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BANKING AND FINANCE REVIEW: WHAT’S IN STORE IN 2017?

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Stacey Cole

By Julian Kinsey, Cole Stacey and Rebecca Jones at national law firm Bond Dickinson LLP 

Challenges and opportunities

Stacey Cole

Stacey Cole

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[1].

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.

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.

Rebecca Jones

Rebecca Jones

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.

Upcoming legislation and cases and how these could impact your 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.

Julian Kinsey

Julian Kinsey

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 they are not used because the legislation is inadequate. 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 [2016] 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 [2015] 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 eDS1, finding that the bank had made a distinct mistake which had been induced because the borrower’s solicitor had written to them requesting the discharge but making 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 outcomeof 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 – 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. One can hope that 2017 will bring some clarity and some stability to the market.

[1] LMA members’ survey, 12 December 2016

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Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape

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Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape 1

By Charles Southwood, Regional VP – Northern Europe and MEA at Denodo

The wide-spread digital transformation that has swept the financial services (FS) sector in recent years has brought with it a world of possibilities. As traditional financial institutions compete with a fresh wave of challenger banks and fintech startups, innovation is increasing at an unprecedented pace.

Emerging technologies – alongside the ever-evolving concept of online banking – have provided a platform in which the majority of customer interactions now take place in a digital format. The result of this is a never-ending stream of data and digital information. If used correctly, this data can help drive customer experience initiatives and shape wider business strategies, giving organisations a competitive edge.

However, before FS organisations can utilise data-driven insights, they need to ensure that they can adequately protect and secure that data, whilst also complying with mandatory regulatory requirements and governance laws.

The regulation minefield

Regulatory compliance in the FS sector is a complex field to navigate. Whether its potential financial fraud or money laundering, risk comes in many different forms. Due to their very nature – and the type of data that they hold – FS businesses are usually placed under the heaviest of scrutiny when it comes to achieving compliance and data governance, arguably held to a higher standard than those operating in any other industry.

In fact, research undertaken last month discovered that the General Data Protection Regulation (GDPR) has had a greater impact on FS organisations than any other sector. Every respondent working in finance reported that the changes made to their organisation’s cyber security strategies in the last three years were, at least to some extent, as a result of the regulation.

To make matters even more confusing, the goalpost for 100% compliance is continually moving. In fact, between 2008 and 2016, there was a 500% increase in regulatory changes in developed markets. So even when organisations think they are on the right track, they cannot afford to become complacent. The Markets in Financial Instruments Directive (MiFID II), the requirements for central clearing and the second Payment Service Directive (PSD2), are just some examples of the regulations that have forced significant changes on the banking environment in recent years.

Keeping a handle on this legal minefield is only made more challenging by the fact that many FS organisations are juggling an unimaginable amount of data. This data is often complex and of poor quality. Structured, semi-structured and unstructured, it is stored in many different places – whether that’s in data lakes, on premise or in multi-cloud environments. FS organisations can find it extremely difficult just to find out exactly what information they are storing, let alone ensure that they are meeting the many requirements laid out by industry regulations.

A secret weapon

Modern technologies, such as data virtualisation, can help FS organisations to get a handle on their data – regardless of where it is stored or what format it is in. Through a single logical view of all data across an organisation, it boosts visibility and real-time availability of data. This means that governance, security and compliance can be centralised, vastly improving control and removing the need for repeatedly moving and copying the data around the enterprise. This can have an immediate impact in terms of enabling FS organisations to avoid data proliferation and ‘shadow’ IT.

In addition to this, when a new regulation is put in place, data virtualisation provides a way to easily find and access that data, so FS organisations can respond – without having to worry about alternative versions of that data – and ensures that they remain compliant from the offset. This level of control can be reflected even down to the finest details. For example, it is possible to set up access to governance rules through which operators can easily select who has access to what information across the organisation. They can alter settings for sharing, removing silos, masking and filtering through defined, role-based data access. In terms of governance, this feature is essential, ensuring that only those who have the correct permissions to access sensitive information are able to do so.

Compliance is a requirement that will be there forever. In fact, its role is only likely to increase as law catches up with technological advancement and the regulatory landscape continues to change. For FS organisations, failure to meet the latest legal requirements could be devastating. The monetary fines – although substantial – come second to the potential reputation damage associated with non-compliance. It could be the difference between an organisation surviving and failing in today’s climate.

No one knows what is around the corner. Whilst some companies may think they are ahead of the compliance game today, that could all change with the introduction of a new regulation tomorrow. The best way to ensure future compliance is to get a handle on your data. By providing total visibility, data virtualisation is helping organisations to gain back control and win the war for compliance.

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TCI: A time of critical importance

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By Fabrice Desnos, head of Northern Europe Region, Euler Hermes, the world’s leading trade credit insurer, outlines the importance of less publicised measures for the journey ahead.

After months of lockdown, Europe is shifting towards rebuilding economies and resuming trade. Amongst the multibillion-euro stimulus packages provided by governments to businesses to help them resume their engines of growth, the cooperation between the state and private sector trade credit insurance underwriters has perhaps missed the headlines. However, this cooperation will be vital when navigating the uncertain road ahead.

Covid-19 has created a global economic crisis of unprecedented scale and speed. Consequently, we’re experiencing unprecedented levels of support from national governments. Far-reaching fiscal intervention, job retention and business interruption loan schemes are providing a lifeline for businesses that have suffered reductions in turnovers to support national lockdowns.

However, it’s becoming clear the worst is still to come. The unintended consequence of government support measures is delaying the inevitable fallout in trade and commerce. Euler Hermes is already seeing increase in claims for late payments and expects this trend to accelerate as government support measures are progressively removed.

The Covid-19 crisis will have long lasting and sometimes irreversible effects on a number of sectors. It has accelerated transformations that were already underway and had radically changed the landscape for a number of businesses. This means we are seeing a growing number of “zombie” companies, currently under life support, but whose business models are no longer adapted for the post-crisis world. All factors which add up to what is best described as a corporate insolvency “time bomb”.

The effects of the crisis are already visible. In the second quarter of 2020, 147 large companies (those with a turnover above €50 million) failed; up from 77 in the first quarter, and compared to 163 for the whole of the first half of 2019. Retail, services, energy and automotive were the most impacted sectors this year, with the hotspots in retail and services in Western Europe and North America, energy in North America, and automotive in Western Europe

We expect this trend to accelerate and predict a +35% rise in corporate insolvencies globally by the end of 2021. European economies will be among the hardest hit. For example, Spain (+41%) and Italy (+27%) will see the most significant increases – alongside the UK (+43%), which will also feel the impact of Brexit – compared to France (+25%) or Germany (+12%).

Companies are restarting trade, often providing open credit to their clients. However, there can be no credit if there is no confidence. It is increasingly difficult for companies to identify which of their clients will emerge from the crisis from those that won’t, and whether or when they will be paid. In the immediate post-lockdown period, without visibility and confidence, the risk was that inter-company credit could evaporate, placing an additional liquidity strain on the companies that depend on it. This, in turn, would significantly put at risk the speed and extent of the economic recovery.

In recent months, Euler Hermes has co-operated with government agencies, trade associations and private sector trade credit insurance underwriters to create state support for intercompany trade, notably in France, Germany, Belgium, Denmark, the Netherlands and the UK. All with the same goal: to allow companies to trade with each other in confidence.

By providing additional reinsurance capacity to the trade credit insurers, governments help them continue to provide cover to their clients at pre-crisis levels.

The beneficiaries are the thousands of businesses – clients of credit insurers and their buyers – that depend upon intercompany trade as a source of financing. Over 70% of Euler Hermes policyholders are SMEs, which are the lifeblood of our economies and major providers of jobs. These agreements are not without costs or constraints for the insurers, but the industry has chosen to place the interests of its clients and of the economy ahead of other considerations, mindful of the important role credit insurance and inter-company trade will play in the recovery.

Taking the UK as an example, trade credit insurers provide cover for more than £171billion of intercompany transactions, covering 13,000 suppliers and 650,000 buyers. The government has put in place a temporary scheme of £10billion to enable trade credit insurers, including Euler Hermes, to continue supporting businesses at risk due to the impact of coronavirus. This landmark agreement represents an important alliance between the public and private sectors to support trade and prevent the domino effect that payment defaults can create within critical supply chains.

But, as with all of the other government support measures, these schemes will not exist in the long term. It is already time for credit insurers and their clients to plan ahead, and prepare for a new normal in which the level and cost of credit risk will be heightened and where identifying the right counterparts, diversifying and insuring credit risk will be of paramount importance for businesses.

Trade credit insurance plays an understated role in the economy but is critical to its health. In normal circumstances, it tends to go unnoticed because it is doing its job. Government support schemes helped maintain confidence between companies and their customers in the immediate aftermath of the crisis.

However, as government support measures are progressively removed, this crisis will have a lasting impact. Accelerating transformations, leading to an increasing number of company restructurings and, in all likelihood, increasing the level of credit risk. To succeed in the post-crisis environment, bbusinesses have to move fast from resilience to adaptation. They have to adopt bold measures to protect their businesses against future crises (or another wave of this pandemic), minimize risk, and drive future growth. By maintaining trust to trade, with or without government support, credit insurance will have an increasing role to play in this.

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What Does the FinCEN File Leak Tell Us?

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What Does the FinCEN File Leak Tell Us? 3

By Ted Sausen, Subject Matter Expert, NICE Actimize

On September 20, 2020, just four days after the Financial Crimes Enforcement Network (FinCEN) issued a much-anticipated Advance Notice of Proposed Rulemaking, the financial industry was shaken and their stock prices saw significant declines when the markets opened on Monday. So what caused this? Buzzfeed News in cooperation with the International Consortium of Investigative Journalists (ICIJ) released what is now being tagged the FinCEN files. These files and summarized reports describe over 200,000 transactions with a total over $2 trillion USD that has been reported to FinCEN as being suspicious in nature from the time periods 1999 to 2017. Buzzfeed obtained over 2,100 Suspicious Activity Reports (SARs) and over 2,600 confidential documents financial institutions had filed with FinCEN over that span of time.

Similar such leaks have occurred previously, such as the Panama Papers in 2016 where over 11 million documents containing personal financial information on over 200,000 entities that belonged to a Panamanian law firm. This was followed up a year and a half later by the Paradise Papers in 2017. This leak contained even more documents and contained the names of more than 120,000 persons and entities. There are three factors that make the FinCEN Files leak significantly different than those mentioned. First, they are highly confidential documents leaked from a government agency. Secondly, they weren’t leaked from a single source. The leaked documents came from nearly 90 financial institutions facilitating financial transactions in more than 150 countries. Lastly, some high-profile names were released in this leak; however, the focus of this leak centered more around the transactions themselves and the financial institutions involved, not necessarily the names of individuals involved.

FinCEN Files and the Impact

What does this mean for the financial institutions? As mentioned above, many experienced a negative impact to their stocks. The next biggest impact is their reputation. Leaders of the highlighted institutions do not enjoy having potential shortcomings in their operations be exposed, nor do customers of those institutions appreciate seeing the institution managing their funds being published adversely in the media.

Where did the financial institutions go wrong? Based on the information, it is actually hard to say where they went wrong, or even ‘if’ they went wrong. Financial institutions are obligated to monitor transactional activity, both inbound and outbound, for suspicious or unusual behavior, especially those that could appear to be illicit activities related to money laundering. If such behavior is identified, the financial institution is required to complete a Suspicious Activity Report, or a SAR, and file it with FinCEN. The SAR contains all relevant information such as the parties involved, transaction(s), account(s), and details describing why the activity is deemed to be suspicious. In some cases, financial institutions will file a SAR if there is no direct suspicion; however, there also was not a logical explanation found either.

So what deems certain activities to be suspicious and how do financial institutions detect them? Most financial institutions have sophisticated solutions in place that monitor transactions over a period of time, and determine typical behavioral patterns for that client, and that client compared to their peers. If any activity falls disproportionately beyond those norms, the financial institution is notified, and an investigation is conducted. Because of the nature of this detection, incorporating multiple transactions, and comparing it to historical “norms”, it is very difficult to stop a transaction related to money laundering real-time. It is not uncommon for a transaction or series of transactions to occur and later be identified as suspicious, and a SAR is filed after the transaction has been completed.

FinCEN Files: Who’s at Fault?

Going back to my original question, was there any wrong doing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.

Moving Forward

How do we do better? First and foremost, FinCEN needs to identify the source of the leak and fix it immediately. This is very sensitive data. Even within a financial institution, this information is only exposed to individuals with a high-level clearance on a need-to-know basis. This leak may result in relationship strains with some of the banks’ customers. Some people already have a fear of being watched or tracked, and releasing publicly that all these reports are being filed from financial institutions to the federal government won’t make that any better – especially if their financial institution was highlighted as one of those filing the most reports. Next, there has been more discussion around real-time AML. Many experts are still working on defining what that truly means, especially when some activities deal with multiple transactions over a period of time; however, there is definitely a place for certain money laundering transactions to be held in real time.

Lastly, the ability to share information between financial institutions more easily will go a long way in fighting financial crime overall. For those of you who are AML professionals, you may be thinking we already have such a mechanism in place with 314b. However, the feedback I have received is that it does not do an adequate job. It’s voluntary and getting responses to requests can be a challenge. Financial institutions need a consortium to effectively communicate with each other, while being able to exchange critical data needed for financial institutions to see the complete picture of financial transactions and all associated activities. That, combined with some type of feedback loop from law enforcement indicating which SARs are “useful” versus which are either “inadequate” or “unnecessary” will allow institutions to focus on those where criminal activity is really occurring.

We will continue to post updates as we learn more.

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