Banking and Finance Insights – February 2025

Welcome to the latest edition of Banking and Finance Insights. As usual, this contains a selection of key point updates on recent highlights in case law, statute and other legal developments. 

We would be 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 

By Susan Mitchell 

1. Extent of senior creditor debt which has first ranking priority under a deed of priority 

In October, the High Court considered a claim by a second ranking creditor (Mrs Burns) that the debt for which the first ranking creditor (Property Funding Limited (PFL)) had priority did not extend to compound interest or certain costs. In Sheila Burns v (1) Fred Bridge and (2) Property Funding Limited, the court reviewed a deed of priority which defined Lender’s Debt as “all monies and liabilities now or hereafter due owing or incurred to the [first ranking] Lender by the Borrower in any manner whatsoever up to a maximum of £850,000 plus interest and costs” and held that: 

• “interest” in the definition of Lender’s Debt meant interest as charged by PFL to Mr Bridge under the loan agreement (rather than some other form of interest arising between PFL and Mrs Burns at a reasonable rate); 

• the compound interest PFL was entitled to charge under its loan agreement with Mr Bridge was properly to be regarded as interest and did not become capital (the purpose of the £850,000 limit in the definition being to limit any further loan advances for which PFL would have priority); 

• the reference to “interest” was properly to be construed as extending to include the compound interest that PFL was entitled to recover under the loan agreement; and 

• the reference to “costs” was a reference not merely to costs of any legal proceedings brought by PFL, but also to all costs and charges and expenses PFL is properly entitled to as mortgagee having exercised its power of sale. 

The effect of this decision was that the interest contractually owed to PFL was to be paid in priority to the debt owed to Mrs Burns, meaning that Mrs Burns would likely receive none of the proceeds of sale of the secured property.  However, the court also calculated that a slightly lower amount of interest was owed to PFL in priority to amounts owed to Mrs Burns, raising the possibility that Mrs Burns may be able to recover at least some of the debt owed to her. 

Conclusion 

This decision is a useful analysis of a commonly used form of definition for first ranking creditor priority debt. It will be reassuring to senior creditors that the restricted interpretation argued for by the claimant was not accepted by the court. 

2. Guarantee v indemnity and when amounts become “due” 

In (1) NatWest Market NV and (2) NatWest Markets PLC v (1) CMIS Nederland BV and (2) CMIS Investments BV, the High Court applied principles of contractual interpretation to mortgage-backed securitisation arrangements entered into by CMIS (with certain EMAC Issuers) to fund CMIS’ mortgage business. Hedging for the securitisations was provided by NatWest, with the relevant Swaps being intended to hedge the potential exposure of EMAC Issuers as a result of most of the CMIS mortgages bearing fixed rate interest while the obligations of the EMAC Issuers were to pay floating rate interest to noteholders. The Swaps were backed by Deeds of Indemnity by CMIS which would in certain circumstances transfer the credit risk of a payment shortfall by an EMAC Issuer from NatWest to CMIS. 

NatWest claimed for sums due and CMIS counterclaimed that they had no liability under the Deeds of Indemnity on various bases, including that: 

• the Deeds were guarantees rather than true indemnities (and therefore subject to the co-extensiveness principle – the general rule that a guarantor’s liability is no greater than that of the principal obligor); and  

• provisions deferring payment by an EMAC Issuer until it has sufficient funds to pay meant that the sums sought were not due or payable by the EMAC Issuer. 

The court held that: 

• as drafted, the Deeds of Indemnity were contracts of indemnity as opposed to contracts of guarantee and the co-extensiveness principle did not apply – looking at the Deeds and the securitisation documents generally, if the intention of the parties and their advisers had been contracts of guarantee the Deeds would have been drafted in very different terms and would not have been titled ‘Deeds of Indemnity’; and 

• while authorities emphasise that the word ‘due’ can refer to the accrual of a debt or the fact that the debt is payable or both, a payment obligation being suspended or deferred does not disturb the underlying debt obligation – the amounts claimed by NatWest were “due” under the relevant hedging documents and, therefore, were to be paid by CMIS to NatWest under the Deeds of Indemnity. 

Conclusion 

The case is another reminder of the importance of clear drafting when setting out guarantee and indemnity provisions, as well as when identifying the underlying obligations and when they accrue. 

Regulatory update 

By Jessica Caws  

1. The Chancellor’s Mansion House Speech: key points for banks and building societies 

On 14 November 2024 the Chancellor of the Exchequer Rachel Reeves delivered her first Mansion House speech. The speech focussed on the Labour Government’s direction of travel for the financial services sector and hinted at the regulatory reform that we can expect to see over the coming years. Rachel Reeves used the speech to highlight the key policy measures for financial services over the coming years, which can be summarised as:    

• the results of the consultation on the senior managers and certification regime (which are expected imminently), which will involve a consultation on replacing the certification regime, an unexpected development;  

• a consultation on reducing the length of deferrals under the remuneration regime for dual regulated firms (a paper from the PRA/FCA has already followed);  

• proposals for the establishment of PISCES, a trading venue to allow trading in shares of private companies; 

• enhancements to the consumer redress scheme and the Financial Ombudsman Service framework;  

• a goal to increase the number of women working within financial services;  

• a focus on sustainable finance, for example considering the value of a UK Green Taxonomy and proposals to regulate ESG rating providers and further sustainability disclosure measures; and 

• a focus on encouraging Open Banking and a goal to further develop the UK Fintech market.  

While the industry has become used to regulatory change, the Chancellor’s speech makes clear that 2025 is going to be another year of the same! 

2. Vulnerable customers: not a tick-box exercise 

Representatives from the FCA continue to highlight to regulated firms that “vulnerability is not a buzzword”. The FCA has confirmed that a vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm. The FCA has said that all customers are at risk of becoming vulnerable, but the risk is increased by having “characteristics of vulnerability”, including poor health (including mental health), life events (for example, divorce or death of a loved one), low resilience to cope (with for example, financial shocks) or low capability (such as poor literacy).   

The concept of customer vulnerability is one of the key elements of the Consumer Duty whereby regulated firms must ensure that vulnerable customers have outcomes as good as other customers. The FCA have made clear in the past that vulnerable customers may have additional needs or be at greater risk of harm and that the Consumer Duty requires regulated firms to pay attention to the specific and individual needs of these customers and tailor their policies and processes accordingly.  

At an event in the Autumn of 2024, the FCA confirmed that the word “vulnerability” is at risk of becoming a mere “tick box” given it is being used so frequently. Instead, the FCA wants regulated firms to be able to proactively recognise vulnerability in all forms and take action to address the risk of financial harm. The FCA confirmed that regulated firms need to understand what vulnerability means for their business and tailor their approach; there is not one standardised way of doing things. The FCA advised that regulated firms think pragmatically about what a good client outcome is for their vulnerable customer base and adapt the way they operate to supports these individuals. The goal is to ensure that people are delivered the financial wellbeing they deserve not only when times are good but “when the chips are down”, when  they are vulnerable. 

Other market developments 

By Lottie Fletcher 

Green Loans 

With green and sustainable finance high on the agenda for borrowers and lenders alike, the LMA has been focussed on developing documentation to assist in negotiations for Green Loans and Sustainability Linked Loans (SLLs).   

Their latest offerings have been draft provisions for Green Loans published in November 2024, closely followed by a Green Loan Term Sheet in January 2025. 

Green Loans differ from SLLs as they are a form of “use of proceeds loan” (i.e. the loan proceeds have to be used for a specific “green” purpose), whereas an SLL is designed to give the borrower a margin discount if they hit various ESG related KPIs. The proceeds of an SLL do not have to be used for a specific project. 

The Green Loan provisions are drafted to reflect the Green Loan Principles (published in February 2023) and are drafted to be used in conjunction with the LMA Investment Grade agreement. However, there is no reason why these terms cannot be adapted for use in Leveraged or REF LMA documents.  

The key elements are: 

1. defining the Green Project – this has been left fairly open, with an option to specify the project or identify by way of agreed eligibility criteria; 

2. monitoring use of proceeds – rather than requiring the payment of the proceeds into a designated account, the borrower is required to provide the lender with evidence to enable the monitoring, tracking and evaluation of how the proceeds have been applied; and 

3. Green Loan specific representations and undertakings in line with the Green Loan Principles. 

As with an SLL, the drafting makes it clear that breach of a Green Loan Provision (as defined therein) does not lead to an Event of Default and instead will constitute a “Declassification Event”. It is worth noting, however, that a breach of the use of proceeds provisions is firmly excluded from the definition of Green Loan Provisions and so such a breach would be an Event of Default. The main consequence of a Green Loan being declassified is that the borrower may no longer publicise that they have a Green Loan, which for companies which are looking to boost their green credentials with customers and suppliers could be reputationally difficult.  

As the market continues to develop and positions between borrower and lenders become more market standard, we can expect further amendments/refinements to the LMA documentation going forward.