In this case, the fronting structure was based on an undisclosed mandate to the Italian bank to grant loans to Italian customers with the use of funding made available by the foreign bank.
The Supreme Court found that, while the loans were granted to the Italian customers by the Italian bank only, this was not sufficient to shield the customers from direct action by the foreign lender. Under Italian law, an undisclosed mandate provides the principal with certain rights of action vs. the customer. Further, the Supreme Court found that the customers did participate in the intercreditor arrangements between the Italian and foreign lender, to acknowledge the existence of the undisclosed mandate, and afford the foreign bank further rights of direct action vs. the Italian customers.
The Supreme Court concluded that it is not the legal form that matters, but the substantive carrying out of a regulated activity by the non-licensed foreign bank. The Supreme Court indeed upheld the characteristics identified by the lower court to conclude that those loans were effectively granted by the foreign bank. These were:
- the foreign bank's sharing in the customers' insolvency risk
- the foreign bank’s independent assessment of the customers' credit standing
- the customers' acknowledgment of the foreign bank’s involvement and role
- the foreign bank’s ability to interfere in the day-by-day credit relationship
- the foreign bank’s exposure, in excess of that of the Italian bank
- inclusion of each loan in the Bank of Italy's Central Credit Register, only in respect of the credit exposure retained by the Italian bank (rather than the loans as whole)
While not all IBLOR and fronting bank arrangements share the same structure and characteristics, the factors listed in the IBLOR Judgment may lead to other cases in which fronting structures are successfully challenged. While it is too early to draw conclusions, those with credit exposure in an IBLOR or other fronting arrangement are reviewing their terms to evaluate the risks ensuing from this development.
Authored by Jeffrey Greenbaum and Carlo Massini