Peter Bloxham has completed the first phase of his independent review of the Investment Bank Special Administration Regulations 2011 and in February 2013 presented an interim report, which HM Treasury has now published. In addition to making a number of immediate recommendations, the interim report sets out further areas to be reviewed as part of a second phase of work. The SAR review home page indicates that Mr Bloxham would welcome views from interested stakeholders on the issues raised in this first report. A final report is to be issued in July 2013.


The special administration regime for investment banks (SAR) was introduced in response to the slow return of client assets in the Lehman administration. Since the regulations came into force on 8 February 2011, three firms – MF Global UK Limited, Worldspreads Limited and Pritchard Stockbrokers Limited – have been placed in special administration. None of these insolvency procedures is yet complete.

In December 2012, the Treasury announced the appointment of Peter Bloxham to review the SAR. The Banking Act 2009 required the Treasury to review the ‘Investment Bank Special Administration Regulations 2011′ by February 2013, and required the review to be carried out by a person with expertise in the law of insolvency or financial services.

The first phase of his review was completed and the report recommends further work to explore the issues identified. Mr Bloxham is co-ordinating closely with the FCA’s own review of its client assets regime. A final report will be made to the Treasury over the summer.

Provisional conclusions

The interim report delivered the following provisional conclusions and recommendations:

  • The SAR regime should be retained
  • The SAR could be enhanced through some amendments/supplemental provisions:
    • A mechanism should be introduced to facilitate the rapid transfer of customer relationships and positions, where feasible
    • The statutory objective in relation to client assets should be clarified by extending from “return” of client assets to “return or transfer”
    • The existing provisions for information sharing and co-operation could usefully be extended
    • The Bar Date mechanism should be extended to include client monies
    • The administrator should be permitted to make distributions of client assets during the period after the Bar Date process has commenced
    • The SAR should clarify the clients’ rights to income, interest and distributions in respect of client assets, and interest on client monies, arising during the period of administration
    • The administrator should be empowered to make full use of communication with clients by electronic means
    • Further consideration should be given to granting limited immunity for administrators
  • Non legislative actions, of a behavioural or operational nature – on the part of firms, their clients and regulators - could reduce the risk of delays in the return of client assets in future SAR cases:
    • Firms may need to improve the quality of their record keeping and reconciliation
    • Firms should ensure that clients (especially retail clients) are able readily to understand the contents of client statements
    • The FSA should ensure a full understanding of the Client Money and Asset Rules
    • The FSA should require firms to ensure that intra-group relationships relevant to the holding of client assets are clear and transparent to clients
    • FSA, FSCS and HMRC should ensure that the existing gateways for exchange of information are optimal
    • FSA should continue to improve CASS resolution packs in the light of the experience of the SAR administrations (intragroup relations need to be transparent)
  • The FSCS plays an important role in cases involving retail clients and some processes could be streamlined to accelerate payment of compensation to eligible clients of failed firms:
    • FSCS should work with investment firms to make clear to clients which clients and products fall within the scope of the FSCS
    • Consideration should be given to amending the current FSCS product perimeters
    • Consideration should be given to the potential for using the FSCS as a mechanism to facilitate transfers
    • More should be done to ensure that the FSCS has rapid access to the information it needs to facilitate a payout
    • There is also a case for the FSCS to have the right to sit on the creditors committee (at least as an observer) from the outset
  • Monitoring of the progress of the existing SAR cases, developments in the Lehman administration, and new developments such as the porting obligations introduced by EMIR should continue, thus proactively keeping under review whether further legislative or behavioural changes might enhance the operation of the SAR regime.

The second phase of the review

Mr Bloxham proposes to work alongside the FCA in the second phase of his review, to ensure that his final recommendations, insofar as they relate to client monies and assets, will operate consistently and effectively with any reform of the CASS rules.

He also proposes to consider a number of areas or topics raised with him:

  • A buffer fund (at firm or market level) to support the costs of dealing with client assets
  • Client preference over the claims of unsecured creditors
  • Administrator’s immunities
  • The constitution and operation of creditors’ committees in SAR cases
  • The role of the courts in SAR cases
  • Differences in default rules amongst the various institutions providing infrastructure or central counterparty services
  • The application of general principles of property and trust law – a move to a standalone mechanism for determining client asset entitlements
  • The inter-relationship between CASS, SAR and general insolvency rules
  • Segregation
  • The impact of the EMIR porting provisions
  • Scope of SAR
  • Production of guidance on financial sector insolvency regimes
  • The Bar Date mechanism
  • Expanding the scope of schemes of arrangement so as to allow them to deal with proprietary claims (and also overseas law governed contracts, subject to the “sufficient connection” test being met).
  • Overseas issues
  • A mechanism to allow the administrator to rely on preexisting records in relation to the investment firm.

Mr Bloxham envisages that this will require further consultation, which will include a call for evidence on the ideas and suggestions set out in this report.