Draft Business Contract Terms (Assignment of Receivables) Regulations 2018

Fiona Bruce Excerpts

Monday 10th September 2018 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft Business Contract Terms (Assignment of Receivables) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Sharma. This is the first time I have served on a Committee as a Minister, and I am extremely pleased to bring forward these positive draft regulations. I am also pleased that the shadow Minister, the hon. Member for Sefton Central, is on the Committee, because he is a Medway person, too—we grew up in the same area. It is great that there are two people on the Committee who know Medway well.

Britain’s 5.7 million small and medium-sized enterprises are the backbone of the economy, accounting for more than half of turnover and 60% of employment in the private sector. Finance is the lifeblood of those businesses, yet many of them are denied by their customers the ability to access one particular finance option. That is the anomaly that the draft regulations will put right. In future, SMEs will, if they choose, be able to raise finance on their invoices more easily.

The most recent figures for asset-based finance show that total advances stand at £22 billion, of which more than £20 billion is invoice finance. Around half that is to large businesses, so invoice finance advances to SMEs amount to approximately £10 billion. In comparison, bank loans and overdrafts to SMEs were £165 billion at the end of 2017.

Invoice finance has real advantages—it is flexible, immediate and supports businesses to grow—so why is take-up so low? The answer is that many customers prohibit their suppliers from assigning invoices—or, more accurately, receivables: the right to receive the proceeds from an invoice. That assignment is essential for invoice finance to operate. Such restrictive terms are found in many purchase contracts. An SME supplier is typically unable to negotiate changes. If it wants a contract, it had better just accept the standard terms, otherwise the work will be offered to a competitor.

Why do those contract terms persist? Some such clauses are written as a general catch-all to prevent suppliers from subcontracting services. However, those standard terms are so wide that suppliers are equally prevented from assigning their invoices to finance providers. In other cases, customers may not want to deal with an invoice finance company. They know that the imbalance of power means their small suppliers are unlikely to act against them if they impose long payment terms or simply pay late. A finance company is a different proposition. Whether such onerous terms exist through inertia or deliberate intent, their effect is the same: they prevent suppliers from accessing the finance they need to thrive and grow.

The draft regulations will put an end to that situation for SME suppliers making routine supplies of goods and services. They will allow providers to offer invoice finance even where restrictive contract terms are in place, knowing that those terms will have no effect. The draft regulations do not require any contract to be redrafted, nor are they in any way retrospective. Existing agreements will continue to be enforceable, and the same standard drafting, including clauses prohibiting assignment, may still be used for contracts entered into on or after 31 December this year. Those clauses will simply have no effect. Therefore, the impact of the draft regulations will be felt gradually, as new supplier relationships are created. This is a simple mechanism with no compliance or reporting burden.

To offer invoice finance, providers will simply need to assure themselves that the supply contract was entered into on or after 31 December this year and that none of the exemptions apply—for example, that the supplier is not a large enterprise. The change will also unlock additional finance for existing clients where advances are currently restricted due to prohibitions on assignment imposed by some of the SME’s customers. The position for both supplier and finance provider will be simpler and more certain, which will help to create the significant benefits that are expected to flow from the regulations.

Two direct benefits are described in the impact assessment, which reflect the two elements of a typical invoice finance arrangement. The first benefit is a reduction in the discount fees charged to suppliers, which reflects the reduced risk that the finance provider will be unable to collect payment because the assignment was not valid. The annual savings to business from lower discount fees are assessed at £13.7 million. The second benefit is a reduction in the service charge based on turnover. That benefit is assessed at £46.1 million. Both benefits result from the reduced costs incurred by finance providers being passed on to SMEs in a competitive market.

Finally, there will be significant indirect benefits from additional finance becoming available and allowing suppliers to take advantage of new business opportunities. Those benefits are assessed at £84.6 million. All those benefits are calculated from survey evidence and follow-up research, as set out in the impact assessment. The overall outcome is a net present benefit to business of £966 million, which I am sure all hon. Members will welcome.

As with any intervention, it is important to ensure that the benefits do not give rise to unintended consequences. Acting to make contract terms ineffective is a powerful measure, which is typically used where there is an imbalance of power between the parties that cannot be corrected in any other way. After the consultation, and even after an earlier version of the regulations was laid, the legal profession raised concerns about the potential impact of the regulations on the use of English law. As hon. Members will know, English law is one of this country’s most valuable exports and forms the basis for contracts in areas as diverse as aircraft leasing, project finance and infrastructure.

We listened carefully to those concerns and my predecessor, my hon. Friend the Member for Stourbridge (Margot James), withdrew the instrument so that they could be properly considered. Following extensive discussions, I am glad to say that these regulations incorporate changes that meet those concerns. I thank all those involved from the City of London Law Society and the trade body UK Finance who have ensured that the original aim was met without putting at risk the position of English law as the leading choice of governing law for international agreements.

The regulations will set suppliers free to access invoice finance when they wish, without being prevented from doing so by their customers. They will do this while preserving the attractiveness of English law overseas and they will bring significant benefits, with a net present value to business of £966 million.

[Fiona Bruce (Congleton) (Con)]

On a point of order, Mr Sharma. Having heard the introduction to the debate, I draw hon. Members’ attention to my entry in the Register of Members’ Financial Interests. I am a member of an SME LLP firm, but it has had no involvement with invoice finance in relation to its own contracts during the whole of its existence.

[John Stevenson (Carlisle) (Con)]

Further to that point of order, Mr Sharma. I am also a partner in an LLP, but we are not involved in the discussions that the Committee is considering. I refer hon. Members to my entry in the Register of Members’ Financial Interests.