Credit insurers are exploiting their dominant market position, says Simon Burke
Struggling retailers are in the news. There is plenty of focus on landlords and banks - how flexible landlords should be, how supportive banks are, whether pre-packs are fair, whether CVAs should be supported, and so on. In other words, a good public debate.
But there is another party that has a huge influence on the ability of a retailer to trade. Their activities have remained largely in the shadows and many of us know almost nothing about them. Increasingly, however, the retail sector has become dependent on these people, like the unnoticed growth of an addiction. I’m referring to the credit insurers.
This small group of companies has become hugely powerful in the retail industry, because most retailers now need to be eligible for cover from them in order to trade.
Moreover, you need cover from more than one, because no one insurer will cover a retailer’s whole creditor ledger. There are very few insurers to begin with, and so little opportunity to shop around, which creates a kind of oligopoly, an unhealthily strong market position.
Increasingly, they have been exploiting this position, especially in situations where retailers are in a tight spot (and there have been plenty of these). I have heard reports of them taking security over retailers’ assets or demanding guarantees from retailers’ banks. This, of course, has the effect of reducing a retailer’s scope to refinance, deepening its problems.
But, most worryingly, they often hold the power of life or death over a retailer, and it is a seriously unrestricted power. Decisions about cover and its terms are made by people who in many cases are unknown to the retailer. They may be reacting to reports about the retailer, or simply taking a bearish view about a sector or a territory.
Often the first thing a retailer knows of this is a panicky call from a supplier saying his cover has been cut. This can be lethal, because word soon spreads and confidence is undermined.
The worst aspect is that the rules by which cover is given or withdrawn are completely opaque. In the case of a bank loan, the bank cannot withdraw it unless it expires, or a covenant is broken by the borrower.
A landlord cannot repossess a shop unless the rent has been unpaid for ages or there is a serious breach of the lease. But a credit insurer can withdraw cover in an instant and without explanation.
I for one think this is an unacceptable state of affairs. I do not deny that credit insurance can be beneficial. But I do not think it is right for any group to have such power without any transparency or accountability to those dependent on its actions.
Other aspects of insurance and financial services are rightly regulated and often subject to oversight or appeal by a state official. It’s time that happened here. As a start, Retail Week and other influential media should shine more light into this murky world.
Simon Burke is chairman of HobbyCraft