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Banking Law > Securities > Flashcards

Securities Flashcards

1
Q

Why do banks sell loans?

A

Risk reduction: Transfer credit risk to other entities.
Meet capital requirements: Improve balance sheet efficiency.
Enable new lending: Free up capital for further loans.
Generate financial and commercial benefits: Exploit market opportunities for profit.

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2
Q

What are loans as bank assets?

A

Loans, such as mortgages and credit card receivables, form a critical part of a bank’s assets and are often sold to achieve strategic financial objectives.

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3
Q

What is novation in the context of loan sales?

A

Novation extinguishes an existing contract and replaces it with a new one, transferring both rights and obligations, requiring consent from all parties.

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4
Q

What is assignment in the context of loan sales?

A

Assignment transfers the rights (benefits) under a loan contract to a new party but leaves obligations with the original lender.

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5
Q

What is the difference between novation and assignment regarding obligations?

A

Novation transfers both rights and obligations.
Assignment transfers only rights; obligations remain with the original lender.

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6
Q

Why is borrower consent important in novation?

A

Borrower consent ensures fairness by acknowledging their contractual relationship with the new lender and is typically required for novation.

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7
Q

Is borrower consent required for statutory assignment?

A

No, borrower consent is not required, but the borrower must be notified of the assignment.

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8
Q

What are the formal requirements for statutory assignment under the Law of Property Act 1925?

A

Absolute transfer of the debt.
Assignment must be in writing.
Express notice must be given to the borrower.

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9
Q

What is equitable assignment?

A

An informal transfer of rights that does not meet statutory requirements. Legal title remains with the assignor, and partial assignment is permitted.

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10
Q

What is a “chose in action”?

A

A proprietary interest in the loan that the assignee acquires through assignment, allowing enforcement of the right to payment.

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11
Q

How does novation apply to syndicated loans?

A

It enables the transfer of a lender’s rights and obligations to another party while maintaining collective security and borrower obligations.

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12
Q

What does Holt v Heatherfield Trust (1942) establish?

A

The necessity of giving express notice to the borrower for a statutory assignment to be enforceable.

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13
Q

What are the benefits of novation for lenders?

A

A clean break from the loan agreement.
Transfer of obligations to the buyer.
Enables seamless participation in syndicated and revolving loans.

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14
Q

What limitations exist for statutory assignments?

A

Statutory assignments must transfer the entire debt unconditionally, and partial assignments do not qualify.

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15
Q

What role does a security trustee play in loan sales?

A

The trustee ensures that security rights are preserved and enforceable during and after the loan transfer.

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16
Q

Why can’t contracts involving personal obligations be assigned?

A

Obligations requiring personal skill, trust, or unique performance cannot be assigned due to their personal nature.

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17
Q

What challenges arise in the transfer of security during novation?

A

Security must be novated or restructured to ensure continuity and enforceability for the new lender.

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18
Q

What is the difference between syndication and participation in loans?

A

Syndication involves collective lending by multiple lenders.
Participation transfers benefits of the loan without creating a direct relationship between the borrower and participant.

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19
Q

What does Tolhurst v Associated Portland Cement Manufacturers (1900) clarify?

A

The extinguishment of obligations under novation and the transfer of new obligations to the buyer.

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20
Q

How does Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd 1994 protect borrowers?

A

It confirms that borrowers can restrict assignment through explicit contractual provisions.

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21
Q

What is sub-participation in loan sales?

A

An agreement where a third party shares in the benefits of a loan without acquiring legal rights over it.

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22
Q

How does sub-participation differ from assignment?

A

Sub-participation does not transfer ownership or require borrower notification, while assignment does.

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23
Q

What are the primary benefits of securitisation?

A

Transfers credit risk to investors.
Frees up capital for new lending.
Enhances liquidity through tradable securities.

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24
Q

What risks are associated with securitisation?

A

Moral hazard: Lenders may lower credit standards.
Complexity in servicing.
Lack of borrower awareness regarding loan ownership.

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25
Q

What is the borrower’s position in a novation?

A

The borrower’s obligations and rights remain, but they are now owed to the new lender under a new contract.

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26
Q

What does Re Western, Public v Gray (1919) establish about equitable assignments?

A

Consideration is not required for equitable assignments, making them flexible for informal transfers.

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27
Q

What are the borrower’s rights under statutory assignment?

A

Borrowers retain the ability to raise defences and set-offs against the new lender that existed against the original lender.

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28
Q

How do Basel III regulations impact securitisation?

A

They require banks to retain some risk in securitised loans, promoting accountability and reducing systemic risks.

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29
Q

Why is borrower notification crucial in loan sales?

A

It prevents disputes and ensures borrowers direct repayments to the correct lender.

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30
Q

How does privity of contract affect loan assignments?

A

Borrowers maintain their contractual relationship with the original lender unless explicitly altered by novation.

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31
Q

What is a partial assignment?

A

A transfer of a portion of the loan’s benefits, permissible under equitable assignment but not statutory assignment.

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32
Q

How does securitisation impact financial markets?

A

By enhancing liquidity, distributing risk, and creating investment opportunities through tradeable loan-backed securities.

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33
Q

Why do borrowers remain unaware of sub-participation agreements?

A

Because sub-participation does not involve a legal transfer of rights, the borrower’s relationship remains with the original lender.

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34
Q

What is the role of the FCA in regulating securitisation under the FSMA?

A

The FCA ensures transparency and compliance with consumer protection laws in securitisation practices.

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35
Q

What does William v Atlantic Assurance (1933) say about statutory assignments?

A

It confirms that only absolute transfers qualify as statutory assignments; partial transfers are excluded.

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36
Q

What challenges exist in cross-border loan sales?

A

Differences in legal systems, security enforcement, and borrower protections complicate international transactions.

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37
Q

What are tranches in securitisation?

A

Layers of securities offering varying levels of risk and return, catering to different investor risk appetites.

38
Q

Why is legal documentation critical in novation?

A

To ensure clarity in the transfer of obligations and the preservation of security arrangements.

39
Q

How does securitisation impact borrowers?

A

Borrowers often face uncertainty about loan ownership and may encounter changes in servicing practices.

40
Q

What regulatory safeguards exist for borrowers in securitisation?

A

Statutes like the Consumer Credit Act mandate borrower notification and transparency in loan transfers.

41
Q

What are the lender’s responsibilities post-loan assignment?

A

To ensure the borrower is notified and that servicing and repayment terms remain consistent.

42
Q

How does Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003) affect syndication?

A

It emphasizes fiduciary duties among lenders, particularly regarding disclosure during syndication sales.

43
Q

What is the borrower’s key consideration during novation?

A

Ensuring that the new lender honours the original loan terms and security arrangements.

44
Q

How do market conditions affect loan sales?

A

Fluctuating market prices can impact the profitability of loan sales and the valuation of securitised assets.

45
Q

Why is borrower consent a limitation in novation?

A

Obtaining consent can delay the transaction and complicate the process, especially in syndicated loans.

46
Q

What are operational risks in loan sales?

A

Miscommunication between borrowers and new lenders.
Disruption of loan servicing processes.
Loss of borrower trust.

47
Q

How do regulatory frameworks address borrower confusion?

A

By requiring clear borrower notifications and consistent enforcement of loan terms post-transfer.

48
Q

What are the risks of selling loans to unregulated entities?

A

Borrowers may lose legal protections, and servicing standards may deteriorate.

49
Q

How does the Rule in Clayton’s Case (1816) apply to revolving loans?

A

It determines the order of repayment in revolving loans, affecting loan balances during assignments or novation.

50
Q

What are the future challenges in loan sales?

A

Increasing complexity in global markets, evolving regulatory requirements, and the rise of FinTech lenders disrupting traditional practices.

51
Q

What is the purpose of securities in lending transactions?

A

Securities provide creditors with rights over a debtor’s assets, ensuring repayment and protecting lenders in case of default.

52
Q

What are the key forms of security used in lending transactions?

A

Fixed charges.
Floating charges.
Mortgages.
Pledges.

53
Q

What does Section 859A of the Companies Act 2006 require?

A

Companies must register charges over their assets within 21 days of creation to ensure enforceability.

54
Q

What is the consequence of failing to register a charge under Section 859H of the Companies Act 2006?

A

Unregistered charges are void against a liquidator or creditor in the event of insolvency.

55
Q

What is a fixed charge?

A

A security interest that attaches to a specific asset, preventing its disposal without the creditor’s consent.

56
Q

What is a floating charge?

A

A security interest over a class of assets that the borrower can use or sell in the ordinary course of business until crystallization.

57
Q

What triggers the crystallization of a floating charge?

A

Events such as insolvency, default, or the appointment of a receiver.

58
Q

What does Section 245 of the Insolvency Act 1986 regulate?

A

The enforceability of floating charges created shortly before insolvency, often invalidating them if deemed preferential.

59
Q

What is the difference in asset control between fixed and floating charges?

A

Fixed charges restrict asset use, while floating charges allow asset use until crystallization.

60
Q

What does Re Yorkshire Woolcombers Association Ltd (1903) establish about floating charges?

A

Floating charges hover over assets until a triggering event causes crystallization, making them enforceable.

61
Q

What is the priority of fixed charges compared to floating charges in insolvency?

A

Fixed charges take priority over floating charges.

62
Q

What did National Westminster Bank plc v Spectrum Plus Ltd (2005) clarify about book debts?

A

Charges over book debts are likely to be classified as floating unless the creditor has significant control over the proceeds.

63
Q

What role does the Financial Collateral Arrangements (No. 2) Regulations 2003 play in securities?

A

It simplifies taking security over financial collateral and allows enforcement without judicial intervention.

64
Q

What is the effect of crystallization on floating charges?

A

The charge converts to a fixed charge, attaching to the specific assets covered by the floating charge.

65
Q

How are fixed charges enforced?

A

Through direct legal action or judicial processes to seize and sell the secured asset.

66
Q

What does Section 238 of the Insolvency Act 1986 address?

A

Transactions at an undervalue, allowing certain security arrangements to be set aside if deemed fraudulent.

67
Q

How does a floating charge provide flexibility for businesses?

A

It allows the debtor to use and sell assets in the ordinary course of business.

68
Q

What is a mortgage in the context of securities?

A

A legal agreement where a borrower secures a loan by pledging real estate or other property as collateral.

69
Q

How does Barclays Bank Plc v Zaroovabli (1997) relate to mortgages?

A

The case highlights the importance of transparent and fair terms in mortgage agreements.

70
Q

What is a pledge in secured lending?

A

A form of security where the debtor delivers an asset to the creditor as collateral, retaining ownership but relinquishing possession.

71
Q

What is the main limitation of floating charges in insolvency?

A

They often rank behind fixed charges and preferential creditors in priority.

72
Q

How does Tolhurst v Associated Portland Cement Manufacturers (1900) relate to novation in securities?

A

The case confirms that novation extinguishes old obligations, replacing them with new ones.

73
Q

What is the borrower’s obligation under a fixed charge?

A

The borrower cannot sell or dispose of the secured asset without the creditor’s permission.

74
Q

What protections does the Companies Act 2006 provide for third-party creditors?

A

The registration of charges ensures transparency, allowing creditors to assess existing securities over a company’s assets.

75
Q

Why are floating charges considered weaker securities?

A

They offer less control over assets and lower priority in insolvency proceedings compared to fixed charges.

76
Q

What is the purpose of crystallization in floating charges?

A

To solidify the creditor’s claim over specific assets during insolvency or other triggering events.

77
Q

How do financial collateral regulations benefit lenders?

A

By reducing bureaucracy and streamlining enforcement of security over financial assets.

78
Q

What are circulating assets in the context of floating charges?

A

Assets like stock or book debts that the borrower can use in the ordinary course of business.

79
Q

What does Re Yorkshire Woolcombers Association Ltd (1903) say about the nature of floating charges?

A

It distinguishes them as hovering securities that crystallize upon specific events.

80
Q

Why is borrower notification important in security agreements?

A

It ensures transparency and compliance with legal requirements, avoiding disputes over enforceability.

81
Q

What are the key differences between fixed and floating charges?

A

Fixed charges attach to specific assets and offer stronger creditor protection, while floating charges cover fluctuating assets with less immediate control.

82
Q

What rights does a creditor have under a fixed charge?

A

Immediate control and enforcement rights over the secured asset if the borrower defaults.

83
Q

How can borrowers challenge unfair mortgage terms?

A

By invoking consumer protection laws such as the Unfair Terms in Consumer Contracts Regulations.

84
Q

What are preferential creditors in insolvency?

A

Creditors with statutory priority, such as employees and certain tax authorities, who are paid before floating charge holders.

85
Q

How does the priority rule affect multiple securities over the same asset?

A

Earlier registered charges typically take precedence over later ones unless otherwise agreed.

86
Q

Why are independent legal advice and transparency critical in secured lending?

A

To ensure the borrower fully understands the implications of security agreements and to avoid claims of unfairness.

87
Q

What role does a receiver play in enforcing security interests?

A

The receiver manages or sells the secured assets to repay the debt owed to the creditor.

88
Q

How does the Insolvency Act 1986 regulate security in insolvency proceedings?

A

By setting priority rules and scrutinizing recent transactions for fairness and legality.

89
Q

What does a floating charge crystallizing into a fixed charge mean?

A

It converts from covering fluctuating assets to attaching specifically to the assets present at the time of the trigger event.

90
Q

How do creditors mitigate risks in securities?

A

By ensuring registration, monitoring borrower solvency, and maintaining compliance with legal formalities.

Banking Law (10 decks)

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