It is clear that anyone wishing to carry out factoring in Germany first needs a factoring licence. However, there are two types of licences on offer, depending on the business model. So what type of factoring licence should I apply for?
Distinction between recourse and non-recourse factoring is not relevant for the question of the factoring licence
Factoring usually distinguishes between recourse and non-recourse factoring. With non-recourse factoring, the factoring company buys receivables from companies, which this company has in respect to its customers. The factoring company assumes the risk that the receivables default (so-called default risk or del credere risk). From a legal perspective, this is a receivable purchase agreement.
In the case of recourse factoring, the receivables are also transferred to the factoring company, but the factoring company does not assume the default risk. The factoring company can take recourse against the company in the event of the purchased receivables defaulting. From a legal perspective, this is classified as a loan agreement.
This classification has a multitude of accounting and legal consequences but is not relevant for the question of the factoring licence.
From a regulatory law perspective, factoring exists whenever a factoring company purchases receivables on the basis of framework agreement, whether this is done with or without recourse. This means that recourse as well as non-recourse factoring constitute factoring in the regulatory sense.
Then what is the difference to debt collection?
Debt collection is the collection of third-party money claims in one’s own name or in the name of a third party for the account of a third party. As a rule, debt collection occurs when a receivable is in default, i.e. the customer does not pay. In order to be able to offer debt collection services, a company needs to be registered in accordance with the German Legal Services Act (RDG), but does not require a factoring licence.
Debt collection is very close to factoring when the company transfers the receivables to be collected to a debt collection company. This can then be difficult to differentiate from factoring. The distinction is only partially based on a payment default. The collection of non-performing receivables does not constitute a money remittance service and is therefore also not a payment service. If the financing function is missing, there is no factoring according to the German Banking Act (KWG).
This does not necessarily mean, however, that this then constitutes a debt collection service for which a registration is required. If the collection of the non-performing receivable is carried out on the company’s own account, i.e. the debt collection agency itself bears the default risk and is not obliged to collect the receivables, this does not constitute a debt collection service.
What types of factoring licences are there even?
On the one hand, factoring is classified as a financial service in accordance with Section 1 para. 1a No. 9 German Banking Act (KWG) and a factoring licence is required in accordance with the KWG.
Additionally, factoring is classified as a financial transfer transaction (Section 1 para. 1 sentence 2 no. 5 of the German Payment Services Supervision Act (ZAG)) and therefore as a payment service and requires a licence under the ZAG (hereinafter referred to as a “factoring licence under the ZAG”).
Why are there two types of factoring licences?
The reasons for the two types of factoring licence are based on the history of supervisory law. Some payment service providers wanted to offer payment services to merchants, such as the collection of customer funds by the merchants. This constituted a payment service, as these service providers collect third-party funds. In order to avoid regulation, the merchant ceded these claims to the payment service provider shortly before the collection, with the result that the payment service provider did not formally collect any third-party funds, but instead dealt with its own claims and therefore, strictly speaking, only conducted “factoring”. In order to prevent this circumvention strategy, BaFin takes the position that this factoring also constitutes a payment service, because from an economic perspective, the purpose is not a type of financing but to provide a payment service.
The factoring licence under the ZAG, however, has higher requirements than a factoring licence under the KWG. The approval procedure for a factoring licence under the ZAG is more complex and includes, in particular, detailed documents regarding IT security. Additionally, the minimum capital requirements are significantly higher for factoring licences under the KWG.
When do I need what type of factoring licence?
BaFin assumes the existence of a money remittance service if the economic intention of the service is to settle payments rather than provide financing to the contractual partner. In this case, the factoring company requires a factoring licence under the ZAG.
If, on the other hand, the focus is on the financing, a factoring licence under the KWG is required.
The differentiation can be very difficult as the BaFin takes an economic rather than a formal view.
The following are indicators of a payment service:
- remuneration for the receivable sold is only due after the collection of the receivable by the factoring company;
- standard purchase and without a detailed credit assessment;
- very low default rate.
Indicators of the transaction fulfilling a financing function include:
- purchase of receivables with longer payment periods;
- interest rates.
It is important to note that the acceptance of the default risk is not an indicator for one licence type or the other.
In borderline cases, it is to be expected that the BaFin will tend to accept a payment service, as the regulatory requirements are higher in that case.
The significance of this distinction can be illustrated by the following example:
A factoring company conducts non-recourse factoring and purchases receivables from merchants with a payment term of 90 days. The receivables are purchased at a discount from the nominal value and bear interest. The factoring company has a factoring licence under the KWG. We can assume for the purposes of this example that the transaction serves a financing function, i.e. the factoring licence under the KWG is sufficient.
The factoring company would now like to expand its range of services and offers a service to purchase receivables from merchants which are due immediately and which are paid by the customers by way of direct debit.
For this new service, there is generally no financing function as the receivable is collected directly and the merchant does not receive the amount more quickly as a result of the service than it would do with a normal payment via direct debit. The consequence is that by offering this new service, the factoring company provides a payment service and it therefore requires a factoring licence under the ZAG. Its current factoring licence under the KWG does not cover this new service. This means that the new service cannot be offered with this factoring licence.
Conversely, however, a company that already has a payment service licence does not need a factoring licence under the KWG if it decides to offer non-recourse factoring with a financing function. This is to avoid double supervision under the KWG and the ZAG.
Not good. This is because unfortunately, factoring is not uniformly regulated throughout Europe. It is therefore not the case that a factoring licence under the ZAG or the KWG also guarantees that a company can offer this in other European countries through passporting rules. Some countries do not require a factoring licence at all, others apply higher standards. It would be great if there was a standardisation. Perhaps this would be an aim worth lobbying for?
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