Julian Kinsey, Cole Stacey and Rebecca Jones of national law firm Bond Dickinson LLP take a look at the year ahead for banks and financial institutions
Challenges and opportunities
2017 looks set to be an interesting and unpredictable year for banks and financial institutions. The global and political uncertainties arising from Brexit and the US election could lead to stagnation in the market, with transactions put on hold until the impact of these major events become clearer. Unsurprisingly, in a recent survey by the Loan Market Association (LMA), 50.9% of respondents said they believed that the global economy and/or geo-political risks, including Brexit, would be the topic most likely to influence the syndicated loan market over the next 12 months.
The fall in the value of sterling following the referendum vote will have created difficulties for many borrowers, in particular retailers, many of whom are protected against such fluctuations at the moment by hedging agreements that are due to expire in early 2017. This may lead them to revisit their financing arrangements in general, resulting in a stream of refinancings through the year.
The main challenge for UK banks in 2017 looks set to be overcoming the uncertainty created by Brexit. If nothing else, we can hope that the next year will bring clarity on the terms of the UK leaving the EU and what arrangements will be put in place to allow UK financial institutions vital continued access to the EU single market.
Nonetheless, the Bank of England is predicting that the effects of Brexit may not be felt until later down the line, and banks are reporting that it is “business as usual” for the time being. If the UK is able to secure a favourable trade deal with the EU, this may bolster lenders’ confidence and lead to a spike in lending activity in 2017, with financings that were previously shelved being resurrected.
Technology bringing opportunities
Putting Brexit and its effects to one side for a moment, technology appears to be a sector of real interest to both established financial institutions and new entrants to the market. We expect that technological innovations, such as Bitcoin and Blockchain, mobile banking and peer-to-peer lending will continue to generate new opportunities for lenders throughout 2017.
Potential growth in residential property financing
Another potential growth area is residential property financing, following the announcement of measures aimed at providing affordable homes in the Autumn 2016 budget, including the creation of a £2.3bn housing infrastructure fund and the removal of restrictions on grant funding to allow providers to deliver a mix of homes for affordable rent and low cost ownership.
Upcoming legislation, cases, and the impact on business
Expected to come into force this year, the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (“Regulations”) will mean that prohibitions on assignment in certain receivables contracts have no effect in some circumstances. The aim of the Regulations is to remove barriers to receivables finance for SMEs.
Whilst the Regulations were expected to come into force in 2016, this hasn’t happened – possibly because of a number of outstanding issues. As the Regulations refer to assignments of receivables but not charges, it is unclear whether they would apply to security assignments. It is also uncertain whether the Regulations would apply to contracts governed by the laws of another jurisdiction, and to international parties entering into English law contracts. Unless points such as these are clarified in the final version of the Regulations, finance providers may be cautious about relying on them.
The update to the Land Registration Act 2002 (LRA) is also expected in late 2017. Of particular interest are the potential changes to the rules around tacking further advances. For mortgages over registered land, the LRA provides that a first mortgagee will take priority over a subsequent mortgagee for later advances made by that first mortgagee if the first mortgagee has no notice of the subsequent mortgage, or if its obligation to make further advances or a maximum amount owing to the first mortgagee is noted on the register.
The Law Commission has sought comments on the extent to which lenders rely on the LRA provisions on tacking in place of deeds of priority, and whether these provisions are not used because of inadequate legislation. It will be interesting whether, in the draft bill, the government abandons these provisions altogether on the basis that the position would be clearer if lenders knew that they needed to obtain a priority agreement in all circumstances where a later charge is granted.
The appeal in the case of African Export-Import Bank and others v Shebah Exploration and Production Company Ltd and others  EWHC 311 (Comm) is due to be heard in the Court of Appeal in June 2017. This case concerns a borrower arguing that a facility agreement based on the Loan Market Association (LMA) form constituted a bank’s written standard terms of business under the Unfair Contract Terms Act 1977, and therefore the requirement for its provisions to be reasonable under that act applied to it. The High Court judge rejected this but if the borrower is successful on appeal, this would have potentially far-reaching implications for lenders, as it may call into question the validity of many of the lender-friendly provisions typically included in LMA style documents.
Another Court of Appeal case awaited with interest in 2017 is the case of NRAM Plc v Evans  EWHC 1543, where a bank submitted a form e-DS1 (an electronic discharge of a registered charge) to the Land Registry by mistake when an earlier loan was repaid but a subsequent loan remained outstanding. The High Court set aside the e-DS1, finding that the bank had made a distinct mistake (induced because the borrower’s solicitor had written to the bank requesting the discharge but made no reference to the later, unpaid loan), and it would be unconscionable to leave the mistake uncorrected. The register could be rectified without the borrower’s consent because the letter sent by their solicitors meant they had contributed to the error. It will be of considerable concern to lenders if these findings are overturned.
Where does Brexit fit into the picture?
Although Brexit is unlikely to directly affect the outcome of these legislative developments, it will inevitably be a topic of major concern for lenders in 2017.
EU membership saw Britain, more specifically London, become one of the largest financial markets in the world and the EU financial centre, often leading key reforms.
Only time will tell whether exiting was the right decision. However, banks and the markets are concerned, as there is no precedent to follow here. Therefore, it is unclear how Britain will have access to its largest customer (the EU) and what the legal, trading and regulatory implications will be. The consequences for banks are therefore equally unclear.
The genuine fear is that exiting the EU will cut trading activity and make doing business with the EU (which currently takes almost half of Britain’s exports) more expensive and time consuming.
The “passporting” rules that enable EU headquartered banks to carry out business in other member states will no longer apply in the same form. This leaves two choices:
- Banks with headquarters in Britain set up new EU-based headquarters; or
- To ensure continued competitiveness as a financial hub, Britain will have to negotiate a bespoke form of exit to ensure a form of “passporting” continues. Every EU member state would need to approve this.
As we move towards finalising the terms of our exit in 2017, the terms of arrangements for Britain’s post-Brexit relationship with the EU will be awaited with interest by financial institutions and their lawyers. One can hope that 2017 will bring some clarity and some stability to the market.
Julian Kinsey is a partner, Cole Stacey is an associate, and Rebecca Jones is a practice development lawyer at national law firm Bond Dickinson LLP