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help customers know how quickly they could benefit from interest on cheques paid in, how soon underlying funds could be withdrawn and when they could be certain a cheque would not be returned unpaid.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.

The judgment on the test case hearing of January 2008 has been published this morning.  On a quick look through, the OFT will be able to review the fairness of the charges under the Unfair Terms in Consumer Contracts Regulations.  Contrary to the implication of some national headlines appearing already that the banks have “lost the case”, no judgment on the fairness of the charges has been given (nor was sought) in this trial of preliminary issues.  The terms do not amount to a penalty under common law.   If the banks wish to appeal the judgment, they have until 22 May 2008 to do so. 

24 April 2008

The FSA hope to encourage consumers to get more confidence in using the retail financial products market.  As part of their project to achieve this, today the FSA have published the Retail Distribution Review Interim Report. 

There is more commentary on my employer’s site. Note this frank declaration of interest; access is free but you might need to register.  At its briefest, the FSA propose a “simpler landscape”:

• Independent advisers to help consumers distinguish between sales and advice.  Is this likely to be acceptable to providers?
• Sellers, who do not give advice.
• Money Guidance - generic advice to help the general population improve their financial awareness.

The FSA will publish a feedback statement in October 2008.  They will report industry responses, outline changes to rules and provide a timetable.

There is a rather interesting paper the BIS have just published that explains the Federal Reserve’s thinking about central banks providing liquidity.  It’s worth having a look at for a view of the big picture of what has been going on in the financial markets over the past year.  It’s by Ben S Bernanke who is the Chairman of the Board of Governors of the US Federal Reserve System and he gave the talk on 13 May. 

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? 

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.

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.

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.