Bank Charge News

The Banking Code Standards Board have published the results of their mystery shopping to see how many banks understood the impact of the 2-4-6 cheque clearing process.  They found there is confusion among bank staff.  They looked for the ability of bank staff to provide clear and accurate information about cheque clearing times.  They also checked whether banks had changed their terms and conditions to bring them into line with the new clearing rules.  In November 2007, the Cheque and Credit Clearing Company standardised maximum cheque clearing times.  This was to help customers know how quickly they could benefit from interest on cheques paid in, how soon underlying funds could be withdrawn and when they could be certain a cheque would not be returned unpaid.  Only one bank provided correct information on all the tests.  At the other end of the scale, a bank gave wrong answers in nearly 60% of cases.  The main area for confusion was calculating the day on which a cheque would not be returned unpaid (certainly of fate).  Some staff gave a description of the clearing cycle before the 2-4-6 changes were implemented.  One bank quoted an 8 day clearing cycle.  Two banks had not advised customers of the changes to the terms and conditions on their accounts.

Bank Law Blogger posted on 2-4-6 in November 2007.

To the casual observer, it might not be obvious why the Vienna Sales Convention is relevant to banking law but I see the Financial Markets and Law Committee have said the Convention will apply to derivative contracts where there is provision for physical delivery. It could extend to cover other financial instruments falling within the category of choses in action. The Convention provides a “uniform law governing the formation of cross-border sale of goods contracts, and delimiting certain substantive rights and obligations arising”. The Convention was adopted in 1980 and came into force on 1 January 1988 but the UK is not a party. Most EU countries, the US, China, Canada, and Australia have adopted the Convention and Japan is about to ratify it. In October 2007, the FMLC set up a Working Group to investigate potential legal uncertainties for the financial markets that would arise from UK implementation of the Convention. The paper sets out the problems of legal uncertainty for financial instruments and makes a plea for express consideration to be given in legislation that implements the Vienna Convention.

Do you need to catch up on Rome 1 or get 5.5 Law Society CPD points under your belt?  The Regulation will come into force on 17 December 2009.   There will be a conference on Rome 1 on 19 September, £140, by the Birmingham Law School, in London.  Rome 1 is shorthand for the now inevitable adoption by the UK on the new choice of law rules in contract.  Earlier posts on this blog, when there was still some doubt as to whether the UK should join, are here.  The conference will cover the position generally, and in the fields of financial services, insurance, IP & e-commerce.

The Government plan to introduce a bribery bill in the 2008/9 parliamentary session, according to this year’s Draft Legislative Plan.  There was a Corruption Bill in the 2005/6 session, that did not survive the end of the session.  It is too early to say whether the new bill will be more or less a repeat of the abandoned one, but the Plan says it will reform the criminal law of bribery.  It will “provide for a new, modern and consolidated scheme of bribery offences to cover bribery both in this country and by foreign public officials abroad, and equip prosecutors and courts with the tools they need to tackle bribery of all kinds.”  The next Parliamentary session is scheduled to open on 3 December 2008.

The next hearing in the test case on bank charges brought by the Office of Fair Trading against seven banks and one building society will be held on 7 July 2008 and is expected to last three days.  The Court will determine:

• whether any other terms and conditions in the bank’s documents that were not covered by the previous judgment could give rise to charges capable of being penalties at common law; and
• whether the terms imposing charges contained in the representative sample of historic terms and conditions which were disclosed in the course of the litigation can also be assessed for fairness under UTCCR.

Some cases have shown the importance of keeping clear notes when you change the terms of an existing agreement.  We have always known that without clear evidence, it is much harder to persuade the court that your version of events is right.  But being human, good practice sometimes gets forgotten.  In one of these cases (Barclays v Gatpaham [2008] EWHC 721 Ch D), a bank was successful in calling default on a property loan because the court believed the bank, not the borrower, when an argument arose over what had been agreed between them in post-default discussions.  The bank had kept clear notes at the time of the discussions with the borrower and sent him a written record shortly afterwards.  By contrast, the court found the borrower’s recollection to be poor. In another case, (RBS v Luwum [2008] EWCA Civ 648) the borrower succesfully argued the bank was estopped from commencing procedings for recovery against him, because of the absence of bank records of the facts as to what had been agreed.  Finally, though this isn’t a bank case: Matthews v Smith ([2008] EWHC 1128 (Admin) QBD (Swift J) 23/5/2008 a case was lost because evidence about what was said in a meeting about a sale and leaseback agreement was uncertain.  So: if you want to be able to prove what was agreed at a later date, write down the facts as you go and send your understanding of what you agreed to the other party as soon as possible afterwards.

David Jones has written an article on some 1st century AD banking records.  He tells of the Sulpicii who provided finance for grain merchants in Puteoli, the port of entry for Egyptian wheat coming to Rome.  Somehow, a collection of wax writing tablets recording the transactions turned up in a suburb of Pompeii.  David looked carefully at the tablets from the point of view of his own experience of modern banking: “bankers are bankers in any age” and he found a pattern of deposits and profitable lending just as you might expect but still feel slightly surprised that societies so far distant in time should behave as we do.  The Sulpicii, he concluded, “provided short-term loans for small business enterprise and bridging finance for well-to-do individuals.  To fund this, they took in deposits from property owners, merchants and foreign residents and members of the imperial household.” 

The article appears in Friends of Classics’s journal (Vol XXXIV).  David is a fellow Classicist who used to be a financial journalist with the Times and the Investor’s Chronicle.  The article is based on his book, “The Bankers of Puteoli” Tempus 2006.  I will be putting it on my birthday list.

It makes good press to express doubt over the legality of borrowers buying back their borrowing cheap.  There has been a flurry of articles about debt buy-backs.  “Debt” in the language of our trade journals - really “loan buy-backs”: to distinguish them from the practice in the securities world which raises no eyebrows.

The discussion has arisen because of the cheapness of secondary debt available for purchase.  The pricing has been driven by the crisis in liquidity and not by the credit status of the borrower.  Yesterday afternoon, the LMA’s (Loan Market Association) seminar on the problem was packed out.  What it boils down to is that buy-backs might be in breach of the terms of the original loan agreement on the facts of the particular transaction.  There is, too, a principle in syndicated lending that lenders should be treated equally by the borrower.  Perhaps as a result of the buy-back, the lenders will not receive a pari passu distribution.

Does a buy-back amount to a “prepayment”?  Does it matter?  Yes, if prepayment is prohibited by the loan agreement or if very specific conditions are imposed on prepayment.  Has a covenant been breached? Does it affect the financial covenants?  All these questions are matters of basic contract law and specific to the transaction and its documentation.  Counsel’s advice has been sought as to whether by implication a buy-back is a prepayment and understandably, Counsel has sat very firmly on the fence (”it’s too close to call”).  he suggests that only the House of Lords will be able to decide.  Some pointers though: the greater the discount, or the non-cash consideration, the more likely it is not to be a prepayment.  If it is not a prepayment and the contract only permits prepayment, the contract is breached.

Alternatives to buy-backs that don’t carry these anxieties are funded participations or total return swaps.

The Loan Syndications and Trading Association  (in America) prohibits buy-backs outright.  The LMA proposes instead to amend its standard form loan documentation so that parties have a choice either to prohibit buy-backs or to permit them provided specific conditions are met and processes are followed.

A storm in a tea-cup?