Enforcement: The Achilles Heel Of EU Late Payments Regulation

Scott Pezza

When discussing late payments in the B2B arena, we are referring to two separate yet related issues. The first is the ordinary meaning of “late,” meaning that buyers are paying some time after the agreed upon payment date. The second is the recognition that buyers have been actively renegotiating payment terms to push the agreed upon date much further out into the future. As we covered in DPO and On-Time Payment Performance, from Metrics to Legal Mandates, existing legislation addresses both of these scenarios.

Why, then, do these problems persist?

Reading over the text of the European Commission’s Late Payments Directive (2011/7/EU), which has been adopted in regulations within individual member states, the rules are clear. For truly late payments, suppliers are entitled to interest and a fixed recovery fee. For payment terms, 60 days is the default, and while they can be extended further via negotiation, the result cannot be “grossly unfair.” Compliance is not monitored by the member states, however, and enforcement is not automatic. While suppliers have these rights, the only way to assert them is through litigation against their (usually larger) buyer.

Between a rock and a hard place

In a 2016 report on the implementation of the directive, the European Commission recognized this difficulty directly. According to its review, “[a]pproximately half of all creditors do not exercise their rights to claim late payment interest, compensation and recovery costs as provided for by the directive for fear of damaging their commercial relationships” (emphasis added). The commission recognized the same fear driving acceptance of extended payment terms and preventing supplier challenges under the “grossly unfair” standard. Both scenarios illustrate the same point: When regulatory enforcement requires a smaller business to risk future sales by confronting a larger buyer, the intended results of that regulation can go unrealized.

Leveraging corporate peer (or PR) pressure

An interesting potential solution to this enforcement problem comes from the UK, in the form of a duty to report. For larger businesses, this duty requires them to report their payment practices (including standard terms) and performance publicly. That information will be available online for review. As a result of this new reporting requirement, large buyers’ exploitation of smaller suppliers will be a matter of public record, with the data centrally available to any members of the press who might find such situations of particular interest.

It seems like a fair bet that the information will be submitted: It is a criminal offense (not just for the business entity, but for the directors as well) to fail to report. The same applies for reporting any “misleading, false, or deceptive” information. Unlike with the Late Payments Directive, enforcement here is governmental. It does not guarantee that payment terms will be honored or that such terms will not be extended greatly, but it does ensure that such behaviors will be made public.

A good first step

Any solution that pushes buyers closer toward the ideals laid out in the Late Payment Directive without forcing smaller suppliers to risk future revenues by asserting their rights is a welcome addition. Certainly, it adds costs for data collection and reporting, and it increases the amount of governmental oversight—two facts that may limit its adoption in other countries where this approach is less politically attractive. For smaller suppliers in the UK, however, the April onset of voluntary reporting and upcoming October launch of mandatory reports should provide some measure of support as they continue to navigate commercial relationships where they can be at a significant disadvantage.

To learn more about B2B payment regulations and establish your action plan to improve source-to-settle and payment performance, read “Mitigating the Risk, Cost and Cash Impacts of European Source-to-Settle Regulations.

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube


Scott Pezza

About Scott Pezza

As part of SAP Ariba's Digital Transformation Organization's Center of Excellence, Scott researches, compiles, and shares best-practice information to help SAP Ariba's customers get the most out of their investments. He has a dual focus on the emerging technologies (AI/ML, IoT, Blockchain, etc.) across the source-to-settle cycle, as well as a specific interest in the financial supply chain (invoice management, payments, discounting, and supply chain finance). His research helps inform strategic planning, performance measurement, and program execution. He has spent the past 17 years in the B2B technology space, in roles ranging from software development and support to research and consulting. Scott earned his BA in English and Philosophy from Clark University, his MBA from Boston University Graduate School of Management, and his JD from Boston University School of Law, where he served on the Executive Board of the Annual Review of Banking and Financial Law.