What has been happening in the market?
See below our general round-up of some key issues facing the market at the present time.
- Update on nullifying restrictions on invoice assignment: the government has announced that it will seek to nullify any contractual term prohibiting the assignment of invoices (sometimes known as "ban on assignment clauses") through forthcoming regulations. These remain in draft, and are not free from ambiguity, but indicate that the nullification will apply to contracts between businesses (not consumers) of all sizes (other than contracts for financial services or involving interests in land). Only one of the businesses need carry on business in the UK, but the contract must be governed by English law. When the regulations come in, they will not apply retrospectively. As to current status, informal indications from BIS are that the regulations may be implemented this autumn (probably 1 October). See our earlier update on this.
- The Senior Managers Regime has been getting some press of late. Basically a new regime to ensure governance and accountability in "banking firms" (which are banks, building societies, credit unions and PRA investment firms) it took effect on 7 March 2016, although introduction of the new rules will be staggered. One of the key things which caused concern was the government's intension that senior managers would have to prove that they had taken all reasonable steps to prevent the failing of their banking firm, as opposed to the regulator having to prove that they hadn't taken such steps. This would have been effectively a reversal of the burden of proof. Thankfully this was dropped, and the burden of proof is with the regulator after all.
- Blockchain is coming: We have discussed previously how blockchain technology could potentially save banks a huge amount of money if it can replace current systems of payment and settlement. Setl, a UK startup, has been able to demonstrate that blockchain is a viable model for processing more than a billion potential payments in one day. A criticism of current Bitcoin blockchains is that payments are only processed once every 10 minutes or so, which arguably would not work for large-scale use in financial markets. If the transaction speed and volume hurdles can be overcome, and given the fact that many of the largest investment banks and other financial industry players such as Visa are investing time, data and money in other startups looking at the same thing, the overcoming of the hurdle of the "Bitcoin curse" (e.g. money-laundering, fraud, and illicit markets) is surely only a matter of time.
- Yes, hold even more capital: the counter cyclical buffer (CCyB). Some of our central banking friends in the Nordic countries had, last autumn, utilised their ability to require banks operating in their banking systems to hold more capital for the purposes of countering increasing cyclical risks to the financial system. Courtesy of Basel III, this is another tool in the armoury of the banking regulators enabling them to require that bank shore up their capital reserves when threats to the financial cycle emerge. The Financial Policy Committee of the Bank of England (the FPC) has this power in the UK and had, until now, kept the buffer at zero. Last December, however, it signalled its intention to set the UK CCyB at 1% in a standard risk environment, and on 29 March it set it at 0.5%, at the same time lifting the overlapping aspects of Pillar 2 supervisory capital buffers. "This will" the FPC says "increase transparency and sharpen the incentives of the buffer system".
- The dawn of Basel IV: Just when you thought the regulatory minefield had been fully mapped out, our friends at the Basel Committee are considering (in fact they have been for some time) a full blown reform of risk weighting calculations (not to be confused with the exercise the ECB is currently undertaking). "Simpler rules which are harder to manipulate" is their guiding mantra - quite what the impact will be is completely unknown. This first step towards Basel IV - or, as some prefer to call it, "the finalization of Basel III – means that just when banks were getting comfortable with their capital position following Basel III implementation, it's all change once more…..
- Hire purchase vs secured loan: we recently dealt with a query about the pros and cons of lending money to a customer to finance the purchase of an asset, secured on the asset (a secured loanor SL), as opposed to buying the asset and leasing it to the customer with an option to purchase at the end of the lease period (hire purchase or HP). There is never going to be a straightforward answer to this question as much will depend on the specific fact pattern of the "lend" but a few choice nuggets appear below:
- if a customer defaults under HP, you can take the asset back (and do what you want with it) but your claim against the customer for shortfall is likely to be a claim in damages which may be a bit more cumbersome than a simple debt claim
- under HP, if a customer defaults and can convince a court it can cure the default, a court may deny you the ability to repossess the asset
- under HP, it is easier to repossess the asset (subject to the above) as it is already yours – enforcing security under SL has a few more hoops (but not necessarily any more than the usual for enforcing any type of security over any asset)
- under HP for cars, there is a quirk in that an innocent purchaser buying from a fraudulent customer may get good title
- with SL, if you are taking security over an asset like this and the customer is a sole trader or a partnership, then the form of document has to comply with specific requirements and there is a registration process which needs to be undertaken at the High Court. This isn't required for Companies and LLPs (that's the Companies House procedure we know and love).