For decades, the Finance House Base Rate (FHBR) has been used by lenders and finance houses seeking a reliable variable rate of interest upon which to set their own interest rates. It is scheduled to be discontinued at the end of the year, so what should lenders be doing? Gateley’s Edmund Locock writes.
It is not glamorous, but at the end of each month the Finance & Leasing Association (FLA) calculates FHBR by reference to the cost of three-month money in sterling Libor (the London Interbank Offered Rate) over the previous eight weeks, with the resulting figure then rounded up by the next half point.
Updated each month, FHBR has historically been able to react to economic changes or uncertainty faster than, say, the Bank of England base rate. Since 2010 the base rate has been hovering around the 1% mark – with some downward fluctuation after the UK’s referendum to leave the EU, of which we shall say no further – and has been a reliable metric for those seeking an industry-specific interest base rate.
That is, until now. The FLA recently announced that FHBR will be discontinued from 31 December 2019. In its Briefing Paper, released on 29 March 2019, the FLA attributes the discontinuance to its decision not to become an authorised benchmark administrator under the EU’s Benchmark Regulations.
While this news does not come entirely out of the blue – the Benchmark Regulations have applied since January 2018, and have been in the pipeline for some time – the demise of FHBR will certainly have a significant impact on some lenders and finance houses in the short term.
FHBR is currently used as a key metric in any number of leasing and finance agreements, and serves as a useful variable base rate from which lenders can set their own interest rates – particularly in relation to interest charged on late or defaulted payments.
From 1 January 2020, all agreements, leases, loans or hire-purchase agreements which calculate their interest rates by reference to FHBR will no longer be able do so. Indeed, unless steps are taken to address the issue, from 1 January 2020 the FHBR rate will effectively be 0% for all agreements that still rely on it.
It is worth noting that the FLA will continue to calculate an adjustment to three-month sterling Libor, and will publish this on a monthly basis. While this calculation is identical to FHBR, it is not the Finance House Base Rate, and the FLA warns that it will cease to publish its calculation should doing so ever bring it within the scope of the Benchmark Regulations.
What Can You Do?
- New agreements: If FHBR is used in standard documentation, it will need to be changed to either a fixed interest rate or to a variable interest rate, calculated using an alternative base rate such as that of the Bank of England. This change will need to be incorporated as soon as possible, and will almost certainly require amendments to many lenders’ standard-form documentation, particularly in relation to new agreements continuing beyond December 2019.
- Unilateral variation: It may be that existing agreements permit limited unilateral variation of interest rates. If so, it will be important that notice of any change be given to customers promptly. There are fewer than nine months until FHBR ceases to exist, which leaves plenty of time to give notice. Depending upon the size of a lender’s customer base, however, giving notice to thousands, or tens of thousands, of customers will be a painstaking task. If agreements do not currently allow for unilateral variation on some level, it may be worth trying to incorporate provisions allowing for some limited unilateral changes to interest rates going forward.
- Agreed variation: More commonly, finance documents do not permit unilateral variation, and agreement will need to be sought from customers before changes can be made. This may be tough, as there is little incentive for one-off customers to agree to a change that will effectively increase (from a base rate of zero if FHBR continues to apply) the interest charges that they will incur. Some customers will refuse, but all will need to be contacted as soon as possible so variations can be agreed in writing where possible.
The discontinuance of the FLA’s FHBR will create work for lenders and finance houses alike. Documentation incorporating interest rates calculated by reference to FHBR will need to be amended, and new interest rates agreed with or notified to customers before the new year.
Although a lot of work, this could be a valuable opportunity for lenders to update and future-proof their standard-form documentation by incorporating provisions allowing for some minor unilateral variations when necessary.
by Edmund Locock