Cessation of Finance House Base Rate (FHBR) – IMPORTANT ANNOUNCEMENT FOR USERS OF CCTA STANDARD AGREEMENTS BEARING ANY OF THE FOLLOWING REFERENCES: RA/RC – LAA/LAC – (VR)OSG – OSL – LA1 – CLFV – HPF – LA2

Introduction

It has come to our [CCTA’s] attention that the Finance & Leasing Association (FLA), after decades of publication, will cease to calculate and publish the Finance House Base Rate (FHBR) from 31 December 2019. It is therefore necessary to consider in advance how FHBR, ceasing to exist on that date, might affect contracts which refer to FHBR.

From 1 January 2020 onwards FHBR should no longer be referenced in contracts because they would refer to a rate that will no longer exist.

The Finance House Base Rate (FHBR)

FHBR is currently set and published by the FLA and provides FLA member companies and others with “a base on which to calculate lending charges in certain industrial and commercial contracts where it is appropriate to vary rates during the period of the agreement” (variable rate contracts). It can also be used as a base on which to calculate default interest in certain lending and hire/leasing contracts. It is also widely used by non-FLA members.

FHBR is a rate which is calculated by the FLA on a monthly basis by averaging 3 month Sterling ‘London Inter-Bank Offered Rate’ (LIBOR) over the previous eight weeks, with the resulting figure then rounded up to the next half point. The process is entirely arithmetical and contains no discretionary element.

To further complicate this situation, it is likely that LIBOR will be discontinued in all its forms after the end of 2021, and users of LIBOR should prepare for this.

Cessation of FHBR

The cessation of FHBR follows the introduction of the EU’s Benchmarks Regulation. The Benchmarks Regulation applies to certain indices, including those by reference to which amounts payable under consumer credit agreements and regulated mortgage contracts are determined. Among other things, the Benchmarks Regulation requires a benchmark administrator located in the EU to be authorised by its national regulator and imposes regulatory requirements on benchmark administrators.

The FLA has no control over the underlying index (3 month Sterling LIBOR) or the methodology for its calculation. LIBOR itself is administered by an authorised benchmark administrator; namely ‘ICE Benchmark Administration’.

Following extensive consideration of the Benchmarks Regulation and of the potential impact on the FLA of becoming an authorised benchmark administrator, including taking legal advice and holding discussions with the Regulator, the FLA concluded that it is not practical or feasible for them to become an authorised benchmark administrator.

FHBR will therefore cease to exist, and will not be calculated or published after 31 December 2019. This is to ensure that the FLA does not fall within the scope of the Benchmarks Regulation avoiding any requirement to become an authorised benchmark administrator following the expiry of certain transitional provisions on 31 December 2019.

Note: The FLA is not able to calculate and publish any replacement rate.

Impact on CCTA members and others who use CCTA standard agreements bearing the references shown in the heading above.

We, the CCTA, have completed a fully comprehensive review of all CCTA standard credit/hire agreements available for purchase by our members and others and have concluded that the above mentioned agreements all reference FHBR and are therefore affected by the FLA’s decision to cease the calculation and publication of the Finance House Base Rate (FHBR) from 31 December 2019.

The specified agreements all reference FHBR either as a base on which to calculate lending charges where it is appropriate to vary rates during the period of the agreement (i.e. a ‘variable rate option’) or, as a base on which to calculate default interest, or both and, as such, require amendment and repapering of the printed forms.

We have consulted Dennis Rosenthal of Counsel on the most cost effective and least burdensome solution to our members.

Consideration was given as to whether the agreements allow us and the lender to substitute a rate or perform a calculation to determine the rate or whether the contract sets out any fallback rate which should be used if FHBR ceases to exist.

Conclusion

In all cases the current wording in the specified agreements is not wide enough to obviate the need for amendment to all agreements, both existing agreements and agreements entered into from 1 January 2020, including the repapering of the printed forms. Any changes must also take into account the likely discontinuation of LIBOR and as such the CCTA and Counsel have decided that it is prudent to use the ‘Bank of England Base Rate’ as a replacement rate in any amendments.

NEXT STEPS

Existing Agreements

All affected existing agreements will need to be varied by way of a modifying agreement for regulated agreements and a variation agreement for unregulated and exempt agreements. For this purpose we [CCTA] and Counsel have drawn up and will provide our members and others with a copy of the appropriate modifying/variation agreement to enable the necessary amendments to be carried out.

If members wish to enter into new agreements, which are affected by these changes and wish to use up stocks of agreements currently in use, this will also require a modifying/variation agreement to be signed simultaneously with the credit/hire agreement.

Supply of Modifying/Variation Agreements and guidance

Please respond to this notification by email to:

graham.haxton-bernard@ccta.co.uk

specifying the agreement identification reference number/s you currently use and we shall supply you, by return, with the appropriate modifying/variation agreement/s together with written guidance on their use.

If at any time you have any queries in relation to this matter or wish to speak with us, please telephone us on 07793 258874.

New Agreements from 1 January 2020

Agreements referencing FHBR should not be entered into from 1 January 2020 because they would refer to a rate that will no longer exist. We are in the process

of preparing and repapering all affected agreements for use from January 2020. This is a lengthier process and because of the holiday season may not be completed by 1 January 2020. You will be notified under separate cover as soon as the new agreement forms become available.

Graham Haxton-Bernard

Head of Legal and Regulatory Affairs Consumer Credit Trade Association (CCTA) Tel: 01274 714954
Mob: 07793 258874

CCTA – Unit G5 – Spring Mill – Main Street – Wilsden – West Yorkshire – BD15 0DX