Lloyds Bank Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hildyard |
| Judgment Date | 03 May 2018 |
| Neutral Citation | [2018] EWHC 1034 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: FS-2017-000004 |
| Date | 03 May 2018 |
Neutral Citation Number: [2018] EWHC 1034 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
BUSINESS LIST (Ch D)
Financial Services and Regulatory
7 Rolls Building, Fetter Lane, London, EC4A 1NL
THE HONOURABLE Mr Justice Hildyard
Case No: FS-2017-000004
and
Martin Moore QC and Mary Stokes (instructed by Linklaters LLP) for the Applicants
Rory Phillips QC and Robert Purves (instructed by PRA & FCA) for the Regulators
Javan Herberg QC (instructed by Deloitte) for the Skilled Person
Hearing dates: 27 th & 28 th March 2018
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction and scope of this Judgment
This judgment concerns an application under Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) by three companies in the Lloyds Bank group (the “Lloyds Group” or the “Group”), seeking an order sanctioning a ring-fencing transfer scheme (“the Lloyds RFTS” or “the Scheme”) for the separation of its retail banking business from its (potentially riskier) wholesale and investment banking activities.
This separation, with ring-fencing, is mandated by statute, and in particular by a new Part 9B which was introduced into FSMA by section 4(1) of the Financial Services (Banking Reform) Act 2013 (“FSBRA”).
FSBRA represents a multi-layered response to the financial crisis of 2008 and 2009. It is all part of a package designed to strengthen the UK's larger high-street banks and to provide additional protection to their retail and small business customers. Ring-fencing is an essential part of that response: it is mandatory and has to be effected by 1 st January 2019.
Sir Geoffrey Vos CHC has described ring-fencing as “a statutory project on an unprecedented scale.” As noted in the skeleton argument provided to me on behalf of the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”, and with the PRA together, “the Regulators”),
“Implementation is a highly complex project of national importance. It will be relevant to millions of retail banking customers in the UK.”
A ring-fencing transfer scheme or “RFTS” is a statutorily-mandated process for implementation of ring-fencing. The process is governed by provisions also newly introduced into Part VII of FSMA by FSBRA. Such a scheme, after detailed consideration by statutorily-designated persons, must ultimately be put before the Court for its sanction before it can be given effect.
The Lloyds RFTS is the second such scheme to come before the English Court for its sanction. The first was a scheme proposed by Barclays Bank plc (“BBPLC”) and Woolwich Plan Managers Limited (“WPML”): this was sanctioned by Sir Geoffrey Vos CHC on 9 March 2018 in the circumstances and for reasons explained in his detailed judgment of that date [2018] EWHC 472 (“the Barclays Judgment”). Other applications, by HSBC and Santander, are pending in this Court. RBS's ring-fencing transfer scheme has already been sanctioned by the Court of Session in Scotland.
My earlier judgments in the context of the Lloyds RFTS concerned procedural issues, and also the Applicants' plan for notification of the proposals to interested persons (“the Communications Plan”), of which more later. This judgment concerns the final stage of a long process: the stage at which the Court must determine whether or not to sanction the Scheme and make ancillary orders to give it full effect.
Its purpose is to explain in greater detail my decision to sanction the Lloyds RFTS, which I announced on 12 April 2018 in advance of detailed reasons given the tight timetable before the preferred effective date for implementation of the Lloyds RFTS. It amplifies the short statement of reasons I gave on that occasion.
In considering the detailed provisions governing the Lloyds RFTS and in reaching my decision, I have had the benefit both of the Barclays Judgment and detailed submissions both written and oral from Mr Martin Moore QC, leading Ms Mary Stokes, who appeared for the Applicants; from Mr Rory Phillips QC, leading Mr Robert Purves, who appeared for the Regulators; and from Mr Javan Herberg QC, who appeared for the “Skilled Person” approved by the PRA to report on the terms of the Lloyds RFTS (see below). I have also heard from a Mr Brown, a customer of a Jersey-incorporated bank in the Lloyds group, who has put forward more general observations. In addition I have considered various objections to the Lloyds RFTS put forward by customers affected.
Structure of this judgment
I address the matter under the following headings (which largely reflect the sequence of submissions made by Mr Moore on behalf of the Applicants):
[A] The ring-fencing regime introduced as Part 9B of FSMA;
[B] The implementation of ring-fencing by a ring-fencing scheme under Part VII of FSMA;
[C] Basic design of the Lloyds RFTS;
[D] Rationale for the design of the Lloyds RFTS;
[E] The Lloyds Group's parallel reorganisation;
[F] The principal features of the Scheme;
[G] Procedural history of the application and previous hearings; [H] The Transferors' Communications Plan and its implementation; [I] Amendments to the Scheme proposed before sanction;
[J] Jurisdictional pre-conditions and their satisfaction;
[K] The Court's role and discretion: the guidance in the Barclays Judgment;
[L] The Skilled Person's Report and conclusions on the Statutory Question;
[M] Objections and representations;
[N] Effective Date: preferred and contingency;
[O] Determination whether the Court should sanction the Scheme;
[P] Form of Order sought: sections 111, 112 and 112A of FSMA.
[A] The ring-fencing regime: Part 9B of FSMA
This new set of provisions requires UK financial institutions having “core deposits” with a combined value (averaged over three years) exceeding £25 billion to separate and ring-fence “core activities” from “excluded activities” (sections 142A and 142G of FSMA) by no later than 1 st January 2019. The detail of the provisions is as follows.
Part 9B of FSMA prohibits a “ring-fenced body”, i.e. a UK institution which carries on deposit-taking and any other designated “core activities” (“RFB”) from carrying on “excluded activities” or contravening certain prohibitions.
A bank will only be designated a RFB if it has (or that bank together with the other UK banks within its group in aggregate have) over £25 billion in core deposits, averaged over a rolling three-year period. To date, the only activity that has been designated as a core activity is the regulated activity of accepting deposits, but only when carried on in specified circumstances. Under the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014, as amended, a bank will only be deemed to be carrying out the core activity of accepting deposits if it accepts any deposit that is a “core deposit”. A core deposit is defined, broadly, as a deposit taken from a retail customer or SME customers at a branch in the UK or elsewhere in the European Economic Area (“EEA”).
“Excluded activities” are defined as the regulated activity of dealing in investments as principal and other activities specified by order. Dealing in commodities has also been specified by order as an Excluded Activity. A RFB must not conduct these Excluded Activities, except in certain exempted circumstances specified in the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014, as amended (“EAPO”). It is to be noted that Article 20 of the EAPO provides that a ring-fenced body must not (subject to certain exemptions) maintain or establish a branch in, or have a participating interest in any undertaking which is incorporated in, or formed under the law of, a non-EEA country. 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.
In addition, subject to certain exceptions, EAPO prohibits a RFB from various other activities, including having exposures to relevant financial institutions (“RFI”) 1 and (as mentioned above) establishing or maintaining branches or having participating interests outside the EEA (the “Prohibitions”).
[B] Ring-Fencing Transfer Schemes
The statutory machinery for a RFTS is set out in sections 106B, 107, 109A. 110(3), (4) and (5), 111 and 112 of Part VII of FSMA, as amended by FSBRA.
Prior to FSBRA and the introduction of these provisions, Part VII of FSMA already provided for banking business transfer schemes and insurance business transfer schemes. However, although a RFTS has features analogous to schemes for the transfer of insurance and banking business, it is categorically distinct: in particular, it
is in effect a compulsory means of achieving a statutory purpose, rather than an elective means of achieving a commercial objective.Section 106B of FSMA provides as follows:-
“(1) A scheme is a ring-fencing transfer scheme if it— (a) is one under which the whole or part of the business carried on— (i) by a UK authorised person, or (ii) by a qualifying body—is to be transferred to another body (the transferee), (b) is to be made for one or more of the purposes mentioned in subsection 3, and (c) is not an excluded scheme or an insurance business transfer scheme …
(3) The purposes are (a) enabling a UK authorised person to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions; (b) enabling...
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