Stop the clocks, cut off the telephone, the Finance House Base Rate (FHBR) will soon be dead.
Terrible news, you say, but what on earth is FHBR?
Obituary – A History of Interest
Each month, the Finance & Leasing Association (FLA) calculates FHBR by reference to the cost of three-month money in Sterling LIBOR over the previous eight weeks, and rounds the figure up to the next half point. Though not as well-known as LIBOR (the London Interbank Offered Rate), or the Bank of England Base Rate, FHBR has been used by lenders and finance houses for decades as a foundation upon which to set their own interest rates.
FHBR is very widely used in the finance and leasing industry and, being published monthly, has historically been able to read and react to economic changes and uncertainty sooner than other base rates such as the Bank of England’s. FHBR is a reliable and popular metric for those seeking an industry-specific base rate.
Or, rather, it was.
On 29 March 2019, the FLA announced that it will cease to publish FHBR on 31 December 2019. The announcement was attributed to the FLA’s decision not to become an authorised benchmark administrator under the European Union’s Benchmark Regulations.
This won’t come as a surprise to everyone; the Benchmark Regulations have applied since January 2018, and the FLA had been weighing up whether to apply for authorised benchmark status for some time. However, the death of FHBR will undoubtedly have a significant short term impact on many lenders, finance houses and their customers.
Short Term Impact
Interest rates play a key role in most, if not all, finance agreements. Interest rates determine, for example, how much lenders and finance houses can charge their customers in late and default fees.
FHBR is perhaps the most widely-used variable interest base rate in the finance and leasing sector. From 1 January 2020, however, all existing agreements which calculate interest by reference to FHBR will no longer be able to do so. Unless changed, the base rate in those agreements will effectively be 0%.
Where funders use FHBR in their standard documentation it will need to be changed to either a fixed rate of interest or to an alternative base-rate calculation. These changes will need to be incorporated as soon as possible, which is no small task, but the alteration is necessary to limit the number of new agreements incorporating FHBR which continue into 2020.
For current agreements the situation is a little trickier. It may be the case that existing agreements allow funders to unilaterally vary interest rates by giving notice to their customers. In that case, funders will need to ensure that they strictly comply with any notice requirements in their terms and conditions and do so as soon as possible. There are, after all, only nine months until FHBR ceases to exist.
More commonly, agreements will not permit unilateral variation and funders will need to seek their customers’ consent to any changes. Obtaining this consent could be tough – what incentive is there for one-off customers to agree to increase their liability? – but it should be done as soon as possible, and any agreements should be documented where possible.
FHBR isn’t gone yet, but its disappearance is already creating work for finance houses and lenders alike. Standard interest clauses need to be re-written and, where necessary, consent sought from existing customers.
Frustrating? Certainly. Perhaps, though, a valuable opportunity for funders to update and future-proof their standard-form documentation by allowing for minor unilateral variations where necessary. Who knows: the Bank of England Base Rate could be next…
This blog post was written by Edmund Locock.
For further information please contact:
Edmund Locock, solicitor, Financial Disputes and Regulation Team
T: 0121 212 7842