Everything you need to know about the new definition of default (FAQ)

A new governance framework has therefore been implemented within BNP Paribas Factor to ensure the proper handling of default situations. 

In light of these regulatory changes, several questions may arise.
To support you, a frequently asked questions section is available below 

 

What does "default status" mean?	A default status (default determination) corresponds to a deterioration in the financial situation of the counterparty that raises doubts about its ability to fully repay its loans/commitments without appropriate measures, such as the realization of any available collateral, being taken.
What is the scope of application of the regulation?	All (and only) financial institutions operating in an EU member state are concerned: credit institutions, financing companies and investment firms.
What are the regulatory reference texts?	European Regulation: Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No. 575/2013 EBA/GL/2016/07 (click here) This is not a new regulation, but rather an evolution aimed at strengthening, for financial institutions, the monitoring and actions taken following the identification of a payment default. Accordingly, the European Banking Authority has established criteria and assessment standards for defaulting "third parties" in order to harmonize the practices of financial institutions across European Union countries. The European Banking Authority set the implementation dates for these guidelines as January 1, 2021 for the "defaulting customer third party" component;  and December 31, 2022 for the "defaulting buyer third party" component (additional time granted).
Why is factoring subject to this regulation?	BNP Paribas Factor is a financing company subject to the regulations of the European Banking Authority.
For companies based in France, can the term "unpaid amount" mentioned in the letter be considered a Banque de France payment incident?	An unpaid amount or arrears, within the meaning of this regulation, is defined as a payment delay of more than 90 days.  This delay is considered a likely indication of non-payment. In the case of a "non-recourse" factoring agreement, this will result in a "default status" being recorded in BNP Paribas Factor's internal systems, rather than a declaration of a "payment incident."
Under the factoring agreement, what are the consequences for buyers?	The presence of invoices overdue by more than 90 days in BNP Paribas Factor's books will automatically result, under this regulation, in the withdrawal of credit approvals. In addition, the default status of the third party will trigger a mandatory three-month probationary monitoring period.
Are clients required to inform their buyers about changes in the regulation?	Our clients have no regulatory obligation to inform their buyers. Nevertheless, in the event of late payment, it may be advisable to make buyers aware of the potential impacts (and consequences) of such a situation.
I am involved in a dispute with my customer regarding the proper performance of the service or delivery of the goods. Am I concerned?	As long as the dispute has not been resolved, the invoice cannot be submitted and is therefore excluded from the default calculation.
I handle payment follow-up and collection under my factoring agreement. Am I concerned?	Yes, the management mandate granted to you means that monitoring your accounts receivable and debt collection are your responsibility.  For receivables that remain unpaid, you must provide BNP Paribas Factor with all relevant details regarding the nature and justification of these unpaid amounts and inform us of the steps and actions taken with the buyer.  Your agreement also provides for the exclusion of disputed invoices after a period of 30 days. Therefore, the presence of invoices overdue by more than 90 days in BNP Paribas Factor's books will automatically result in the withdrawal of credit approvals.
How can you prevent "default"?	Payment of the invoice eliminates the risk of being classified as "in default."  Your usual contacts at BNP Paribas Factor must be informed of any situation preventing or delaying payment of the invoice.  For example:  invoices that are overdue and subject to a dispute or claim,  invoices subject to credit notes that have not yet been assigned,  invoices that have been paid directly,  or any other reason

For any other questions, we recommend contacting your usual BNP Paribas Factor representative, who will be able to provide more detailed answers to your questions.