action against such clauses currently included in the Bill and the independent Secured Transactions Law Reform Group continues to support such action as part of its ongoing work on the modernisation of the UK’s legal framework around security interests.

20. The use of ban on assignment clauses is clearly an unnecessary and onerous restriction on the ability of businesses to use their own assets to access finance. The presumption should be that the use of such restrictive clauses is unacceptable in normal circumstances.

21. Therefore it follows that the implementing regulations should be approved under the negative resolution procedure rather than the positive procedure; the presumption must be that the use of such commercial restrictions must be justified, not vice versa. The ABFA believes that this presumption should be appropriately reflected in the parliamentary approval process. In addition, the regulations must be brought forward as soon as possible.

Business payment practices (Clause 3)

22. The ABFA supports measures to bring greater levels of transparency to payment practices, particularly those of larger businesses. Robust regulations should be brought forward to implement these measures as soon as possible.

23. Too often large customers can impose extended payment terms and onerous contractual conditions on smaller suppliers – transparency around these terms must be the absolute minimum requirement.

24. Whilst recognising the objective of reducing the regulatory burden for small businesses, the ABFA believes these requirements are equally as relevant for medium-sized business as for large. Some very significant businesses would fall under the definition of Medium and the ABFA believes it would be consistent with the objectives of the legislation to extend these requirements to those businesses also.

Credit information (Clauses 4 and 5)

25. The ABFA supports this section of the Bill which has the objective of better facilitating the provision of credit information on SMEs to a wider range of potential finance providers. However these measures have to be accompanied by better information about the types of finance that are available and that may be appropriate.

26. The ABFA noted the additional announcements made following the publication of this draft of the Bill regarding the development of private sector platforms to facilitate the provision of this information.

27. The priority in this area must be to ensure that relevant information is made available to all relevant providers of finance that meet accepted standards; the platforms must operate as inclusively as possible.

28. Businesses seeking finance may not always be aware of or fully understand the finance options that are available to, and may be appropriate for, them. It is essential that these measures are accompanied by steps to ensure the provision of authoritative and balanced information about the types of finance that are available and where they can be obtained.

29. Information on the full range of options must be provided to businesses seeking finance as early as possible in the process, and certainly in advance of the point at which consent for sharing their information is requested, to ensure that they are able to provide informed consent.

30. A central concern would be ensuring that the consent regime operates effectively, particularly in the context of the forthcoming Data Protection Regulation.

31. Another significant concern is to avoid imposing an onerous burden on the institutions that will be required to provide information and to ensure that the information provided is relevant and useful for a range of credit providers. A significant amount of detail will need to be confirmed in the implementing regulations including the types of information that will be shared and the institutions that will be required to share them. The ABFA looks forward to contributing to this process.

Disclosure of VAT registration information (Clauses 6 and 7)

32. The ABFA supports these measures; timely VAT registration information would be helpful for those providing finance in assessing and managing risks, particularly those associated with fraud.

PART 3 – PUBLIC SECTOR PROCUREMENT

Regulations about procurement (Clause 33)

33. The ABFA has previously agreed protocols on the assignment of debts with both the UK and Scottish Governments (with the now defunct Office of Government Commerce for the former and the Scottish Procurement Directorate for the latter) with the objective of better enabling businesses seeking to supply public bodies to access invoice finance.

34. However bans on assignment are still found in some supplier contracts issued by public bodies. The new regulations should reflect the agreements reached in those protocols and the ABFA looks forward to appropriately contributing to the development of those regulations in due course.

35. These regulations will be particularly important if the generalised regulations restricting the effect of bans on assignment (covered in Clauses 1 and 2) are not brought forward as quickly as possible.

PART 7 – COMPANIES: TRANSPARENCY

Register of people with significant control (Clause 70)

36. The ABFA strongly supports the measures brought forward in this Part of the Bill aimed at ensuring greater transparency of company ownership and control. The proposals for a Register of Significant Control are to be particularly welcomed as they would support the fulfilment of obligations under Anti-Money Laundering regulations.

Corporate directors (Clauses 76 and 77)

37. The abolition of corporate directors is to be welcomed in the interests of greater transparency. The ABFA would have concerns if regulations allowing broad exceptions were brought forward.

Shadow directors (Clauses 78 and 79)

38. The more comprehensive extension of the general duties of directors to shadow directors is to be welcomed. This should serve as a further deterrent to any individual or body acting as a shadow director.

39. However it would be helpful if further guidance could be issued in due course on the limits to which providers of funding can impose conditions on the running of a company without becoming a shadow director.

40. As a minor drafting point with regard to Clause 79, it is not clear whether "or" is required to be inserted after point (b) to ensure that these are understood to be separate situations.

PART 10 – INSOLVENCY

41. The ABFA was pleased to contribute to the independent review of pre-pack insolvencies and welcomes measures to provide greater transparency for all creditors in such situations. All stakeholders recognise that the priority in such cases must be the preservation of jobs and value; if used appropriately pre-packs can be an important tool in enabling this.

ABOUT THE ABFA

42. ABFA Members provide finance to client businesses on the basis of the clients’ assets – this will often be the debtor book, as represented by its invoices (invoice finance; factoring and invoice discounting). In addition, many ABFA Members will provide wider funding packages based on other receivables held in a client business (referred to as asset based lending). In addition to the debtor book, these assets can include plant, machinery, property, stock and even intangibles such as intellectual property.

43. The products and services provided by the industry allow businesses to release the working capital tied up in their unpaid invoices and other assets, giving them the finance and time to invest, grow, evolve and prosper.

44. ABFA membership includes the specialist divisions of the UK and Irish high street banks, a number of challenger and specialist banks, and a number of independent non-bank finance providers. ABFA Members provide finance to businesses of all sizes and have particular expertise in supporting the SME sector.

45. At the end of Q2 2014, the ABFA’s Members were providing almost £19 billion to over 43,000 clients. Around half the client businesses supported by ABFA Members have annual turnovers of £1 million or less and over 80 percent of these clients have annual turnovers of less than £10 million. In 2013, the industry supported businesses with a combined annual turnover of over £275 billion.

46. The ABFA is committed to demonstrating and enforcing the high standards its Members will meet through the ABFA Code, Professional Standards and Complaints framework.

47. This includes an independent Complaints Process, run by Ombudsman Services, and an independent Professional Standards Council chaired by Lucy Armstrong. More information on the Standards framework is available at www.abfa.org.uk/standards.

October 2014