The Banking Act 2009

Andrew McKnight, Salans' leading Banking and Finance

Consultant, takes an in-depth look at the implications of the

Banking Act 2009

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...