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There is a feeling that the banking industry is going through a period of transition. Some people speak hopefully of an eventual return to normal lending activities. My feeling is that the new normal has not yet emerged.
What is evident is the increased involvement of government in bridging what is seen as a funding gap. The latest example of this, Funding for Lending, is under way. The Green Investment Bank is busy recruiting transac-tion specialists. The UK Treasury is prepared to support, through loans and guarantees, up to £40 billion of infrastructure projects. The European Investment Bank has been recapitalised and is ready to lend more in the UK. The Scottish Government has been promoting several similar initiatives.
Increasingly, the case for a national investment bank is being made. First by the Centre for Global Studies towards the end of last year, and most recently by the British Chambers of Commerce. Their reports can be accessed by clicking here and here.
Alternative sources of finance include long term institutional investment, but this is taking time to materialise; capital markets which, along with the monolines, are showing signs of new appetite; sovereign wealth funds are investing directly into the UK; and funds financed by high net worth investors are now increasingly active.
Does all this mean that there will be a permanent change in finance provision, to one that is more multi-sourced? Will the role of the banks be refocused on overdraft or asset finance lending together with specialist finance products, as new capital and regula-tory structures and continuing balance sheet issues restrict their recovery? Is the interven-tion of Government going to become a permanent, rather than temporary, feature of the financing landscape?
Maybe within a year or two the answers will have emerged.
Michael StonehamPartner0131 656 [email protected]
Focus on...Swap mis-sellingThe latest potential balance sheet problem for banks, after PPI claims and LIBOR-rigging, is swap mis-selling. Customers, mainly small and mid-sized businesses, are alleging that they were mis-sold derivative products which were unsuitable for their needs. No doubt this has been prompted by the realisation that a termination sum may be payable on early close out of a swap, which a customer might want to cancel given the dramatic fall in interest rates over recent years.
In a rare piece of good news for the banking sector, the courts in Scotland have held that the contractual arrangements entered into could not be disregarded and remained binding on the parties. The case of Grant Estates (in administration) v The Royal Bank of Scotland followed on from a number of high profile litigations in jurisdictions such as Germany and Hong Kong, and also an FSA review process which resulted in UK banks agreeing to provide appropriate redress to customers where mis-selling had occurred.
The case resulted in an emphatic victory for RBS, and will give some comfort to other UK banks, but is unlikely to end the series of complaints being made by disgruntled customers. It remains open to customers, as a part of the review process, to seek scrutiny by an independent reviewer with oversight from the FSA. It is hoped that any such reviews take account of the comments of Lord Hodge in this case.
A full note of the case is here and if any questions arise on it please do contact [email protected].
Your regular Scottish Banking & Financial Services bulletin from Brodies LLP
Hadrian’s Wall
Recent cases have established that, in Scotland, a lender cannot recover from the borrower’s lawyer its losses arising from a fraudulent mortgage application.
The joint cases of Cheshire Mortgage Corporation v Morna Grandison (Judicial Factor) and Blemain Finance v Balfour & Manson LLP had similar facts. A legal firm was
instructed by the borrower to prepare standard securities in favour of the lender. It turned out that the mortgage applications were fraudulent.
The lenders tried to establish that the borrower lawyers had impliedly warranted the veracity of their clients. The court held that any warranty was limited to the fact that they had a client who had given them authority to act. The security transactions had been conducted in accor-dance with normal practice, and there was no alleged negligence or other breach of duty on the part of the
lawyers involved.
Whilst this seems to be a fair result, some questions arise. Do the terms on which banks are prepared to allow borrower lawyers to prepare security need to be revised to impose an express warranty regarding veracity, and would this be accepted by borrower lawyers? And, more potently, how did the law firms involved fail to spot the fraud by their clients?
For further information on these cases contact [email protected]
CREDO Nov
12
Christine O’NeillPartner0131 656 [email protected]
Did you know?
Brodies is ‘first choice for renewable energy projects in Scotland’ and has more tier 1 and tier 2 rankings than any other Scottish law firm (source, Legal 500 2012, published October).
Market Reports
Whither Banking Reform? The Law Society of England & Wales and the City of London Law Society have issued comments on the banking reform white paper. These comments come largely from a spread of lawyers at the major London law firms.
They feel that there is an increased risk of a chaotic and uncertain period for UK banks and their customers arising from the methodology being used to implement the ring fence. More work is needed to reach a firm foundation for this reform. The international context needs to be addressed and the economic and international impact has not been fully thought through. In addition, there are unnecessary protectionist aspects and there is concern that that there could be an adverse impact on consumers, SMEs and on competition generally.
In a lawyerly, understated, way the white paper proposals are given a complete roasting. We agree with most, maybe all, of the comments made. Our competition head Mark Clough QC has been a part of the group which produced the report, available here.
Financial Policy Committee Minutes of the interim committee meeting were published late September. They conclude that risks to financial stability have not altered sufficiently since the previous meeting to warrant changing the current policy recommendations.
However, there was clearly much debate, hinted at in the minutes, about the interaction between the capital requirements for banks, the liquidity guidance, and the perceived need for banks to resume active lending. The relationships between resilience and credit conditions, and between credit conditions and growth, were acknowl-edged as complex, which is presumably committee-speak for inherently contradictory. Click here for the minutes.
A few days later Paul Fisher, of the MPC and the FPC, gave a speech on developments in financial markets. It picked up on many of the issues mentioned in the committee meeting, and contained a detailed analysis of the Funding for Lending Scheme which is worth a read. Click here to see.
SnapshotJoanne Bridge, Senior Solicitor
01224 392 [email protected]
Jo Bridge is an experienced banking lawyer who joined us as a senior solicitor in the autumn of 2011 as a part of our expansion of our banking team in Aberdeen.
She has covered real estate finance, general corporate banking and restruc-turing, PPP/PFI and energy transac-tions in her career to date, and is much enjoying her return to the place of her university studies and the dynamic atmosphere in our Aberdeen office.
If you weren't a lawyer, what would you be?
I like to think that I would have made a good crisis negotiator. As a banking lawyer, I thrive in pressurised situations. What is the best advice you have received in your legal career to date?
Focus on quality. In the current economic climate, clients are turning to firms that have proved they can consistently deliver quality advice. As a Brodies employee, this is something that is expected of, and comes naturally to, me. Regardless of timing, financial or other constraints, my focus remains firmly on delivering sound commercial client-focused advice.
If you were given a wild card entry for the Glasgow Commonwealth Games 2014 which event would it be for and why?
I'm torn between Ker-plunk and Monopoly. Could we introduce a general board games category?
Kilting CornerDespite occasional discussion about the likely mechanics of Greece or Spain switching out of euros, a more relevant local concern is what would happen to our currency and our Scottish banknotes in the event of Scotland voting yes to independence.
If we presuppose that Scotland becomes an independent country, and yet keeps the UK (English) pound, then what would that mean? Would we have a new central bank? Or would the Bank of England perform that role with the MPC setting interest rates? Would the Bank of England issue banknotes in Scotland and, if so, would the independent Scottish banknote issue need to be maintained?
These issues and others are considered in a thoughtful article The English pound in an independent Scotland by Andreas Rahmatian (an English solicitor) which you can access on this link with due acknowledgments to the Journal of International Banking Law and Regulation.
His basic thesis is that the UK would be the continuing state, much as Russia was the continuing state of the USSR, and that, as a result, it would retain membership of the EU and the UN. In contrast, when Czechoslovakia split into two states the old state was dissolved and the two new states were admitted to the UN. So, according to his interpretation, Scotland would be a new state in search of a new currency.
His conclusions, demonstrating maybe somewhat limited horizons, are that if the future fiscal and monetary frame-work requires the issue of banknotes that appear Scottish but, to make them effective, are essentially UK money in financial terms, and the central bank continues to be the Bank of England, it is difficult to see the point of gaining independence. Click here, and decide for yourselves!
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Credo is the Latin root of credit and trust which emphasises the underlying credibility of the borrower's promise to repay; the foundation stone of our financial system. If you have any comments or questions on the content of Credo please email [email protected] or your regular Brodies contact. To unsubscribe please click here.
Christine O’NeillPartner0131 656 [email protected]
