Contents:
September 2008
Contents:
Pitts v Jones [2008] QB 706
The primary issue raised for consideration by the English Court of Appeal in this case was whether an undertaking that was not in writing but purportedly given by the respondent was a guarantee or an indemnity. A contract of guarantee, to be enforceable, is required by section 4 of the English Statute of Frauds 1677 ("Statute") to be in writing and signed by the guarantor. The issue is applicable in a New Zealand context as section 27 of the Property Law Act 2007 is analogous to section 4 of the Statute.
In brief, the facts of the case were that the respondent (the majority shareholder) undertook with the appellants (the minority shareholders) that if the purchaser of their shares defaulted on payment then the respondent would pay the sale amount to the appellants. The undertaking was not reduced to writing. The purchaser became insolvent and the respondent claimed that the undertaking was a guarantee and unenforceable if not in compliance with the Statute. The appellants on the other hand argued it was an indemnity and the Statute did not apply.
The Court of Appeal stated that although it was common ground that a contract of guarantee is a type of indemnity, it is important to distinguish between the two because the Statute applies only to contracts of guarantee. Further, an indemnity merely connotes the right of one party to look to another to satisfy his or her losses and may arise under a contract (for example, under a contract of insurance) or by operation of law. On the other hand, a guarantee arises where A promises to pay B a sum of money and then C promises that if A fails to pay B then C will pay B.
In distinguishing between a guarantee and indemnity, the Court of Appeal cited Guild & Co v Conrad [1894] 2 QB 885 where it was stated:
there is a plain distinction between a promise to pay…if the principal debtor makes default in payment, and a promise to keep a person who has entered…into a contract of liability indemnified against that liability, independently of the question whether a third party makes default or not.
Ultimately the Court of Appeal held that there was no liability on behalf of the respondent unless the primary obligation of the purchaser to pay was breached and because of this the contract was a guarantee and the Statute applied.
Ashe v National Westminster Bank plc [2008] 1 WLR 710
The decision has important practical lessons for financial institutions and other mortgagees. For a variety of reasons, lenders may prefer to delay the enforcement of their security rights against a mortgagor with a history of failed payment. If the delay continues for a long period of time and proper steps have not been taken to protect the legal interests of the lending institution, enforcement of the security rights may be statute-barred.
Facts
Mr and Mrs Babai granted a second legal mortgage to the National Westminster Bank plc. The bank had, in law, the immediate right to take possession of the property, if it chose to do so, as soon as the "all moneys" legal charge was executed in 1989.
Although the bank made formal demands for payment in 1992, it took no proceedings or other steps to protect its legal position. There were negotiations between the parties as to payments being made by instalments. The last payments were made in 1993. Mr Babai was made bankrupt on 22 March 1993. The bank issued formal demands in 2001, but, otherwise did nothing.
The main issue was whether the mortgagors, who were in exclusive possession of their mortgaged property for more than 12 years after the limitation period began to run, were in adverse possession of it for the purposes of the Limitation Act 1980.
In 2006, Mr Babai's trustee in bankruptcy brought proceedings for a declaration that the bank's mortgage had become extinguished because of the operation of the statutes of limitation. This claim succeeded at first instance and the bank appealed.
The bank submitted that the mortgagors' continued possession of the property must have been with the express or implied consent of the bank. The argument was that there was no "adverse possession". It was argued that such possession needed to be wrongful possession and without any right or consent. This was rejected. The Court stated that there was no evidence that the mortgagors ever requested permission from the bank to remain in possession. Furthermore, the Court said that it does not necessarily follow from the non-enforcement by the bank of its right to enter possession that it impliedly consented to the mortgagors remaining in possession. And finally, the Court stated that the mortgagors did not require permission as their right to possession was derived from their legal title to the property; not from the bank's title.
Adverse possession within the meaning of the Limitation Act 1980 referred to the capacity of the person in possession and not to the nature of this possession, and meant ordinary possession by a person in whose favour the limitation period could run.
The English Court of Appeal dismissed the appeal. It was held that the mortgagors should be considered to have been in adverse possession against the bank as they relied for their possession on their own title and did not claim under the bank. They neither sought nor obtained permission of the bank to remain in possession. Accordingly the statute had extinguished the bank's rights, leaving the mortgagors free from them.
The recent case of Blue Water Resort Limited v Marac Finance Limited (HC Christchurch, CIV 2008-409-1184, 20 August 2008, Christiansen AJ) concerned an application to set aside a statutory demand.
In the case Blue Water Resort Limited ("Blue Water") applied to set aside a statutory demand issued by Marac Finance Limited ("Marac"). The amount demanded by Marac was claimed to arise pursuant to a debt that was assigned to Marac from a third party under a settlement agreement. The third party had lent funds to a group involved in property development, with these funds secured by guarantees from several companies, including Blue Water.
Blue Water presented the Court with two lines of argument in its application to set aside the statutory demand. Firstly, they challenged the legal effect of the assignment relied upon by Marac on the basis that it was not an absolute assignment of debt, but instead that it was an assignment by way of charge. In support of this argument Blue Water referred the Court to the assignment agreement. The wording used in this agreement stated that the assignor was assigning and transferring by way of mortgage all of its interests and rights in obligations in a settlement agreement to Marac. On this basis Blue Water argued that Marac could not demand payment of the debt from Blue Water and could only require that it receive any payment by Blue Water to the assignors, pursuant to their security. Secondly, Blue Water argued that Marac's right to payment arose in connection with an interest in land (which was then assigned to Marac) and therefore the Personal Property Securities Act 1999 ("PPSA") should not apply by virtue of the application of s23(e)(ii) PPSA.
Marac took the view that the statutory demand was issued by virtue of rights it acquired under the PPSA and that the assignment created a deemed security interest under s17(1)(b) PPSA.
Associate Judge Christiansen thought it reasonably arguable that the right to payment assigned to Marac arose in connection with an interest in land, thereby preventing the PPSA from applying. However his Honour accepted that it if this were not the case, and if Marac did have a deemed security interest, then it was still arguable whether Marac could enforce its security interest under the PPSA.
Furthermore, his Honour referred to s105(b)(i) PPSA which provides that Part 9 PPSA (which deals with the rights and obligations of a secured party when enforcing security) does not apply to a security interest created, or provided for, by a transfer of an account receivable or chattel paper. His Honour accepted that this section meant that prima facie, Marac could not enforce its security interest. However, as the assignment was expressed to be by way of mortgage rather than an absolute transfer his Honour considered there to be uncertainty about whether the section applied to the current case.
Without deciding the issue, his Honour's view was that to interpret s105(b)(i) in a way that limited its application to absolute transfers only, and to exclude any application to in substance security interests in the form of non-absolute transfers, would be contrary to the PPSA's policy of regulating according to substance rather than the form of the transaction.
In light of this view his Honour concluded that, at best, it can be conceded that Marac may have had the right to enforce its security interest by virtue of s105(b)(i), if you took the view that s105(b)(i) did not apply to the current case. However he still considered it reasonably arguable that Marac might not be able to enforce.
Given that it was reasonably arguable Marac might not have been able to enforce, and the fact that it was not possible to fully assess the claim given the limited information before the Court, his Honour found that Blue Water had an arguable case for a defence to Marac's claim under the PPSA, and accordingly set aside the statutory demand.
The case of Clairview Developments Pty Ltd v Law Mortgages Gold Coast Pty Ltd [2007] 2 Qd R 501, recently came before the Queensland Court of Appeal. It considered the principle that a person taking a transfer of a mortgage is subject to the equities that bound the transferor, and the extent to which it applies. Specifically, it considered whether such equities include the set off of an unliquidated demand (an equitable set off).
The appellant, as mortgagor and registered proprietor of the land in question, provided mortgages well in excess of the current value of the land. It claimed that an oral term of the mortgages was that the mortgagee's solicitor would obtain a development agreement with the Council, significantly increasing the value of the land. This agreement was not actually obtained and the appellant claimed loss and damages for the difference, forming the basis of the equitable set off claimed in the current case.
The mortgages had been transferred by the mortgagee to the respondent, without notice being provided to the appellant. The respondent attempted to exercise its power of sale, and the appellant lodged caveats while awaiting the decision regarding damages. At trial, these caveats were removed by summary judgment to allow the sale to occur. This was an appeal of that case.
The appellant sought to rely on the principle that "where a mortgagor does not join in the assignment of a mortgage by the mortgagee, the transferee is bound by the state of accounts between the mortgagor and the transferor." However, the Court found for the respondent. It was held that an unliquidated damages claim did not fall within this principle, and that regardless of the wide phrasing used case law had established it only for liquidated damages and legal set offs. Further, it was considered that the benefit of holding a security would be greatly diminished if a claim for damages was allowed to prevent enforcement until the conclusion of such litigation. Any claims seeking to restrain powers of sale under mortgages are generally only granted where the amount of the mortgage debt is paid into the court, and the Court saw no evidence of such an act and no reason to make an exception in this case.
The recent case of Burmeister v O'Brien and Ors (HC Tauranga, CIV 2005-470-0396, 2 September 2008, Stevens J) discusses the Credit Contracts and Consumer Finance Act 2003 ("CCCFA") in the context of housing buy back scams.
The Burmeisters' home was debt-free. They had paid the principal and all interest payments owing under a loan from the BNZ, although the BNZ mortgage had not been discharged. The Burmeisters entered into an investment scheme with Messrs Geoffrey and John Clayton. The Burmeisters understood that under the scheme, title to their home would be transferred for a term of three years to "a secure family trust" administered by a group of companies known as the ICMG group. In return, they were to receive a weekly income of at least $200 and two lump sum payments of $15,000 and $7,000 respectively, the ICMG group was to pay rates and insurance for the property and the property was to be returned to them unencumbered at the end of three years or any extension of the investment term.
In September 2001, the Burmeisters signed a document presented to them by Geoffrey Clayton which they believed was an acknowledgement that they had agreed to join the scheme. They then, as requested, collected title documents to the property from the BNZ, obtained a discharge of the BNZ mortgage and passed the title documents to Mr John O'Brien. Following the collection of title documents, various steps were taken by Mr O'Brien which eventually led to the registration of a transfer of the property to the O'Brien Family Trust ("Trustees").
Mr O'Brien obtained a valuation of the property which was used to support an application to the ASB for a loan to purchase the property. On or about 5 October 2001 the Trustees granted a mortgage in favour of ASB to secure an advance made to them by the ASB ("ASB Mortgage"). The loan secured by the ASB Mortgage funded the purchase price of the property.
The Trustees' solicitor, Mr Mark Henley-Smith, was instructed by the ASB, to arrange for the loan and mortgage documents to be executed by the Trustees. On or about 14 November 2001, Mr Henley-Smith presented the BNZ discharge, the transfer of the property to the Trustees and the ASB Mortgage for registration.
In November 2002, the Burmeisters discovered that title to the property had been transferred to the Trustees. The Burmeisters pleaded that the transfer of the property to the Trustees took place without their knowledge or consent. In particular, they said that they did not sign the transfer.
Issues for determination
The issues for determination were:
- whether the ASB Mortgage is a security interest under the CCCFA taken in connection with the buy-back transaction;
- whether the CCCFA overrides the principle of indefeasibility in the Land Transfer Act 1952 ("Land Transfer Act"); and
- whether the knowledge of Mr Henley-Smith can be imputed to the ASB so as to invoke the fraud exception to indefeasibility.
Application of the CCCFA
Under s 119 of the CCCFA, if a "security interest" is "taken in connection with a buy-back transaction", it is to be treated as part of the transaction for the purposes of re-opening oppressive transactions under s 120.
Stevens J found that the ASB Mortgage was not a "security interest" for the purposes of the CCCFA. It was not "taken in connection with a buy-back transaction" such as would mean, pursuant to s 119(1), that the ASB Mortgage and the buy-back transaction were "linked transactions".
Impact of the CCCFA on the indefeasibility provisions of the Land Transfer Act
ASB submitted that, as a result of holding a registered mortgage under the Land Transfer Act, ASB had an indefeasible interest in the property notwithstanding that the mortgagor, the Trustees, may have been registered as proprietor on the title through fraud.
Stevens J considered that the provisions of the Land Transfer Act as a whole, and the provisions of the CCCFA regarding the re-opening of oppressive buy-back transactions, can operate effectively to protect homeowners against the activities of those parties involved in buy-back transactions without cutting across the interests of innocent registered mortgagees for value. Stevens J was not satisfied that the provisions of the CCCFA should override the provisions of the Land Transfer Act and accordingly held that the CCCFA is not intended to override the interest of a bona fide mortgagee for value.
Knowledge of the common solicitor to the Trustees and ASB
Stevens J held that, given the limited mandate given to Mr Henley-Smith by the ASB, any knowledge Mr Henley-Smith gained when acting for the Trustees should not be imputed to the ASB.
The Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill have both had their third reading this month and have been passed.
The select committee report has made a number of recommendations to the Financial Advisers Bill intended to resolve some earlier difficulties identified with the Bill's broad definition of a financial adviser and puts in place more effective processes to supervise this sector.
The Committee recommended new definitions of financial advice, including a product-based approach to the definition of financial advice; tiered categories of financial adviser services; and, the development of a Qualifying Financial Entity model.
It has also re-crafted the regulatory structure for financial advisers giving central regulatory oversight to the Securities Commission and establishing a new member of the Commission, to be called Commissioner of Financial Advisers, who will be responsible for overseeing the establishment of the rules that will govern financial advisers as well as the disciplinary processes that will be set up.
The Finance and Expenditure Select Committee also reported back on the Financial Service Providers (Registration and Dispute Resolution) Bill. The Bill requires all financial service providers to be registered on a central register and requires that all financial service providers belong to a dispute resolution scheme.
The Reserve Bank Amendment Bill (No 3) was passed on 3 September 2008 making the Reserve Bank the regulator of non-bank deposit takers. Dr Bollard, the Governor of the Reserve Bank, said he is confident that the new legislation will provide a strong basis for confidence in the deposit-taking sector, which includes finance companies, building societies and credit unions.
The Reserve Bank’s role will be to require information from trustees of deposit takers, to develop and enforce minimum prudential and governance requirements and to administer credit rating requirements.
Credit ratings from reputable rating agencies will play an important role in the new regulatory arrangements. The Reserve Bank will engage with stakeholders, including deposit takers and trustees, in developing the regulations once the legislation has been enacted. The Reserve Bank will also work with the Securities Commission to revise and simplify public disclosure requirements for deposit-takers.
The Reserve Bank will be working to develop and introduce new regulations for the industry over the next two years. These regulations will introduce consistent standards for key risk areas such as financial strength (capital), access to cash (liquidity) and lending to associated parties. It is expected that these new rules will be introduced in 2010.
The Settlement Systems, Futures, and Emissions Units Bill was introduced to Parliament on 2 September 2008 and is before the Commerce Select Committee. The Bill it is intended to reflect the policy decision to:
- create a statutory framework for clearing and settlement systems that meet the expectations of international and domestic participants;
- align the regulation of exchanges seeking to operate in both the securities and futures markets and codify that participants approved by the operator of an authorised futures exchange are authorised futures dealers; and
- clarify the legal status of emission units and the trading thereof.
On 17 September 2008 a draft Anti-Money Laundering and Countering Financing of Terrorism Bill was released for consultation as a working draft. The Bill is intended to implement enhanced international anti-money laundering and counter terrorist financing ("AML/CFT") standards. At present, New Zealand's law relating to AML/CFT standards are dealt with in a number of ways, including:
- Section 243 of the Crimes Act 1961 & Section 12 Misuse of Drugs Act 1975 (Money Laundering Offences);
- Proceeds of Crime Act 1991;
- Mutual Assistance in Criminal Matters Act 1992; and
- The Financial Transactions Reporting Act 1996.
The new regulatory framework is intended to:
- detect and deter money laundering and the financing of terrorism;
- maintain and enhance New Zealand's international reputation by complying with the Financial Action Task Force on Money Laundering Recommendations;
- contribute to public confidence in the financial system;
- be supervised by existing agencies, which have existing responsibilities for the various sectors covered;
- include new civil and criminal offences;
- include a set of core requirements relating to customer due diligence, reporting, and AML/CFT policies and practices; and
- implement a set of objectives and criteria to guide ongoing development and implementation of the regulatory framework.
The Code of Practice for home equity release products ("Code") has been approved by Cabinet. The Code aims to present in a single document the proposed legislative requirements for home equity release products.
Home equity release products, often called reverse mortgages, are mostly taken up by pensioners who borrow against the equity in their homes. Interest on the loan is accumulated and added to the principal of the loan, with the loan not being repayable until the borrower dies or leaves the home permanently, or the home is sold.
Important factors in developing the Code was that home equity release products usually involve a customer's largest asset and tend to involve pensioners who would be disproportionately affected by a financial setback and who may have little or no capacity to recover from it. Of particular concern are products that do not include a no-negative equity guarantee or lifetime occupancy protection.
The Code was drafted to be consistent with the existing safeguards in current consumer protection legislation. Essentially, the Code provides additional protections for users of home equity release products, in no way limiting or invalidating the protections already provided by consumer and other legislation.
International security offerings in New Zealand
China's financial regulatory reform in post-wto period
Lessons from the US subprime mortgage crisis
The international financial system and future global regulation
Issue 9, 2008 of the Journal of International Banking Law and Regulation contains four articles of interest.
The first article is entitled International security offerings in New Zealand by Ross Pennington and Ed Brown.
The article begins by discussing the dominance of New Zealand's debt capital markets in 2007 by Kauri bond issuances. Kauri bonds are New Zealand dollar denominated bonds issued by overseas issuers and cleared through Austraclear New Zealand. In relation to Kauri issuances, Pennington and Brown note that three pleasing aspects have emerged recently. First, it has proved possible to undertake Kauri issues from the full range of major international bond programmes, such as EMTN, Australia MTN (AMTN) and Global Programmes. The question of which programme to use is now almost always straightforwardly one of issuer preference. Second, once an issuer has undertaken its debut issue, execution of subsequent trades is something that can be done with relative ease and with a turnaround of as little as a few working days. Third, of particular importance to generating a sound international investor base, an issue by Queensland Treasury Corporation laid the groundwork for initial issuance into the United States institutional market through Rule 144A issuance, cleared through Euroclear and Clearstream Luxembourg, via the bridge operating with Austraclear New Zealand.
The article then discuses another major development in New Zealand in the past year, being the tapping of the New Zealand market by international banks for their Tier 1 capital raisings.
In addition to an overview of the Kauri trade, Pennington and Ross provide an excellent summary of the different requirements an issuer is faced with when issuing either retail or wholesale debt securities in New Zealand. Where the offer is made only into the wholesale market or to investors under a NZ$500,000 minimum subscription, legal compliance is restricted to not being misleading or deceptive (there are no positive disclosure obligations nor any general market expectation for a formal and specific information memorandum).
In the absence of an exemption, an offer of debt securities to the public in New Zealand can only be made under the following documentation in terms of the applicable securities legislation (primarily the Securities Act 1978 ("Act") and the Securities Regulations 1983):
- Investment Statement;
- Prospectus;
- Trustee;
- Trust Deed.
The article then examines the audit and financial information requirements with criticism being directed at certain financial reporting requirements. For example, many of the requirements are "frozen in time", reflecting enterprises that predominated New Zealand 20 years ago. Further, Pennington and Brown note that some multi-national issuers could encounter problems with New Zealand's reporting requirements relating to a detailed classification of assets and liabilities.
The article also considers a number of other important considerations for a retail issuance, including:
- regulatory approvals for listed securities;
- the scope for directors', arranger's and dealers' liability; and
- the process in which the Securities Commissions can exempt issuers from certain security law requirements.
The second article is entitled China's financial regulatory reform in post-WTO period by Ge Jianguo, Wan Xuesong and Zhang Xiaolei.
The article examines the reforms that have taken place in China's financial sector since its entry into the World Trade Organisation ("WTO"). It also looks at the lessons China has taken from the reform of other countries' financial systems.
Upon joining the WTO on 10 December 2001, China was allowed a five-year transitional period to allow it prepare itself for the opening up of its economy. China began to put in a great amount of effort into reforming its financial sector to enable it to cope with direct competition from foreign financial institutions. The four major Chinese state-owned commercial banks were restructured, listed on major exchanges and introduced large foreign banks as strategic investors. Foreign financial institutions were encourages, and new Chinese institutions were created, to service rural areas. The capital market has been strengthened through the making of some fundamental laws and regulations, including measures relating to the equities-segregation system, financial conditions and corporate governance. State-owned insurance companies have been reformed and their investment fields expanded so as to improve profitability and corporate governance.
At the end of the five-year post-WTO transitional period, China adjusted its regulatory objectives:
- The aim of its financial regulation was no longer solely to restore the financial system and restrain inflation. Its aim now is to push effective financial supervision and to ensure the financial system's safety and efficiency.
- The supervision of the finance sector is shifting from a strict, rules-based approach to a looser, prudential approach to regulation.
- A monitoring system has been established, with commissions supervising each of the Banking, Securities and Insurance sectors (collectively, the "Commissions"). As many financial institutions tend to conduct a variety of operations that may fall under more than one of the divisions, the three Commissions have issued a joint memorandum clarifying each Commission's responsibilities and setting up the Joint Conference System on Financial Supervision.
- Domestic institutions have been pushed to improve their competitiveness and innovation. Securities law reform has broadened the range of products which financial institutions can offer.
- As part of China's WTO commitments, it has broadened the entry, business range and supervision requirements for foreign banks so that they are now substantially the same as for domestic banks.
China has since shifted gradually from supervising institutions to supervising functions, in the same vein as the US, Japan and Germany. The aim of financial regulation has changed from strict, restrictive supervision into releasing, enabling supervision which gives financial institutions the freedom to find creative solutions to problems especially in light of the credit crunch in the US. The method and approach to supervision has moved from a rules-based approach to a principles-based approach similar to that of the United Kingdom's Financial Services Authority. China is also looking to strike an appropriate division of roles and powers between the various regulatory bodies.
The third article is entitled Lessons from the US subprime mortgage crisis by Dr Mark Fox and Dr H. Lane David.
This article discusses the cause of the subprime mortgage crisis in the US, as well as social and economic effects of the crisis. It then goes on to analyse what future causes of action can be taken.
The article identifies that borrowers were often complicit in contributing to the subprime crisis by misleading financial institutions about their ability to repay loans. Other causes identified are: an irrational exuberance in housing prices in the US; dubious lending practices and the growth of collateralised debt obligations (CDOs); third party originators or mortgage brokers; the "originate-to-distribute" theory, which builds on subsidies offered to the banking sector by governments; and the contribution of Alan Greenspan, Chairman of the Federal Reserve.
Costs of the crisis include devaluation of house prices, and a reduction of growth in the housing market, as well as loss of homes by families involved and therefore increased homelessness.
Policymakers must consider what regulatory and supervisory actions should be taken to avoid or ameliorate such financial system failures in the future. Lessons can be drawn from the US subprime crisis to allow policy makers and regulators to foresee potential problems and implement proactive rather than reactive policies and responses.
The fourth article is entitled The international financial system and future global regulation by Rhys Bollen.
This article discusses the international financial system, current international regulatory measures, how a global regulator might be established and some of the issues involved. The article then goes on to suggest some gradual steps to be implemented in order to achieve global financial regulation and analyses the suggested process through which they might be achieved in light of the political issues involved.
Financial markets are now a global phenomenon, and the internationalisation of financial markets has grown exponentially over the last two decades. This provides many benefits, for example it provides access to deeper and more liquid capital markets for businesses. There have, however, been a number of significant crises; the most recent being the US sub-prime mortgage debacle and its flow on effects. The article goes on to question what is needed for stability in the international financial system and the solution put forward is global regulation, to be administered by a centralised supervisory body.
The article then puts forward a possible model for regulation under which the body would supervise a set of international standards in attempt to facilitate greater harmonisation between individual markets. The suggested starting point for the rules being a combination of Basel banking rules (the Accord and Concordat), and a detailed and robust set of securities rules (building on the IOSCO principles and multilateral MOU). In terms of international adoption of the model, the article argues that incremental change is possible and should be pursued.
The article also discusses some of the risks associated with global regulation; the most basic issue being that of political accountability. Where national regulators are accountable to a responsible minister, government department, or parliament, no such formal structure exists at an international level. A second issue discussed is that of national sovereignty amongst states; whether the practical realities of world politics would make it likely that a global regulator would gain support, notwithstanding the multitude of benefits that would ensue.
The article concludes that the current financial market crisis may not be sufficiently severe and the supporting inter-governmental frameworks not sufficiently developed, to support global regulation of the kind proposed.
The July/August 2008 issue of the Australian Banking and Finance Law Bulletin contains the article entitled The Financial Ombudsman Service - a 'one stop' shop by Rhett Martin. The article addresses the introduction of the new Financial Ombudsman Service ("FOS") in Australia and focuses on how FOS will operate and any limitations FOS may have.
FOS, introduced earlier this year, has been described as the 'one stop' shop for consumers dealing with banking, insurance and investment services. FOS is federally funded and free for consumers to use. FOS is an amalgam of the old ombudsman services governing these areas. Most forms of financial product or service provided to consumers including and any act or omission, maladministration, or issue of a consumer's privacy in connection with those services will be covered by FOS.
To qualify for FOS coverage, the claimant must be an individual or small business, the amount claimed must be less than A$280,000 (although there is no requirement for monetary loss). FOS does not have the ability to determine claims about any general policy of the service provider (such as the setting or negotiating of interest rates), or to consider a dispute relating to the exercise of commercial judgement as these are matters the provider has set according to their own "internal decision-making processes". Also if an issue is a "test case" for a new area of dispute and of importance the industry there can be an application to have the dispute referred to a hearing or tribunal. These qualifications provide a significant limitation on FOS's jurisdiction to determine any claim or dispute.
The system is described as user friendly. The processes are simple and stepped out, with the focus throughout being the parties reaching a mutual settlement. If a settlement cannot be reached, the Ombudsman will make a recommendation to the parties. If both accept, the proposition will be binding on its terms. If the consumer accepts but the service provider does not the Ombudsman has the authority to make a determination against the service provider (for up to A$280,000 or on non-monetary terms for a privacy issue). The terms of reference for banking and finance disputes set out the parameters within which FOS operates. FOS decisions will be guided by the applicable law, industry codes and guidelines, good industry practice and fairness in the circumstances. Importantly, FOS, unlike legal avenues, will not be bound by its previous decisions. However, the author believes that previous decisions will be highly persuasive on FOS and not lead to any real threat of uncertain outcomes.
An important development is the underlying responsibility of FOS to report to the Australian Securities Commission (ASIC) on matters which will have a material effect on individual or small business beyond the parties to the dispute. Examples given by the author include product flaws and inaccurate interpretation of standard terms and conditions. This reporting role could be of significant effect and highlights the important role ASIC now plays in delivering consumer protection.
The author believes overall that FOS is not a major change from the older ombudsman regimes. The parameters of the new FOS system remain to be tested; however, it will be a user friendly service when it is.
The July 2008 International Financial Law Review contains the article Beware specific performance by Yuen-Yee Cho and Victoria Todd.
The litigation settled in mid-May between Bain Capital/THL Partners ("Bain/THL") and their funding banks has left some interesting legal questions unanswered, such as the availability of specific performance in the context of financing commitment letters.
In November 2006 Clear Channel Communications ("Clear") entered into a merger agreement with Bain/THL. A financing commitment letter was signed between Bain/THL and their banks to fund the acquisition. The letter included a medium-form term sheet. There was no market material adverse change condition precedent.
During negations regarding the facility documentation an email was reportedly leaked to Bain/THL indicating that the banks were trying to re-cut the deal as on current terms the deal would result in immediate mark-to-market losses to the banks. This was of grave concern for Bain/THL as they did not have the right to terminate the merger agreement if their financing fell through.
The merger agreement had a clause giving the buyer recourse to the remedy of specific performance however there was no such clause in the commitment letter.
On 26 March 2008 Bain/THL launched proceedings in the Supreme Court of New York against the banks, alleging breach of contract, fraud, deceptive trade practices and civil conspiracy.
It is reported that the settlement of the case entailed the deal going ahead but Clear stock being valued lower as less debt being provided by the banks at increased pricing.
Specific performance is a discretionary remedy, therefore it must be shown that damages cannot adequately compensate a party for the remedy to be used. In light of the current tight state of credit markets and the financing commitment Bain/THL felt that damages would not be a sufficient remedy and as such the specific performance clause was included in the merger agreement. As this was a term to which the parties had given express contractual acknowledgement the court would take it into account if it had been require to decide on the issue of specific performance.
We are yet to see specific performance clauses in financing documents however English and Australian courts have awarded specific performance to enforce merger and lending obligations. If such clauses were used care would need to be taken to ensure they achieved the desired effect in light of other terms such as those dealing with reverse termination fees, material adverse change clauses, financing out provisions etc.
The author opines that the problems surrounding specific performance in this case could have been avoided by the use of a long-form term sheet, or an interim facility agreement (essentially a short-term bullet facility) to ensure funding availability.
The May 2008 issue of Butterworths Journal of International Banking and Financial Law contains the article The difference a year makes in regulation by Joanna Gray. The article asks where to now for risk-based financial regulation in the current economic climate.
The author notes that just over a year ago, in March 2007, the UK and its main financial sector regulator, the Financial Services Authority ("FSA"), were being praised, particularly in comparison to the more onerous requirements of its US counterparts. Since then, turmoil in international finance markets and the collapse of Northern Rock plc ("Northern Rock") have caused the FSA and its methods to come under greater scrutiny.
The FSA, along with the Bank of England and Treasury, has taken a risk- and principles-based approach to regulation of the financial sector with the central aim of minimising risk. Reports into the events leading to the run on Northern Rock have been critical of the FSA's supervision and queried the FSA regulatory framework. The FSA has admitted a lack of intensity and rigour in its supervision of Northern Rock but maintains that it is the operation and not the nature of the process that was flawed - that the drying up of the interbank wholesale market leading to Northern Rock's problems was not a foreseeable risk; that it was an unforeseeable 'unknown' that materialised. The FSA remains committed to keeping risk as the organising principle at the very heart of its supervisory processes. The author describes this commitment as 'striking' and believes that for it to be justified, there needs to be greater acknowledgement that such uncertainties and unknowns will continue to exist and not be covered.
This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com
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Prue Flacks or Guy Lethbridge | WELLINGTON |
John Powell, Ross Pennington or Geoff Busch | AUCKLAND |
WELLINGTON |
AUCKLAND |