SME owners to demonstrate at BIS over decision to encourage use of unregulated asset based lenders

 

Small business owners from all over the UK will be converging at the offices of the Department for Business, Innovation & Skills (BIS) to highlight the unregulated structure of the asset based lending industry (factoring/invoice discounting), one of the key finance sectors of the Government’s ‘Alternative Funders Initiative’.

BIS is promoting the ‘Alternative Funders Initiative’ to SMEs that have been turned down for a conventional loan or overdraft by the banks. The main beneficiary of this is the unregulated asset based finance industry, which incorporates factoring and invoice discounting, where the company borrows typically against 70% of the value of an invoice.

Campaigners are going to demand to speak to the Permanent Secretary, Martin Donnelly, to point out that all of the examples given to the Minister in the Tomlinson Report were SMEs that were financed by the banking sector, such as RBS GRG and therefore already protected by the Prudential Regulation Authority (PRA). The factoring/invoice discounting finance sector is only covered by the Sales of Goods Act  – the same legislation as pawnbrokers.

The asset based finance sector funds around £300bn worth of invoices annually for businesses, in turn employing approximately one million people. The industry has been rocked by a series of scandals over the forced insolvency of solvent companies, with finance companies then profiting from the sale of the assets of the company.

A factoring company can easily make up to £500,000 through a secured creditor at the expense of HRMC, normally the largest unsecured creditor due to the removal of the Crown Preference.  The industry’s trade body launched its own Ombudsman Service with a maximum fine of £25,000 for the factoring company.

Campaigners will be highlighting the advice from Andrew Bailey, Deputy Governor of the Bank of England that will put 70% of lending under the control of the Prudential Regulation Authority without any additional costs or regulatory requirements through the simple amendment of existing legislation.

Brian Moore, Spokesman for the campaign group, Regulation Asset Based Finance (RABF), says it is madness that an SME can be protected by the PRA for a loan or an overdraft borrowed from a bank: “To then act on advice from the Government for an alternative funder, borrow from the same bank (or any other asset based lender) via a factoring agreement and only be covered by the Sale of Goods Act.”

Brian adds that the factoring industry has for years been a fraudsters dream: “Any fraudster can set themselves up in the industry and persuade the SME to sign a contract without lending a penny and in some cases put them into insolvency at the expense of the HMRC.

“We have seen company after company closed for their assets both by the banking and non-banking sector. We are calling on Martin Donnelly to brief the incoming Secretary of State on the lack of regulation in the factoring industry, and the need to implement the suggestions from Andrew Bailey to bring 70% of the lending under the umbrella of the PRA.

“We will be demanding that the unregulated asset based finance industry is removed by BIS as a recommended alternative lender until the subsidiaries of the banks are covered by the amended legislation as recommended by the PRA,” Brian concludes.