Welcome to the Bond Dickinson LLP banking and finance outlook for 2017. In this report we have set out our predictions for the most interesting legal and market developments for banking and finance over the next year.
2017 looks set to be an interesting and unpredictable year for banks and financial institutions. The global and political uncertainties on the horizon arising from Brexit and the US election result could lead to stagnation in the market, with transactions put on hold until the effects of these major events become less unclear. Unsurprisingly, in a recent survey by the LMA1 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.
On the other hand, the initial fall-out of the referendum result has been less dramatic than many expected. 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, including a satisfactory replacement for the loss of a single European passport, this may bolster lenders' confidence and lead to a spike in lending activity in 2017 with financings that were previously shelved being resurrected.
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 which 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.
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. 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.
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.
Wishing you all the best for a prosperous 2017.
Julian Kinsey Head of Banking and Financial Services
T: +44 (0)117 989 6920 E: julian.kinsey
1 LMA members' survey, 12 December 2016
Legal developments and practical impact
African Export-Import Bank and others v Shebah Exploration and Production Company Ltd and others  EWHC 311 (Comm)
This case is an appeal of a High Court judgment which is due to be heard in the Court of Appeal in June 2017.
The case involved a borrower arguing that a facility agreement based on the Loan Market Association ("LMA") recommended form constituted a bank's written standard terms of business within the meaning of the Unfair Contract Terms Act 1977 ("UCTA"), and therefore the requirement for its provisions to be reasonable under that legislation applied to it.
The High Court judge found in favour of the bank and commented that in circumstances where commercial parties, represented by solicitors, have utilised a neutral industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, it would require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties.
> The LMA's recommended form of documents are used widely as the starting point for corporate facility agreements in the syndicated loan market and beyond.
> If the borrower is successful in this case on HWWLHSHUK[OL*V\Y[VM(WWLHSUKZ[OH[ UCTA does apply to LMA-style documents, this would have potentially far-reaching implications for lenders, as it may call into question the validity of many of the lender-friendly provisions included in such documents which may not be regarded as reasonable by the courts.
> Based on the trial judge's comments, LMA documents which are subject to minimal negotiation would be a particular cause for concern.
1 LMA members' survey, 12 December 2016
NRAM Plc v Evans  EWHC 1543
This is another Court of Appeal case which will be heard in May 2017.
The claimant's predecessor, a bank, had taken an "all-monies" charge from the defendants when making a loan to them in 2004. The loan was subsequently repaid and another loan granted in 2005. The bank submitted a form e-DS1 to the Land Registry confirming that the property was no longer charged, but the claimant argued that this had been done as a result of a mistake by the bank. The issues for the court were whether the charge was effective to secure the 2005 loan, and whether the charge had been cancelled by mistake and the register should be rectified to correct that mistake.
The High Court found that the charge did secure the 2005 loan. It said so on its face, and also by way of the mortgage conditions which were incorporated into the charge. For the court to set aside a voluntary disposition, such as an e-DS1, for mistake, the mistake had to be distinct and more than just forgetfulness, inadvertence or ignorance; it had to be a causative mistake of sufficient gravity, normally as to the legal character or nature of the transaction; and it must be unconscionable or unjust to leave the mistake uncorrected. In issuing the e-DS1s the bank had made a distinct mistake which had been induced because the defendants' solicitor had written to the bank requesting removal of the charge quoting only the 2004 loan account number, with no mention of the 2005 loan. It would be unconscionable to leave the mistake uncorrected and the bank was therefore entitled to be re-registered as proprietor of the charge.
In order for the register to be rectified, the registered proprietor's consent was required unless through fraud or lack of care it had caused or substantially contributed to the mistake, or it would be unjust for any other reason for the alteration not to be made. The letter sent by the defendants' solicitors meant that they had contributed to the error by lack of proper care.
> It will be of considerable concern to SLUKLYZPM[OLZLUKPUNZHYLV]LY[\YULKI` the Court of Appeal, and may result in banks reviewing their procedures when issuing DS1s and other deeds of release to ensure that they do not mistakenly cancel charges which secure subsequent loans.
> The case also serves as a reminder to borrower lawyers to ensure that they include details of all relevant loans in any request for discharge of security.
Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015
When in force 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.
Where a receivables contract contains a non-assignment clause, any assignment in breach of that clause will be invalid as between the purported assignee and the debtor. The debtor can refuse to pay the assignee and continue to deal with the assignor. This is unattractive to finance providers and such restrictions therefore prevent companies raising finance against invoices they have issued by way of factoring or invoice discounting.
The Small Business, Enterprise and Employment Act 2015 came into force in March 2015 and included a power for the Secretary of State to make regulations to nullify prohibitions on assignment of receivables in certain types of contract. In December 2014 the draft Regulations were published and a consultation commenced, with the government then responding to that consultation in August 2015. The government response sought to clarify certain ambiguities in the scope of the Regulations, including confirming that they will apply to business-to-business contracts only, regardless of business size, and will exclude financial services contracts and contracts involving interests in land.
> It was expected that the Regulations would come into force during 2016, but this is yet to occur, possibly because of a number of outstanding issues which have been PKLU[PLK^P[O[OLT
> For example, because 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 to which UK companies are party, and to international parties entering into English law contracts.
> It seems likely that the Regulations will JVTLPU[VLLJ[K\YPUNHUK[OL extent of any amendments to address such issues is awaited with interest.
Update to the Land Registration Act 2002 (LRA)
This draft bill is expected in late 2017. It is intended to improve certain aspects of the regime governing registered land, and the Law Commission held a consultation on this during 2016. Of particular interest to banks and their lawyers will be potential changes to the rules around tacking further advances of mortgages over registered land.
Tacking is the ability for a lender with prior ranking security to secure further advances (new loans) under that security in priority to amounts secured in favour of a lender with subsequent security. For mortgages over registered land, section 49 of 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. In practice lenders rarely rely on these provisions, and tend to insist on a deed of priority with any subsequent chargee to agree the priority of further advances.
The Law Commission has sought comments on the extent to which lenders rely on the section 49 LRA provisions in place of deeds of priority, and whether they are not used because the legislation is inadequate. They have queried whether persons other than the proprietor of a registered charge should be able to tack (at present a further advance by a syndicated lender which is not also the security agent in whose name a charge is registered may be at risk). They also asked whether problems are caused where loans are drawn down in instalments and those instalments are classed as further advances.
> It will be interesting whether, in the draft bill, the government attempts to extend and strengthen the statutory protections VU[HJRPUNHVYKLK[VYZ[TVY[NHNLLZ under the LRA, or 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.
Rebecca Jones Associate (Practice Development Lawyer) Banking and Financial Services T: +44 (0)207 788 2430 E: rebecca.jones
How is Brexit likely to affect these?
Although Brexit is unlikely to directly affect the outcome of the cases and legislative developments discussed, 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 correct decision. However, banks and the markets are concerned 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:
1. Banks with headquarters in Britain set up new EU-based headquarters; or
2. 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.
Cole Stacey Associate Banking and Financial Services
T: +44 (0)2380 208 046 E: cole.stacey
What Matters Most
Bond Dickinson LLP banking and restructuring key contacts
If you would like further information or to discuss the services we provide please contact any member of the team.
Julian Kinsey Partner Banking and Finance T: +44 (0)117 989 6920 E: julian.kinsey
Graham Jeffries Partner Banking and Finance
T: +44 (0)2380 208050 E: NYHOHTQLYPLZ
Philip Withey Partner Banking and Finance T: +44 (0)117 989 6919 E: philip.withey
Charlie Reid Partner Banking and Finance T: +44 (0)207 788 2314 E: charlie.reid
Julian Gill Partner Restructuring and Insolvency T: +44 (0)191 279 9659 E: julian.gill
John Connor Partner Banking and Finance T: +44 (0)113 290 4478 E: john.connor
Rebecca Jones Associate (Practice Development Lawyer) Banking and Finance T: +44 (0)207 788 2430 E: rebecca.jones
Andy Stirk Partner Restructuring and Insolvency T: +44 (0)113 290 4427 E: andy.stirk
Bond Dickinson 2017
Bond Dickinson LLP is a limited liability partnership registered in England & Wales under no OC317661. Authorised and regulated by the Solicitors Regulation Authority for legal work.
This communication is provided for general information only and does not constitute legal or other professional advice. You should consult a suitably qualified lawyer on any specific problem or matter.