Monthly Highlights: July 2017

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from July 2017.

Brexit

FMLC warns of financial services impact if UK becomes a 'third country' post-Brexit

The Financial Markets Law Committee (FMLC) has published a paper discussing the possibility of market disruption if the UK becomes a 'third country' from the perspective of European legislation, with no treaty provision governing the supply of financial services into the EU single market.

Lending

LMA publishes revised English law investment-grade primary documentation and updates its suite of facility agreements

The Loan Market Association (LMA) has published revised forms of its English law investment-grade primary documentation to account for changes made to its leveraged documentation in November 2016. These changes have been incorporated across the LMA suite of facility agreements and intercreditor agreements. The LMA has also announced other changes to documentation.

Changes have been made to:

  • the incorporation of increase lender mechanics to allow any commitment cancelled pursuant to the illegality or prepayment of single lender provisions to be assumed by a replacement lender
  • the expansion of the agent's spot rate of exchange to allow for agents to use a publicly available rate
  • updates to the definition of federal funds rate to reflect market practice and a change in the manner in which the rate is calculated
  • expansion of all lender matters to cover, among other things, a change in currency of payment

Other changes include:

  • the users’ guide to LMA finance party default and market disruption clauses to remove the provisions relating to Alternative Reference Banks
  • the leveraged-based documentation to update the representation in respect of centre of main interests to refer to the recast Insolvency Regulation (EU) 2015/848
  • better align provisions throughout the documentation, and
  • the leveraged senior facilities agreement and the real estate finance facilities agreements to envisage free transferability between arrangers to facilitate fronted underwriting

To view the amended documents, members can log into the LMA website.

Commission seeks views on new instrument to protect against business borrower’s default

The European Commission is seeking views on possible initiatives for developing secondary markets for non-performing loans (NPLs), in a bid to tackle the issue. The consultation is looking particularly at ways to improve the market's functioning, and more specifically on loan servicing activities by third parties and transferring loans away from the originating bank. Feedback is also sought on a new instrument, ‘accelerated loan security’, made to increase protections against business borrower’s default to improve the functioning of the small and medium-sized business credit market. The deadline for responses to the potential measures is 20 October 2017. For more information, see the European Commission’s website.

African Export-Import Bank and others v Shebah Exploration & Production Company Ltd and others [2017] All ER (D) 177 (Jun), [2017] EWCA Civ 845

Lenders will welcome the Court of Appeal’s judgment, which has upheld an order for summary judgment for a sum of more than US$ 150m owed under a facility agreement. The court dismissed as unarguable the borrowers’ attempt to use section 3 of the Unfair Contract Terms Act 1977 (UCTA 1977) to make a ‘no set off’ clause in the facility agreement unenforceable, and thus the borrowers were prevented from setting off their liability for US$ 150m against a counterclaim for US$ 1bn.

The key issue before the court was whether the parties’ facility agreement, which had used the Loan Market Association (LMA) model form as a starting point for negotiations, could arguably constitute the standard business terms of the syndicated lenders.

UK Finance sets out its priorities

The new trade body UK Finance launched on 3 July 2017 representing nearly 300 of the leading firms providing finance, banking, markets and payments-related services in or from the UK.

UK Finance has been created by combining most of the activities of the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Stephen Jones, the UK Finance CEO said the new body was a response to a changing landscape. ‘As the boundaries between different financial services have become blurred, one of the industry’s challenges has been to ensure products reflect and respond to the needs of all customers.’

Security

Saw (SW) 2010 Ltd and another v Wilson and others (as joint administrators of Property Edge Lettings Ltd) and another [2017] EWCA Civ 1001

The Court of Appeal has dismissed an appeal by creditors claiming that an appointment of an administrator to a company (PELL) under a second ranking debenture was invalid because that debenture was not a qualifying floating charge that was enforceable at the time the appointment was made (as required by paragraphs 14 and 18 of Schedule B1 to the Insolvency Act 1986 (IA 1986)). The creditors argued that an express automatic crystallisation clause in first ranking security created by PELL in favour of another lender had been triggered as a result of the second ranking debenture being created by PELL without obtaining the consent of the holder of the first ranking security as required by its terms. The effect of the automatic crystallisation of the floating charge under the first ranking security was, the creditors argued, to ensure that no property of PELL (present or future) could ever fall within the scope of the second floating charge rendering that floating charge a nullity. In effect the creditors were saying that the floating charge in the second ranking debenture was not a floating charge at all and could never be enforced because there was no property of PELL to which it could ever attach.

The Court of Appeal disagreed and upheld (though for different reasons) the decision of the first instance court (see Re Property Edge Lettings Ltd; Saw (SW) 2010 Ltd and another v Wilson and others [2015] EWHC 4069 (Ch), [2016] All ER (D) 118 (Mar) that the second debenture was a qualifying floating charge that was capable of being enforced. The appointment of the administrators was valid.

In the course of her judgment, Arden LJ makes some interesting observations about the proper construction and effect of an automatic crystallisation clause which might affect the drafting of such clauses in the future.

A voidable disposition is not a mistake for the purposes of altering the register (NRAM v Evans [2017] EWCA Civ 1013)

The Court of Appeal confirmed that the registration of a voidable disposition, before it is rescinded, is not a mistake justifying alteration of the register. However, the register could be brought up to date once the voidable disposition had been rescinded.

Asset finance

Law Commission consultation of draft clauses for the Goods Mortgages Bill

The Law Commission has welcomed the Government’s intention, confirmed in the Queen’s Speech on 21 June 2017, to take forward recommendations to replace the outdated Bills of Sale Acts with a Goods Mortgages Act. A consultation on the terms of the proposed new law has been launched inviting responses which closes on 7 August 2017. The purpose of this consultation is to determine whether the current wording meets the policy recommendations as set out in the Law Commission 2016 report. For more information, (including the draft clauses for the Goods Mortgages Bill, see the Law Commission website).

For more information, see News Analysis: Reforming bills of sale—what might the Goods Mortgages Bill look like?

Trade finance

Barclays to give government export support to businesses

UK Export Finance (UKEF) is partnering with five of the UK’s biggest banks, to offer government-backed financial support to a wider range of businesses, including exporters and supply chain small and medium-sized enterprises (SMEs). The support, which is being delivered via a digital platform to ensure speed and efficiency, will also be extended to smaller companies that support big UK exporters giving them access to their clients’ international business. For more information, see the press release.

Debt Capital Markets

UK government unveils new regime for insurance-linked securities

HM Treasury has published regulations implementing a new regulatory and tax framework for insurance linked securities, following a consultation launched in November 2016. The goal is to position the UK as a leader in the rapidly growing global reinsurance market. The regulations will be laid before Parliament after summer recess and will come into force in the autumn of 2017.

FCA publishes Prospectus Rules (Miscellaneous Amendments) Instrument 2017

The Financial Conduct Authority (FCA) has published the Prospectus Rules (Miscellaneous Amendments) Instrument 2017, which amends the FCA Handbook and Prospectus Rules sourcebook so as to build in provisions of the Prospectus Regulation which shall apply from 20 July 2017.

Derivatives

Derivatives H1 2017

In news analysis: Derivatives—H1 2017 round up, the Banking & Finance team analyses what the key developments in the world of derivatives have been over the past six months.

CGL Group Ltd v Royal Bank of Scotland plc [2017] EWCA Civ 1073

The three linked appeals concerned interest rate hedging products that the appellants were required to buy as a condition of loans made to them by the respondent banks. The regulator (the FCA) had required the banks to conduct a review of how those products were sold to small and medium-sized businesses. The principal question was whether or not the banks had a duty of care to those businesses to carry out the reviews required by the regulator with reasonable care and skill.

The judge dismissed the appeals and clarified that a duty of care did not arise to the customers where the banks had to comply with a regulatory scheme that was monitored by the regulator and the decisions examined by an independent expert.

FCA says variation margin impact ‘broadly positive’

The Financial Conduct Authority (FCA) has published a research paper analysing the impact of the variation margin requirements introduced by the European Market Infrastructure Regulation (EMIR) in 1 March 2017. The study acknowledges that some smaller, non-financial corporate counterparties in particular may be temporarily having difficulties accessing the OTC derivatives market. However, according to the data, there has not been any significant decline in overall activity or the number of counterparties trading in the market.

Structured products and securitisation

BCBS and IOSCO propose criteria for simple, transparent and comparable short-term securitisations

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissioners (IOSCO) are consulting on proposed criteria for identifying simple, transparent and comparable short-term securitisations. They were designed to help the parties to such transactions to evaluate the risks of a particular securitisation across similar products and to assist investors with their conduct of due diligence on securitisations. Feedback is sought by 5 October 2017.

The BCBS has also issued a consultative document, ‘Capital treatment for simple, transparent and comparable short-term securitisations’, outlining how the short-term simple, transparent and comparable criteria could be incorporated into the regulatory capital framework for banks.

UBS AG, London Branch v Glas Trust Corporation Ltd and another [2017] EWHC 1788 (Comm)

The Commercial Court (Financial List) ruled on a claim, concerning a securitisation transaction. The claim was brought by UBS AG, London branch, for declaratory relief against GLAS Trust Corporation Ltd, which was the note trustee in the securitisation, and Fairhold Securitisation Ltd, which was the issuer of the notes. The dispute arose after an extraordinary resolution of noteholders authorised and directed the note trustee to meet certain legal and financial expenses of an ad hoc group of noteholders (the AHG expenses). Under the relevant agreement, the expenses of the note trustee fell to be paid in priority to UBS. UBS had argued that the AHG expenses did not constitute expenses that might be incurred by the note trustee under the relevant transaction documents. The court held that UBS had made good its objections to the extraordinary resolution, and that, as conceded by the note trustee, the adoption of the AHG expenses could not proceed as it had originally proposed.

For more detailed commentary, see News Analysis: The need for a trustee to carefully scrutinise expenses (UBS AG, London Branch v Glas Trust Corporation).

Regulation for banking lawyers

FCA publishes draft application forms for benchmark administrators

The Financial Conduct Authority (FCA) has published drafts of the forms that firms will need to use when applying to be a UK benchmark administrator in accordance with the EU Benchmarks Regulation. The draft forms have been made available as part of the FCA's consultation (CP17/17) on Handbook changes to reflect the application of the Benchmarks Regulation, which was launched on 22 June 2017. The FCA has asked for comments on the forms by 6 August 2017.

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