Over the last 10 days FIS has briefed several Lords, attended separate meetings with the Small Business Commissioner (SBC), the Small Business Minister and Department of Business all looking to support the progress of the Commercial Payments Bill. The Bill has taken a significant step forward completing its Second Reading in the House of Lords on 9 June. The Bill is a landmark intervention to tackle late payment culture (across the UK). At its core, the Bill brings together three strands of reform:
- Capped payment terms (60 days, or 30 days for certain public bodies)
- A fundamental reset of construction payment practices, including a ban on retentions
- A major expansion of the Small Business Commissioner’s powers
The good news is at the second reading debate, Peers in the Lords were clear – construction is one of the sectors most affected by late payment and poor practice, and reform here is a priority. An area generating particular interest is the ability to exempt certain contracts from maximum payment terms. At present FIS is not too concerned by the exemptions as, whilst adding a tier of complexity, they should not impact the core issue of power imbalance. Proposed exemptions are limited to :
- where the purchaser is the smaller party,
- where both parties are large undertakings, or
- where categories are defined in future regulations (this is likely to be addressing particular sectoral issues that exist in industries such as publishing).
To manage exemptions, contracts must be in writing and explicitly state the exemption being relied on. The proposed ban on retentions received broad support in principle, but with a clear message that implementation will be critical. Debate in the Lords suggests scrutiny is likely to focus on:
- how the transition period operates in practice
- what replaces retentions as a risk management tool
- whether any unintended consequences emerge in contracting behaviour
Whilst principle is widely backed, but the mechanics are far from settled and there is more work to be done here. Again we are reassured by discussions with the Minister and Civil Servants that Government is intent on preserving the core values that this Bill is intended to uphold, ending the abuse of retention and the practice of starving the supply chain of vital cash (termed in discussion as “unapproved credit”.
The Bill also transforms the role of the Small Business Commissioner (SBC) into a more active market regulator and in the meeting with the SBC we heard more about how fines for “persistent late payers” could be implemented. It was particularly interesting to get early sight of new research into how different systems have been adopted across the globe. The Minister again reassured that the intent it to ensure SMEs in Britain are working in a culture that encourages investment and growth and are not providing a line of “unapproved credit” to large corporations. As it stands, the SBC will step up to:
- Provide advice, training and guidance across all sectors
- investigate persistent late payers and enforce reporting requirements
- use stronger enforcement powers, including sanctions
Importantly for construction:
- The intent is that fines for persistent late payers will be administered through the SBC
- Adjudication powers for the SBC will not apply to construction contracts, given the existing statutory regime
- However, they will apply to non-construction contracts involving construction businesses
This reflects a deliberate attempt to strengthen enforcement without duplicating the existing adjudication framework. There is recognition that changes will be required to the Construction Act to carry this into law and consultation will be required for this. The Second Reading debate confirmed broad cross-party support for the Bill’s objectives and a clear recognition that late payment is a systemic issue requiring intervention. But it also highlighted where attention will now turn:
- How exemptions are defined and controlled
- How the retentions ban is implemented in practice
- How the expanded SBC powers are deployed and resourced
With Committee Stage next, the Bill will now undergo line-by-line scrutiny, where many of these issues are likely to be tested and refined. FIS are continuing to hold the line that late payment and retentions are more than commercial irritants, they impact decision-making, the transfer of risk and undermine investment in training, supervision, innovation and safety. When cash flow becomes uncertain, behaviours deteriorate.
We will continue to track developments closely as the Bill progresses and provide further updates over the coming months. In the meantime, please do get in touch with any queries or feedback.
You can see the full transcript of the Lords Debate here.