Legal company and business advisor TLT investigates which hot topics -acquirers should consider in 2025 as part of their due diligence.
Consumer
The introduction of consumer obligation by the FCA in 2021 introduced a formal duty of care between financial service providers and their customers. Companies are now obliged to ensure that the needs of their customers are central to their company and are considered in every phase.
Consumer obligation is based on results and companies must be able to prove that their customers actually have good experiences. This is a continuous obligation and requires companies to constantly assess and improve their products and procedures.
From July 31, 2024, the consumer obligation was further expanded to closed books. Consumer obligation has a direct influence on the purchasing decisions of the portfolio, because the buyer must ensure that his due diligence is sufficiently covers compliance with consumer obligation for both open and closed books. Additional challenges will be where the legal and useful title of a portfolio is kept separately and when deciding which party is responsible for guaranteeing compliance.
Consumer obligation remains crucial in transactions of loan portfolios, because it requires acquirers to assess how the duty is and will be complied with and to have a plan for non-compliant books.
The inclusion of unfair conditions in contracts or not delivering real value or effective customer support can lead to companies breaking their obligations. Due to regular assessments, audit and consumer feedback, the FCA tries to ensure that companies meet consumer obligation. Non-conforming companies can risk financial fines, a ban on offering certain products or legal proceedings in more serious infringements.
Building Safety Act 2022
The Building Safety Act 2022 has made significant changes to the safety regulations. Although the law aims to achieve higher safety standards for building safety, it presents a new series of challenges for lenders, whether they are the construction, the purchase of completed buildings or the purchase of individual units in it.
Credit providers can be referred to as ’employed persons’ under the law, therefore responsible for guaranteeing that financing and resources are allocated to compliance with the requirements for the safety of construction. The law has also introduced additional safety requirements for buildings with a higher risk (buildings with at least two residential units and that are at least 18 meters high or with at least seven floors), including a safety report.
Lenders (and ultimately portfolio buyers) must analyze the reports to evaluate the risks involved.
Dragonfly
FCA concerns about the reliability of the London Interbank in 2017, the rate (Libor) offered, since the benchmark in financial products led to the swing since September 2024. It has been replaced by alternative risk-free rates (RFRs) such as the Sterling Overnight Index average (Sonia) or by the Bank of England Base Rate (BBR). Where loans previously referred to Libor, the transition in lenders and serviceers is obliged to update systems and documents to adjust the application of alternative rates.
Unclear Fallback provisions in contracts have added further complexities, especially if the language is insufficient and disputes can arise between parties with regard to applicable rates or adjustments. Recent cases have shown that the courts are not willing to accept that in itself the termination of Libor can be used as the basis for parties to try to avoid their obligations under agreements that refer to Libor.
Buyers of loan portfolios must evaluate whether loans require a transition, whether they include robust fallback provisions and how sellers have treated the transition from Libor before the sale.
The above issues emphasize the importance of implementing thorough due diligence and legal advice on your legal obligations. All problems that are revealed during your due diligence must be processed in the price of your bid, as a result of the potential costs that can be incurred when solving those problems. They may also have to be tackled when drawing up the relevant sales agreement.
The article was written by experts in the structured finance team of National Law Firm TLT: Tom Ward, partner; Anum Sajjad, employee; Lorna McWilliams, senior employee.