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The FCI 55th Annual Meeting in Marrakech marked a historical moment in receivables finance, unveiling three transformative initiatives set to redefine the industry’s landscape. This powerful trifecta, comprising UNIDROIT’s Factoring Model Law, the FCI Legal Study, and the IFC Knowledge Guide on Factoring Regulation and Supervision, reflects a collective endeavour meticulously designed to operate in harmony.
IFC has consistently prioritised the support for SME finance. In addition to unlocking working capital finance for SMEs, factoring serves as a risk-mitigated mechanism relying on underlying trade for financiers, strengthens value chain relationships for companies, and enhances transparency and efficiency in financial systems.
In alignment with its dedication to SME finance, IFC has spearheaded the creation of the IFC Knowledge Guide, reflecting its commitment to enhancing working capital accessibility for SMEs and the development of the factoring market.
In Marrakech, Peter Mulroy, Secretary General of FCI, sat down with Qamar Saleem, CEO, SME Finance Forum, to talk about the importance of these initiatives, uncovering how the IFC Knowledge Guide, with its practical orientation, complements the foundational legal frameworks introduced by the Model Law and the benchmarking provided by the FCI Legal Study.
Bridging regulatory gaps
Historically, the factoring industry lacked clear guidance on regulatory aspects. While FCI had previously submitted several papers offering insights into specific attributes for implementing a regulatory framework, a structured regulatory framework for the factoring industry was still missing.
The IFC, in collaboration with the World Bank, recognised this void and created the ‘IFC Knowledge Guide on Factoring Regulation and Supervision.’
The IFC Knowledge Guide is an exhaustive resource providing a deep dive into the factoring industry from a regulatory perspective.
The guide is crafted to cater to a diverse audience, including policymakers, decision-makers, officials at central banks, and supervisory authorities. Beyond local borders, its scope extends globally, reaching governmental departments and the personnel of international institutions like the World Bank.
Saleem said, “Often, factoring and regulatory regimes are confined to the domestic level, leading to inconsistencies. This makes it challenging to discern the necessary elements for a robust factoring and supply chain network.”
While the guide is primarily aimed at central banks and regulators, it doesn’t solely focus on the regulatory aspect. Instead, it intertwines practical elements and addresses several global challenges facing the industry.
Saleem further underscored such an essential feature of the Knowledge Guide, “We felt we need a knowledge guide which is practical, offering practical insights and concrete recommendations.”
The guide, consisting of six main sections, goes beyond theoretical frameworks. It provides practical guidelines to policymakers, offering examples and best practices that can be leveraged for setting up effective regulatory regimes.
The document, therefore, serves as a comprehensive tool, providing options and recommendations for establishing a coherent regulatory framework, allowing any central bank/regulator to gather the most important elements when developing regulations within the factoring industry.
Furthermore, complementing UNIDROIT’s model law, the IFC guide represents a reference point for law reforms and future harmonisation efforts. As Saleem pointed out, “The knowledge guide complements the model law, giving industry practical insights and examples on how to set up the right regimes.”
Navigating the regulatory seas: A central banker’s compass
Steering regulatory frameworks, central bankers can use the IFC Knowledge as a crucial navigational tool since it is designed to empower them with insights into three pivotal elements: regulations, supervision tools, and regulatory financial aspects.
One of the central tenets of the Knowledge Guide is its comprehensive coverage of global factoring laws. With the increasing adoption of factoring laws worldwide, Saleem highlighted the importance of the guide for central bankers, stating, “The guide sheds light on these aspects, giving central bankers valuable insights into the evolving regulatory framework.”
For central bankers, this translates into a vital resource for understanding the global factoring regulations thereby facilitating informed decision-making.
In addition to regulations, the guide also enables central bankers to gain practical insights into the necessary supervisory and control tools. Saleem said, “It goes deeper into local policies, considering not only regulatory perspectives but also central bank standpoints.”
This in-depth exploration provides central bankers with the tools needed to ensure effective oversight and regulatory compliance.
Moreover, the Knowledge Guide recognises the significance of capital requirements and capital adequacy regulations within regulatory frameworks.
Saleem noted, “The guide equips central banks not only with regulatory insights but also with a perspective on capital adequacy.” This holistic approach ensures that central bankers have a well-rounded foundation of all strategic areas to set standards or policies they expect financial institutions to meet.
A collective force for global impact
The factoring industry has embarked on an unprecedented journey, unveiling three initiatives that promise to propel the factoring and receivables finance industry to new horizons.
Introducing three sophisticated legal and technical initiatives — UNIDROIT’s Factoring Model Law, the FCI Legal Study, and the IFC Knowledge Guide on Factoring Regulation and Supervision — the industry stands on the verge of a transformative era.
The journey began with the launch of the Factoring Model Law in 2019, and was quickly followed by FCI’s Legal Study in 2020, which lasted nearly 3 years.
FCI Legal Study, a comparative study of legal and regulatory environments for factoring and receivables financing in Europe and some other major markets.
The study spans 91 countries, making it the most extensive and comprehensive legal study in receivables finance to date, and incorporates the 2013 EUF legal study, a comprehensive review of the legal and regulatory framework in the 27 EU countries.
Saleem emphasised the FCI Legal Study’s role as the missing piece of the puzzle, not just providing information but serving as a benchmark for stakeholders in the factoring market.
In conjunction with the release of the IFC Knowledge Guide, UNIDROIT has unveiled its recently adopted Factoring Model Law. This self-standing legal regime addresses legal and institutional gaps in the factoring industry, facilitating seamless factoring transactions.
The transformative trio operates on multiple levels — the legal foundation, extensive coverage and benchmarking, and practical implementation.
Expressing excitement about the potential these initiatives hold, Saleem said, “I view it in three key aspects: the law sets the foundational framework, the knowledge guide offers practical insights, and the legal study serves as the industry benchmark.”
Together, these three initiatives form a cohesive foundation for the growth and development of factoring and receivables finance, each playing a distinctive yet interconnected role in reshaping the factoring industry.