Banking and Finance predictions for 2019

Our colleagues in our Restructuring & Insolvency team recently published an alert setting out their predictions for the UK’s Restructuring & Insolvency market during 2019. You can read their insights here. Meanwhile, we on the brighter side of the finance world have been predicting what are likely to be some of the key themes for the UK’s loan and wider finance markets in 2019. Please read on to see our forecasts below.

1. Market trends

Towards the end of last year, the Loan Market Association conducted a survey of its members on the outlook for the syndicated loan market over the next 12 months. The results can be reviewed by clicking here. The overall mood amongst syndicated loan investors appears to be one of cautiousness, with warnings against complacency, some volatility expected and yet still some opportunities for the savvy investor. More activity is expected this year in terms of dividend recaps, refinancings and green loans. Borrowers are not short of funding options in what remains quite a liquid market, so in some respects they would be foolish not to tap it. However some sectors might perhaps find 2019 a challenging year due to growing geopolitical risks and a slowing global economy, which might prompt some arrangers to flex margins and terms to attract investors where necessary. The overall feeling is that clouds are forming, with some showers expected.

2. Brexit dramas

An easy prediction this, since barely a day passes these days without some news associated with the UK’s withdrawal from the European Union. But with the date for MPs to vote on Theresa May’s Brexit deal now scheduled for Tuesday 15 January, we can all look forward to (fingers-crossed) some greater clarity on the UK’s planned withdrawal from the EU very soon. In the meantime, those seeking a refresher on the implications of a no-deal Brexit on lending to borrowers located in EU 27 countries by UK lenders would do well to read the LMA’s handy paper published on this very topic earlier in December last year (please click here to read more). It identifies a number of issues (and potential solutions) to ensure that borrowers are adequately protected in the event of a no-deal Brexit, including in relation to the potential loss of licensing rights for financial institutions, ensuring the continuing validity and enforceability of the loan itself (including the extent to which judgements of the English courts will be enforceable in other EU member states) and potential solutions to other ancillary non-core lending issues.  

3. The end of LIBOR

We can likely expect further developments this year relating to the transition away from LIBOR and other interbank offered rates which are commonly used as benchmark rates for loans and other financial products. Although not yet set in stone, it seems pretty likely that LIBOR will cease to be published after 2021. Many have predicted that there will be a transition to an overnight risk-free rate such as SONIA (Sterling Overnight Index Average). But more work still needs to be done to find a suitable LIBOR replacement, especially since SONIA has some distinguishing features (unlike LIBOR, it is an overnight rate and backward looking). We can expect more progress to occur in this respect during 2019, following which loan agreements will be updated to reflect the new market approach. Until then, borrowers and lenders alike will need to rely upon existing fall-back wording to address what happens where LIBOR ceases to be available.

4. More FinTech Regulation

Bitcoin was amongst the biggest losers of 2018, but interest in the wider Fintech industry remains high and 2019 is expected to see a wave of domestic and EU regulation in this space. The UK’s Cryptoassets Taskforce consisting of the Bank of England, the Financial Conduct Authority and HM Treasury published its final report on the UK regulation of crypto assets on 30 October last year, and out of that we can expect much more to follow during 2019. Looking further afield, peer-to-peer lending platforms will be keeping a careful eye out for the FCA’s policy statement (expected in the 2^nd quarter of this year) on proposed new rules and guidance for loan-based crowdfunding platforms. HMRC is expected to issue revised tax guidance on crypto-assets. In the summer, the EU Commission is expected to report on the EU’s Financial Data Standardisation project. And by the end of this year the Financial Action Task Force is expected to review the standards applicable to virtual currencies. These are just a few examples of some of the many regulatory changes affecting this space in the coming year, and participants in this sector will do well to stay on top of a rapidly changing regulatory landscape.

5. Securitisation Regulation

Regulation 2017/2402/EU laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardisation securitisation became directly applicable in all EU member states on 1 January this year. This EU Securitisation Regulation will introduce a new securitisation framework across the EU, effectively replacing many of the existing rules relating to the implementation of securitisation transactions. The Regulation applies to institutional investors and to originators, sponsors, original lenders and securitisation SPVs. Amongst its key features are extensive due diligence checks to be undertaken by institutional investors which hold securitisation exposures (Article 5). There are also new requirements regarding risk retention, including a requirement for originators, sponsors or original lenders of a securitisation to retain on an ongoing basis a material net economic interest in the securitisation of not less than 5% (Article 6). To review the UK’s domestic legislation which, amongst other things, designates the FCA as the UK’s competent authority for the supervision of compliance of persons engaged in the conduct of selling securitisation positions to retail clients in the UK for the purposes of the EU Securitisation Regulation, please click here.