UK regulators have responded to calls for clarity over a letter sent to all trade finance CEOs in September, telling industry insiders that certain guidance does not apply to receivables financing programmes.
The letter, jointly authored by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority, expressed concern over lenders’ exposure to “unnecessary risks” in light of high-profile company failures in the trade and commodity finance sector.
It said examinations of specific firms had revealed “significant issues relating to both credit risk analysis and financial crime controls”, and called on the industry to make a series of specific improvements around risk management processes.
However, in response, the International Trade and Forfaiting Association (ITFA) requested additional clarity from the authorities, arguing that certain approaches to risk “have evolved because of applicable legal rules and reasonable commercial practice”.
In one example, it singled out the authorities’ instruction that in a trade finance transaction, banks should obtain “formal written acknowledgement from the end buyer that the amount due… is payable to the financing firm, and not to the borrower”.
ITFA said that advice appeared to apply to the purchase and discounting of receivables or invoices, but that in practice, a seller does not necessarily want its end buyer to know about the sale of receivables to a financial intermediary in case it is perceived as disloyal or in poor financial standing.
As a result, smaller firms could be discouraged from using such financing tools, even where cheaper than unsecured lending or overdraft financing.
In an emailed response to ITFA, the authorities confirm that the guidance would not typically apply to such programmes.
“Our letter refers to transactions facilitating the financing of trade finance transactions where the end-buyer is aware of the third-party financing arrangements,” says Ben Martin, head of the PRA’s supervision division.
“The factoring activities that you highlight in your response tend to be undertaken on a confidential basis and as such we would consider them outside the scope of the transactions cited in this communication.”
Martin adds that firms “should consider the nature of the controls required depending on the type of the underlying financing”.
When contacted by GTR, ITFA chairman Sean Edwards said he welcomes the authority’s response.
“The confirmation that there is no requirement to obtain acknowledgment from a buyer where the sale of the related receivable is not known to him – this applies not just to factoring but other receivables finance – is very valuable and welcome,” he says.
“It means that the long-standing commercial and legal practices so far as notification are concerned can continue without incurring any new regulatory risk.”
However, Edwards adds that the association is “still pursuing the same degree of clarity for credit insurance”.
ITFA had also taken issue with the regulators’ recommendation that firms seek formal confirmation they are identified as a loss payee for risk insurance cover in situations where there is non-payment by the end buyer.
According to the regulators, they should also ascertain whether the firm “is in compliance with any requirements set out in the insurance agreement”.
ITFA said in response that companies often use insurance on a portfolio basis, with cover structured to deal with a large number of obligors.
“It will not be necessary, nor usually possible, to conduct personalised checks or receive individual confirmations,” it pointed out.
The PRA did not immediately respond when contacted by GTR.
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