Treasury and FCA are consulting on changes to the Special Administration Regime (SAR) for investment banks. The changes will implement several Bloxham review recommendations. Treasury says it has been particularly alert to:
- the importance of simplifying and speeding up the SAR process to reduce costs to both clients and creditors;
- the importance of ensuring any changes give legal certainty about the status of client and creditor claims;
- the need to maintain consistency with the broader insolvency framework, including pre-existing insolvency procedures and FCA’s client assets sourcebook (CASS);
- the need to provide for flexibility and future proofing; and
- the government’s wider objective of protecting and promoting the reputation of the UK as a global financial centre.
Treasury’s consultation covers:
- transfers of client assets: administrators need to be able to carry out transfers of the business of an investment firm, and consequently of client assets, more quickly and easily. Treasury proposes provisions for the novation of client contracts and assets by operation of law as part of a wider business transfer, provision for a limited moratorium on the exercise of termination rights by custodians and provisions to allow the sharing of confidential information;
- bar dates: the Bloxham review recommended, and Treasury supports, extending and strengthening the SAR bar date mechanism. It plans that the mechanism should include client money, to align the treatment of the client money and custody asset claims processes, to give administrators increased flexibility when making distributions and to strengthen the mechanism to provide for a hard bar date;
- interaction of SAR and CASS: Treasury agrees the SAR regulations should interact effectively with CASS, including ensuring clarity around clients’ claims on the failed firm and not allowing arbitrage between the two regimes;
- procedural and administrative proposals: Treasury will implement most of the review’s recommendations to ensure the SAR regime aligns with more than just CASS, including making changes to ensure entities that had dealings with the failed firm prior to its collapse cooperate with the administrator, aligning the SAR with EMIR, reviewing the law under which client asset entitlements arise, general insolvency rules, and the role of the courts in investment firm insolvencies. It also looks at role of the authorities in SAR administrations, including for an enhanced role for FSCS; and
- lessons learned: the paper summarises lessons learned from the various court cases that have arisen in respect of recent investment firm administration proceedings (both SAR and non-SAR) and how the government has reflected on these in developing its response to the review.
Treasury says the changes will not apply to a firm put into the SAR before the date on which they come into force. Treasury’s consultation includes draft legislation, and it asks for comments on its proposals by 20 April.
FCA has published a discussion paper seeking views on its reaction to the Bloxham recommendations addressed to it and, generally, on CASS 7A. The paper covers many of the Bloxham recommendations including:
- FCA’s decision not to proceed with its “speed proposal” to enable client money to be distributed quickly following the failure of an investment firm, based solely on the records of the firm. Now there will be legislative change, FCA does not need to take forward the plan, which many respondents had not liked anyway;
- the transfer mechanism, including whether it could be possible to effect a partial transfer of the client money pool and on FCA’s proposal to codify the transfer of custody assets, this time including partial transfers;
- proposals for a hard bar date and minimum contact requirements before a hard bar date becomes effective;
- application of the “hindsight principle” FCA previously consulted on, and whether it should be applied to cleared open margined transactions. It also asks whether it should consider any other type of transaction and whether contractual provisions or some alternative valuation method should be used either instead of or in addition to valuation under the hindsight principle;
- whether it needs to make changes to CASS 7 to reflect Treasury’s proposals on deduction of costs from the client estate;
- the benefits of alternative methods of requiring firms to provide information on products to assist FSCS in making payments as quickly as possible, and on clarifying to clients what will be covered by FSCS;
- suggested additions to firms’ CASS resolution packs;
- whether any changes are needed to implement the administrator’s power to top up client money shortfalls;
- what case law, judgments and court decisions might benefit from codification within CASS;
- whether firms should segregate a prudent margin in respect of administration costs (a client money buffer);
- how interest earned on the client money pool after a primary pooling event (PPE) should be used;
- whether FCA’s proposals on the treatment of allocated but unclaimed client money and de minimis balances following a PPE are right, and whether there should be an equivalent provision for unclaimed assets; and
- whether FCA should consider introducing distribution rules within CASS for custody assets.
FCA seeks views by 9 May. It plans to consult later in the year on this, and on proposals relating to currency conversion, the definitions of a PPE and a secondary pooling event, the treatment of post. PPE receipts and additions to the CASS Resolution Pack. (Source: Treasury consults on investment bank SAR changes and FCA asks for views on SAR/CASS changes)