Weekly Blog by Philip King, CEO of the ICM - 'Better Late than Never'

There's been a late payment furore this week, in my world at least. I was interviewed on 5Live Investigates on Sunday and then on Monday the Prime Minister announced that BIS is going to launch a consultation on the subject.

In the midst of Cameron's announcement he repeated the suggestion made by Vince Cable in August that there might be penalties or fines for late payment. Quite apart from the debate about the practicalities of implementing such a step, the point missed is that the Late Payment legislation introduced in 1998 and strengthened by subsequent Statutory Instruments, most recently in March this year, allows for a fixed fee to be charged and supplemented by additional recovery costs for invoices paid late. The Institute's press release issued on Monday makes the point that the late payment charges are, by definition, a fine or levy for late payment.

Lord Digby Jones entered the fray stating that the Prompt Payment Code wasn't effective. He said it was merely a nice statement of intent. But that's exactly what it is: a voluntary commitment to treat suppliers fairly and pay them according to the terms agreed! If it had the teeth that he is demanding, it would cease to be a voluntary code. Now I'm not saying it couldn't be improved nor am I disagreeing with the sentiment for other or more stringent measures but I do get frustrated when people say something isn't working when it's doing what it says on the tin!

Some critics have suggested that I'm personally responsible for the Code and its defender-in-chief. I'm not, the ICM simply hosts and administers it for government but let's not dismiss the benefits out of hand: nearly 1,500 organisations have signed up, including 72 of the FTSE100; many have made fundamental changes to improve their internal systems and processes; and a dialogue has started where conversations didn't previously exist. If the Code didn't exist, by the way, the debate wouldn't be taking place and the issue wouldn't be getting airtime in the way it is. These are tangible benefits and should neither be ignored nor trivialised.

The fact is that the Prompt Payment Code was introduced as a measure to drive a change in culture complementing other measures such as the late payment legislation, naming and shaming by business organisations, and good credit management practice which - all too often - is missing from business relationships. This last point was driven home to me at an ICM Regional Roadshow in London yesterday when attendees heard about the breadth of influence credit management has, and the value it adds, across the entire business.

Credit management isn't just about collecting cash from recalcitrant customers. Good credit management starts before an order is even received by assessing the risk of a potential customer, establishing its identity and status, ensuring that it is good for the sums of credit likely to be incurred, submitting invoices correctly and promptly, understanding its invoice processing and approval systems so that they can be met, and taking swift action if payment isn't going to arrive when it's expected.

I'm capturing a huge amount of activity in a single sentence and not doing it justice but my point is this: we have to change the culture to one where treating suppliers fairly is part of the corporate responsibility agenda and we have to stamp out exploitation of small businesses by organisations that wilfully take advantage of their supplier base but that's not the whole story. We also have to help businesses to help themselves by getting the basics right. Unless we do that, we'll never see the improvement we all seek.

Weekly Blog by Philip King, CEO of the ICM - 'Measure for measure'

The Government has this week published its response to the BIS Select Committee's report on Debt Management published in March and it makes interesting reading.  The original report contained 23 recommendations and the government responds to each one in turn. The document can be found here and what pleases me is the measured and proportionate nature of the responses.

 

The timetable for the planned review of the regulatory framework, including the transfer of regulatory powers from the OFT to the FCA, is set out with the final transfer expected to take place by April 2014.  Having a clear timetable and plan including expected consultation dates is helpful.  The more interesting aspects, however, relate to payday loans and debt management companies.

On payday loans, the Government refers to the work it has been carrying out with the four main trade associations representing over 90% of the payday loan market to improve consumer protection in their codes of practice.  These improvements together with the OFT’s review investigating levels of compliance with the Consumer Credit Act are, in my view, the right approach before any more stringent measures are considered.  Furthermore, the codes include measures to address the issues of rollover loans, affordability assessment, and continuous payment authority, and the Government has undertaken to review how best to include high-cost credit transactions in credit files.

In summary, close engagement with the trade associations to introduce enhanced consumer protections into their codes of practice and their commitment to publish a common industry-wide Good Practice Customer Charter setting out in a clear, concise and user-friendly format what customers of payday and other short-term loans should expect from their lender is positive and encouraging.  One can never condone poor practice but I believe payday loans have their place in certain circumstances and meet a particular need.

With regard to Debt Management companies, the Government is working with stakeholders to develop a Protocol of best practice for debt management plans which will cover transparency of fees and costs (particularly where they are upfront), misleading advertising, and safeguarding client accounts.  Again, in my view, working with the industry and trade bodies makes absolute sense before considering legislation and heavier regulation.

 
It's worth also noting that – in both cases – the approach being proposed will deliver faster results than would be achieved by the introduction of legislation.  Finally, as an aside, I have to mention again my particular soapbox that Debt Management Plans should be reported in the insolvency statistics so that the published numbers are a true representation of personal insolvency levels.

Weekly Blog by Philip King, CEO of the ICM - Dodging the silver bullet'

It has been a busy week. I went to the ICTF (International Credit & Trade Finance Association) Symposium in Paris on Sunday and presented to the delegates on Monday afternoon about the EU Late Payment Directive which is due to be implemented by March 16, 2013. Yesterday, I attended a Round Table at the House of Commons organised by the Forum of Private Business and Graydon discussing their ‘Research on Payment Culture', and this morning I attended Mark Prisk's Small Business Economic Forum at BIS.

The common theme with all three has been the impact of late payment on business and economic growth, a subject I also addressed in my blog last week. I've been looking at the EU Directive in much more detail and it includes some good elements building, as it has, on the 2000 Directive. Nevertheless, I remain sceptical about legislation being the silver bullet many suggest. Two of the primary reasons for the ineffectiveness of the current Directive are ignorance and reluctance. Huge numbers of businesses don't even know about the Directive and many of those that are aware of it don't know how to use it properly. Even if they know about it, and know how to use it, businesses don't want to upset their customers by raising an invoice for late payment charges and interest; they believe it will impact negatively on their relationship as a supplier. 

Consensus among the politicians, business organisation leaders, accountants and journalists at yesterday's Round Table was that it is the culture in business that needs changing. Legislation may play a part but it won't be the sought-after panacea. One of my most common themes when talking about cash-flow management is the need for payment terms to be integral to general trading discussions. Payment terms and arrangement shouldn't be sitting stage-left waiting to come on stage when everything else has been discussed and agreed! They should be discussed alongside price, discounts, colour, quantities, quality, delivery arrangements, and everything else that needs to be agreed.

Cashflow is vital to suppliers; the supplier's strength and sustainability of the supply chain is vital to buyers, and these issues are not mutually exclusive. When managed properly, credit terms can deliver more, to the benefit of supplier and buyer alike.

That's what credit management is about and why it's so important and central to business success.   

Weekly Blog by Philip King, CEO of the ICM - 'A case of the tail wagging the dog'

Ed Davey announced last Thursday that the Government is not going to seek to introduce new legislative controls on pre-packs at this time because it is not convinced that the benefit of new legislative controls presently outweighs the overall benefit to business of adhering to the moratorium on regulations affecting micro-businesses.

It's hardly surprising that the announcement has caused a furore and been presented as a victory for the insolvency profession and a massive blow for creditors. Indeed, there was a blog over the weekend that drew attention to my comments and those of Frances Coulson, President of R3, as epitomising the two positions. To be frank, this suggestion misses the point. My anger and frustration is not at the decision not to introduce legislative changes, even though I think they had some merit.

I am not fundamentally opposed to pre-packs and I believe they can be of enormous benefit when used correctly and appropriately. What I am fundamentally opposed to, however, is the abuse of pre-packs and the phoenix situation when the same directors continue what is, to all intents, the same business, but without previously incurred debts, leaving creditors high and dry. Two of the key benefits of the proposed changes were the notice period that would allow creditors to communicate with insolvency practitioners and bring what might be important and relevant information to their attention (a notice period that the Court could agree to be waived in certain circumstances), and the requirement that the IP should make a declaration in advance that he believed the pre-pack to be the appropriate solution in the circumstances; psychologically, so much more powerful than making that statement after the event as part of the SIP16 process.

But perhaps what really frustrates me is the obvious waste of time, resources and effort, and the justification for the decision that has nothing to do with what is right or wrong. A consultation launched in March 2010, and the subject of numerous meetings with stakeholders, papers, and discussion, has now been kicked into the long grass (as I feared it would) with an assertion by Ed Davey that he has asked his officials "to undertake an urgent review in conjunction with stakeholders of how the existing controls on pre-packs have been working.......". Surely that 'urgent review' could and should have been carried out as part of the consultation process? I am all for cutting regulation and red tape, and I am encouraged by the Government's ambitions and success in reducing bureaucracy through the work of the Better Regulation Executive under Lord Curry, but when the regulations argument justifies policy decisions, it feels too much to me like the tail wagging the dog.

I certainly do agree with those who, in the debate since last week, have suggested that suppliers might - and should - pay more attention to credit risk management in order not to be in the frame (or at least to control their exposure) when a pre-pack, or any other insolvency, happens.