How can we help you?

This is the first of our quarterly lender bulletins setting out key issues for lenders to be aware of.

Reminder of the Updating Duty and other changes coming in 2024 under the Economic Crime (Transparency and Enforcement) Act 2022

The Register of Overseas Entities (the Register) was established by the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA) and it requires any overseas entity that owns or buys land in the UK to take reasonable steps to identify its “registrable beneficial owners” and submit details to Companies House to be put on the Register. The rationale is to add further transparency in the UK property market and tackle global economic crime.   Whilst all lenders are now well aware of requirements for registration it is worth also remembering that ECTEA has imposed an updating duty on all registered overseas entities. Each registered overseas entity is required to provide an update statement to Companies House annually (even if there are no changes).  An update statement must be filed within a year of the anniversary of date of registration (or a year of the filing date of the last statement) subject to a 14-day grace period).  Failure to update could have severe consequences pursuant to legislation it is a criminal offence which may result in financial penalties or even potentially prosecution. Furthermore, non-compliant overseas entities will face restrictions on their ability to transact with their property - a note will be added to individual registers within the RoE to flag that an update statement has not been filed by the deadline.

For overseas entities that have are registered after 4 March 2024 there are key points for trusts and nominees to note. ECTEA now provides that trustee beneficial owners of an overseas entity will constitute "registrable beneficial owners" regardless of whether they are subject to their own disclosure requirements, which means that corporate trustees are now registrable.  ECTEA also now provides that a trustee will be a "registrable Beneficial owner" regardless of where they sit in the group so a trustee which indirectly owns the overseas entity will always be a registrable beneficial owner for the purposes of disclosure.

The definition of "registrable beneficial owners" now includes nominees so that where an overseas entity holds qualifying UK property as a nominee for another person, that other person (or if that other person is a legal entity, the beneficial owner of it) will qualify as a ‘registrable beneficial owner’ of the overseas entity and will need to be disclosed on the register.

Sustainability disclosure and labelling regime

Anti-greenwashing rule – 31 May 2024

The Financial Conduct Authority (FCA) has announced that a new anti-greenwashing rule and guidance will come into force on 31 May 2024, from which time all FCA-authorised firms will need to ensure their sustainability references are fair, clear and not misleading and proportionate to the sustainability profile of the relevant product and service.  

The FCA is introducing this rule because consumers are increasingly demanding more sustainable finance products and there is a fear that a growing number of products and services may be exaggerated and misleading.

The rule comes as part of a wider package of measures updating the FCA's ESG Handbook, including investment labels in marketing (see below) and is significant in supporting the role the financial services sector has in helping the UK economy transition to net zero. 

Labelling regime – 31 July 2024

The FCA is also introducing investment labels available for use by UK Asset managers in relation to products that meet positive sustainability criteria, from 31 July 2024. The labelling regime is designed to help consumers differentiate between different sustainability objectives. There are four labels:

(1) Sustainability Focus – The sustainability objective must be consistent with an aim to invest in assets that are environmentally and/or socially sustainable, determined using a robust, evidence-based standard that is an absolute measure of sustainability.

(2) Sustainability Improvers - The sustainability objective must be consistent with an aim to invest in assets that have the potential to improved environmental and/or social sustainability over time, determined using a robust, evidence-based standard that is an absolute measure of sustainability.

(3) Sustainability Impact - The sustainability objective must be consistent with an aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome, determined using a robust, evidence-based standard that is an absolute measure of sustainability.

(4) Sustainability Mixed Goals – This includes products with a sustainability objective that is a combination of the objectives for the other labels.

The measures highlighted above form part of the UK Sustainability Disclosure Requirements published by the FCA, which also include comprehensive disclosure and marketing guidelines. These measures will improve trust, integrity and credibility in the sustainable finance market.  

HM Land Registry piloting scheme to update lenders directly regarding mortgage applications.

HM Land Registry (HMLR) has recently announced that it has commenced a pilot scheme with 10 of the top mortgage lenders to enable direct updates to lenders on the status of their mortgage applications. Lenders will be provided with a unique "MD" reference code which will need to be included on each application made on its behalf. 
Provided the MD reference code is included, lenders will receive weekly updates containing details of each relevant application, property, and where the property is in the registration process, including completed and cancelled applications.

This is a very exciting development and if the pilot is successful, it should provide for huge efficiency and cost savings for lenders and their solicitors. It should also free-up HMLR resources, who are said to field over 20,000 enquiries by phone each month checking on the status of applications. 

ESG – The US SEC announces Climate Disclosure Rule

On 6 March 2024 the US Securities & Exchange Commission issued the Climate Disclosure Rule, setting out the climate-related information that certain public companies in the US (including banks) must disclose. 

Beginning in 2026, certain companies will be required to disclose both their Scope 1 greenhouse gas emissions (those directly generated by the company e.g. from an office boiler or from a company car) and Scope 2 GHG emissions (those indirectly generated by energy the company purchases e.g. electricity). However, companies are only required to disclose if they large enough and consider their emissions "material". Approximately 40% of 7,000 US public companies and 60% of 900 foreign private issuers registered with the SEC would be deemed large enough.

Controversially, the Rule will not require any companies to disclose their Scope 3 emissions, being emissions generated by a company’s supply chain and the consumption of its products. This is good news for lenders investing in high-emissions sectors such as oil & gas, whilst the Rule may disincentive certain lenders from financing low carbon projects, since these lenders will not benefit from disclosing low Scope 3 emissions data to the SEC. Equally, lenders inclined to fund low carbon projects cannot use the Scope 3 disclosure to gain greater transparency on their borrowers' emissions. 

Reflecting on a key legal case of 2023: Phillip v Barclays Bank (APP Fraud)

On 12 July 2023, the Supreme Court handed down its judgment in Phillip v Barclays Bank UK PLC [2023] UKSC 25.  This was significant as banks continue to battle with unprecedented numbers of fraudsters attempting to exploit their customers.  The issue in the case was whether a bank owes its customers a duty not to carry out a payment instruction if the bank has reasonable grounds for believing the customer is being defrauded. The Supreme Court decided that no such duty exists and that a bank must carry out its customers' payment instructions promptly.  In this situation, Mrs Philip had unequivocally authorised Barclays Bank to make the payment. 

The Phillip v Barclays case involved authorised push payment (APP) fraud, which occurs when fraudsters deceive a customer into authorising a payment from their bank account to an account that is controlled by the fraudster. Mrs Phillip had given clear instructions to Barclays Bank to make the payment to the fraudster, not knowing that she was being defrauded. The Bank therefore had a duty to execute the transaction.  The Supreme Court found that a bank would have a duty to execute a transaction following clear instructions from a customer to make a payment, even if the bank has reasonable grounds for believing the customer is being defrauded.

Banks can proceed with more certainty going forwards that they can make payments where a customer has given clear instructions, even in the case of APP fraud. There is however a question over whether the bank would be able to make such a payment if they had reliable information from a source such as the police that the customer is being influenced by a fraudster when providing authority to make a payment. 

The Supreme Court's decision followed the passing of the Financial Services and Markets Act 2023, which provides a framework for banks to reimburse victims of APP fraud in qualifying cases. Many victims of APP fraud in future may therefore hope to use that legislative framework, rather than trying to rely on a breach of contractual or common law duty owed by a bank.