Out-Law / Your Daily Need-To-Know

Asset transfers and bank ring-fencing

Out-Law Guide | 18 Dec 2013 | 4:03 pm | 1 min. read

This is one of a  series of guides  on issues connected to ring-fencing and banking reform faced by banks. Other guides cover issues such as tax, employment, issues for directors, real estate, pensions, litigation, third party contracts and competition considerations.

This guide was last updated in December 2013

The allocation of assets and liabilities inside and outside the ring-fence will have a fundamental impact on the ability of ring-fenced banks to succeed. Where a ring-fenced body does not own, or have a legal entitlement to use, the assets that it needs to carry on its core activities, alternative arrangements will be necessary.

Arms length contracts may be required to ensure as far as possible that the ring-fenced body is not dependent on the resources of other group members which could cease to be available in the event of the insolvency of a group member.

Where the transfer of assets to the ring-fenced body or group sharing is not possible, alternative solutions will need to be considered which may have implications in terms of capital expenditure and additional ongoing costs. Intra-group financing arrangements, cross-guarantees and other security packages will also need to be considered to ensure that the ring-fenced body is not exposed to a failure of the wider bank.

Ring-fencing may also require legal restructuring allowing businesses and assets to be transferred into, or out of, the ring-fence. There may be a need to 'tidy up' assets which are held in the 'wrong pocket'.

Such restructuring could involve Business Transfer Schemes under Part VII of the Financial Services and Markets Act 2000. Part VII governs schemes for the transfer of banking and insurance businesses and can be used to effect the transfer of books of business from one institution to another or for a group to consolidate several of its businesses into one.

One of the great benefits of court-approved Part VII schemes is that they permit the transfer of a large number of separate legal relationships with customers en masse. The substitution of a new counterparty is achieved without having to secure individual customer consents. There is no vote of the customers and the key focus of the legislation is to safeguard their interests via the attention given by the regulators and the imprimatur of the court’s sanction.

To effect a Part VII transfer, the bank would still need to undertake an extensive policyholder communication programme to ensure customers receive information about the transfer and this would need careful advance planning, not least to ensure customers’ addresses can be identified. Such a transfer would also require attentive project management, detailed management attention and careful timetabling with the regulators and the courts to meet the deadline.  

The customer impact

Part VII transfers offer a neat and effective way to transfer books of business without impacting customers unduly. However, rigorous engagement with stakeholders is recommended as is a clear focus on project management.