In this issue:
- Consumer Credit Legislation - Business Lenders Beware
- The FSA Business Plan 2010/11 - will it make it to the end?
- Reporting suspicions of money laundering: Damages if you do, damned if you don't?
- Maximising the Value of Repossessed Real Estate
Welcome to our latest Banking eBulletin. Change (or perhaps the
lack of it) has been in the air with the UK election. As you will
see we are highlighting below some changes in the field of English
law and practice as well, such as those in the consumer credit
field and the regulatory landscape.
The case relating to anti-money laundering summarised below has
caused some industry comment. Another contribution highlights the
possibility of adding value to property (such as property held as
security) through use of the planning system. We are fortunate, and
unusual, in having chartered planners as well as planning lawyers
in our planning group.
There have been other developments as well. For example the LMA has
published a revised version of its intercreditor agreement for use
in its leveraged acquisition finance transactions and the second
and extended edition of the book I edit on
International Acquisition Finance: Law and Practice has
been published by OUP.
In the field of trade finance, the International Chamber of
Commerce has published its revised Uniform Rules for Demand
Guarantees (URDG 758) which will be implemented on 1 July 2010. It
is hoped that this revision will prove more popular than the
previous one and that the rules will be incorporated in increasing
numbers of guarantees issued by banks and other institutions.
For those involved with property finance, please note that the Land
Registry has launched its third consultation on legislation needed
to implement the e-conveyancing system. The consultation ends on 25
June 2010 and the proposals are due to be implemented in
2011.
The International Bar Association (IBA) has recently conducted a
multi-jurisdictional survey as part of a study in achieving
effective loan security. DMH Stallard completed the response to the
survey titled 'Enforcement of Security Interests in Banking
Transactions in England and Wales'. You can get more
information about this survey by clicking here.
Consumer Credit Legislation - Business Lenders Beware
Those dealing with businesses may well think that consumer
credit law is not applicable to the finance they provide. However
the Consumer Credit Act 2006 amended the Consumer Credit Act 1974
(CCA 1974), by abolishing the upper limit for consumer credit
regulation and making various other changes relevant to
businesses.
As a result CCA 1974 applies to credit transactions where the
debtor is a sole trader or a partnership of two or three partners
or an unincorporated body such as a club (unless in each case all
the partners or participants are bodies corporate), as well as to
individual consumers. (It still does not apply where the debtor is
a company or another body corporate).
There are various CCA exemptions which may apply or can be made to
apply if the relevant steps are taken, so it is as well to check
the position before providing finance of any sort to anyone in the
above categories.
Further changes are now being made to the consumer credit regime by
means of regulations which can be found on the Office of Public
Sector Information website (www.opsi.gov.uk).
The Consumer Credit (EU Directive) Regulations 2010 make various
changes to CCA 1974 and its associated regulations to implement the
EU Consumer Credit Directive. Annex A to the related explanatory
memorandum explains the new requirements which will apply to
business lending arrangements covered by CCA 1974.
Other regulations replace existing regulations made under CCA
1974:
- Consumer Credit (Total Charge for Credit) Regulations 2010;
- Consumer Credit (Advertisements) Regulations 2010;
- Consumer Credit (Disclosure of Information) Regulations 2010;
- Consumer Credit (Agreements) Regulations 2010.
As a result this is a good time to review agreements and procedures
if finance is being provided which may fall within the consumer
credit regime.
The FSA Business Plan 2010/11 - will it make it to the end?
The FSA published its Business Plan for 2010/11 on 17 March,
2010. The old philosophy of the "light-touch"
retrospective approach with its focus on systems and controls is
discarded in favour of a more proactive outcomes-based approach.
This highlights a willingness on the part of the regulatory
authorities to intervene earlier than was previously the
case.
Whether the FSA will ever be able to carry out this plan and what
impact the new Financial Services Act will have very much depends
on the effect of the general election result. The Conservatives
have proposed radical change to the regulatory framework,
abolishing the current tripartite system and giving the Bank of
England responsibility for maintaining financial stability.
The Financial Services Act contains an array of measures born out
of discussion and debate arising from the credit crisis and broader
powers consistent with its new proactive philosophy. There are
provisions that relate to recovery and resolution plans or
"living wills", controls over executive remuneration, new
FSA powers to suspend firms and individuals from carrying out
regulated activities and ever broader information gathering
powers.
The Act gives the FSA an additional regulatory objective of
contributing to the protection and enhancement of the stability of
the UK financial system. Together with broader rule making powers
the Treasury or the FSA will be able to implement binding rules
without further parliamentary approval or scrutiny, the loss of
which should, in our view, be considered very carefully.
It is a natural response to the near catastrophic failure of the
financial system to look hard at deficiencies in the regulatory
framework which may have contributed to the crisis. The reality is
that none of the firms, as far as we are aware, which were
supported by the British taxpayer, directly or indirectly, were
guilty of breaching any regulation at least in any way which may
have materially contributed to the crisis. In addition, it would be
a perverse result if any regulator would have had the vision and
tenacity to step in and prevent financial institutions from making
the business decisions which led to their downfall –
aggressive expansion, massive leverage, risky lending - when the
highly paid senior management entrusted by shareholders with
running the institutions failed to see the flaws in their business
models and execution. This reality is relevant to the regulatory
reforms now being considered globally, and in our view the focus is
rightly on the quantity and quality of capital required to support
a bank's activities and on structural changes designed to
protect the "utility" from the "casino". The
FSA's Business Plan emphasises the retention of principles
based regulation but with subtle refinement focusing on outcomes
and not inputs. It would, in our view, be dangerously naive for
anyone to expect changes to prudential regulation to turn
regulators into sophisticated business and risk managers, however
worthy the intention.
Reporting Suspicions of Money Laundering: Damages if you do, Damned if you don't?
In a recent judgment the Court of Appeal indicated that a
bank's suspicions of money laundering can be put to proof at
trial.
Mr and Mrs Shah, Zimbabwean-based customers of HSBC, gave
instructions to the bank on four occasions to transfer funds out of
their account. The bank suspected that funds in the account were
criminal property and so, on each occasion, sought Serious
Organised Crime Agency (SOCA) consent to transfer the funds.
Consent was forthcoming, but the transfers were delayed pending
SOCA's decision. The Shahs argued that HSBC's failure to
carry out their instructions, coupled with its explanation that
delays were due to the bank's duty to comply with UK statutory
obligations, led to rumours circulating within Zimbabwe. This, they
claimed, resulted in the Zimbabwean authorities seizing the
Shahs' assets and the couple suffering losses of US$300
million.
The Shahs' claim that HSBC had breached its duty in failing to
carry out their instructions had been initially struck out as
having no realistic chance of success. However, the Court of Appeal
decided that the case could be allowed to proceed and that it was
for the bank to establish the primary fact of its suspicion by
producing evidence and calling witnesses in the ordinary way.
So, are banks now caught between a rock and a hard place, facing a
choice between criminal sanctions for failing to report suspicions
of money-laundering, on the one hand, and damages claims for
breaching their duty to their clients, on the other?
In fact, whilst the judge recognised that banks are in the
"unenviable position" of having to balance competing
duties and that the duty of care which they owe to their customers
cannot be completely excluded by legislation, the judgment also
offers reassurance. The bank would have a good defence if it could
show that it had a suspicion. This means that the bank "must
think that there is a possibility, which is more than
fanciful" that the facts exist. There is no additional
requirement for the suspicion to be reasonable.
Nonetheless, a bank could be liable if it unreasonably delayed in
disclosing its suspicions to SOCA (in this case a delay of two days
was considered not unreasonable) or if , once consent was granted,
it unreasonably delayed in carrying out the transaction. There is
also a possibility that a bank may have a duty to provide customers
with information about the conduct of their affairs, once there is
no longer any risk of prejudice to an investigation.
It would be prudent for banks to review their systems to ensure
that suspicions which lead to disclosures to SOCA are evidenced,
and that their standard terms adequately protect them against
claims for loss caused by dealing appropriately with money
laundering suspicions.
Maximising the Value of Repossessed Real Estate
Over the last few months banks have announced record losses in
the sale of repossessed land and property. With the Council of
Mortgage Lenders predicting further increases in the number of
repossessions during 2010, the stock of repossessed properties on
banks' books, and the resultant financial losses, are likely to
grow further.
The majority of these financial losses are attributable to land or
property being sold on the basis of a valuation of its existing
use. However, greater values could be achieved if, prior to being
marketed, consideration is given to whether a site has any
potential for additional or alternative forms of development which
may help achieve an uplift in value.
DMH Stallard's Planning team can assist by appraising
repossessed sites for their development potential. A planning
appraisal provides an inexpensive and relatively quick overview of
the key planning issues pertaining to a property or site. It
provides advice on the prospects for achieving planning consent for
additional or alternative, and potentially more valuable, forms of
development. Our expertise and in-depth knowledge of planning
policy and the peculiarities of different planning authorities
ensures the identification of genuine development options.
Our appraisal report can be provided alongside the marketing
details for a site as evidence of the potential. Our Planning team
can also progress options through to a planning application with
the potential to secure an even greater uplift in value.
Described in Chambers and Partners 2009 as a 'group making real
waves' and 'truly on an upward spiral' the Planning and
Environment Group continues to go from strength to strength with
its unique mix of planning consultants and solicitors. The Group
now boasts eight planning consultants and five solicitors and
continues to be ranked as a Top Planning Consultancy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
