There aren’t any special laws in the UK concerning factoring. Rather there are rules concerning banking, financial contracts etc., but nothing that sets out specifically how factoring firms are supposed to conduct themselves.
The obvious authority to rule on these matters would be the Financial Conduct Authority (FCA), but an application to the FCA to determine financial fair play would cost each company between £2,000 and £50,000. These are expenses that would be passed onto the customer. In the highly competitive market of trade receivables finance such extra costs would be detrimental to the sector.
Currently, there are three main bodies that regulate factoring companies in the UK.
UK Finance (UKF)
Firstly, there is UK Finance. It is an independent body that has set a number of rules and principles for its members to follow. It is this body that oversees invoice finance in the UK. As it is a non-government body, the factoring sector in the UK is essentially self-regulating.
UKF had its inception on 1st July, 2017. They took over the role of the defunct Asset Based Finance Association (ABFA) which had previously regulated factoring. UK Finance has about 300 firms on its books all connected to the factoring sector.
The main goal of UKF is to promote the values of safety, transparency and innovation in the banking and finance industries. They also serve as a voice for its diverse members.
The Financial Conduct Authority (FCA)
As mentioned already, factoring companies don’t pay the FCA to regulate factoring or certify certain companies. Rather they are a non-governmental body that champions fairness and transparency in financial dealings. If a company or individual feels they have been unfairly treated in a financial transaction the FCA will pursue the matter. Thus, if a company has a dispute with a factoring company, then the FCA can provide independent resolution services as well as clarify the legal context.
Being an NGO means that the FCA doesn’t carry the weight of a government body when it intervenes in disputes. It can advocate for change but not legislate change.
National Association of Commercial Finance Brokers (NACFB)
The National Association of Commercial Finance Brokers was founded in 1992 with the mission statement to provide support to commercial finance brokers, especially in their role supporting funding solutions for Small and Medium-sized Enterprises (SMEs).
There are about 2,000 members of the NACFB. Members are required to abide by a Code of Conduct. The code was recognised in 1994 by the Office for Fair Trading.
Moreover, members in order to carry out commercial financial services must show they have full or limited Consumer Credit Permission, Professional Indemnity Insurance and a Data Protection Licence.
A company considering using factoring services for the first time would be advised to approach a company that is a member of NACFB.
In Summary
Since the factoring industry is largely self-regulating, there is no need for any company offering invoice finance to join any of the above bodies. There are Acts of Parliament that deal with insolvency, notifying debtors etc. (see our post Legal Regulation for England and Wales) and other specific financial practices. And as long as these laws are followed, a factoring firm is free to act as it chooses in terms of procedures and fees.
UK Finance, the Financial Conduct Authority and The National Association of Commercial Finance Brokers do attempt to advocate best practice and seek to give redress against poor practice. Membership of UKF and the NACFB indicates to prospective clients that factoring firms do follow regulatory guidelines, just voluntarily.
