Back in September 2023, the European Commission presented its proposal for a Late Payment Regulation as part of the SME Relief Package. The subsequent debate centred primarily on the strict reduction of payment terms to a maximum of 30 days and the creation of a new authority to monitor and enforce the regulation. The aim was to adopt the regulation in the first quarter of 2024.
Postponed is not canceled
In the current legislative period, the European Parliament, shortly before the end of its term, approved the amended draft of the Late Payment Regulation by the Committee on the Internal Market and Consumer Protection (IMCO). This means that the new European Parliament will have to take up the dossier again after the elections in June and the constituent plenary session in mid-July.
In terms of content, the new Parliament has the freedom to build on the previous content, but does not have to do so. Most recently, the rigid 30-day deadline was made somewhat more flexible (up to 60 days). The previous parliament retained the planned European enforcement authority and additional obligations for companies to provide evidence.
What does this mean for the securitisation market?
The draft Late Payment Regulation aims at protecting SMEs, but has far-reaching implications for securitisations and other structured financing instruments. The introduction of fixed, short payment terms could force buyers to take out loans to bridge financing bottlenecks. Factoring, securitisation and other receivables-based financing instruments could only cover the shorter payment terms. A switch to a credit-based financing solution between suppliers and buyers with longer payment periods is also to be expected in some sectors, which would fail to fulfil the objectives of the regulation.
Limiting payment terms could reduce the availability of financing and have a negative impact on the cash flow and liquidity of SMEs, which could increase the risk of insolvency. SMEs that buy within the EU and export outside the EU would be particularly affected as they would be faced with different payment terms. Overall, the proposals could increase the costs of supply chain financing and liquidity management, as some of the existing financing instruments would no longer be available. Furthermore, the proposed regulations would result in additional administrative and adjustment costs for creditors and debtors.
What can be expected?
A new Parliament and the new Hungarian Presidency of the Council of the EU certainly mean a new game. It remains to be seen how much of the previous draft of the Late Payment Regulation will remain. We will keep you up to date.