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Practice profile: Regulatory changes signal air of uncertainty for banking & finance lawyers

Practice profile: Regulatory changes signal air of uncertainty for banking & finance lawyers

Banking and finance lawyers are facing a number of upcoming regulatory changes which have significant implications for both themselves and their clients. Briana Everett looks at the…

Banking and finance lawyers are facing a number of upcoming regulatory changes which have significant implications for both themselves and their clients. Briana Everett looks at the current climate of financial reform.

AIR OF UNCERTAINTY: There are several challenges on the horizon for banking & finance lawyers
Despite a strong and expanding workflow following the global financial crisis, lawyers working within the banking and finance space are now facing a significant period of regulatory uncertainty thanks to upcoming domestic and international reforms.

According to Baker & McKenzie partner Bryan Paisley, the global financial crisis has resulted in an increase in widespread financial regulation at a national level as well as a vast amount of legislation being churned out globally.

"We've been working on an ongoing basis with our clients to work out what the everyday practical implications of those changes are," Paisley says.

And while the current plans for reform are creating an air of uncertainty amongst both the Australian and global banking and finance sectors, the ongoing lack of clarity on the domestic front with respect to the Federal Government's proposed carbon pricing mechanism is adding to reservations within the market.

"It's something that has to be factored into every deal being done in the area," Paisley says.

"If there's one thing business dislikes that's uncertainty. Anybody looking at doing transactions in the Australian market is going to have to take the [proposed carbon price mechanism] into account. But equally, you only have to look at the amount of inward M&A that's going on to see that yes, people have taken it into account, but it's certainly not stopping deals."

"There is now a renewed confidence in the economy. People are seeing that the asset prices are reasonably inexpensive and the banks are starting to lend again, which they were reluctant to do in 2009 and 2010."

Paul Jenkins, Partner, Blake Dawson

Similarly, Freehills partner Andrew Booth notes that the flow of work relating to general financing transactions has not been impeded by the uncertainty surrounding Australia's carbon pricing scheme.

"The uncertainty associated with the carbon tax is not suppressing the deal flow in general financing transactions," says Booth. "I think we've had a really good deal flow and there's been some pretty good bank appetite post-GFC."

However, within the project finance space, Freehills partner Brendan Quinn has observed the impediments to investment which have eventuated as a result of the Federal Government's lack of direction concerning the proposed carbon pricing scheme.

"The power sector has been dominated by a lack of certainty. That lack of certainty as to whether we will have a carbon tax - and if so what form it will take - is retarding both new investment in the sector as well as presenting real challenges for the refinancing of existing assets, particularly coal-fired assets," Quinn says. "There are certainly some deals being done in the renewable sector. There's been a few - we've acted on the last two or three wind farms done in the market, but there's probably another couple of dozen in the pipeline so there's a large number there waiting for REC (renewable energy certificate) prices to improve."

Aside from the uncertainty within the power sector, within the general corporate finance space there has been a significant level of activity, according to Booth, with the market being dominated by a combination of new deals and re-financings in 2011.

"One area where there has been a lot of activity in terms of new deals has been demergers. There's two in the marketplace at the moment - the Tabcorp demerger and the Fosters demerger," Booth says, whose team acted on the bank group for both.

"We've also seen a range of re-financings and new syndicated re-financings ... We've seen a return of underwritten syndicated deals."

"One area where there has been a lot of activity in terms of new deals has been demergers."

Andrew Booth, Partner, Freehills

According to Blake Dawson partner Paul Jenkins, 2011 has seen a revival in new lending activity with approximately $80 billion in loans in need of refinancing.

"That's all coming through the market and we're seeing a resurgence in corporate finance activity as well as leveraged finance - leveraged finance transactions that we haven't been between 2007 and 2009 when there was a lot of leveraged finance," he says.

"There is now a renewed confidence in the economy. People are seeing that the asset prices are reasonably inexpensive and the banks are starting to lend again, which they were reluctant to do in 2009 and 2010."

On the domestic front

In October this year, Australia's Personal Property Securities Act 2009 (PPSA) is set to finally commence after its May 2011 start-date was postponed as a result of industry requests for more time to prepare - a request formally endorsed by the Council of Australian Governments' Business Regulation and Competition Working Group in February 2011.

Enacted in 2009 to replace a complex system of approximately 70 existing laws and to create a single register for security interests, the PPSA's introduction has sent banking and finance lawyers scrambling to properly prepare themselves, and their clients, for what will be a fundamental reform impacting a number of businesses across many different industries.

"The PPSA is changing how security interests are formed and how they are enforced, but it's really changing all the security aspects of our practice," Jenkins explains.

"Everybody is still trying to work out the practical implications of the PPSA"

Bryan Paisley, Partner, Baker & McKenzie

"It's a significant change for us and a significant change for our clients. We're currently acting for 11 financial institutions so it's a big area for us in terms of assessing how those changes will impact on them, changing their documentation, changing their procedures - all in anticipation of the October start-date."

While New Zealand and Canada enacted similar legislation years ago, Jenkins says the Australian reforms are quite complex despite the intended outcome of streamlining existing regulations.

"I wouldn't necessarily say it's a good change but it's quite a complex change to our existing law," he says. "It was intended to streamline and make the process of taking security more consistent and easier, but in effect, it is actually quite a complicated change and will take a lot of time to be bedded down."

While the PPSA will undoubtedly have a significant impact on banks, the new requirements for registration of security interests will also affect the corporate sector, particularly with respect to retention of title arrangements for suppliers, joint venture agreements and equipment hire companies.

"Everybody is still trying to work out the practical implications of the PPSA and how those are going to play out," says Paisley, who has been working extensively with his logistics clients in the equipment rental sector to decipher the implications.

"The market is developing a consensus as to how it's addressed upfront but the banks are well on top of it. It's actually the people who don't think it's going to affect them that it's going to have the biggest implications for, but banks and banking and finance lawyers are all over it like a rash."

International developments

Adding to the significant overhaul of the Australian regulatory framework will be the global financial reforms set to take place with respect to the introduction of new capital and liquidity standards for banks.

Introduced as a protection measure in the wake of the liquidity shocks that took place during the global financial crisis, in December 2010 the Basel Committee on Banking Supervision announced its plans to implement new bank capital and liquidity standards as part of the global financial reform agenda presented to the Seoul G20 Leaders Summit in November last year.

"The agreements reached today are a fundamental strengthening of global capital standards," said the president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision (the oversight body of the Basel Committee), Jean-Claude Tichet on 12 September 2010.

"Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery."

"That lack of certainty as to whether we will have a carbon tax - and if so what form it will take - is retarding both new investment in the sector"

Brendan Quinn, Partner, Freehills

The new measures are aimed at improving the global banking sector's ability to absorb shocks arising from financial and economic stress - no matter what the source - with their introduction causing a substantial degree of concern amongst different countries as to what the true impact will be.

With the implementation phase of the new capital and liquidity requirements set to begin from January 2013, members of the Australian banking and finance industry now face a significant period of preparation as they attempt to meet the new requirements - a task claimed to be particularly difficult for Australia given its relatively low levels of government debt.

"The main issue that the regulators are looking into is government securities. That has proven quite challenging for Australian banks due to the relatively low level of federal, and to some degree state, government debt," says Paisley.

"There are diverging views as to the implications the Basel III requirements may have for banking lending and overall economic growth, but Australian banks are widely perceived to be very well capitalised so there's an overall consensus that they will not need to do any additional capital raising under Basel III. However, Basel III is still a long way off. It's still very much at the macro level. The bankers know it's coming, but they don't know yet what the impact is going to be."

According to Paisley, the liquidity requirements introduced under Basel III represent a somewhat unique development, indicative of how significant the issue of liquidity has become since the global financial crisis and the collapse of Lehman Brothers and the Icelandic banks.

"Liquidity is a huge issue in times of stress and there really hasn't been any global regulation of that kind. What will be interesting is the types of potentially unintended consequences that those sorts of global capital regulations may have."

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Practice profile: Regulatory changes signal air of uncertainty for banking & finance lawyers
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