The UK public’s decision to leave the EU is an important one. Leaving the largest economy in the world is bound to have consequences for UK banks and their customers in both in the immediate future and long term. The economic uncertainty caused by the leave vote, and eventual Brexit, is inevitably going to put customers at odds with their banks. Ultimately this could result in the types of legal and financial issues experienced both during and after the 2008 financial crisis.
Already we are seeing signs of stress on the banking sector and talk of future bailouts. It was announced on Monday that the trading of RBS and Barclays shares had been suspended following their prices dropping by 15% and 10% respectively.
In this post, we will explore some of possible challenges faced by bank customers in the near future and some of the lessons learned from the 2008 crisis.
In any period of economic uncertainty, banks are going to be much more reluctant to lend. Higher capital requirements (brought about by EU regulations) may be good for their stability but they are not good from their customers in terms of the availability of finance.
The 2008 financial crisis led to countless so-called “broken promises” cases, many of which are still rumbling their way through the courts. Generally, these cases involved an indication or promise to lend prior to the crash which was later reneged upon by the bank when working capital to lend became unavailable. These cases were particularly catastrophic for customers who had already committed their own money or other loan facilities to property projects they fully anticipated were going to be fully funded.
Customers should avoid embarking on courses of action as a result of vague or otherwise non-binding commitments to lend made before the vote. Indications that the finance will be forthcoming in the future should not be taken at face value. What might have satisfied a credit committee prior to the referendum might be out of the question now that the pursuer strings have been tightened.
Unless a written agreement is in place it is highly likely that indications of support from a lender will be “subject to credit” and not binding on the bank. Indications of lending support made prior to the referendum should be revisited before business decisions are made.
If discussions are taking place regarding the provision of finance ensure that any undertakings to lend (unconditional or otherwise) are obtained in writing and that meetings are properly minuted and contemporaneous notes taken. All this will help if there is a dispute in future regarding what was said.
It is a fact of business that when economic and commercial circumstances change parties will seek to reassess their contractual arrangements and try to exit those that are no longer profitable. The same can be said for banking agreements. When put under pressure banks may well try to terminate facilities and recover their loans and overdrafts.
Customers should be wary of breaching their loan to value covenants. It was widely speculated prior to the referendum that a leave vote would damage the property market. This appears to be way the market is heading with drops in prices expected across the country. Banks are likely to request valuations in order to test covenants. If this happens care should be taken to ensure that any valuations are instructed on an appropriate basis to ensure that they are carried out fairly. Borrowers should be wary of valuations being instructed on a vacant possession or “fire sale” basis.
It is also important that borrowers ensure that valuations obtained for testing covenants are suitable for lending purposes and are not being prepared by surveyors for “indicative purposes only”.
There is little doubt that we are about to enter into a period of economic uncertainty. Is the fact of this alone enough to result in the termination of banking facilities?
Contracts often contain provisions dealing with force majeure or material adverse changes in circumstances. However in deciding whether a contract can be terminated on the basis of the Brexit a court would have to consider the circumstances in which the contract was made.
The court would have to consider whether or not the UK’s continued membership of the EU was essential to the performance of the contract. This might be less of an issue with banking agreements, however, it could be relevant in cases in which project funding was related to EU linked endeavours or which also involved EU funding.
Special attention should be paid to overdrafts. These types of facilities are repayable by borrowers “on demand”. Accordingly, payment can be demanded at any time.
One of the many scandals which came out of the last financial crisis was the miss-selling of interest rate hedging products. Regular readers of this blog will be no strangers to the facts of this fiasco.
At present, there is a lot of speculation as to how the 'leave' vote will effect interest rates (with the possibility of negative interest rates even being floated). If interest rates are kept low any breakage costs payable under an interest rate swap agreement will increase as the product becomes more costly for the borrower and more valuable to the counterparty bank.
Armed with the knowledge of ongoing low rates it may be that we begin to see banks pushing these products on to borrowers again by making them conditions of loan finance. Given the highly complex nature of these products specialist advice should be sought regarding their purchase.
Following the 2008 financial crisis, we have been involved in a number of disputes borne out of economic uncertainty. Some of these were a result of banks simply protecting their own financial positions and solvency. Others, such as those involving interest rate hedging products and the banks’ various “restructuring” departments, were more opportunistic and profit driven.
Whilst it is to be hoped that the volatility of the pound and the slump in the markets in the days following the Brexit vote will stabilise in the days to come, this is an aspiration rather than a prediction, and objective scrutiny of the markets suggests economic turmoil for a sustained period. If that in fact materialises, it seems almost inevitable that we may begin to see a rise in disputes between banks and their customers.
If you require advice on your business on any of these issues, contact us today to arrange a meeting with one of our expert solicitors.