As we approach ‘Brexit day’, the future of the UK’s loan market is looking increasingly uncertain as concern grows about the possibility of ‘no deal’. In order to guide the market through this uncertainty, the Loan Market Association (LMA) has published a supplementary note to its 2016 note: Documentary implications of Brexit for LMA facility documentation (see our blog on that here).
The supplementary note, which should be read together with the original note, focuses on concerns associated with the loss of financial services passports, or passporting rights, in situations where facility documentation envisages ongoing activities that may require these rights and considers the potential ways to minimise the impact through finance documentation if these rights were to be lost.
What are passporting rights?
Financial services passports ‘passporting rights’ allow UK banks (as regulated entities within the UK) to lend into other EU jurisdictions without the need for licences that may otherwise be required.
Although passporting rights may not be lost until the end of 2020, EU authorities have indicated that the private sector should prepare for the consequences of the UK’s withdrawal from the EU, taking into account every eventuality, including a ‘no deal’ scenario, which may result in a withdrawal of these passporting rights.
The Government has said that, if necessary, it will introduce temporary permissions to allow European Economic Area (EEA) firms to continue operating in the UK for a limited period post Brexit, while they seek authorisation or recognition from the UK regulators. However, at the moment, there are no proposed reciprocal arrangements for UK firms to continue doing business in the EEA.
Concerns in the loan market
UK institutions are responsible for monitoring ongoing contractual arrangements which envisage the provision of cross-border financial services to ensure compliance with overseas licensing and regulatory requirements following withdrawal of the financial services passport regime.
In the supplementary note, the LMA outlines concerns about the loss of passporting rights. Those being discussed in the market include:
Potential adjustments to LMA documentation
In addition to outlining the concerns above, without making recommendations, the supplementary note explores the benefits and limitations of ways in which parties might consider adjusting LMA documentation to shield against the risks associated with the loss of passporting rights. Adjustments considered include:
- using tranching structures to ring-fence funding arrangements to certain borrowers and lenders only, this will enable institutions to confine their lending obligations to certain members of the borrower group and/or allocate their lending obligations between suitable entities within its own corporate group (for example, UK lenders only participating tranches available to UK only borrowers);
- using fronting structures to ensure an institution’s obligations are carried out by an appropriately authorised “fronting lender”, subject to the implementation of back-to-back funding arrangements (such as sub-participation) between that fronting lender and the remainder of the syndicate;
- widening the scope of existing illegality clauses to account for situations where a lender reasonably considers that continued participation under an existing arrangement may result in illegality;
- widening the scope of existing facility agent resignation provisions to enable a facility agent to unilaterally appoint a successor in a range of specified jurisdictions or in any jurisdiction which is not materially prejudicial (existing LMA facility documentation limits a facility agent’s ability to unilaterally appoint a successor to those operating within a specified jurisdiction);
- allowing accounts (such as mandatory prepayment accounts) to be held with third-party institutions or branches; and
- introducing further controls on borrower accession, including a requirement to obtain “all lender consent”, to ensure only suitable borrowers (to which lenders are authorised to lend) are able to become party to existing financing arrangements.
The LMA note makes it clear that, whilst negotiations relating to the terms of the UK’s Brexit deal are ongoing, there will be few changes made to its standard-form loan documentation. However, the potential withdrawal of passporting rights presents a real and present risk to UK lenders engaged in the provision of cross-border financial services. Market participants are therefore reminded of their obligation to assess ongoing contractual arrangements on an institution and jurisdiction specific basis to ensure compliance with overseas licensing restrictions post Brexit.
The note is available to LMA members on the LMA website.