Securities for Lending II Flashcards
What is the method for taking stocks and shares as security?
- Complete a stock transfer form
- Get customer to sign a Memorandum of Deposit
- Send shares to the registrar of the company concerned and transferred into the name of the bank’s nominee company
- Obtain a release by the bank transferring the securities back into the customer’s name by completing a stock transder form and sending it and the certificate to the registrar, then forwarding the new certificate to the customer
What is a life policy?
A document which evidences a contract conerning the insurance or the assurance of a person’s life. The usual conditions of a life assurance contract are that in return for a premium of a series of premiums, as assurer will pay a cash sum or annuity either on the death of the person whose life is assured or on the survival of that person to a given date. In the case of an annuity, payments are made from a given date until the death of the life assured or an earlier stipulated date.
What types of Life policy are there?
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Endowment - savings policies that provide both a life cover payable on the death of the saver and a capital sum at maturity. They are designed to be payable over longer terms and have been used as repayment vehicles for interest only mortgages. They can in turn be split into:
- Non profit - guaranteed sum paid on maturity/death but no bonuses
- Full cost with profits - bonuses added to guaranteed sum assured
- Low cost with profits - cheap premiums and combines with profits endowment with decreasing term assurance
- Unit linked endowments - bonuses added to provide a lump sum that should pay off mortgage on maturity - though not guaranteed. It is guaranted to pay mortgage on death.
- Whole life - may be taken out with/without profits and only provide for payment on the assured’s death
- Term assurance - assurance for a given term - if the life assured survives the term, there is no payment
- Unit linked - a small part of the premium is used to provide life assurance and the remainder is invested in unit trust funds
What factors should be considered when taking a life policy as security?
- Premiums - this should be paid up to date
- Uberrimae fidei - if the proposer does not disclose a material fact at the time they are completing the application form or gives false info, then the contract can be voided by the assurance company
- Insurable interest - The proposer must have a monetary interest in the life assured for a policy to be issued - i.e. have a good reason to take out a policy on another to avoid people speculating on the life of another
- Terms/Conditions which might affect security value - the policy should be free of any conditons that might detract from its value as security
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Valuing the policy -
- Sum assured - the sum the assurance company will pay to the beneficiary’s estate on death/maturity
- Surrender value - most life policies acquire a surrender value two years after they’ve been issued - it represents the immediate value of the policy to the bank so is considered more important than the sum assured.
- The policy must be assignable - there will be a statement on the policy if the policy is not assignable.
- Prior assignment - if the policy has been assigned previously, the relative assignation makes up part of the chain of title which is required for an assurance company to pay out. The bank will want the retrocessed (discharged) assignation to be deposited with the policy.
- Age admission - a life policy will normally state either ‘age admitted’ or ‘age not admitted’
What should a bank ensure when receiving a life policy as a security?
The life policy should be inspected to ensure that the bank will be in a position to rely on the policy monies being payable to it, should it become necessary to realise the security.
What is a supported guarentee?
A supported guarentee is one where the guarantor has provided additional security which can be looked to only in the event that the guarantor is not able to fulfill their guarantee obligation if called upon. One cannot realise more from collateral secuirty than the amount of the guarantee.
What is the definition of a property?
What are the types of property?
Any tangible (e.g. land) or intangible (e.g. intellectual property) asset which can be owned.
Types:
- Personal property - any property which isn’t real property e.g. money, shares etc.
- Real property - land, buildings or both
In Scotland:
- Corporeal property - tanglible assets
- Incorporeal property - intangible assets
What is a tenure?
What types of tenure are there?
Ways in which the owner of a property holds the asset
Law of Property Act 1925:
- Freehold ownership - perpetual ownership of property unles owner dies w/o heir. It then reverts to the crown
- Leasehold ownership - ownership subject to agreement with the freeholder for a period of time
Commonhold and Leasehold Reform Act 2002:
- Commonhold ownership - those occupying residential units (flats, apartments & maisonettes) may form a Commonhold Association set up as a limited company with Articles of Association apportioning rights and obligations
Scotland:
- Moveable - anything that can be moved - can be in/corporeal
- Heritable - anything that can’t - can be in/corporeal
What types of rights over corporeal and incorporeal property exist (for Scotland…)?
- Real rights (proprietry rights) - e.g. property ownership
- Personal rights - the relationship between people, e.g. a verbal contract to sell land
What is a debenture?
A document which states the terms of a long-term loan to a company, indicating the date of repayment and the rate of interest.
The debt may be secured by a charge over the company’s property (fixed & floating charges)
What is a fixed charge?
Simply another way of saying a legal mortgage; the charge fixes on the assets charged.
What is a floating charge?
What happens when a company defaults?
An equitable mortgage which the debenture gives over the current assets of a company. Unlike a fixed charge, a floating charge allows the owner of the assets to buy and sell them provided they’re not in default.
A floating charge becomes a fixed charge the moment the borrower defaults (therefore can no longer buy and sell assets). Floating charges created after September 2003 are ring-fenced for unsecured creditors as follows:
- 50% of first £10,000 of floating charge realisations
- then 20% of floating charge realisations
- A max ring-fenced fund of £600,000
How do banks take securities from limited companies?
In England and Wales banks take debenture as security. This incorporates a fixed and floating charge.
In Scotland banks take a bond and floating charge.
What are the advantages to taking a debenture/bond containing a floating charge as a security?
- The lender can take charge over assets which would otherwise be difficult to charge
- The procedure is straightforward
- The lender can appoint an administrator following a petition to the court to grant an administration order
What are the disadvantages to taking a debenture/bond as a security?
- Valuing all the assets can be very difficult
- If the security has to be realised, the lender may find that certain assets have disappeared or have seriously fallen in value
- Creditors of a company sometimes feel that the execution of a floating charge signifies that the company is in financial difficulty
- If the security is to be realised, as administrator will have to be appointed whose costs will reduce the value of the assets being sold or disposed of
- The floating charge may not be valid if the business was insolvent when the security was granted
