The impact of insolvency on mortgages poses increasingly serious risks for both borrowers and lenders, according to leading solicitors Rosling King.
Speaking to the Council of Mortgage Lenders’ Autumn Update in Leeds on Tuesday, Georgina Squire, Head of Dispute Resolution at Rosling King LLP, said the consequences of insolvency in the mortgage market will become more far-reaching in the event of interest rate rises.
“It is estimated that up to two million people have never had to deal with an interest rate rise. There is a wide range of pitfalls for both borrowers and lenders in the event of insolvency and the potential fall-out from these should not be underestimated”, Squire told the CML.
She highlighted forthcoming changes in Insolvency Rules – due to take effect next year – as being potentially important changes. “We do not know the detail as yet but the changes could be the biggest in 30 years.”
Here Georgina Squire addresses some of the key questions that arise regarding insolvency and mortgages.
What happens when one of a pair of joint borrowers becomes bankrupt?
The effect is that the insolvency severs their joint interest. The bankrupt’s beneficial interest is vested in their Trustee in Bankruptcy. The title remains in both borrower names and is held on trust for both the Trustee and the solvent borrower. The lender is protected as the Trustee can only assign the insolvent borrower’s equitable interest, giving notice of the assignment to the lender.
Is the security at risk in the event of a borrower’s insolvency?
Any relatively new security is vulnerable and reviewable during the ‘hardening period’, as defined by the Insolvency Act 1986. There is the possibility to set aside the charge as a transaction at undervalue or as a preference which would improve a creditor’s position. In this case, the borrower has to do this knowing they are preferring one over another. Also, this has to happen in the two years prior to personal bankruptcy. A court order is necessary to release or discharge security if preference or transaction at undervalue.
What are the potential consequences of having unperfected security where a borrower becomes insolvent?
Often an insolvent borrower does not have enough from the proceeds of a sale to pay all charges on the property.
Failure to register with HM Land Registry could prejudice the lender’s security. Basic priority rules mean that legal mortgages rank in priority in the order shown in the Charges Register, not the date of creation, subject to any entry to the contrary.
Further advances by a lender will not always rank in priority with the original charge. They may rank lower and behind all subsequently registered charges.
Security not registered at Companies House is also void against a liquidator, administrator or third party creditor of a corporate borrower.
Can a lender, as mortgage in possession, sell the security property if a trustee in bankruptcy has been appointed?
Yes. Under Section S104(1) Law of Property Act 1925 – a mortgagee exercising its statutory power of sale has the power to transfer the property by deed free from all interest and rights over which it has priority.
The 1986 Insolvency Act ensures that the estate vests in the Trustee in Bankruptcy on its appointment. It is automatic. The Trustee in Bankruptcy’s interest is subject to any charges on the property. A Bankruptcy Order does not affect a secured creditor’s right to enforce its security. Therefore a mortgagee can take possession.
The mortgagee and the trustee may take own their possession actions. The trustee is unlikely to pursue it if they know the mortgagee is also taking action. The trustee must account to the mortgagee for the total amount of the mortgage debt if they obtain the Possession Order. Also, a mortgagee must send the trustee the bankrupt borrower’s share of any surplus on sale.
Can a mortgagee appoint an LPA Receiver over the security following the borrower’s bankruptcy?
The trustee’s interest is subject to any charges on the property. Therefore a mortgagee can exercise a power to appoint a Receiver.
However, the Receiver will not act as agent of the borrower when bankrupt. The lender should look at the mortgage deed and discuss with the Receiver whether they can and wish to act. The lender may be liable for the Receiver’s actions. The Receiver will also have greater duties to the lender than to the borrower and may want an indemnity from the lender. As a result, possession is usually favoured where a bankruptcy order has been made against one borrower.
How does bankruptcy affect buy to lets? For example what happens to rental payments?
The Legal Charge will usually allow rent to be charged to the lender by way of a first fixed charge.
Even though the trustee obtains the bankrupt borrower’s beneficial interest in rental income, it should be subject to the lender’s security and so the lender can demand it is paid to them in full.
Can the lender enforce the security to pay the full mortgage debt once the borrower has been discharged from bankruptcy?
Yes, but any shortfall is likely to fall within the bankruptcy. Bankruptcy usually lasts one year. At the end the bankrupt is discharged and a lender has no further remedy against them for any debt which was included within the bankruptcy i.e. a shortfall that arose prior to the bankruptcy order.
Forthcoming changes to the Insolvency legislation and how they affect mortgagees
The most significant forthcoming changes are Insolvency Rules 2016. This is a significant rewrite of 1986 Rules and will likely be the most far-reaching modernisation of red tape and consolidation of amendments since 1986. The transitional provisions are not yet clear but the changes are expected to take effect from October next year.
Q&A with Clare George-Hilley, co-founder, Centropy PR
Clare George-Hilley is the co-founder of Centropy PR
Global Banking and Finance Magazine recently caught up with Clare George-Hilley, co-founder of fintech and financial services specialist PR agency Centropy, as the company toasts to three years of trading. We asked Clare about what life is like running an agency in the city, the trends she is seeing in the financial services space and what the future holds following the Covid-19 outbreak.
Why did you decide to set up Centropy PR?
I was looking for an opportunity to launch my own agency, both my husband and I had been in the public affairs and public relations industry for over a decade and we thought the time was right to go out on our own.
We could see that the financial services industry was surging, with challenger brands and new technology transforming traditional banks and setting new standards of customer service. There was a huge market opportunity to create and launch a PR agency that could provider first class comms support, alongside a deep understanding of complex regulations such as AML, KYC, and the GDPR. Likewise, many traditional technology firms are diversifying their offerings, to tap into the growing market opportunity posed by the fintech boom.
So, we worked on a business plan, designed a strategy for winning clients and officially launched in September 2017. Within a few months we had a growing portfolio of clients and a thriving business, since that point, we have never looked back!
How is Centropy doing now and what are you plans for growth?
The last three years have flown by and our client portfolio has grown and diversified quickly. We now manage PR campaigns for clients on everything from cryptocurrency, wealth management to payments and trading software.
We’ve also hosted parliamentary debates with key industry figures, including Members of Parliament (MPs) on topics such as the future of the financial services industry and the impact of challenger banks on traditional providers. The team is expanding quickly and we’re investing heavily in the latest training and support to ensure our team members are equipped to reach their full potential.
How do you see the next 12 months?
The Covid-19 outbreak has crippled the economy, forcing millions of people to work from home due to the very serious health risks. The knock-on effect of this crisis will lead to companies cutting costs where possible to save jobs, so tech will play a vital role in ensuring many businesses stay afloat.
We are already working with contactless payments specialists and other fintech companies that offer solutions to help companies survive and thrive despite the inevitable challenges ahead.
We aim to continue building our portfolio of expertise, testing ourselves with new challenges and delivering the best possible service to clients
This is a Sponsored Feature.
Lessons from past recessions and advice for business owners during the coronavirus pandemic
By Neil Davis, managing director and co-founder of Sterling Networks
What is Sterling Networks?
“Sterling Networks is a professional organisation founded in 2014 which facilitates networking events for businesses across the Midlands, Oxfordshire, Wiltshire and the South West. Over 300 members attend our fortnightly breakfast and lunchtime meetings.”
What is your background prior to establishing Sterling Networks?
“During the 1990s, I worked in the corporate team for Halifax. My wife, Tracey, and I went onto own a manufacturing business, which was also called Sterling, and produced a range of gifts, merchandise and promotional items.
“We soon realised tradeshows were a great way to meet distributors and clients. From there, the business grew exponentially, and we managed to build a network of around 500 distributors. Eventually, we became ground down by the manufacturing business – in part because the local manufacturing sector was being devastated by competition from China – and took the decision to sell the business and relocate to Spain.
“After spending several years living abroad, we moved back to the UK to set up Sterling Integrity (EXPO’S) & Sterling Networks (Networking) We were inspired by a desire to help businesses make meaningful connections with one another, and we haven’t looked back since.”
The UK has recently entered a recession, brought about by the coronavirus pandemic. What have you learned from past recessions and how are these experiences helping you to navigate the current crisis?
“I’ve lived through a number of recessions and have seen the pain that insolvency causes companies on a large scale. It’s taught me that there are those who win and sadly those who lose, and that businesses must adapt to a rise in demand for certain products or services at a time of financial crisis.
“Given the nature of what Sterling Networks offers [an opportunity for business owners to connect and grow together] I decided we could build upon the brand due to the demand for new business during the pandemic. We therefore moved our networking events from face-to-face to virtual via tools like Zoom and have gained a steady stream of new members in recent months, reaching an overall total of well over 300.
“On top of that, we’ve taken new staff on during the crisis and have launched a number of new regional groups across the country. I was determined that Sterling should come out of the pandemic with a head start, so my attitude to the recession has been much more positive than those who are forecasting nothing but doom and gloom.
“We can’t pretend high street retail wasn’t suffering long before the pandemic came along, and thousands of new businesses are sure to start up to meet the demand for the products and services that people require at a time such as this. In order to develop and grow businesses need to focus on where changes need to be made to meet this demand.”
Sterling Networks has been providing emotional support to its members throughout the pandemic. What advice have you been giving to members that could be useful to other business owners?
“I try not to be too opinionated and respect other people’s views when giving advice to members, as there are always two sides to every circumstance. I’ve been careful not to say to people that they should be doing one thing or another, as I don’t know their business and its needs quite like they do. The only thing that I have been telling members is the importance of setting up one-to-ones with one another. By doing so, they can listen to the needs and concerns of other, like-minded business owners and work out ways that they might be able to help one another.
“The pandemic has meant we all have a bit more time on our hands, so the advice I would give to people is to use this extra time wisely. Not having to travel physically from one meeting to another means there is a greater opportunity to connect with more people. It’s important to remember that individuals outside of your business can be just as valuable as those within it.”
What makes you hopeful for the future and are there any words of encouragement you can give to budding entrepreneurs?
“The key events that have happened to this country during my lifetime – whether wars, recessions, or the pandemic – have enabled me to take stock of things. While these experiences are certainly challenging, we all become stronger for living through them, and it gives me great confidence that the world will ultimately improve as a result of the pandemic.
“The whole world is effectively rebooting right now, as is the business community. I like to think entrepreneurs will recognise this opportunity to take better care of their peers, and this translates to greater collaboration between organisations. Speak to as many people as you can, ask all the questions that you need to and do your homework. This might well be a difficult time for us all but planning for the future must start now if it is to become as prosperous as I know it can be.”
Exclusive Interview with Ugo Loser, CEO of ARCA Fondi SGR
Arca Fondi SGR is a mid-sized Italian active asset management company. Founded in 1983 by a consortium made up of 12 regional banks, the company has grown in time, expanding its network of distributors and its client base. Nowadays Arca manages Mutual Funds, Pension Funds and Institutional Accounts with total AUM exceeding 30 € bln, reaching more than 100 banks and financial institutions and serving more than 800,000 final clients.
What are the key contributors to ARCA Fondi SGR’s success over the past 35 years?
Arca has always put clients and distributors first. That is to say we have always privileged fair pricing for funds and developing high quality products and services for our customers. This requires constant innovation as an objective and looking for people’s talent to be free to produce its effect
Why are people the founding element of ARCA Fondi SGR and how have you sustained this vision over the years?
We work in small teams, people are young and motivated and can perform duties with a high level of autonomy and responsibility. Innovation is asked to everyone, everyday
What makes Arca Fondi SGR different from other asset management firms in Italy?
Arca is a company focused on doing what it can do very well, that is to say mutual and pension funds, services for clients and banks. We never follow short term trends but always look for long lasting impact on the industry, like we’ve done may times in the past
What products/services has ARCA Fondi SGR pioneered?
Arca has been the inventor of “Arca Cedola”, fixed-horizon, coupon paying funds, which have been with no doubt the greatest product innovation of the past 12 years on the Italian market. This type of funds, at first strictly based on bonds and later as a balanced product, has encountered an enormous success both with clients and distributors due to its simple and effective value proposition. Arca is a market leader also in the “PIR” segment of funds, a range of product focused on mid and small sized companies, that have been the best performers in the Italian stock market for the last few years. In services, Arca is a leader in technology applied to asset management. Our website, app and digital services for clients and banks are award winning, state of the art combination of data, technology and channels, and the best is yet to come on this side.
What strategies do you have in place to sustain your market position and withstand professional competition in the country?
As I mentioned, we do not waste resources on projects with dubious results, instead we constantly invest on people, products and services. The high level of profitability that Arca has been able to maintain even in difficult years for the markets of the banking sector is a further testimony that this strategy works very well
How do you use technology to create meaningful experiences for your customers?
First of all, we have created a whole new division, Arca InnovAction Lab, dedicated to technology, data and processes. This ensures projects are delivered quickly and they are free to leave bad past practices behind. Arcaonline.it, Arca’s website, provides distributors with detailed information on clients’ portfolios, asset under management and subscription/redemption requests. It monitors aggregate selling data offering to our partners a suite functions and analytics to track commercial campaigns. And if the banks branches need assistance, they may ask Sara, our digital chatbot. A broad and timely multimedia production, covering exclusive reports, comments, presentations, videos, webinars and newsletters is also available on the website.
Customers, subscribing Arca’s funds through its distributors’ network, may access Arcaclick, a dedicated area on Arcaonline.it. With Arcaclick the client can easily browse through her portfolio of funds, analyze its characteristics, view transactions and historical funds’ performance in customizable views. Arcaclick is also a powerful source of information on Arca product range: Prospectus, KIIDs and other literature is easily accessible along with news, comments and reports. Arcaclick may also be accessed via Arca Fondi App, a free application for mobiles and tables, running on both iOS and Android. Available 24/7 and in mobility, Arcaclick gives clients the opportunity access information, news and details of their personal portfolio anytime and anywhere.
What key trends will drive pension growth in 2020 and beyond?
The Italian market for pension funds is still very small and therefore there is a great opportunity to grow. Arca Fondi manages the biggest open ended Italian pension fund and it’s been constantly at the top of its rankings. As people and workers are looking for yield and to weather short term volatility, the pension fund is very well poised to profit from this trend.
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