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Something borrowed, something blue? LMA tells its member banks to warn customers of any competition risks

30 June 2014

On 30 May 2014 the Loan Market Association (LMA) issued a Guidance Note to its member banks and lending institutions advising them of steps for managing the risk that multi-bank syndication arrangements might give rise to an infringement of competition law.

Most significantly, these include forewarning customers.

Borrowers therefore need to seek advice before consenting to any disclosed arrangements and potentially signing up to syndication terms that are vulnerable to legal challenge under competition law. 

It would be potentially very damaging to agree a loan which is later found to have infringed the law. By contrast, raising concerns early may head off the risk and preserve your right to ultimately seek a remedy, in the event a facility is challenged.

What are the Competition law risks with syndication?

The syndicated loan sector sees involved cooperation between various banks and other lending institutions in order to agree and service syndicated lending facilities.

The multi-bank dealings these entail are no less vulnerable to competition law scrutiny than any other form of agreement between actual or potential competitors on a relevant market.

As the LMA has highlighted in the Guidance Note, any inference that arrangements are designed to or may have the effect of:

  • fixing prices (eg discounts, margins, credit terms etc)
  • sharing or dividing up markets or borrowing customers
  • fixing or limiting capacity in the market (eg the amount of capital made available)
  • rigging bids (ie agreeing to manipulate any competitive tender process)
  • exchanging non-public competitively sensitive information.

could result in a finding of infringement if the arrangement is reported to the Competition and Markets Authority (CMA) by a disgruntled borrower and/or the CMA decides to investigate a particular arrangement (or, indeed, the entire market) on its own initiative.

Competition law infringements can lead to fines of up to 10% of group turnover, the invalidity of loan agreements and civil claims. 

It can also result in the commission of the criminal cartel offence provided for under the Enterprise Act 2002, leading to further fines, ramifications and even imprisonment of individual directors and officers.

How does the LMA suggest this risk be managed?

The LMA identifies in particular the reforms introduced to the cartel offence pursuant to the Enterprise and Regulatory Reform Act 2013. 

Most notably, this removed the requirement for any prosecutor to prove a person accused of participating in a cartel acted dishonestly, making it much easier to bring prosecutions before the criminal courts. 

However, the counterbalance to this is that publication of arrangements, so as to notify customers, constitutes an exception to the offence.  In addition, specific defences are now provided for. 

Importantly, these include two defences (not intending to conceal the arrangements from customers and not intending to conceal them from the CMA), which means that if banks communicate any intended arrangements they consider might risk a breach of competition law, and the nature of that risk, then they greatly increase their prospects of being effectively protected. 

What does all this mean for borrowers?

There is also a defence under the reformed cartel offence for having taken reasonable steps to communicate the arrangements to legal advisers for the purposes of taking professional advice before implementing them. 

The LMA strongly recommends its members (ie the banks) seek legal advice on any competition risks with proposed syndication arrangements. 

However, this advice should also apply to borrowers.

Failure to address the risk level of any arrangement, particularly anything highlighted to it by the lead arranger, could result in all-important finance being halted and your business becoming embroiled in costly and damaging investigations. 

You should especially seek legal advice in relation to anything which might suggest:

  • inappropriate contact between representatives of different banks during the bidding phase for a syndicated loan
  • any party receiving and dealing with unsolicited sensitive information
  • interaction between member banks regarding the setting and variation of facility terms
  • conduct in relation to refinancing or distressed transactions.

Banks are advised by the LMA to seek and keep a record of proposed contacts with competitors and ensure the bank operates within the terms agreed.

It is therefore imperative that a proper risk assessment is conducted before agreeing to any such terms, so that any risk is adequately addressed in advance. 

Specialist advice on the application of competition law to syndication arrangements is therefore extremely valuable.

This article was written by Rory Ashmore.

For more information please contact Rory on +44 (0)20 7427 1031 or rory.ashmore@crsblaw.com