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EU Draft Regulation on the third party effects of assignment of claims is published : effects on factoring, collateralisation and securitisation in the EU

March 14th 2018

The EC Commission's proposal for a Regulation of the European Parliament and of the Council  on the law applicable to the third-party effects of assignments of claims has been published. This is of interest to Financial institutions involved in factoring, collateralisation and securitisation both prior to and post Brexit

It is part of the general Commission mandate to simplify private international law and its application within the EU.

This Regulation is part of the proposed Capital Markets Union (CMU), which is to be in place by 2019.

There is no doubt that it is important to capital markets adjacent to the CMU, such as the UK and the Crown Dependencies. These will be affected by this indirectly, as there will be a significant shift in emphasis following this Regulation.  Post Brexit it will affect all forms of factoring, collateralisation, securitisation or other forms of self-financing and leverage in the context of the comparative complexity of enforcement by an assignee coupled wih the withdrawal of the UK from the Brussels I enforcement Regulation.

To be specific, securitisation tends to take place in relation to consumer credit such as automobile and domestic consumer items. Given  the ERU's eports t he UNioetd Kingomd, it is likely that a significant amount of consumer credit will not only be granted by EU groups' own financial subsidiaries, but also through specific securitisation vehicles and contracts giving the ability to offload tranches into the local consumer's financial market. Any change in the law undergirding  these transfer transactions is likely to increase costs as much as reduce them.

The specific objective of this proposal is to help to increase cross-border transactions in claims by providing legal certainty through the adoption of uniform conflict of laws rules at Union level.

To quote the Commission: "The specific objective of this proposal is to help to increase cross-border transactions in claims by providing legal certainty through the adoption of uniform conflict of laws rules at Union level."...

"....in order to increase cross-border transactions in claims and securities, clarity and predictability as to which country's law applies to determine who owns a claim or a security after a cross-border transaction are essential. Legal uncertainty as to which national law determines who owns an asset further to a cross-border transaction means that, depending on which Member State's courts or authorities assess a dispute concerning the ownership of a claim or a security, the cross-border transaction may or may not confer the expected legal title. In case of insolvency, when the questions of ownership and enforceability of rights resulting from cross-border transactions are put under judicial scrutiny, legal risks stemming from legal uncertainty may result in unexpected losses.
The uniform rules laid down in this proposal will designate which national law should determine the ownership of a claim after it has been assigned on a cross-border basis and, thereby, eliminate legal risk and potential systemic consequences. The introduction of legal certainty will promote cross-border investment, access to cheaper credit and market integration.
The assignment of claims is a mechanism used by companies to obtain liquidity and have access to credit, as in factoring and collateralisation, and by banks and companies to optimise the use of their capital, as in securitisation."

This is of interest to any financial institution involved in factoring, collateralisation and securitisation finance seeking to have access to the CMU, or financing credit out of the CMU into the United Kingdom, and also to cross-border insolvency practitioners.

There may be post-Brexit possibilities for linkage between Ireland, and the Crown Dependencies in this area.

However,  the Dutch jurisdictional domination of the insolvency market under the current Regulation, and the exclusion of creditors claims against Duitch companies in liquidation will be a force to be reckoned with.

The link to the proposal can be found  here.

Please contact me with any queries.