Response to consultation paper amending Guidelines on definition of default
7. Question 7. Do you agree with the revised treatment of technical past due situations in rela-tion to non-recourse factoring arrangements? And if you do not agree, what are the rea-sons? Do you have any comments on the clarifications of paragraphs 31 and 32 in the current GL DoD?
The EUF agrees with and gives full support to the revised treatment of paragraph 23, point d) as outlined in Section 4 “Amendments”:
11.Point d in paragraph 23 is replaced by the following: ‘(d) in the specific case of factoring arrangements where the purchased receivables are recorded on the balance sheet of the institution and the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013 is breached but none of the receivables to the obligor is past due more than 90 days’
This change better reflects the economic reality of payments in trade receivables and non-recourse factoring, significantly improving the risk sensitivity of the definition of default and avoiding unnecessary default classifications of creditworthy debtors, with all the consequences such classifications would have on the overall exposure of the banking group to that counterparty.
We believe the proposed amendment effectively addresses the concerns of the factoring industry, providing an appropriate solution to the issues created by the current framework.
With regard to the changes concerning the treatment of undisclosed factoring arrangements (paragraphs 31 and 32), the EUF takes note of the EBA’s decision to remove the provision that allowed factors the flexibility to consider the date agreed with the client for the transfer of collected amounts, replacing it with two new technical default events.
Although collection practices, in the case of undisclosed factoring, may vary across jurisdictions and contractual arrangements, this provision was included in the original version of the Guidelines to account for the technical days that a factoring agreement may grant to the client when acting as the factor’s agent for the collection of receivables, allowing the client to complete the internal reconciliation of inflows before transferring the collected amounts to the factor.
However, we expect the effect of this change to be mitigated by the extension of the technical past-due period introduced in paragraph 23, point (d), while acknowledging that further analysis may be required in future to assess the actual impact.
We understand that the introduction of the new technical past-due events (paragraph 23, points (e) and (f)):
12.In paragraph 23, point e and f are added as follows:
‘(e) Where the obligor has not been adequately informed about the cession of the receivable by the factor’s client and the institution has evidence that the payment for the receivable has been made to the client.
(f) In the specific case of undisclosed factoring arrangements, where the payment was made by the obligor to the client before the payment was 90 days past due and the transfer of this payment from the client to the factor occurred after the 90 days.’
responds to the need to ensure that a debtor who has actually paid is not classified as in default. We fully agree with this principle, also considering its implications for the debtor’s position in supervisory reporting and risk centralization databases, although we expect that these events will rarely apply due to the nature of such arrangements.
8. Question 8. Do you agree with the other changes to the guidelines to reflect updates from Regulation (EU) 2024/1623?
The EUF strongly supports the decision to keep paragraphs 25 and 26 unchanged, as outlined in Section 3.5, paragraph 61 of the Consultation Paper.
We completely share the view that “while the use of 180 days was inspired by the previous discretion in CRR, it was not directly connected to it. This is directly observable through the wording of the paragraph that is different from the other three paragraphs mentioned above (there is no reference to “the competent authorities’ have replaced”). In fact, the provision in paragraph 25 of the GL DoD is useful in the case where the discretion was not exercised: in the case where the 90 days were replaced by 180 days, no days past due threshold would be breached anyway. Instead, the 180 days was put as a compromise solution, as a constraining factor to the additional flexibilities provided for these exposures”.