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The FCI 55th Annual Meeting in Marrakech marked an important moment in receivables finance as the International Institute for the Unification of Private Law (UNIDROIT) launched the Model Law on Factoring. 

This initiative follows the introduction of UNIDROIT’s first instrument in the field of factoring, the UNIDROIT Convention on International Factoring. Specifically designed to address legal and institutional gaps in the factoring market, the Model Law on Factoring looks at countries lacking a comprehensive legal framework for secured factoring transactions. 

Concurrently, the International Finance Corporation (IFC) unveiled its ‘Knowledge Guide on Factoring Regulation and Supervision’. Together, these initiatives create a foundation ready to elevate legal and investor confidence, progressing the factoring industry to unprecedented heights.

In Marrakech, Peter Mulroy, Secretary General of FCI, sat down with Jose Ignacio Tirado, Secretary General of UNIDROIT, to discuss the journey leading to the UNIDROIT Model Law on Factoring, its key features and its pivotal role in shaping the future of receivables factoring. 

The evolution of UNIDROIT Model Law on Factoring

Factoring is a powerful financing scheme, particularly for SMEs, to access finance with fewer limitations through unlocking funds tied up in their unpaid invoices. 

The immediate access to cash for the supplier/seller makes factoring an essential financing instrument, specifically for developing countries where a large number of SMEs form the backbone of their economies, often with limited access to traditional bank loans. 

What sets factoring apart is the fact that credit is intricately tied to the value of a supplier’s accounts receivable rather than the supplier’s overall creditworthiness. 

Thus, it enables higher-risk suppliers to shift their credit risk to more creditworthy buyers. Moreover, with a continually growing volume of international trade, cross-border factoring presents a solution to working capital obstacles, facilitating SMEs’ active participation in global markets. 

Despite these advantages, persistent constraints in accessing credit, especially within emerging markets, coupled with the absence of a uniform framework facilitating the development of factoring, have impeded its broader adoption. Tirado said, “We need to develop standards to trade with countries and ensure that SMEs can access financing.”

Consequently, these challenges prompted the World Bank to acknowledge the necessity of a standalone Model Law on Factoring. Initiated in 2018, the World Bank recognised the significance of such a law, particularly for emerging markets contemplating the introduction of factoring domestically. 

The proposal highlighted the predominant focus of existing instruments on international transactions, accentuating the need for more guidance for nations to develop functional domestic factoring frameworks.

The World Bank’s proposal for the UNIDROIT 2020-2022 Work Programme, as highlighted by Tirado, presented three critical reasons for developing the Model Law: 

• Increasing access to credit, 
• Overcoming ongoing constraints on credit in developing countries, 
• Addressing the existing gap in international rules for factoring. 

This joint effort between UNIDROIT and the World Bank laid the foundation for a model law that not only addresses international transactions but also accommodates the legal intricacies of individual countries, fostering a more inclusive and standardised approach to factoring regulations. 

Key features of the UNIDROIT Model Law on Factoring

The UNIDROIT Model Law on Factoring has been strategically tailored to meet the diverse needs of both developed and developing economies. 

As Tirado underscored, “The Model Law on Factoring is a stand-alone instrument and therefore is easy to grasp not only from the legislator’s standpoint but also from those that need to apply it. The judges, the lawyers and, of course, the financial industry.”

One of the distinctive features of the Model Law on Factoring is its autonomy, eliminating the need for constant reference to additional legislation, and simplifying the application process within a legal framework. 

Emphasising its universal applicability, Tirado said, “The Factoring Model Law is an amazing balance, easy to interpret and implement by various legal families.”

Moreover, the Model Law on Factoring’s development involved an inclusive process with experts and observers of diverse backgrounds. 

Tirado highlighted this inclusivity, stating, “It caters for the needs of both civil and common law approaches to legislation. That’s very important because no country and no system should feel alien to this model law.”

The Model Law on Factoring is comprised of fifty-four articles that strike a balance between comprehensive coverage of the different factoring techniques and clarity. 

Tirado said, “It covers recourse and non-recourse with notification without notification national and international it does cover, of course, it caters for both, ordinary and reverse factoring.” 

This approach offers clarity without adding unnecessary regulatory complexities. Establishing a sound legal and regulatory framework allows the industry to ensure that all factoring transactions receive adequate legal and regulatory support. 

This, in turn, provides investors with adequate recourse in local courts when needed, boosting investor confidence and enhancing protections for the factoring and receivables finance community. 

As Tirado highlighted, “By providing this simplified, yet clear model law, from a global perspective, we hope to enhance access to finance, reduce transaction costs, and ultimately foster thriving economies.” 

Supporting infrastructure: IFC’s Knowledge Guide

In conjunction with UNIDROIT’s Model Law on Factoring, the IFC unveiled its ‘Knowledge Guide on Factoring Regulation and Supervision’ during the meeting. 

The main objective of this Knowledge Guide is to direct legal reforms supporting receivables finance and thereby promoting inclusive access to credit in emerging markets. 

Offering recommendations for a unified regulatory framework, particularly for non-banking financial institutions (factoring companies) engaging in receivables transfer, the guide complements UNIDROIT’s Model Law on Factoring. 

It provides valuable insights tailored for policymakers and decision-makers involved in the law reform process, such as officials from central banks, supervisory authorities, and governmental departments.

In addition, since 2013, the European Federation for the Factoring and Commercial Finance Industry (EUF) has been conducting a comparative legal study of the factoring industry covering 27 EU countries and six benchmark markets. 

This year, FCI expanded this Legal Study to encompass all the markets it serves, resulting in a comprehensive analysis of 91 countries. This expansive Legal Study is the most extensive ever produced for Receivables Finance.

The launch of the UNIDROIT Model Law on Factoring, the IFC ‘Knowledge Guide on Factoring Regulation and Supervision,’ and the FCI Legal Study stand as a significant stride forward. 

These three vital and harmonious documents are set to propel the factoring industry, particularly in emerging markets where the industry has yet to develop. 

Tirado described it as a “perfect trio,” these documents establish a robust framework for legal certainty, instil investor confidence, and, most importantly, foster the growth of the receivable finance industry globally.