Re Lloyds Bank plc

The court considered an application under Part VII of the Financial Services and Markets Act 2000 to sanction a ring‑fencing transfer scheme (RFTS) devised to implement the statutory ring‑fencing regime introduced by the Financial Services (Banking Reform) Act 2013 and Part 9B of FSMA. The statutory machinery and pre‑conditions examined included sections 106B, 107, 109A, 111 and the certificate requirements in Schedule 12 Part 2B (paragraphs 9B and 9C), together with related orders such as the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (EAPO).

The Skilled Person (appointed under section 109A) concluded that, while the Scheme would cause some adverse effects to certain Commercial Banking customers, those effects were not greater than reasonably necessary to achieve the statutory purposes of ring‑fencing. The Prudential Regulation Authority had given consent and provided the required certificates including a certificate as to financial resources. The court was satisfied the communications plan gave appropriate notice, that jurisdictional pre‑conditions were met and that the court should use its ancillary powers under sections 112 and 112A of FSMA to give full effect to the Scheme.

For these reasons the Court sanctioned the Lloyds RFTS and ordered ancillary relief to implement the transfers, subject to the terms and contingency provisions described in the judgment.

Background and nature of application. This was an application by Lloyds Bank plc, Bank of Scotland plc and Lloyds Bank Corporate Markets plc for a court order under Part VII of FSMA sanctioning a ring‑fencing transfer scheme to separate specified excluded activities from the core deposit‑taking business in compliance with Part 9B of FSMA as introduced by the Financial Services (Banking Reform) Act 2013. The Scheme would transfer certain wholesale and excluded business from the Transferors to a newly authorised transferee, LBCM.

Parties and procedure. The Prudential Regulation Authority and the Financial Conduct Authority participated as regulators. A Skilled Person was appointed under section 109A to produce a Scheme Report and Supplementary Report addressing the statutory two‑part question: (a) whether persons other than the transferor are likely to be adversely affected by the Scheme and (b) if so, whether any adverse effect is likely to be greater than reasonably necessary to achieve the statutory purposes in section 106B(3). The PRA gave consent to the application and issued the certificate as to financial resources. The court had earlier considered and given directions on the communications plan and other procedural matters.

Issues framed by the court. The court framed its task around the statutory pre‑conditions for sanction (including PRA consent and the Skilled Person’s report), the Statutory Question posed to the Skilled Person under section 109A, the adequacy of the communications and opportunity to be heard under section 110, and whether in all the circumstances it was appropriate to sanction the Scheme under section 111(3). The court also considered the scope of its ancillary powers under sections 112 and 112A to make orders giving effect to the Scheme.

Court’s reasoning and subsidiary findings. The court accepted the Skilled Person’s careful, conservative methodology and conclusions. The Skilled Person had identified a number of possible adverse effects affecting primarily a small cohort of Commercial Banking customers (including effects arising from the Transferee’s relatively smaller balance sheet and a lower credit rating) but concluded that those effects were not greater than reasonably necessary to achieve ring‑fencing. The PRA had reviewed the Scheme (including later amendments and the Supplementary Report), given consent and issued required certificates, and the FCA had been consulted. The communications plan had been implemented satisfactorily and provided meaningful opportunity for representations; only a small number of formal objections were filed and were considered and addressed. The court also scrutinised proposed amendments, arrangements for residual assets/liabilities, treatment of security, duplication of master agreements and collateral provisions, and accepted that the court’s ancillary powers under ss.112 and 112A were properly used to secure effective transfer. The court allowed a contingency effective date provision but recorded that the Applicants elected to proceed with the originally planned date.

Wider context. The judgment notes the scale and novelty of the ring‑fencing project, the statutory imperative to implement ring‑fencing by 1 January 2019, and that this was the second RFTS to be sanctioned by the English court, with reference to the earlier Barclays decision. The court emphasised its discretionary but non‑ministerial role, its reliance on the Skilled Person and Regulators, and its willingness to scrutinise scheme design where material adverse effects were identified.

The court sanctioned the Lloyds ring‑fencing transfer scheme. It held that statutory pre‑conditions for sanction had been satisfied (including PRA consent and the Skilled Person’s Scheme Report and Supplementary Report and the certificate as to financial resources), that the communications plan provided adequate notice and opportunity to be heard, and that, applying the Statutory Question, any adverse effects identified were not greater than reasonably necessary to achieve the ring‑fencing purposes. The court authorised ancillary orders under sections 112 and 112A of FSMA to give effect to the transfers and permitted a contingency effective date while noting the Applicants proceeded with the original effective date.