Since November 1 2001, it has been possible for banks incorporated or conducting business in the UK to transfer that business to another bank by obtaining the sanction of the court under Part VII of the Financial Services and Markets Act 2000 (FSMA).
Typically banks want to transfer a banking business when they have merged or taken over another bank and wish to consolidate or reorganize the UK business operations of two companies. In these circumstances they can apply for the court's approval of a banking business transfer scheme. If the scheme is approved, on a given day, the business to which the scheme relates ceases to belong to one company and belongs to another instead. Liabilities as well as assets are transferred and contractual relationships with third parties are switched without the need for consent from third parties.
How have banks transferred business before now?
A regime for the transfer of insurance business existed before the Financial Services and Markets Act under the Insurance Companies Act 1982. Part VII of the FSMA replaces the 1982 Act and brings together procedures for the transfer both of insurance business and banking business under the general heading (Control of Business Transfers).
English law has no doctrine of universal succession, which would enable one company to assume the business of another. Most assets can be validly assigned, but liabilities cannot. To do so requires the consent of the third party creditor or obligee. There are also certain kinds of contract the benefit of which cannot be assigned from one person to another without the consent of the third-party contractor. This would apply if they contain a clause prohibiting assignment, or if the third party has an interest in the specific identity of his contractual counterparty.
Banks have numerous contractual relationships with customers, employees and market counterparties. Obtaining the individual consent of each of these to the transfer of the relationship to a new company would in many cases be a difficult, if not impossible, task. Thus, before Part VII of the FSMA, transfers of banking business were usually achieved through the cumbersome process of obtaining a private Act of Parliament. (Recent examples are the HBOS Investment Banking Act 2002 and Barclays Group Reorganization Act 2002.) While this route is still open for transfers of banking business, it is unlikely to be used much in future. Part VII of the Financial Services and Markets Act will become the only means of effecting a banking business transfer scheme on the full commencement of section 104 of the Act. So far that section has only been brought into force for insurance business transfer schemes: SI 2001/3538.
How do the new rules change the transfer process?
Part VII gives the court wide new powers to effect a transfer of banking business. In particular it allows property and liabilities to be transferred "whether or not the transferor has the capacity to effect the transfer in question" (section 112(2)(b)). In the context of an insurance business transfer scheme, the court has recently confirmed that these words are to be given a wide interpretation. They are intended to overcome the difficulty that arises with contracts where the agreement of a third party would be required for the relationship to be transferred (WASA International (UK) Insurance v WASA International Insurance, 2002).
Who can use the transfer machinery?
In order to qualify as a banking business transfer scheme, the business to be transferred must be carried on by a person with permission to accept deposits but who is neither a building society nor a credit union. If the transferor is incorporated in the UK, then it does not matter whether or not the business to be transferred is carried on in the UK. But, if the transferor's place of incorporation is outside the UK, the scheme must relate to business presently carried on in the UK that will continue to be carried on after the transfer. The transferee can be any kind of body, domestic or foreign.
How have the new rules been used so far?
The applications already made have involved a variety of UK and overseas banks. Abbey National has used the machinery to transfer deposit taking and lending business between two UK subsidiaries (Re Cater Allen Ltd and CA Premier Banking, April 30 2002, unreported). Halifax transferred some of its treasury functions to a subsidiary of Bank of Scotland as part of the HBOS merger (Re Halifax, May 3 2002). In July 2002, as part of a worldwide reorganization of its activities, BNP Paribas obtained sanction for a scheme transferring its London private banking business from an English subsidiary to a French subsidiary (Re BNP Paribas Private Bank and BNP Paribas Private Bank, July 12 2002). More recently Bank of Beirut, having taken over a smaller Lebanese bank, Beirut Riyad Bank, assimilated its London business by means of a transfer of banking business (Re Beirut Riyad Bank and Bank of Beirut UK, December 3 2002).
What conditions must banks fulfil?
Banks applying for the sanction of a scheme must fulfil a number of conditions. First, the Financial Services Authority is entitled to advance notice of the scheme, as are the home state regulators of the transferor and transferee if the relevant home states are elsewhere within the European Economic Area.
The transferee must satisfy the court that it is authorized to conduct the business it is to receive under the scheme. So, where that business is conducted within the UK the transferee must obtain all the requisite permissions from the FSA, or show that it has qualified for authorization by virtue of its passport rights from another EEA country.
Another requirement is that the transferee's principal regulator certify that the transferee will possess "adequate financial resources" after taking into account the proposed transfer. This requirement is important from the point of view of protecting creditors.
Finally, it is necessary to obtain the FSA's approval of a notice advertising the fact that an application has been made for a transfer of banking business, which must be published. Other than this there is no requirement to notify customers and others of the scheme, but many applicants may feel it best to write to their customers.
What is the court's role?
The court's part in approving banking business transfer schemes is twofold. First, it must satisfy itself that the applicant has fulfilled the conditions described above. Secondly, it must consider it appropriate to sanction the scheme bearing in mind all the circumstances of the case.
The considerations that may affect whether the court sanctions a scheme are not yet the subject of any decided case. Clearly, the court must give due weight to any representations opposing the scheme. The FSA has the right to attend and be heard on the hearing of the application, as do persons who allege that they would be adversely affected if the scheme were implemented.
The particular interests the court would normally consider are first those of the customers whose accounts are to be transferred. A customer who is disgruntled for reasons of convenience, for example changes in their account conditions, is unlikely to present a serious obstacle. The best course for such a customer is normally to take their business elsewhere rather than oppose the transfer scheme. But if the customer is locked into a long-term loan, switching lenders may not be feasible without making special arrangements. Equally, banks have an obligation of confidentiality to their customers. So, it is a matter of potential importance if customers have a genuine concern about the transfer of their account information and other personal data from the transferor bank to another company.
Another group that might suffer prejudice is creditors whose debts are to be moved from the transferor to the transferee. The regulator's certificate that the transferee will possess "adequate financial resources" (see above) may be too little protection for them. The holder of bonds issued by the transferor and rated at triple-A will not wish to see a scheme approved if substituting the transferee for the transferor will downgrade the bonds to double-A minus. Such a problem might well be overcome by designing the scheme to preserve the transferor's liability on the bonds.
While the creditworthiness of the transferee is obviously important, there can be circumstances where the continuing creditworthiness of the transferor is also important. If the scheme only transfers part of the business of the transferor, leaving part of it behind, the position of the remaining creditors of the transferor must be borne in mind. Provided that the transfer is made for a consideration that reflects the value of the net assets transferred, creditors should have little to complain about. But ultimately, the court may have to make a decision (akin to that taken by the regulator in respect of the transferee) about whether the transfer will leave the transferor with "adequate financial resources".
The court might hesitate to sanction a scheme if it would damage the interests of minority shareholders in the transferor or transferee. Clearly, Part VII of the FSMA was not intended to provide a mechanism for asset stripping at the expense of minority shareholders.
Finally, the position of employees may need attention. They are given a specific right to participate in the proceedings if they believe they would be adversely affected by the implementation of the scheme. In general, all relevant employment contracts are automatically switched from the transferor to the transferee, because the scheme constitutes a transfer of an undertaking. This gives employees a good level of protection, so only in special circumstances could a transfer harm them.
Experience so far suggests that banking business transfer schemes are rarely opposed. Assuming this is the case, a scheme that meets the regulatory conditions should meet with the court's approval.