The question is raised as the same has become particularly relevant for a number of financial institutions operating in the factoring sector, whereby an incorrect initiation of the counting of past due may lead to a misclassification of the relevant exposures which, in turn, could cause an overly burdensome effect for financial institutions in terms of prudential capital requirements (also in instances which are not characterized by actual or potential credit risk deterioration).

There are several events which may cause the misalignment between the actual payment timing and the stipulated invoice payment terms, resulting in the extension of the duration for which the purchased receivables remain on the factor's balance sheets beyond the formal expiry of the relevant invoices. Such discrepancy mainly arises from: (i) the inherent commercial relationships between suppliers and their customers, potentially characterized by a disparity in bargaining power between the parties, (ii) the internal administrative processes implemented by debtors in order to precondition invoice payments to the prior verification of the supply of goods or services, (iii) the dunning, clearing and invoice reconciliation processes employed by the factor. However, these events do not inherently signify a deterioration of the actual risk profile of a debtor or a default scenario, and in certain instances (such as point (iii) above) they are not even directly attributable to the debtor itself.

With regard to non-recourse factoring (where the purchased receivables are recognized on the balance sheet of the factor in accordance with the applicable accounting principles, and the factor assumes exposures to the debtors of the client) it is crucial to note the following:

• The contract is exclusively between the financial institution and its client (i.e., the assignor of the receivables), and not with the debtor (i.e. the party generally making the actual repayment of the receivables to the factor), who remains a non-contractual party to the financial institution. In addition, in undisclosed factoring arrangements (as outlined in par. 32 of EBA/GL/2016/07), the debtor may not even be informed of the assignment of the receivables;

• The contract between the factor and the client must explicitly or implicitly reflect and determine specific payment timings in order to allow the transfer of substantially all risks and benefits of ownership, thus enabling the derecognition of the credit obligation from the client’s balance sheet (i.e., non-recourse condition according to IFRS 9, par. 3.2.6). These contractual timings are crucial to the factor to: (i) determine the pricing of the financial transaction, (ii) verify the compliance of the relevant financial transaction with the usury law thresholds from time to time applicable and (iii) record the financial instrument for accounting purposes;

• The contractual payment timings referred to in the previous point are therefore part and parcel of the factoring contract and its credit exposure. Their practical implementation, however, could reflect particular conditions deriving from commercial practices in place between clients and debtors.

Employing the contractual payment timing derived, even implicitly, from the contract with the client as the basis for calculating days past due ensures:

• Full compliance with CRR3 (art. 5(b)(4)), defining credit obligation as "any obligation arising from a credit contract, including principal, accrued interest and fees, owed by an obligor", thus establishing a direct link between the credit contract (in place between the factor and the client/assignor) and the assigned credit obligation;

• Enhanced identification of default and risk scenarios, preventing the misclassification of counterparties with high creditworthiness (for example highly rated companies, public administration entities);

• Consistency with the broader risk management framework, as the contractual payment timings reflect realistic repayment expectations and are used by the factor to calculate other regulatory indicators (e.g., Liquidity Coverage Ratio, Net Stable Funding Ratio, Interest Rate Risk in Banking Book limits);

• No conflicts with the formal payment terms derived from the credit contract between the financial institution and the client, in contrast to the debtor who does not have a contractual relationship with the financial institution;

• A more harmonized definition of default across factoring and other financial instruments characterized by credit obligation due dates which are generally based on what is contractually agreed with the client. This could lead to regulatory and interpretative simplification without the need for further exemptions or specific provisions for factoring;

• Prevention of arbitrage by financial institutions in defining contractual payment terms and in accurately identifying defaults, as extensive long payment terms could lead to: (i) possible breaches of usury limits, (ii) unattractive pricing for clients and (iii) delayed profit distribution through amortized cost accounting.

Furthermore, initiating the counting of days past due based on contractual terms included in or implied by the contract agreed with the factor’s client would not appear to incentivize late payments by the debtor, as those are bound by Directive 2011/7/EU, encouraging prompt payment practices by both enterprises and public authorities. In this regard, the role of financial institutions specialized in non-recourse factoring is also to ensure more effective collection processes compared to those of their clients.