The Banking Act 2009
Andrew McKnight, Salans' leading Banking and Finance
Consultant, takes an in-depth look at the implications of the
Introduction
Events over the last year or so have demonstrated the need for
governmental, regulatory and central bank intervention, sometimes
of a drastic nature, in the affairs of banks which find themselves
in financial difficulties, usually because of a lack of liquidity
but also through a deficiency in capital. Up until recently, the
matter had been dealt with in the UK in an ad hoc fashion,
sometimes using supervisory powers under the Financial Services and
Markets Act 2000 and its legislative predecessors. Generally
speaking, however, there had been no legislation in the UK peculiar
to the situation of banks in financial difficulties; thus the
insolvency of a bank fell within the general rules that relate to
insolvency, rather than under any legislation specifically tailored
for banks. For instance, in the administration of Lehman Bros
International (Europe) and its associated companies, the rights of
creditors and other counterparties of the insolvent companies
(including those asserting proprietary claims) have been governed
by the usual procedures and so subjected to the moratorium that
applies in an administration against asserting and enforcing
claims1,.
As a temporary measure, following upon the failure of Northern
Rock PLC, the Banking (Special Provisions) Act 2008 came into
force, which permitted the UK authorities to take action so that
the share capital and the business, assets and liabilities of
failed authorised deposit takers could be transferred, in whole or
in part, to the Bank of England, the Treasury or a commercial
entity. The Act specifically provided that the powers under it
would cease to be exercisable on 21st February, 2009 (S. 2(8)), but
without prejudice to action taken beforehand (S. 2(9)). It was
pursuant to the Act that Bradford & Bingley PLC was
nationalised and some of its engagements passed over to Abbey
National PLC on 29th September, 20082. The Act was also
used in relation to Northern Rock PLC3 and in two later
instances, relating to Heritable Bank PLC4 and Kaupthing
Singer & Friedlander Ltd5.
After consultation during 2008, the Government sought to deal
with matters on a more permanent footing. It introduced the Banking
Bill before Parliament in October, 2008. The Bill provided for the
application of a "Special Resolution Regime" in relation
to banks in difficulties. The Bill also contained provisions
dealing with other topics, such as funding of the Financial
Services Compensation Scheme, inter-bank payment schemes and
financial stability within the UK, as well as various miscellaneous
matters. The Bill was given initial consideration by Parliament
before its session came to an end in November, 2008. It was then
re-introduced in the new session of Parliament and received the
Royal Assent as an Act of Parliament on 12th February, 2009 and
thereby became the Banking Act 2009. The parts of the Act dealing
with the Special Resolution Regime came into force shortly
thereafter, on 17th and 21st February, 20096. Some of
the other parts of the Act have yet to be brought into force.
In a number of places, the Act provides for secondary
legislation to be made to amplify upon matters referred to in it.
It also provides, in Ss 5, 6, 12 and 13 for a Code of Practice (the
"Code") to be issued by the Treasury, relating to the use
of the Special Resolution Regime. The Code was issued and laid
before Parliament on 23rd February, 20097.
S. 10 of the Act provides for the establishment of a
"Banking Liaison Panel" to advise on matters relating to
the Special Resolution Regime, including the making of secondary
legislation pertaining to it, the Code and certain of the powers of
the Treasury under S. 75 to amend the law (but not, as the Code
notes at Para. 6.23, to provide advice on the exercise of a power
under S. 75 which "is carried out in connection with or to
facilitate a [proposed or actual] particular use of a stabilisation
power"). The Panel includes legal experts and representatives
of the banks, the Financial Services Compensation Scheme, the
Financial Services Authority, the Bank of England and the Treasury.
Para. 2.11 of the Code states that the Treasury expects the Panel
to take a particular interest in providing advice relating to
partial property transfers (which are mentioned further below).
A note of caution
The Special Resolution Regime has as its principal objectives
the protection of the interests of retail depositors, the
continuance of the health of the financial system and the
maintenance of public confidence in the banking system, whilst also
seeking to protect public funds, which will no doubt be seen as
laudable objectives. It also bows it head towards those property
rights that are protected under the Human Rights Act 1998.
There are potential disadvantages, however, in this type of
legislation, as there is the possibility that the objectives which
have just been mentioned might be put forward and implemented at
the expense of some of a bank's non-retail creditors and
counterparties. This is because a major plank in the Special
Resolution Regime is to favour retail depositors over other
creditors of a bank. There is also an assumption that creditors and
counter-parties whose claims and positions have been transferred
would consider it a benefit to find that, without having any say in
the matter, they had ended up with a completely different party on
the other side of their transaction to the entity with which they
had originally contracted. There might be various reasons why they
would not wish to have dealings with the transferee or be cautious
in doing so. For instance, there might be regulatory restrictions
which prevent them from being in that position or there might be
other difficulties of a commercial, legal or regulatory nature that
may arise in consequence of the transfer. These types of
disadvantages may deter persons from dealing with banks in the
first place or, at least, have the effect of increasing capital
requirements for transactions that might be affected.
The Banking Act 2009 does address one other problem which became
evident in the consultation process whilst the legislation was
being prepared. This problem concerned the situation where there
was only a partial transfer of a failing bank's business and
engagements to another commercial entity or a bridge bank owned by
the Bank of England. Such a partial transfer might have the
consequence that some of the persons who may have dealt with the
bank could find that their outstanding claims and positions were
not transferred, so that they would be left with claims against the
discredited rump of the bank that remained and was not transferred,
whilst the more fortunate creditors and counterparties of the bank
would find that their positions have been included in the transfer.
As noted below, provision is made in the legislation to address
this difficulty.
It is also worth noting that the Act provides that events of
default type clauses in documentation otherwise binding upon a bank
might be overridden as part of the transfer of the bank's
engagements or securities (or in consequence of such a transfer,
even if not the direct subject thereof), so that its creditors and
counterparties could not take action to protect themselves based
upon the occurrence of the transfer, such as by accelerating the
bank's obligations, relying upon conditions precedent to refuse
to perform their own contractual obligations or closing out
positions. Licensors may find that they cannot terminate their
grants. The Act also contemplates that contractual clauses, such as
negative pledges and anti-assignment clauses (which would prevent
or restrict transfers of assets from taking place), may be
overridden, notwithstanding the reasons which justified the clauses
when they were originally agreed. In addition, there are some
disturbing provisions as to overriding existing beneficial
interests in the course of a transfer.
It follows that law firms will need to consider the possible
effect of the Act when issuing legal opinions if one of the parties
to a transaction might become subject to the operation of the
Special Resolution Regime.
The Special Resolution Regime
As already noted, the Banking Act 2009 provides for the
introduction of a "Special Resolution Regime". The regime
consists of three "Stabilisation Options", which are
provided for in Part 1 of the Act, as well as a "Bank
Insolvency Procedure" (ie. liquidation) in Part 2 of the Act
and a "Bank Administration Procedure" in Part 3 of the
Act. The latter will be available to assist the Bank of England in
the pursuance of two of the Stabilisation Options. The Code (Paras
5.17 to 5.25) discusses the manner in which the choice between the
options will be exercised.
The regime will apply to UK banks (strictly speaking, authorised
deposit takers) that find themselves in financial
difficulties8, although it is also possible that some
banks will be taken out of the scope of the Act (see S. 2). The Act
extends the ambit of the Stabilisation Options so that they will
apply, in addition, to building societies (Ss 85 to 88). The
options may also be applied to credit unions by secondary
legislation (S. 89). With respect to building societies, the Bank
Insolvency Procedure and the Bank Administration Procedure (called,
respectively, "building society insolvency" and
"building society special administration") have been
extended to apply to building societies (see the Building Societies
(Insolvency and Special Administration) Order 20099,
implemented pursuant to Ss 130 and 158 of the Act). The two
procedures may also be extended to cover credit unions. For the
sake of simplicity, what follows will concentrate on the
application of the regime to banks.
It should also be noted that the Act contemplates that special
provisions might be...
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