Strengthening the Inshore Regulations – Engagement Video Series: Using money to control a licence

Slide 1 - Strengthening the Inshore Regulations

Using money to control a licence

Slide 2 - Context

Starting and running an inshore fishing enterprise can be expensive.

Many harvesters rely on loans from third parties to fund their enterprise and often use the licence as collateral and security.

But, loans have become the main way for third parties to try to control the licence holder depending on the terms and conditions of the loan.

As we saw previously, control is on a continuum and can also be indirect.

For new entrants, there is a heightened risk of “easy” loans being used to control a licence.

DFO’s objective is to maintain access to capital while upholding licence holder independence.

Slide 3 - How money leads to control or influence.

In the last presentation we spoke about the concepts of use and control.

While the licence holder must be the one using and controlling the licence, sometimes lenders can insert themselves and use the financing (money) as leverage to make operational decisions.

The image on this slide shows what that can look like – while the fisher holds the licence title, the lender, through the loan, dictates the operational conditions – specifically, a lender may decide when the licence holder has to fish, where they must fish, how they must fish, and with whom they must fish.

For DFO it is important that the licence holder, not the lender, is the one making these decisions.

The next slides highlight some of the ways control or influence can be exerted through the use of money, as seen by DFO while implementing the regulations over the last five years.

Slide 4

One of the most common ways DFO has seen money being used to control a licence holder is by making the loan agreement linked to a supply agreement. These are referred to as “integrated supply and loan agreements”.

When such an agreement is in place:

• If the licence holder refuses to comply with an operational measure (such as landing with processor X) rather than a loan obligation (the inability to pay loan) the lender may use this to justify acting upon the security (which means calling in the loan).
• Lenders outline such non-monetary terms and conditions that trigger agreement default clauses to take control of the licence and recommend a new licence holder who fits their own business interests.
• By doing so, the lender exerts their leverage over the licence holder (during the fishing season while on the water) if the licence holder wants to exercise their rights and privileges under the licence, such as selling to another processor or buyer for a better price.
• This locks the licence holder into following the lender’s wishes or risk having the loan called in and payment being due immediately or having the lender trying to name someone else as the next recipient.
• The risk of a technical, non‑payment default, increases influence and control over independent decision making.

Slide 5

Another concern is when the supply agreement creates exclusivity by not allowing the licence holder to freely exercise their rights and privileges.

This can happen when a licence holder is locked in to selling to only one person without any opportunity to look elsewhere.

Under these types of exclusivity arrangements:

• A Licence holder commits to sell all catch a particular company – most often in exchange to receive the loan.
• And sometimes the exclusivity requirement can last for the entire loan period.
• Even after the loan is paid off a licence holder may be contractually required to sell the catch to that same person.
• In this sense, licence holders are not free to negotiate or sell to someone else even if they can get a better price for their catch.

In other words, exclusivity clauses reduce competition in the fishery:

• Fewer buyers can result in lower prices: Exclusivity limits the need for processors to compete for supply, weakening harvesters’ bargaining power and leading to lower dockside prices.
• New or smaller processors struggle to access raw supply, entrenching those who are already well established thereby reducing innovation.
  • For example, fewer competitors can result in less pressure to improve. So, if only a few large firms dominate, the variety of approaches shrinks. Such as, if a new processor wants to introduce a more sustainable or efficient processing method their inability to access supply due to exclusivity agreements could make them unable to do so.
• When there is limited bidding and transparency, prices and market signals are distorted, reinforcing processor market power over time.

Competition is part of a healthy market environment and when it is restricted or reduced, licence holders can be worse off.

The end result is that the licence holder’s independence is undermined.

Slide 6

More recently, concerns have been raised around the need for licence holders to require a guarantor or a cosigner.

Guarantors and co-signers are people or organizations that promise to repay a loan if the borrower cannot.

Usually, these types of arrangements are required when a licence holder doesn’t have the money or credit to take the loan out on their own.

However, what we’ve seen is that:

• Sometimes, the guarantor or co‑signer may also have commercial interests (such as being a processor or buyer).
• Since they are often larger companies with more money, lenders can rely on their credit to provide assurances that the loan will be paid back.
• However, guarantors or co-signers may add operational requirements to suit their own needs (on the promise of acting as the guarantor/co-signer) but that ignore licence holder independence.
• Even recognized financial institutions (such as banks or credit unions) have required this type of arrangement.
• But this can allow for outsized leverage by the guarantor or co-singer where their commercial interests extend beyond a lender–borrower relationship.

Slide 7 - Discussion question

Are there any other ways you have experienced loans being used to control a licence holder?

Slide 8

There are several different ways that DFO could address the concerns from the previous slides.

The ideas presented here are for discussion and do not necessarily reflect the final options that will be put forward.

Instead, we want to get a sense from you about which of these areas you think DFO could pursue to address the identified concerns:

Specifically, should DFO:

• Identify ways to increase access to recognized lenders.
• Explore options for fisher associations to negotiate financial services.
  • Such as letting associations set requirements for third party lenders.
  • Or having harvester-led funding mechanisms.
• Place stronger limits on non-recognized lenders. Such as:
  • Limit or ban certain agreement terms and conditions;
  • Set different rules for lender-types (processors; family members, or other harvesters);
  • Require guarantors or co-signers to disclose their commercial interests, or prohibit supply-side agreements when acting as a guarantor or co-signer.

Slide 9 - Discussion question

What are your thoughts about these areas?

Slide 10 - Discussion question

Are there any other options that you think DFO should consider?

Slide 11 - Thank you