There has been some ongoing discussion about the pros and cons of invoice finance, factoring and invoice discounting becoming regulated products, i.e. being regulated by the FCA (Financial Conduct Authority). I wanted to put forward my thoughts about the subject, in the hope that they may be considered by anyone that is constructing an argument for, or against, regulation of the invoice finance industry.
Hidden Fees?
The case for FCA regulation of the invoice finance industry is often predicated upon the notion that hidden fees are widespread or that unfair contractual terms are the norm, with both cited as being unfair to customers. However, having been involved with invoice finance brokerage for over a decade, I can recall very few examples of customers being unhappy because of “hidden fees”. Of course, costs are often an issue, many existing users want the cost of invoice finance reduced, but in most cases, the fees are understood, it's just a case of wanting what they have cheaper.
The same goes for contractual terms. Many invoice finance companies now offer short contract periods and there are numerous “spot factors” and “selective invoice discounters” that allow customers to dip in and out of invoice finance with no minimums or contractual obligations.
Increased Cost
There would be a huge cost associated with regulation. The application fee alone, for an organisation to become FCA regulated, is between £1,500 and £50,000. Those costs will inevitably be passed onto the customers, making these products more expensive.
Unhappy With Your Invoice Finance Company?
There are two other key facts that are pertinent. We surveyed 200 randomly selected existing invoice finance users, across a spectrum of different providers, and we found that 98% of existing invoice finance users (197 out of 200 to be precise) were prepared to recommend invoice finance to other businesses. I know that we conducted the research in a completely impartial way, so to me that reflects an industry that is treating its customers well.
Secondly, the ABFA (Asset Based Finance Association), the UK invoice finance industry body, recently launched a code of conduct for their members and an Ombudsman process, to back up arbitration with customers. In the first year, of the 43,000 clients handled by its members, only 13 complaints were received by the Ombudsman. This equates to just 0.03% of clients complaining to the Ombudsman. Again, this supports the idea that generally, the industry is treating its customers well.
Yet Another Barrier Or an Enabler?
The other argument that I have heard for regulation is that regulation is a prerequisite for the government to really get behind invoice finance and enable invoice finance to find a bigger share of the business finance market. There might be some beneficial support that would come from this, and I have frequently highlighted awareness as one of the key issues for our industry. However, I fear that the cost of invoice finance, currently being offered to a market where only 39% of businesses have any borrowing requirement at all, is not going to be addressed by this – and that is often the key barrier to acquiring new customers. It is also not true to say that there isn't already government support for these products, for example, a ban on assignment has been outlawed.
Self Regulation Of Invoice Finance
Based on these key facts, I fail to see the argument that the invoice finance industry warrants further regulation. It would appear to be doing a good job of self regulation, as evidenced by low levels of complaints and high levels of customer advocacy for these products. Regulation would add more costs, that will ultimately drive prices higher, at a time when lower cost finance, and greater product awareness, is required to bring these products to a wider audience.
Reply To The Factoring Training Question Posted
Replying to the question posted about where to get factoring related training – firstly, please contact Mike Vince who provides specialist training for the sector. Otherwise, UK Finance provide a range of factoring related training.