Following his webinar with Credit today, Damian Riley, director of business intelligence at HML, talks about upcoming changes to impairment.
| Damian Riley|
director of business intelligence, HML
IFRS 9 – have you heard of it? If you are a debt provider you may have done. Nevertheless, many businesses, particularly smaller ones, may be unaware – and this isn’t helped by the seemingly distant implementation date of January 2018.
So what is IFRS 9? It is a new accounting standard that replaces the current IAS 39. Under the current system, mortgage lenders and other debt providers are required to calculate an expected loss value for accounts that are impaired – and for those accounts only.
However, this will all change under IFRS 9. Once this kicks in at the start of 2018, debt providers will need to reassess the probability of their customers defaulting on their loans, and what the expected losses would be for all of their exposures, even those that are currently performing. In addition, this will need to be carried out during each reporting period.
2018 is a long way off – so why is this important now? Well, the task at hand is by no means small. In order for a lender to have comprehensive enough information to base their assessments on, a history of measured risk is needed.
The benchmark for this will be when the loan assets were placed on to the lender’s balance sheet. Large firms, particularly the advisory companies, have noted that this retrospective exercise could take as long as three years to complete, so firms that haven’t commenced this task need to start this as soon as possible.
It’s not just the provisioning calculation task at hand that debt providers need to keep in mind when planning for the implementation of IFRS9.
More than half of banks surveyed by Deloitte believed that impairment charges could climb by as much as 50 per cent as a result of the new accounting standard. While taking on extra costs is no mean feat for any firm, at HML we believe this could particularly impact upon the mortgage market, one which is getting back on its feet after the economic crash.
HML’s chief executive officer Andrew Jones recently spoke to Credit Today about the expectation that around £150bn of mortgage portfolio trades are expected to come to market in the UK within the next five to seven years. If lenders don’t prepare for IFRS9 and have the right models in place, they may end up forecasting higher potential expected losses.
Subsequently, lending appetite could be restricted, something which may set the market back at a time when business volumes are strong.
HML, in association with Deloitte, covered the transition to IFRS 9 in a Credit Today webinar on September 3. During the broadcast, the presenters examined modelling and data challenges posed by the implementation, as well as looking at the wider business implications, and examining the effects on different asset classes.
Frances Coulson, head of litigation and insolvency at Moon Beever Solicitors, looks at the implications of Coventry v Lawrence.
| Frances Coulson|
head of litigation and insolvency, Moon Beever Solicitors
On 22 July the Supreme Court gave judgment in Coventry v Lawrence, a fairly simple neighbour nuisance case which had the misfortune to become a test case for the argument that the recoverability of adverse costs premiums and success fees on conditional fee agreements from the opponent amount to a breach of that paying party’s human rights.
By a majority of 5:2 the court found that that recoverability did not amount to any such breach. Had they found otherwise, this would have had massive implications for pre-2012 cases generally and for insolvency cases pre- and post-2012. The Supreme Court had delayed the case so that the Government, represented by the Attorney General, could intervene to make representations. Seven other bodies intervened, including R3, the Association of Business Recovery Professionals (the trade body for insolvency practitioners).
The background to this was the serious reduction in availability of legal aid. The Access to Justice Act 1999 allowed recoverability of success fees and ATE premiums from the paying party (subject to assessment). Lord Jackson’s 2010 report severely criticised legal costs overall and recommended the abolition of recoverability of uplifts and ATE premiums. Most of Lord Jackson’s report was implemented, including this abolition, save for temporary two- year carve-outs in three areas – including insolvency cases – to enable alternatives to be explored.
R3 lobbied to retain the insolvency exemption and commissioned a report by Professor Peter Walton of Wolverhampton University to research the current framework and likely result of any change. Professor Walton concluded there was no system which would produce as good results for creditors.
Mr Coventry also argued that, rather than take the base costs and consider proportionality and then separately consider the ATE and success fee, the courts should consider the whole costs and the effect on the paying party. Present rules state that “A percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.” This argument was also rejected.
The court held that the current Access to Justice Scheme is justified by the need to widen access to justice after the withdrawal of legal aid, was made following wide consultation and was well within the wide area of discretionary judgment of the legislature and rule-makers. This was the third such scheme enacted.
The Supreme Court accepted that, where there were no perfect solutions, the Scheme was a rational and coherent one for providing access to justice for those to whom it would probably otherwise have been denied, and hence struck a fair balance between the interests of different litigants.
Mr Coventry has indicated he will take this case to the European Court of Justice but hopefully the insolvency exemption will survive. As officers of the court, insolvency practitioners maintain the highest standards and when they cannot recover their own fees in litigation they are unlikely to risk their own money on any but the best of cases for the benefit of creditors, against those who have deprived them of their money.
In Coventry v Lawrence, Frances Coulson represented R3, the Association of Business Recovery Professionals Limited, instructing Simon Davenport QC, Daniel Lewis, Clara Johnson and Tom Poole, barristers from 3 Hare Court.
Nigel Sanders, partner at Ogier Jersey, takes creditors and insolvency practitioners through the island’s laws.
| Nigel Sanders|
partner, Ogier Jersey
As an international financial centre, Jersey’s insolvency law has developed through statutory frameworks and customary law principles in a way that is intended to balance the interests of creditors and debtors alike. The following 5 areas will be of particular interest to creditors doing business involving Jersey-based companies or individuals.
1 – Creditor led insolvency procedures in Jersey
Creditors with liquidated debt of in excess of £3000 can seek a declaration from the Jersey Court that their debtor be declared en désastre under the Bankruptcy (désastre) (Jersey) Law 1990 (the 1990 Law). There is no formal statutory demand process. Upon a declaration being made, title and possession of the property of the debtor vest automatically in the Viscount, an official of the Royal Court. With effect from the date of the declaration, a creditor (other than a secured creditor) has no other remedy against the property or person of the debtor, and may not commence or continue any legal proceedings to recover the debt.
A creditors’ winding up under the Companies (Jersey) Law 1991 requires a shareholder resolution to be passed. On a creditors’ winding up, liquidators are appointed, usually by the creditors. The liquidators will stand in the shoes of the directors and administer the winding up, gather in assets, settle claims and distribute assets as appropriate. After the commencement of the winding up, no action can be taken or continued against the company except with the leave of court.
There are no Jersey law insolvency procedures equivalent to the UK administration or administrative receivership or to the US Chapter 11 bankruptcy procedures. Insolvency proceedings in Jersey do not automatically combine parent and subsidiary companies’ assets into a single pool; the insolvency is on a company by company basis. However, the provisions in the Companies Law relating to just and equitable winding up have been applied by the Royal Court in a widening range of circumstances in recent years (including, for example, where a pre-pack sale of a business was under consideration).
2 – Secured creditors
Neither a declaration en désastre nor the commencement of a creditors’ winding up prevents secured creditors enforcing their pre-existing rights against the property of the company in respect of which security is held.
Under the Security Interests (Jersey) Law 2012 (which relates to security over intangible movable property such as shares), for security created under that Law, a secured creditor with fixed security (i.e. security perfected by control) or floating charge security (i.e. security perfected by description and registration) can enforce its security in the same way, usually by exercising a power of sale or appropriation.
Bankruptcy of the grantor of the security will not affect the power of the secured party to appropriate or sell the collateral provided the security is perfected. Un-perfected security will be void upon insolvency.
3 – Set-off
Article 34 of the 1990 Law provides for mandatory set off of mutual credits, mutual debts and other mutual dealing between a debtor and a creditor. By virtue of the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005, contractual set-off provisions may survive the bankruptcy of any party or other person and will be enforceable in accordance with their terms, regardless of any lack of mutuality.
4 – Powers of a liquidator or the Viscount to set aside transactions
The liquidators, on a creditors’ winding up, and the Viscount on a désastre, may:
• disclaim any onerous property (including unprofitable contracts, but excluding Jersey real property) by giving notice to interested persons;
• apply to the Royal Court for an order setting aside any transactions at an undervalue or preferences entered into or given within a relevant period before the commencement of the creditors’ winding up or the declaration of désastre; and
• apply to the Royal Court for an order setting aside extortionate credit transactions entered into in the prior three years.
The relevant period for transactions at an undervalue is 5 years preceding the winding up or désastre, provided the debtor was insolvent at the time or became insolvent as a result of the transaction. For an undervalue transaction with a connected or associated person, the burden shifts such that the transaction will be deemed liable to be set aside unless it is provide that the debtor was solvent at the time or did not become insolvent as a result of it.
For preferences, the relevant period is 12 months. A preference arises where the debtor permits something to be done to put a creditor in a better position in the event of a winding up of the debtor than it would have been, provided that the Court is satisfied that the debtor was influenced to give the preference by a desire to put the creditor in the better position. Again, the burden of proof shifts for connected or associated persons.
On setting aside, the Royal Court has a broad discretion with regard to the orders that can be made, albeit the interests of third parties who have acquired property interests in good faith and for value.
5 – Cross-border insolvency – recognition and passporting
Article 49 of the 1990 Law provides that the Royal Court shall assist the courts of prescribed countries and territories (currently the UK, Guernsey, the Isle of Man, Finland and Australia) in all matters relating to the insolvency of any person to the extent it thinks fit. However, this does not exclude the pre-existing customary law right of the Royal Court to exercise its inherent jurisdiction to assist non-prescribed countries or to have regard to the rules of private international law. A letter of request is first required from the home Court seeking the assistance of the Royal Court.
Jersey has recognised a wide range of foreign office holders to enable them to act in Jersey in respect of insolvent overseas entities with interests or liabilities in Jersey (typically Jersey premises, employees and other creditors). These have included English administrators and liquidators and fixed charge receivers.
Although the EU Regulation on Insolvency Proceedings does not apply in Jersey, the Royal Court may still have regard to where the debtor’s centre of main interests is in considering applications to commence insolvency proceedings. It may be possible to put a Jersey company into administration under English law, by making an application for a letter of request from the Royal Court to the English court. It would be necessary to show in the application to the Royal Court that English administration would be likely to achieve the best possible outcome for the debtor and creditors (as opposed to local alternatives, such as a creditors’ winding up or a désastre).
Jersey insolvency law is undergoing regular review and consultation and it is anticipated that developments will be seen in the near future that will provide greater flexibility and options for creditors of Jersey companies.
Nick Pearson, chief executive of The Debt Counsellors Charitable Trust, explains why the FCA’s review of debt advice is a serious jolt for free debt advice providers.
| Nick Pearson, chief executive, The Debt Counsellors Charitable Trust|
As many readers will be aware, on 25th June the FCA published its long awaited and much anticipated “Quality of debt management advice” thematic review.
Naturally, the headlines were grabbed by the research findings in relation to the “unacceptably low standard” of debt advice from fee charging debt advice companies.
This probably came as no surprise to many of us, merely confirming what we already knew, or at least suspected. The phrase “dog bites man” springs to mind.
What received much less, indeed very little coverage in either the trade or public facing media was the FCA’s findings in relation to the quality of debt advice from free to client debt advice providers.
It is unclear from the research how many of the eight providers surveyed were free to client providers but I understand it was 2 providers, both larger organisations offering mainly telephone advice
In summary, the FCA found that 20% of the free sector cases they reviewed “were assessed as posing a high risk of harm to consumers“and “just under half of the free to customer cases were assessed as medium risk” of harm to consumers. This is a real “man bites dog “story.
Until the FCA published its findings, the free sector has been pretty much immune from any sort of criticism; there has been a conspiracy of silence about the quality provided.
The prevailing view was one best typified by the former regulators attitude. The OFT did free providers and their clients a major disservice by adopting a “free debt advice can never give rise to consumer detriment and even if it does, we are not interested” approach.
Many creditors of course have privately expressed their concerns about the low quality of much free debt advice but have been afraid of media/political censure and backlash if they ever had the temerity to say anything publically.
The cat is now well and truly out of the bag! From my point of view it was good to see the FCA having the courage to publish research of this sort; I suspect there was much behind the scenes lobbying to get the report watered down in relation to its findings for free providers.
I would urge the FCA to continue investigating the quality of debt advice from free providers and in particular those predominantly face to face advice services which were grandfathered in to FCA authorisation with only perfunctory scrutiny.
As chief executive of a small, but growing, telephone based free to client debt advice provider I am well aware, as are my staff and trustees, of the need to provide the very highest standards of advice, support and service to clients.
I am sure we are not alone but as Mike O’Connor, chief executive of Stepchange, quite rightly put it, the FCA findings have come as a “wake up call’ to many free providers.
A European judgment has made staff consultation rules, which apply when a business goes bust, a little clearer. But there remain tricky, practical elements, as Moon Beever’s Sarah Rushton explains.
| Sarah Rushton|
partner, Moon Beever
On April 30 the Court of Justice of the European Union (CJEU) delivered its opinion in the long-running Woolworths case, USDAW & Wilson v WW Realisation 1 & Ethel Austin (in administration).
It ruled that an ‘establishment’ in legal terms is the entity to which workers made redundant are assigned to carry out their duties. This ruling was made to determine whether collective consultation rules are triggered. The court referred the matter back to the Court of Appeal to apply the ruling.
Whilst the decision will undoubtedly be welcomed by employers, collective consultation remains one of the trickier areas of the law. Last year the then business secretary Vince Cable and the Insolvency Service referred three Deloitte partners to the ICAEW for possible conflicts of interest in their dealings relating to Comet.
The referral was prompted by awards of around £26m to former employees in relation to a failure to inform and consult on redundancies when the business went into insolvency. However, whilst the former business secretary may have regarded the law in this area as ‘very clear’, the practical implementation of it, when trying to save a failing business, is anything but.
The Trade Union and Labour Relations (Consolidation) Act states that an employer must collectively consult where it proposes to dismiss as redundant 20 or more employees at one establishment.
If it fails to do so each employee may be entitled to a protective award of up to 90 days’ gross pay. Awards are punitive rather than compensatory.
This limitation meant that often collective consultation requirements were not triggered where (for example) a business had a chain of shops and fewer than 20 employees were made redundant in each individual shop.
Consultation must begin ‘in good time’; however, certain minimum time periods apply depending on the number of redundancies proposed.
There is a limited ‘special circumstances’ defence available for employers who fail to collectively consult, but case law has established that insolvency or entering into administration, in and of itself, does not amount to ‘special circumstances’.