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Goodbye to Finance House Base Rate

The New Year saw the demise of the FLA’s well-established Finance House Base Rate (“FHBR”) essentially to avoid the regulatory consequences of some complex EU Benchmark Regulations.

However, in practice the FLA will continue to publish a figure which will effectively replace FHBR. In the words of the FLA statement explaining the change:

“With effect from 1 January 2020, the FLA proposes to calculate an adjustment to 3 month Sterling LIBOR and publish this on a monthly basis as a service to members and others who wish to reference LIBOR with this adjustment in their contracts but do not wish to perform the calculation themselves. This adjustment will be calculated by averaging 3 month Sterling LIBOR over the previous eight weeks, with the resulting figure then rounded up to the next half point. The calculation of the adjustment will be entirely arithmetical and will contain no discretionary element. It will be calculated and published by the FLA on the last Friday of each month”.

In other words exactly the same figure will be produced but by a method which the FLA believes will avoid any possible regulatory consequences.

It is also worth bearing in mind that LIBOR is expected to disappear at the end of 2021, so what impact do these developments have on financiers’ contractual documentation?

New Agreements

New Agreements should certainly avoid references to FHBR, and where appropriate reference should be made either to the monthly calculation by the FLA referred to above, or if preferable reference to a margin over say Bank of England base rate. It is worth observing that for many decades financiers’ documents which have chosen to refer to base rate have normally referred to that of the financiers’ own main bankers, but in these days of low interest rates there would seem to be little harm in simply referring to Bank of England base rate going forward.

Existing Agreements

Firstly, existing Agreements should be checked to see to what extent there is a power of unilateral variation in relation to current references to FHBR: if such a power exists then it should be exercised with careful reference to any required notice period, with a covering explanation of the demise of FHBR and it’s replacement presumably by a method of calculation no less advantageous to the customer.

Secondly, if there is no power of unilateral variation, then it is worth remembering that Agreements often contain clauses intended to deal with “future proofing” such as the following:

“A reference to this guarantee and indemnity (or any specified provision of it) or any other document shall be construed as a reference to this guarantee and indemnity, that provision or that document as in force for the time being and as amended, varied, supplemented or novated from time to time.”

In our view a court would construe the rate which after 1 January 2020 will be published by the FLA as a mathematical adjustment to 3 month Sterling LIBOR (and which of course will be identical to the current calculation of FHBR) as the appropriate amendment for the references to FHBR in documents with provisions such as this.

Thirdly, even where there is no unilateral power of variation and no attempt to “future proof” the definitions, it is certainly arguable that on general principles of construction of contracts the courts would also be likely to apply the FLA’s new mathematical adjustment to 3 month Sterling LIBOR on the basis that this reflects the intention of the parties: in other words if the parties had been asked what rate would apply if FHBR was ever abolished, the answer would have been the nearest replacement.

Finally, as for the expected demise of LIBOR, whilst this does not require immediate action is worth considering building in either a unilateral power of variation or an attempt at “future proofing” in the definitions in all new Agreements going forward.

 

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