Covid-19 and financial services disputes

Posted: 23/03/2020

The coronavirus (Covid-19) pandemic continues, with the global death toll breaching 10,000. In an effort to minimise the impact of the pandemic, financial services regulators and firms have focused on putting together contingency plans, ensuring that customers stay protected and that firms remain operational during these challenging times.

In this note, the banking and finance team at Penningtons Manches Cooper provide an overview of the key implications of the coronavirus for the financial services industry in the UK, together with recent responses from regulators and other industry leaders.

The effect of Covid-19 on financial services

Earlier this month, Chancellor Rishi Sunak announced a £350 billion package of support for businesses (by way of government-backed loans) amid the coronavirus economic crisis, including the Coronavirus Business Interruption Loan Scheme. Questions have been raised as to how this package compares to the bailout of the banks in the 2007-09 financial crisis, or in fact, how the financial crisis brought about by Covid-19 compares to the credit crunch of 2008. One of the main differences has been the fact that in 2008-09, the government bailed out the banks; this time around, the government is bailing out businesses. In cash terms, whilst the bank bailout was larger (peaking at £955 billion in December 2009, according to statistics from the National Audit Office), the current bailout package for businesses is aimed at saving a much broader range of industries which would otherwise be in breach of financial covenants and at risk of insolvency.

The government package is in addition to all the measures taken by lending institutions and financial services firms, which have been tasked with contacting their customers in order to ensure that any potential breaches of lending or borrowing arrangements caused by the pandemic are avoided or minimised as far as possible. The following are some of the key considerations to keep in mind when discussing the potential impact of Covid-19 on any financial arrangements:

• Financial covenants: with the revenue of many businesses being affected by the outbreak, consideration needs to be given to the relevant financial covenants and thresholds, ensuring that these are complied with, or if not, that they are negotiated. Payments received from insurance, such as business interruption insurance, should be included in any financial covenants calculations.
• Material adverse change: in times of economic downturn, financial institutions would often rely on ‘material adverse change’ clauses (‘MAC’ clauses) in order to call in any loans. It is anticipated that the ongoing pandemic would adversely affect many businesses across the UK, therefore making them vulnerable to such clauses. As outlined below, lenders are currently being encouraged to do everything possible to treat customers fairly and address any potential impact of the pandemic. Whilst many financial institutions would therefore likely avoid relying on MAC clauses, borrowers should nonetheless be aware of this and negotiate as appropriate as soon as possible.
• Assets valuation: with many employees now working remotely, valuation of assets for the purposes of security or financial covenants is likely to be challenging. Consideration should therefore be given to deferring any valuation dates to a later date.
• Payment defaults: borrowers need to be aware of the implication of any payment defaults and consider how they could inject cash into their business, for example through business interruption insurance, in order to be able to make due payments. If any difficulties or delays are anticipated, borrowers should be contacting their lenders immediately in order to discuss extended grace periods or any other support that may be available. For further information on possible insurance claims, see this update.
• Force majeure clauses: whilst the majority of the standard loan agreements would not include a force majeure clause, other financial instruments, such as derivatives contracts including International Swaps and Derivatives Association, Inc. (ISDA), do. Participants in the financial market should therefore consider whether the relevant derivatives contract includes a force majeure clause, and if so, whether the Covid-19 outbreak could constitute a force majeure or similar event of default or termination. For further review of ‘force majeure’ clauses, see this update.
• Business interruption: with many employees across the UK being required to self-isolate, and some offices required to close, businesses will need to consider whether they could continue operating remotely, or whether any long-term business interruption might constitute an event of default under any lending arrangements. This should be discussed between lending institutions and borrowers as soon as possible.

Industry response

As mentioned above, in these challenging times, regulators are working together with the government and central banks to provide any necessary support to regulated firms and their customers. Set out below are some of the responses by regulators and other industry leaders, to date.

Financial Conduct Authority

In a statement issued on 4 March 2020, the Financial Conduct Authority (FCA) confirmed that it is working closely with the Bank of England (BoE) to review the contingency plans of a wide range of firms, assessing operational risks and ensuring that markets continue to function well and that customers are protected. Since then, the FCA has issued further notes in relation to support available to customers and information for firms. The FCA has confirmed that it is “closely engaged with firms to understand the potential impacts on consumers of coronavirus” and that “firms must treat customers fairly and consider the needs of those potentially affected by the impact of coronavirus.” The FCA’s focus to date has been on the following:

• maintaining regular contact with firms, ensuring they have appropriate business continuity plans in place, and actively managing their liquidity to help them meet the challenges posed to customers and staff by coronavirus;
• asking firms to be clear and transparent and provide support to consumers and small businesses facing challenges;
• postponing activity which is not critical to protecting consumers and market integrity in the short-term;
• discussing critical issues with the industry and updating approaches taken by providers and insurance providers;
• ensuring that firms continue to take all steps to prevent market abuse risks; and
• warning customers to be aware of scams related to coronavirus, including, for example, insurance policies, pensions transfers, or high-return investment opportunities (such as investment in cryptoassets).

Financial Ombudsman Service

The Financial Ombudsman Service (FOS) continues monitoring complaints, “ensuring that businesses are being fair in their assessment and handling of complaints involving the virus”.

Financial Reporting Council

Earlier this month, the Financial Reporting Council published guidance for companies on disclosure of risks and other reporting consequences arising from the emergence and spread of Covid-19. They have now published a further update, confirming that audits should continue to comply fully with required standards, and additional time should be taken, if necessary, even at the risk of delaying company reporting. 

Lending Standards Board

On 11 March 2020, the Lending Standards Board (LSB) issued a statement confirming that it is working with the financial services sector, ensuing that firms have contingency plans in place “to deal with major events and continue to support and serve customers”.

UK Finance

Responding to the government’s announcement of the Coronavirus Business Interruption Loan Scheme, the Chief Executive of UK Finance, Stephen Jones, said: “We urge all businesses to think about how their customers and suppliers could be affected by this global outbreak and to contact their finance providers as early as possible if they think they might have any additional financing requirements.”

Building Societies Association

The Building Societies Association has urged everyone who is concerned about their ability to meet their mortgage repayments to speak to their lender as early as possible to get help.

Next steps

In line with the guidance and statements referred to above, financial firms need to remain alert to the continued impact of the outbreak and keep up to date with any updates from the regulators, the government and central banks. Borrowers need to be reviewing their financial arrangements now, and if not already contacted by their lenders, start making the necessary approaches in order to discuss any options, such as agreeing repayment holidays or extended grace periods, waiving any breaches and deferring valuations dates.

For further information on the widespread economic impact and legal implications of the spread of Covid-19, please refer to our dedicated coronavirus hub, which we will keep updated as more information becomes available.  

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