Lloyds Bank Plc & Ors R(ring-fencing transfer scheme) (Rev 1)

In sanctioning a ring-fencing transfer scheme, the court’s discretion under Financial Services and Markets Act 2000 is genuine and unfettered. The court must assess the statutory question by identifying material adverse effects which are real possibilities and consequences of the scheme, then deciding whether they are greater than reasonably necessary to achieve the statutory purpose.

The design of the scheme is primarily a matter for the directors, but commercial latitude decreases where a material adverse effect might have been avoided by another scheme design. The court must consider the scheme as a whole, with assistance from the skilled person and regulators, and is not bound by their recommendations. A ring-fencing transfer scheme is a compulsory statutory process, distinct from ordinary elective business-transfer schemes.

Three companies in the Lloyds group applied under Part VII of Financial Services and Markets Act 2000 for sanction of a ring-fencing transfer scheme. The scheme transferred excluded activities and prohibited exposures from Lloyds Bank plc and Bank of Scotland plc to Lloyds Bank Corporate Markets plc, so that the transferors could operate as ring-fenced bodies under Part 9B.

The application followed extensive preparatory hearings, regulatory approval, a skilled person’s report and public and individual notification. Two formal objections and other concerns were considered. The central issues were whether the statutory preconditions were satisfied, whether affected persons were likely to suffer material adverse effects, whether any such effects were greater than reasonably necessary, and whether sanction and ancillary orders were appropriate.

1. Sanction. The Scheme was sanctioned under section 111 of Financial Services and Markets Act 2000. The statutory preconditions, including the appropriate certificates, regulatory consent and the transferee’s authorisation, were satisfied.
2. Nature of the jurisdiction. A ring-fencing transfer scheme is a compulsory statutory mechanism for achieving compliance with the ring-fencing regime. It is categorically distinct from elective commercial transfers under Part VII. The court’s discretion under section 111(3) is genuine and unfettered. The court is not a rubber stamp and is not compelled to follow the regulators or the skilled person.
3. Statutory question. The court adopted the guidance in Re Barclays Bank plc and others [2018] EWHC 472 (Ch). Relevant adverse effects are those which are possibilities that cannot sensibly be ignored, are consequences of the scheme, and create a real or significant risk. If a material adverse effect is identified, it must be assessed against the statutory purpose, not merely against the constraints of the chosen design.
4. Scheme design. The directors are entitled to substantial latitude in selecting among compliant designs, provided they act properly and in accordance with section 172(1) of the Companies Act 2006. That latitude diminishes as the seriousness of an adverse effect increases, particularly where another design might avoid it.
5. The skilled person’s reports were meticulous, independent and comprehensive. The identified adverse effects, including effects associated with the transferee’s credit rating and split banking relationships, were no greater than reasonably necessary to achieve the statutory ring-fencing purpose. The communications plan and objections disclosed no defect requiring refusal of sanction.
6. The court approved ancillary provisions under sections 112 and 112A, including transfers of property and liabilities, continuation of proceedings, preserved rights and provisions necessary to give the Scheme full effect. The Summary of the Scheme could be attached to the order, provided it was not treated as a substitute for the Scheme.