Measured response to ABFA claims!

Jeff makes some interesting points in his reply; I would say that we should never challenge the right of free independent journalism that is ‘regulated’ unlike the factoring industry. He is right that asset based lending is worryingly not covered by any financial regulation or the PRA and is instead covered by the Sale of Goods Act 1979 which also covers pawn shops. I do not believe when the Act was written that was designed to cover sophisticated financial products which even ABFA seem to be unable to work out the cost of borrowing from their members.

 He has failed to mention that appalling abuses of his members clients on an industrial scale that has been exposed in the Telegraph, Times, FT and the Treasury Select committee to name a few. The Telegraph led with an example of broker(s) been given substantial incentives to find struggling SMEs to put into insolvency to profiteer on their assets at the expense of HMRC and other unsecured creditors.

 He challenges RABF to give him example(s) of 90+% APR from his members – that can be easily be done. To work out how much factoring will cost is simple; There is a monthly admin fee based upon the maximum facility a company will require, an interest charge of x% above base rate and where necessary a mandatory invoice insurance. You put those into the Growth Street APR calculator and job done. Cleary the asset based finance industry like to keep this as a black art to hide the obscene profits.
Brian Moore
Campaign for Regulation of the Asset Based Finance Industry
www.rabf.org.uk

http://www.altfi.com/article/1613_sme_finance_space_short_on_transparency

Reply from Jeff Longhurst Chief Executive Officer Asset Based Finance Association

Hi Brian,

Thank you for your email.

I hope that you are keeping well. 

There would be a technical difficulty with your proposal inasmuch as asset based finance will generally be provided on the basis of debt purchase.  In that sense, it is not lending and interest is not charged. So strictly speaking it would be misleading and potentially illegal to use interest rates or APRs.

However I appreciate the underlying point that you are making which is transparency about the overall costs of finance to businesses and that is something the ABFA fully supports. 

An asset based finance facility will often be a bespoke service tailored to the specific requirements and circumstances of the client.  The two primary costs to a client of an ABF facility will be a service charge and a discount charge; with the latter being payable only on the funding drawn down.  These charges will be easily comparable between providers. 

There are likely to be other contractual charges that will be specified in the contract to reflect any additional services that a client requests or to cover other events outside the normal running of the facility.  Again, these will be easily comparable between providers.  The market is extremely competitive and I would always recommend that potential clients shop around to ensure they get the most appropriate facility for them, although the most appropriate facility might not always be the cheapest. 

Comparison between a single rate or metric like an APR can work for a standard off the shelf product like a credit card or a personal loan.  But for a service-oriented facility intended for businesses rather than consumers, there is a risk that one ends up comparing apples with pears. 

A prospective facility needs to be considered qualitatively, not just quantitatively. For instance, there are some client businesses that use factoring for the service element (ledger management and collections) and don’t even draw down funding. What is key is that SMEs understand the options available to them, what the benefits and costs are and are able to make an informed choice.  Transparency about the overall costs of finance is key to that and is something that the ABFA fully supports and encourages amongst its Members.

I note that you have copied in Lucy Armstrong, the chair of the Professional Standards Council, which, as you know, is independently responsible for maintaining and enforcing the Standards Framework which all our Members work under.  How to ensure transparency in fees and charges is something that the PSC considers on an ongoing basis - if you do have any specific examples or evidence of what you believe is poor practice I would encourage you to bring them to Lucy’s attention.

In the meantime, best wishes for a Merry Christmas and a Happy New year. 

Regards

Jeff Longhurst

Chief Executive Officer

Asset Based Finance Association

Borrowers open to exploitation over fees

 Providers of asset-based finance to small and medium-sized enterprises should declare an APR showing the true annual cost of the debt, just as lenders to consumers must do, campaigners say. The Campaign for Regulation of Asset Based Finance describes SME finance as “the next financial scandal in the making,” pointing out that large chunks of the sector are exempt from the sort of protections normally offered to consumer borrowers.

Asset-based finance, in which SMEs take on debt against assets ranging from plant and machinery to unpaid invoices, is at an all-time high, says the Asset Based Finance Association. But while new sources of SME funding have been welcomed, some fear businesses are vulnerable to exploitation. “Some lenders hide the true cost of this credit by advertising products using prices that either fail to include fees, or use rates for periods shorter than one year,” warned  James Sherwin-Smith, chief executive of Growth Street, who is backing  the campaign. “The lack of price clarity means firms are paying more than they should.”

http://www.independent.co.uk/news/business/sme/many-firms-are-on-a-collision-course-with-the-pensions-regulator-over-auto-enrolment-a6780791.html

Fury as small firms pay over 90% in hidden loan costs: Pressure groups call for law forcing banks to publish rates when lending to businesses

 By Vicki Owen For The Mail On Sunday

Published: 21:57, 19 December 2015 | Updated: 21:56, 19 December 2015

Small companies taking out loans are being charged interest rates as high as 90 per cent, say campaigners who are demanding a change in legislation to force lenders to come clean over costs.

Pressure groups hope their calls will be considered as part of a review of lending to small companies launched this weekend by Parliament’s Select Committee on Business, Innovation and Skills.

Banks and other lenders are already required by law to publish the annual percentage rate they charge for loans, credit cards and mortgages, but they are not bound by the same rules when making loans to businesses.

Crucially such APRs take into account the cost of extra charges, which add significantly to costs.

The Campaign for Regulation of Asset Based Finance has written to representatives of the leading banks to call for a published interest rate to be mandatory.

Brian Moore, a spokesman for the campaign, said: ‘This single move would bring much needed clarity to the true price of asset-based finance and help clients compare the costs.’

He added: ‘Support is building and it has been breathtaking the number of businesses who have seen our blog and then rung us up saying they went for what looked like 2.5 per cent plus an admin fee that turned out to be an APR of more than 90 per cent.’

Moore said the lack of an official APR calculation meant examples of loan rates given by lenders could be misleading because various fees, compulsory insurance and other charges could boost the total cost to something far higher than expected.

Campaigners have lobbied the Asset Based Finance Association – which counts all of the leading banks among its members – as it claims such lenders are the worst offenders.

James Sherwin-Smith of business lending comparison website Growthstreet is wholeheartedly supporting the demands for the clear pricing of the cost of loans to small businesses.

 He said: ‘I hope the Select Committee on Business, Innovation and Skills will back our campaign for an APR for all SME finance products.’

Bank lending to smaller firms has been the subject of controversy since the credit crunch.

Select Committee chairman Iain Wright MP said: ‘After real difficulties during the credit crunch, business access to finance appears – superficially at least – to be back to normal. 

'But small businesses in particular still say that access to finance is one of their biggest obstacles to future growth.

‘As a committee we want to look at how access to finance has changed since the end of the financial crisis.’

Read more: http://www.thisismoney.co.uk/money/markets/article-3367166/Fury-small-firms-pay-90-hidden-loan-costs-Pressure-groups-call-law-forcing-banks-publish-rates-lending-businesses.html#ixzz3uqpQbHMP

Access to finance inquiry launched - SMEs are demanding that factoring companies use APR!

18 December 2015

The Business, Innovation and Skills Committee has launched an inquiry on access to finance, looking at how the landscape for access to finance has developed since the end of the financial crisis and the improvements on finance which Government could make to boost the number of successful and high-growth businesses.

• Inquiry: Access to finance
• Business, Innovation and Skills Committee

Chair's comments

Iain Wright MP, Chair of the Business, Innovation and Skills (BIS) Committee said:

"After real difficulties during the credit crunch, business access to finance appears, superficially at least, to be back to normal. But small businesses, in particular, still say that access to finance is one of their biggest obstacles to future growth. As a Committee, we want to look at how access to finance has changed since the end of the financial crisis. Among other issues, we will want to examine some of the alternative ways of raising finance, such as crowd-funding and peer-to-peer, and whether they are sufficiently well-regulated and monitored for companies to be confident in utilising them."

Scope of the inquiry

The Committee is seeking evidence on the following points:

• How has the landscape for access to finance evolved since the end of the financial crisis?
• What have been the most successful Government policies to assist growing companies access private finance and where is there room for improvement?
• Does the UK have globally competitive markets / suppliers for financing (and debt financing) at 1) seed 2) venture and 3) growth stages? What steps could Government take to strengthen these systems?
• Are alternative methods of raising finance (such as crowd-funding and peer-to-peer) sufficiently well-regulated and monitored for companies to be confident in utilising them?
• What are the main improvements or interventions, in terms of finance, that the Government should make to achieve the objective of increasing the number of successful and high-growth businesses in the private sector?

SME Finance Space Short on Transparency

By Ryan Weeks on 18th December 2015

Is there a scandal bubbling up within the small business lending space?

CEO of recently launched Growth Street James Sherwin-Smith certainly thinks so. And he’s not alone. Brian Moore, a spokesperson for The Campaign for Regulation of Asset Based Finance (RABF), has penned a forceful letter to Jeff Longhurst, CEO of The Asset Based Finance Association (ABFA). The letter calls for all members to publish a representative Annual Percentage Rate (APR) alongside financial products. The ABFA’s membership is comprised of a few dozen banks and traditional invoice finance providers. 

Mr. Moore’s letter reminds Mr. Longhurst that commitments number 2 and 3 in the ABFA code of conduct stipulate that member companies must act with integrity – dealing fairly and responsibly with clients and guarantors – and that members must provide clients and guarantors with “all the appropriate information” in a timely and transparent manner. But when it comes to publishing a representative APR, Moore asserts that the ABFA’s operating principles fall short of the mark:

“Clauses 3.1.1 through 3.1.8 within the Guidance then go on to state ways in which ABFA members should provide clients with information on fees and charges, however the Guidance falls short of being prescriptive in this area.”

Moore goes on to describe the asset based finance industry as suffering from a crippling lack of transparency – one in which the true cost of funds is obfuscated by complex tariff structures and hidden fees. Such comments are supported by the findings of a MarketInvoice study, published in May of this year, which revealed that the UK’s banking sector has been fleecing businesses for £758m each year on invoice financing – an overcharge of £425m.

How will Mr. Longhurst and the ABFA react to the call for greater transparency? To clarify, the RABF is lobbying the ABFA to require that all financial promotions and product documentation carry a representative APR. This feels like a somewhat difficult principle to oppose, as any counter-argument would by necessity hinge on defending the notion that business owners are better left in the dark when it comes to cost of capital.

Growth Street provides flexible overdrafts of up to £150k for small businesses, and is highly transparent around costs. Borrower rates vary case-to-case, but are typically 8-15% per annum. Growth Street recently launched an APR calculation tool, in order to assist SMEs in comparing the price of various forms conventional and alternative finance. CEO James Sherwin-Smith offered his take on the state of transparency within the small business lending space:

“SME finance is the next UK financial scandal in the making. Business lending is currently exempt from APR regulation, which enables some lenders to hide the true cost of this credit by advertising products using prices that either fail to include fees, or use rates for periods shorter than one year. Factoring providers typically quote charges as a low percentage over base rate; however, the fees found in the small print usually constitute the majority of the cost. The lack of price clarity available to SMEs means small firms are paying more than they should for commercial finance. Something needs to be done, and we will be campaigning for APR for SMEs, to form part of the wider government agenda to improve price transparency.”

 http://www.altfi.com/article/1613_sme_finance_space_short_on_transparency

Making APR mandatory within the ABFA Code of Conduct Letter to ABFA

TO: Jeff Longhurst, Asset Based Finance Association (ABFA), 15 December 2015

Subject: Making APR mandatory within the ABFA Code of Conduct

 

Dear Jeff,

As CEO of ABFA, you will know that the ABFA Code for Members clearly states that:

·         ABFA members shall act integrity and deal fairly and responsibly with clients and guarantors (Commitment 2)

·         ABFA members shall provide clients and guarantors with all the appropriate information in a timely and transparent manner (Commitment 3)

Further, the ABFA Guidance that accompanies the Code states that “ABFA members shall ensure their marketing activities, whether through advertising, sales literature of verbal assertions shall be honest, fair and clearly understandable.” (1.2.3).

Clauses 3.1.1 through 3.1.8 within the Guidance then go on to state ways in which ABFA members should provide clients with information on fees and charges, however the Guidance falls short of being prescriptive in this area.

The level of detail the Guidance goes into to try and hold members to Commitment 2 & 3, while not mandating adherence by being prescriptive, should perhaps come as no surprise. The asset based finance industry is rife with a lack of transparency when it comes to the true cost of finance, obfuscating the real price through complex tariff structures and significant fees that are buried deep in the terms and conditions of often lengthy contract documentation.  This is also consistent with recent findings of the FCA review of, and the CMA investigation into, the supply of SME banking services, which found that “prices are opaque and lending products are complex”.

One route that could help clean up the industry, and potentially avoid further regulatory scrutiny, would be for ABFA to hold true to their Commitments and the ethos of the Guidance by mandating that any financial promotion or product documentation carries a representative Annual Percentage Rate (APR). 

This single move would help bring much needed clarity to the true price of asset based finance, and help clients compare the cost of finance between propositions and providers.

Some alternative finance providers (such as business overdraft platform Growth Street http://www.growthstreet.co.uk) offer transparent and fairly priced working capital solutions, including tools to estimate both the APR and the total cost of credit (TCC) that businesses pay. If alternative providers can do this, why can’t ABFA?

Jeff, if ABFA and its Members want to honour their commitment to being fair, responsible and transparent, and truly have nothing to hide, it would be a huge step forward for the industry to make the disclosure of APR a mandatory requirement.  I welcome your response.

Yours sincerely,

Brian Moore,

Spokesman Campaign for Regulation of Asset Based Finance