LMA supplementary note on Brexit contingency planning - loss of financial services passports
It has been difficult for the Loan Market Association (LMA) to assess implications for loan documentation or to produce a set of comprehensive recommendations for institutions as a result of the uncertainties surrounding Brexit. However, potential consequences relating to the possible loss of the financial services passports and potential documentary mitigants, should the UK leave the EU with no special agreement in place, are becoming clearer. For this reason, the LMA published a supplementary note, Documentary implications of Brexit for LMA facility documentation, intended to be read in conjunction with the 2016 Brexit Note, in the hope of raising market awareness of these issues.
In a no deal scenario, the UK government has agreed to put in place temporary permissions and recognition regimes to cover the loss of the financial services passports, allowing EU27 institutions to carry on their financial services activities in the short-term and enough time to apply for full authorisation from UK regulators. The EU has not made any such commitment, which is problematic for UK based institutions carrying out regulated activities, who may rely on the financial services passports to perform in an EU27 State.
The LMA has noted several contractual mitigants which could provide an element of protection for institutions on the loss of the financial services passports which include:
- the ability to transfer the relevant rights and / or obligations under existing facility documentation to an appropriately licensed affiliate;
- the ability for an institution to change the branch through which it acts under existing facility documentation to an appropriately licensed branch;
- contractual rights to exit the transaction under illegality protections; and
- the ability to control the accession of additional members of the borrower group to existing lending arrangements.
In an effort to further mitigate the effect of a potential future loss of the financial services passports, the LMA has explored the ways in which facility documentation on current transactions could be adjusted, this includes:
- tranching structures – to address a syndicate’s lending to a multi-jurisdictional group where the potential for some lenders (or some entities in a lender’s own corporate group) to lend to some members of that borrower group might be impacted in the future by a loss of the financial services passport. If this approach is to be considered, the LMA have suggested options as to how best to categorise the availability of the tranche impacted by loss of the financial services passport by reference to either specified borrowers, borrowers in specified jurisdictions, or borrowers to which lending is subject to specified regulatory requirements. Each has its own advantages and disadvantages;
- fronting structures – structuring a facility in a way that the lending which might be impacted in the future by a loss of the financial services passports be carried out by a single appropriately authorised “fronting” lender, subject to back-to-back funding arrangements between the fronting lender and the remainder of the syndicate;
- illegality clause – the LMA acknowledge that it may be difficult in practice to obtain a definitive opinion that a loss of the financial services passport renders a lender’s participation in the loan unlawful, due to European licensing regimes. However, more flexibility could be built into the illegality clause, by expanding its application to instances where an institution reasonably considers that illegality might result from its maintenance of the loan;
- facility agent resignation – a facility agent’s ability to appoint a successor under LMA facility documentation is limited, in that any successor must be operating through an office in a specified jurisdiction. A facility agent’s flexibility to do so could be increased by expanding the range of specified jurisdictions, or providing for a more flexible location qualification;
- account banks – greater flexibility could be introduced, allowing for these accounts to be held with other institutions acceptable to either the security agent, or relevant secured party in the case of cash collateral accounts;
- controls on borrower accession – if facility documentation requires the consent of a group of lenders for the accession of a new borrower and that group is less than all lender consent, greater protection could be introduced by preventing the accession of specified new borrowers, or by requiring all lender consent for an accession by such a new borrower; and
- mandate letters and commitment letters – these could be supplemented by incorporating mechanics allowing for a transfer of the mandate / commitment to an institution’s affiliate and / or allowing an institution to change the branch through which that mandate / commitment is performed.
As it currently stands, the LMA does not intend to introduce any of these adjustments into its facility documentation and it has stressed that it is not recommending their adoption. Again, the purpose of this note and the suggested adjustments is simply to increase market awareness of the issues and potential options. The note includes a schedule of exit and transfer rights in, and change of branch under, currently published LMA Facility Documentation.
 Including lending, letter of credit / bank guarantee issuance, facility agent and security agent, and provision of bank accounts.