Preparing for increased regulation in Supply Chain Finance

The supply chain has been a consistent source of conversation across industries during the COVID-19 pandemic, with hurdles impacting every point of contact. As this trend persisted, supply chain finance has been under increased scrutiny. With more scrutiny comes the potential for more regulation.

Kevin Day, CEO of HPD Lendscape, joined Managing Editor of ABF Journal, Phil Neuffer, to discuss the pros and cons of increased regulation in the supply chain finance sector. In the podcast, they would also discuss how these developments could be a force for good and the types of technology lenders need to employ to deal with evolving regulatory frameworks.

Listen to the podcast, or read the transcription, below.

Phil Neuffer, ABF Journal: Hi Kevin, thanks for taking the time to jump on the podcast today. Before we get into today's conversation, can you give us a short introduction to your background and your work with HPD Lendscape?

Kevin Day, HPD Lendscape: Thank you, Phil. My background has primarily been technology and I began my career as a developer, moving up the lines of command into business analysis and into software design - primarily in asset-based finance in all its various forms.

Most of my career has been working at HPD Lendscape, raising through the ranks of the business from a developer to my current position which is CEO for the business. At HPD Lendscape, we specialize in providing technology in the asset-based finance space.

Phil Neuffer: Great. One of the things that we wanted to talk about today is supply chain finance, specifically with regard to regulation. There's been a debate circulating about potentially regulating the space more, why do you think this conversation is becoming more prevalent nowadays?

Kevin Day: Firstly, regulation is generally not a bad thing, and people often sort of look at regulators or regulation as being something that is going to hamper and hold back a certain sector. I look at it as providing a level playing field where the rules of engagement are clearly defined. It is effective in terms of helping the sector to develop its reputation for good practice, consistency and sticking to its goals of supporting in case supply chain finance and businesses.

Phil Neuffer: With the supply chain finance issues which are prevalent due to the COVID-19 pandemic, how is the debate around regulation evolving? Has there been a change in the support for regulation?

Kevin Day: One of the key aspects of supply chain finance has always been around KYC, so it's always been important to know who the actual parties are involved in any particular transaction. I don't see anything changing in that respect, and it is always going to be important.

The other side that we would like to see is how corporations are able to disclose what they're doing in terms of supply chain finance. Obviously, there may have been an impact on their balance sheets position, and I think it's not that it's necessarily a bad thing as it leads to greater transparency. Particularly, where things may not have gone to plan.

I think is it generally good for the sector to do what it can to present things correctly. Whether that is self-regulation or regulation from a government body, it is something that is inevitable and something the sector should embrace.

Phil Neuffer: You've mentioned a level playing field as being one of the benefits of a more regulated supply chain finance market, especially for paper-based lenders in the US. Are there other benefits?

Kevin Day: One of the key benefits is having consistency in how supply chain finance works. I think that the problem of supply chain finance as a term is that it can be really interpreted in many ways, and I think that's part of the danger is that term, like supply chain finance, is that it gets misinterpreted. Some of the bedrock elements of how supply chain finance is meant to work can get diluted and get lost.

For example, one of the key principles is the fact that the buyer is typically about investment-grade – a high-quality buyer. Although nothing is risk-free in life, for those organizations providing liquidity into supply chains, they need to have some assurances or certainty that the invoices in that program are going to get paid.

Phil Neuffer: What are some of the challenges that could be presented for lenders and if regulations do increase? There's a lot of positives but are there challenges that could crop up?

Kevin Day: The challenge of any kind of regulation is red tape and bureaucracy. Everybody wants things to be as agile and seamless as possible, but as soon as you have regulation it does mean that structure or processes need to be followed, whether that be in a more organized or prescriptive way. Some might fear that may dilute some of the creativity that might otherwise be involved.

I think the jury is out and we need to see how things evolve as regulation comes in. Regulation can be a two-way street, and there can always be pushback when things go too far.

There are many organizations that act on behalf of the industry and lobby against any poor regulation that might be coming our way, but I think that always needs to be a case. Regulators also have a responsibility not to harm good financial products, like supply chain finance, where they're being applied and implemented correctly.

Phil Neuffer: Should more regulations do come to pass, in the near term or the long term, how do you think lenders can better position themselves to deal with the increased burden you have mentioned?

Kevin Day: When being regulated, things like automation and having good systems of record are bedrocks for the justification of what you are doing. Clear processes, documentation and contracts are all helpful to ensure that when programs are set up, that they will meet regulatory requirements.

On the opposite side of that, when you have poor documentation or contractual undertakings, dealings are ambiguous and there is no auditability, that is when things start to unravel and fall apart.

Phil Neuffer: What role can a company's technology suite play in helping to keep on top of this? You have mentioned some already, but what types of tools would be needed to deal with requirements and regulations?

Kevin Day: The key factor is ensuring you have a core system that can meet all the accounting requirements, making sure there is never any doubt to the financial position between the various parties. The onboarding process is also becoming increasingly important, bringing suppliers into supply chain finance programs in a way that's relatively slick and straightforward.

At the same time, it needs to collate all the necessary documentation and undertakings of that supplier to ensure that they are who they say they are, that we've got evidence of who they are, and the fact that from a KYC perspective, they meet all the requirements.

Phil Neuffer: Do you expect there to be increased regulations?

Kevin Day: Regulation always works region by region, country by country in most cases. Some countries are highly regulated and many of the things we have been talking about have been in place and already fall into standard practice. It’s definitely not one-size-fits-all. If you go into less regulated environments like the UK or US, there is inherently a good business practice. From a regulatory perspective, it may well be that it is not as bad as people may think.

Regulators are not out to do damage. They are trying to protect businesses where they can, to provide certainty or clarity so that all parties understand their position. Without tripping over ourselves to embrace this, I think that sectors should not fear regulation. We should welcome it as much as we can.

Phil Neuffer: For the areas that are less regulated, for example, the UK or US, how do you imagine regulations might be implemented if they are adopted?

Kevin Day: A lot of it comes down to banking regulation full stop.

If you look at the UK market, to say it's unregulated is not quite true. If you are a bank, by definition, you are regulated. If you are non-bank, you are less regulated or unregulated.

I think there will be several things which will apply from general financial good practice. Currently, governments are really concerned about anything that could be questionable or crime-related. This could be suspicious parties or trades in different jurisdictions or anti-money laundering concerns.

There are also other areas around fair play. There is already a lot of regulation around protecting businesses in terms of unfair practice, but I think these things may become more regulated or emphasized in terms of businesses' interpretation and application of the rules.

First appeared on: ABF Journal