Banking and Finance Insights – February 2024

Welcome to the first edition of Banking and Finance Insights. Our intention is to circulate an edition two or three times a year, highlighting some notable legal developments over the past few months. We expect that these updates will be of most interest to in-house legal teams (to spotlight some recent developments) but do not intend to make them overly technical or detailed: there is always a plethora of academic material available online, to which we do not intend to add, but rather to provide some bite-sized chunks of information which can be digested quickly.

We are of course happy to discuss any issues in more detail and would also welcome any requests for areas which you would like to see covered in future editions – please do get in touch with one of the team!

Cases of interest from 2023

By Susan Mitchell

1. Fixed and floating charges

In April, the High Court had cause to consider the vexed question of when a fixed charge is not fixed but floating. In the case of Re Avanti Communications Limited (In Administration) the court held that the charge was fixed rather than floating, despite the fact that the chargor had some permissions to deal with the charged assets.

The case concerned charges granted by Avanti over a satellite payload and certain related assets, rights and licences – whether the charges were fixed or floating would determine the order of payments to be made out of administration proceeds. 

Conclusion     

Whether a charge will in practice be held to be fixed or floating will depend partly on control of the charged assets, but also on other matters such as the nature of the charged assets and whether any permitted disposals relate to the assets themselves or only the proceeds of the assets. Where it is important that a fixed charge is obtained, careful consideration of any permitted disposals will be needed on a case-by-case basis.

2. Powers of Attorney

In November, the High Court considered the requirements for a legal assignment under section 136 of the Law of Property Act 1925 (Frischmann v Vaxeal Holdings SA and others).  The court held that the assignment in question was effective as an equitable assignment but not as a legal assignment under section 136.

The case concerned an assignment of rights under certain loans and a guarantee by the claimant’s father to the claimant. The assignment document was executed by the claimant both as attorney (by way of a Lasting Power of Attorney) for his father and on his own behalf. The court held that the assignment did not comply with the requirements of section 136 because execution by an attorney was not execution “under the hand of the assignor”.

Conclusion     

The judgment is based on a very inflexible interpretation of relevant statutory provisions and may in time come to be seen as dependent on its own particular facts. Further, there are good arguments for the view that the judgment has no relevance where execution is not by an attorney for an individual assignor. In the context of lending documents (such as debentures), until the position becomes clearer care will need to be taken in any situation where a legal (as opposed to an equitable) assignment is required.

3. Prepayment rights

In November, the High Court was asked to give summary judgment that the claimant (as borrower) was contractually entitled to prepay sums outstanding under a convertible term loan facility (Chocolate City Limited v WEA International Inc.) The court rejected the application, holding that the claimant did not have a real prospect of establishing a right to prepay the loan.

The case was decided on the basis of interpretation of the facility agreement (and two related Nigerian law documents). The facility agreement contained no express prepayment right, but wording referring to prepayment rights was included in other LMA-based clauses in the facility agreement (and it was these references on which the claimant based some of its arguments). The court held that the lender’s interpretation of the facility agreement was to be preferred.

Conclusion

Whilst the judgment is based on contractual interpretation of particular contracts, it is a reminder of the importance of clear and consistent drafting. Prepayment rights a borrower may have will not be straightforward in all circumstances, but a clear expression of the agreed position in the facility agreement should help to minimise potential future uncertainty.

New legislation to watch out for

By Susan Mitchell and Jessica Caws

1. Economic Crime and Corporate Transparency Act 2023 (ECCT 2023)

The Economic Crime and Corporate Transparency Act 2023 (ECCT 2023) received Royal Assent on 26 October 2023, and follows on from the Economic Crime (Transparency and Enforcement) Act 2022 (which provided for Companies House to maintain a register of overseas entities including information about their beneficial owners, and requirements around matters such land ownership and transactions involving overseas entities).

ECCT 2023 is part of the package of legislation aimed at preventing abuse of UK corporate structures and tackling economic crime. Two of the main elements of ECCT 2023 are:

• Broadening the powers of the Registrar of Companies to allow it to become a more active gatekeeper over company creation and custodian of more reliable data concerning companies and other UK registered entities such as LLPs and LPs – including new powers to check, remove or decline information submitted to, or already on, the register.

• Introducing identity verification requirements for all new and existing registered company directors, People with Significant Control, and those delivering documents to the Registrar.

The identity verification requirements will affect Companies House filing requirements which are common on banking transactions (such as company formation, charge of directors, amending articles, registering charges and marking charges as satisfied). It is expected that these requirements will come into effect during 2024 (once required Companies House systems are in place). Future editions of Insights will no doubt return to this topic once further practical details are available.

2. Financial Services and Markets Act 2023 (FSMA 2023)

The Financial Services and Markets Act 2023 (FSMA 2023) will make extensive reforms to the UK’s post-Brexit regulatory framework. The changes introduced by FSMA 2023 are being phased in over time, with some of the provisions already in force – future editions of Insights will feature more information in due course.

Other market developments

By Jessica Caws and Lottie Fletcher

1. The Consumer Duty

On 14 December 2023 the Financial Conduct Authority (FCA) published its findings on a review of implementation of the Consumer Duty (the Duty) in the retail banking sector (the RB Review). Firms may find the review useful when approaching the implementation deadline for “closed products and services” on 31 July 2024.

The Duty, enshrined as an FCA “Principle for Business” is the obligation on all regulated firms in relation to their retail market business to “act to deliver good outcomes for retail customers”. The Duty is underpinned by three “cross-cutting” obligations: (1) act in good faith (2) avoid causing foreseeable harm (3) enable and support retail customers. Further detail is found in outcome rules divided into four categories: (1) products and services (2) price and value (3) consumer understanding (4) consumer support. The Duty came into force in relation to new and existing products and services that are open to sale or renewal from 31 July 2023.

The RB Review reminded firms engaging in retail finance that they should be putting consumers at the heart of their business. The RB Review identified common themes across implementation and identified good and poor practices.

In terms of ‘good’ practices, the FCA praised firms for putting in place implementation frameworks that outlined end to end customer journeys and identified gaps within outcome rules. Regarding distribution, the better frameworks had clearly identified the target market and considered a wide range of distribution channels. Considering consumer understanding, better practices involved identifying key communications and using a range of testing to identify gaps (then improving issues identified). The FCA also praised firms for improving their support for customers in financial difficulty, for streamlining the process for customers reporting fraud and for those dealing with the affairs of deceased family members.

In relation to ‘poor’ practices, the FCA reminded firms of the need to monitor their customer outcomes; firms should be using a range of data points rather than relying on a single source of insight. The FCA noted that some firms failed to consider the treatment of vulnerable customers, which should be addressed. The FCA announced its disappointment around the failure to bring business current accounts sufficiently into the scope of their Duty review. The FCA reminded firms that the Duty also applies to SME customers. Several firms also failed to consider that consumers were using mortgages for debt consolidation purposes. Thought should be given to debt consolidation where a product allows it (even if not designed for this purpose).

2. FSB super-complaint to FCA – personal guarantees on business loans

On 11 December 2023 the Federation of Small Businesses (FSB) published a letter it had sent to the FCA setting out a super-complaint it is making under the Financial Services and Markets Act 2000. In short, the complaint focusses on FSB’s belief that lenders’ growing demands for personal guarantees on business loans is causing harm to small businesses and that regulatory intervention is needed.

Currently, lending to corporates and some business lending is not regulated in the same way as lending to an individual is regulated (depending on the circumstances) and one of FSB’s suggestions is that the FCA should consider extending the regulatory regime so that all business loans below a certain amount are clearly subject to FCA rules (including loans to companies).

In respect of loans to corporates, the assumption is that personal guarantees granted by directors were not included in the regulatory regime on the basis that limited companies exist to limit the liability of their directors if the business fails. By requiring personal guarantees on such a large scale, lenders are undermining the logic of this argument. The FSB letter suggests that, therefore, looking at regulating such loans is appropriate.

At this stage, the FSB is asking the FCA to investigate the issue further and asks that the FCA looks specifically at whether there is evidence that lenders are using personal guarantees to gain influence over a business before it goes into default and whether this may lead to a conflict of interest on the part of the lender.

If the FCA does decide that further regulation is required then, potentially, this could increase the cost of such loans and impact lenders’ business models (particularly alternative lenders) and so certainly “one to watch” going forward.