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Why regulation and codes will fail to achieve prompt payments

We've had directives, codes, initiatives and trial-by-media, but the practice of paying commercial suppliers late, beyond what are considered to be acceptable payment terms, persists across Europe.

In 2013, the EU introduced its Late Payment Directive across the European Economic Area (EEA), requiring member states to adhere to 'a decisive shift to a culture of prompt payment'. In the UK, the EU directive was implemented through the Late Payment of Commercial Debts Regulations 2013 (SI 395/2013), while the UK's Prompt Payment Code (PPC) sets out to go a step further than the regulatory approach by introducing a voluntary initiative to encourage businesses not just to obey the law but to actively make prompt payments closer to 30 days rather than the 60 days required by the directives.

What is the Prompt Payment Code?

The UK's PPC sets standards for payment practices. Signatories to the code undertake to pay suppliers on time, to give suppliers clear guidance on payment procedures and to encourage good practice. The code also asks signatories to pay within a maximum of 60 days, which is in line with late payment legislation requirements, while aiming to adopt payment terms of 30 days. It's overseen by the Chartered Institute of Credit Management (CICM) and, as of August 2016, there were more than 1,800 signatories.

Carrot or stick?

So which approach works: regulation or the voluntary code? If last week's announcement from the European Commission is anything to go by, regulations aren't working for everyone in Europe. The EC announced it is taking further steps against four member states (Greece, Italy, Slovakia and Spain) to ensure the correct application of the Late Payment Directive (Directive 2011/7/EU). The EC stated that late payments have a negative impact on businesses by affecting their liquidity and cash flow, complicating their financial management and preventing them from growing. Commissioner Elżbieta Bieńkowska said: “Late payments are a major burden for Europe's companies, especially small ones. By asking member states to respect the rules on late payments, we are protecting businesses and helping EU's competitiveness.”

And yet the voluntary PPC also seems to be a weak option. Writing in The Paypers, Richard Manson, of CloudTrade, argues that one of the major obstacles to timely payments isn't a lack of willingness to pay on time but a lack of automated e-invoicing: “Without proper processes and the right technology in place, the Prompt Payment Code remains nothing but pie in the sky for many organisations and no amount of culture change will ‘stamp this out’.”

It seems that the problem of burdensome paper invoices – which need to be signed, approved, entered into systems and can get lost at any stage along the way – isn't really addressed by the EU and UK directives, nor by the PPC initiative. So we have a situation in which neither the stick nor the carrot will improve payment practice. Governments and relevant associations should be delving far deeper into the problem and looking at new technologies to deliver far more efficient invoicing.


CTMfile take: Hands up everyone who's ever been paid late – and got mad because of it! This is a serious problem for smaller companies and while the EC and UK authorities are trying to address it, we won't have prompt payments across the board until the majority of enterprises adopt efficient, automated e-invoicing.

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This item appears in the following sections:
Payments - Receipts
Accounts Receivable Management
Payments - Disbursements
Accounts Payable Management

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