An influential trade finance industry group says pressure from UK regulators to strengthen risk management processes could have unintended consequences for receivables finance and trade credit insurance. 

The comments come from the International Trade and Forfaiting Association (ITFA) in response to a letter sent to all trade finance CEOs by the Financial Conduct Authority (FCA) and Prudential Regulation Authority last month. The letter highlighted “significant issues relating to both credit risk analysis and financial crime controls” across the sector. 

Making reference to recent high-profile failures in the commodity and trade finance industry – which have included the collapse of Greensill Capital in March and a string of fraud cases in Singapore and the Middle East – the two regulators warned that companies are exposed to unnecessary material risks. 

However, the ITFA argues in response that certain approaches to risk “have evolved because of applicable legal rules and reasonable commercial practice”, in a letter seen by GTR. 

The regulators’ guidance could make banks feel “under an obligation to change existing practices which could, in fact, have the effect of making their business less safe”, it says. 

“In view of this, we believe that some additional communication clarifying that your letter is not intended to overturn sensible and reasonable practices would be welcomed by the trade finance community,” urges the letter, signed by ITFA chairman Sean Edwards. 

The first issue singled out by the association is that the authorities suggest that in a trade finance transaction, banks should obtain “formal written acknowledgement from the end buyer that the amount due… is payable to the financing firm, and not to the borrower”. 

ITFA says that principle is not generally applied by banks purchasing and discounting receivables or invoices, nor is it a legal requirement. 

This is primarily because a seller often does not want its end buyer to know about the sale of receivables to a financial intermediary, in case it is perceived as disloyal or in poor financial standing. 

Following the authorities’ suggestions could discourage smaller firms from using this kind of finance, even though it is typically cheaper than unsecured lending or overdraft financing, ITFA argues. 

A seller is also likely to be in the best position to service debts in a receivables finance transaction, due to its relationship with the buyer. A third-party lender “may be met with suspicion and distrust”. 

The second concern is over the provision of credit insurance in a trade finance transaction. 

The regulators say: “Best practice would be for a firm to seek formal confirmation that they are explicitly identified as a loss payee for risk insurance cover on non-payment of debts by the end-buyers ​​​​and that the firm is in compliance with any requirements set out in the insurance agreement.” 

The validity of insurance has become a flashpoint in the fallout of the Greensill collapse, which was sparked when its insurer, Bond & Credit Company, refused to renew billions of dollars in cover. Investigations are ongoing into whether earlier policies were in fact valid in the first place, the company has said. 

But according to ITFA, companies often use insurance on a portfolio basis, with cover structured to deal with a large number of obligors. 

“It will not be necessary, nor usually possible, to conduct personalised checks or receive individual confirmations,” it says. 

Seeking formal confirmation that a firm is in compliance with an insurance policy is “unlikely to be achievable in practice as insurers will not be in a position to judge what an insured may or may not have done”, it adds. 

ITFA has asked the two regulators for “further clarifications which will assist UK banks in carrying reviews and assessments of their procedures”. 

The FCA did not immediately respond when contacted by GTR.