Worldwide: Loan Servicing – The Impact Of Increasing Compliance Requirements

Last Updated: 21 July 2017
Article by TMF Group

Loan Agency has always been an area dominated by bank teams, specifically those banks with in-house bank lending and syndication teams.  This loan agency back office supported the banks' own portfolio whilst also being an agent for the wider transaction.

However the market has developed rapidly and, at a recent loan agency industry conference in London, TMF Group's Head of Loan Agency Claudia Small joined a panel dedicated to discussing third party agents. The discussion arose out of the significant growth in the number of independent agents, and the alternatives that they can bring to a transaction and the market as a whole.

The differentiating factors of an independent third party Loan Agent

Conflict and focus have to be two of the biggest differentiators between in-house and third party providers. Conflict, particularly in the case of distressed scenarios, as independent agents will be neutral of the loan structure; being neither a borrower nor lender.  And focus, where a bank may have multiple roles in a transaction, an independent agent will not. They will purely concentrate on the agent role and will review updates, documents and amendments based solely on the operational aspects of their role. The independent agent can focus their involvement on their area of expertise, bringing added value to practical discussions due to this expertise.

In contrast, a bank agency function sitting alongside potentially a lender or arranger team and under the same corporate governance umbrella, whilst still having the operational expertise within the team and ability to contribute significant operational input, may be hamstringed by differing internal priorities.

An independent provider has the ability to provide services across a portfolio of transactions, not limited to those where a lending role has been taken. This means that the breadth of knowledge and experience can bring added advantages of transferrable operational skills across deals, without impacting on client confidentiality. Team members gain rapid and valuable experience across a breadth of transactions and a multitude of counterparties, structures and credit risks.

Regulatory requirements and compliance

A recent panel at the LMA loan agency conference shared data on what will have the biggest impact on loan operations in the next 12 months – 45.8% stated that it would be compliance issues and 26% geopolitical events such as, but not only, Brexit.

In this context, the ECB "expects credit institutions to ensure that more stringent risk management practices are put in place for transactions". Whilst a necessary step, does this mean that banks' loan agency teams will be subject to the same strict requirements that their wider banking colleagues are? Could this challenge the cost benefit of having loan agency in-house for all transactions, when there are credible and experienced external providers for whom this is a core service?

A place for both

So where are we going from here?  There is clearly a place for both in-house bank solutions and independent third parties.  Working together with solutions provided on a case-by-case basis whether for individual loan transactions, portfolios or sector/geographical specifics.

With this solution-based approach, the specifics of the individual transaction components and its requirements are the driver – whether it's geographical reach, distressed expertise, efficient systems, sufficient resourcing, lack of conflict or size of provider.

With the rise in regulatory requirements, the market has been opened to a range of third party providers, there to assist banks in their work – whether by acting under a white label arrangement or by taking over loan agency roles for complex or higher risk (from a bank perspective) transactions.

The development of less traditional players can only provide greater opportunity for loan originators to find bespoke solutions for their transactions, whether looking for geographical exposure, agent expertise to support operational considerations or a particular asset class or experience of team members.

Differing types of independents

With this backdrop, it's unsurprising that the number and type of independent loan agents has increased, each delivering similar but differentiated services.

As one of these providers, TMF Group has an established and experienced third party loan agency team, with services expanding geographically in terms of the assets supported, the way they are supported and the types of aligned services that are being developed and interlaced with traditional loan agency functions.

There are also a growing number of smaller, new independents without the global reach, but staffed by experienced senior marketers. Plus the traditional bank providers are now also actively seeking to utilise their existing framework by offering services to external client appointments, where there is no obvious conflict or confidentiality issue.

Whilst loan agents within banks have strong balance sheets to draw on when developing services, will increased compliance requirements mean that their systems, processes and procedures become more of a burden? A service-focussed provider can be more nimble in decision making and taking actions whilst maintaining rigorous systems processes and procedures.

The ability to be nimble in decision making as transactions change is beneficial, given that a slow decision making process could cost more in time, effort and price movement. Being able to focus on the specific area of agency solutions means that decision making can be easier given the narrowness of the decision being made.

The ability to work with borrowers across the globe with differing timelines, structure or ownership can also be an advantage.  Working with our colleagues located in-country, TMF Group's loan agency team can quickly get comfortable with geographical requirements that less global - or those agents that are more geographically averse - cannot take. Working on African loans vs supranational sponsored transactions have their own requirements that experience and expertise can mitigate.

Where next?

Traditional bank agency functions continue to drive a large proportion of the agency market but, with the onset of increased global regulation and their potential organisational restructuring as a result, the loan agent provider market is in a state of flux.  New entrants are appearing and bank providers are looking for alternative solutions and ideas, which ranges from outright outsourcing of their internal loan agency teams and functions, to partnerships and complete loan agency changes, which can take the form of white labelling or delegation to a new agent.

A breadth of agents with differing solutions is good for the loan market and its continued health and vitality. The difficulty may be in choosing your solution. One solution is TMF Group - with a truly global footprint, a strong balance sheet, an experienced loan agency team and technology supported processes.

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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