Barclays Bank Plc
| Jurisdiction | England & Wales |
| Judge | Sir Geoffrey Vos |
| Judgment Date | 09 March 2018 |
| Neutral Citation | [2018] EWHC 472 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: FS-2017-000002 |
| Date | 09 March 2018 |
[2018] EWHC 472 (Ch)
Sir Geoffrey Vos, Chancellor of the High Court
Case No: FS-2017-000002
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
FINANCIAL SERVICES AND REGULATORY LIST
The Rolls Building
The Royal Courts of Justice
7 Rolls Building, Fetter Lane,
London EC4A 1NL
Mr Martin Moore QC and Mr Ben Shaw (instructed by Slaughter and May) appeared for the Applicants
Mr Rory Phillips QC and Mr Robert Purves (instructed by the PRA and the FCA) appeared for the Prudential Regulation Authority and the Financial Conduct Authority
Mr Javan Herberg QC and Mr Simon Pritchard (instructed by Grant Thornton) appeared for Mr Byers, the skilled person
Mr Michael Tennet QC and Mr Joseph Steadman (instructed by Linklaters) for Barclays Pension Fund Trustee Limited
Mr Robert Brown, a person who had made a statement of representations, appeared in person
Hearing dates: 27 th and 28 th February 2018
Judgment Approved
Sir Geoffrey Vos, Chancellor of the High Court:
Introduction
Barclays Bank plc (“BBPLC”) and Woolwich Plan Managers Limited (“WPML”) (together the “Applicants”) are members of the Barclays banking group (the “Group”). They are the first of the 5 major UK banks to seek final sanction of their proposed ring-fencing transfer scheme (the “Scheme”) under Part VII of the Financial Services and Markets Act 2000 (“ FSMA”). There have been several judgments in the lead up to this sanction hearing, but it is now necessary for the court to consider as a matter of its discretion whether to sanction the Scheme under section 111 of FSMA.
I have had the benefit of detailed written and oral submissions on behalf of the Applicants themselves, Mr Mark Byers of Grant Thornton (the “Skilled Person” or “Mr Byers”), the skilled person appointed to provide the court with his report (the “Scheme Report”), the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) (together the “Regulators”), and from Barclays Pension Fund Trustees Limited (the “Trustee”), the trustee of the Barclays Bank UK Retirement Fund (“UKRF”). There have also been some 100 statements of representations received, of which 97 related to the UKRF (the “pensions representations”).
Since this is the first application for the court's sanction of a ring-fencing transfer scheme, I shall need in due course to consider the legal principles upon which the court should act in exercising its discretion to do so. I shall also need to consider the answers to the twofold “statutory question” which the Skilled Person is required to answer under section 109A(4) of FSMA namely (1) whether persons other than the transferor concerned are likely to be adversely affected by the scheme, and (2) if so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve whichever of the purposes mentioned in section 106B(3) of FSMA is relevant.
BBPLC is a subsidiary of Barclays plc (“BPLC”), the ultimate parent of the Group. BBPLC is at the moment the Group's main trading entity, undertaking retail and investment banking activities in the UK and internationally. WPML, a subsidiary of BBPLC, acts as ISA (individual savings account) plan manager for funds offered as investments to BBPLC's private banking customers. In the broadest of outline, the Scheme proposed will transfer the bulk of BBPLC's UK retail and business banking business to a new ring-fenced entity, Barclays Bank UK PLC (“BBUKPLC”), a newly incorporated entity which is currently a subsidiary of BBPLC.
In a little more detail, the Scheme will transfer out of BBPLC those of its activities required to be inside the ring-fence, and some of its other activities that are permitted to be inside the ring-fence. Thus, BBPLC's UK retail banking operations and parts of its UK business banking operations (including deposit-taking, mortgage lending, payment cards, digital payment solutions and personal loans), as well as the UK wealth management businesses of BBPLC and WPML, will be transferred. These activities have operated under a dedicated division of BBPLC, Barclays UK (“BUK”), since 1 st March 2016. The retail and business banking activities will be transferred into BBUKPLC. The wealth management activities will be transferred into Barclays Investment Services Limited (“BISL”), a subsidiary of BBUKPLC which will offer agency dealing and other investment services. Then, on 1 st April 2018 (the “Effective Date”), BBUKPLC's entire issued share capital will be transferred from BBPLC to BPLC.
The directors of the Applicants considered the approach I have briefly described as preferable to transferring out of BBPLC the businesses that needed to be outside the ring-fence, and making BBPLC the ring-fenced entity. This was at least partly because of the size and complexity of BBPLC's international and investment banking business, which needed to be outside the ring-fence.
It is perhaps important to note at this early stage that the Applicants have decided to limit those entitled to open accounts with BBUKPLC to those with an address in the European Economic Area (“EEA”). Customers based outside the EEA will, however, still be able to open accounts with BBPLC.
Two other Group companies will also form part of the Scheme. Barclays Services Limited (“ServCo”) and its subsidiaries will provide the Group's operational entities (including BBUKPLC and BBPLC) with the services required for continuity. Various preparatory steps have already been taken, so that, for example, employees, assets and intellectual property rights have already been transferred to ServCo. There are, however, residual assets still to be transferred, which are the subject of one of the ancillary orders sought by the Applicants. Barclays Security Trustee Limited (the “Security Trustee”) will hold security interests provided by certain of BBUKPLC's and BBPLC's corporate and business banking customers on trust from the Effective Date.
As I will explain in more detail below, the pensions representations primarily complain about BBPLC becoming the UKRF's principal employer by 1 st January 2026. They would generally prefer BBUKPLC to become the UKRF's sponsoring employer, or would advocate the UKRF being split into two schemes, one sponsored by each of BBPLC and BBUKPLC. It is said that BBPLC is a smaller and riskier entity than BBUKPLC. The remaining representations concern (1) the position of retail banking customers in Jersey and other Crown Dependencies (made by a Mr Robert Brown (“Mr Brown”), who made oral submissions), (2) the effect of the Scheme on ISA investment accounts and the protection afforded by the Financial Services Compensation Scheme (“FSCS”) (made by a Mr Bruce Garbutt (“Mr Garbutt”)), and (3) the continuity of a right to legal redress against BBPLC (made by a Ms Rachel Mawhood (“Ms Mawhood”)). I will return to the detail of these representations in due course.
The ring-fencing regime
The ring-fencing legislation was enacted in response to the 2008–2009 financial crisis, with a view to strengthening UK banks and providing additional protection to their retail and small business customers.
A new Part 9B of FSMA was introduced by section 4(1) of the Financial Services (Banking Reform) Act 2013 (“FSBRA”). Part 9B will take effect from 1 st January 2019. It requires UK financial institutions to separate and ring-fence “core activities” from “excluded activities” (sections 142A and 142G of FSMA). The only activity so far designated as a core activity is accepting deposits ( section 142B of FSMA). The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 (the “CAO”) defines this activity as accepting a “core deposit”. Paragraph 2 of CAO explains the circumstances in which accepting a deposit is not a core activity. The definition is framed negatively but has the effect that a core deposit is one taken from a retail or small business customer at a branch of a UK bank that is subject to Part 9B of FSMA in the UK or elsewhere in the EEA. The CAO further provides that the ring-fencing regime only applies to an institution if its combined value of core deposits exceeds £25 billion (paragraph 12). “Excluded activities” include dealing in investments as principal ( section 142D of FSMA) and other activities specified in the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (the “EAPO”). Paragraph 20 of the EAPO provides that a ring-fenced body must not (subject to certain exemptions) maintain or establish a branch in, or have any subsidiary incorporated in or formed under the law of, a non-EEA country. Leading counsel for the Applicants informed me that Her Majesty's Treasury (“HMT”) is aware that an amendment to this provision will be required before the UK leaves the European Union, because it would otherwise thereafter preclude UK branches or subsidiaries.
These legislative provisions have led 5 of the UK's banks – Barclays, HSBC, Lloyds, RBS and Santander – to apply for sanction of ring-fenced transfer schemes in advance of 1 st January 2019. The court in Scotland is dealing with RBS's sanction application, and this court is dealing with the remaining four banks' applications.
The legislation relating to ring-fencing transfer schemes
I shall now set out the relevant parts of the legislation that relates to the ring-fencing transfer schemes that will be required if the UK banks are to comply with the ring-fencing regime when it comes into force on 1 st January 2019. These provisions were generally amended or inserted into Part VII of FSMA by section 6 and schedule 1 to FSBRA.
Section 106B of FSMA provides as follows:-
“(1) A scheme is a...
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