UK: Banking eBulletin - May 2010

Last Updated: 21 March 2011
Article by Gwen Godfrey

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 (

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.

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