Alliance & Leicester Plc & Anor, Re Financial Services & Markets Act 2000

MR JUSTICE HENDERSON: I have before me an application brought by a Part 8 claim form by Alliance & Leicester Plc (“Alliance & Leicester”) and Santander UK plc, which I will call “Santander”, seeking an order under section 111(1) of the Financial Services and Markets Act 2000 sanctioning a transfer of the banking, mortgage and other financial activities business now carried on by Alliance & Leicester to Santander, with the exception of the ISA manager role currently performed by Alliance & Leicester, which is proposed to be transferred to a different company in the Santander group called Santander ISA Managers Ltd (“ISM”). Various ancillary orders are also requested under section 112 of the 2000 Act, and the proposal as a whole is embodied in a scheme which the court is asked to approve.

The background to the matter is set out clearly and helpfully in the skeleton argument of Mr Martin Moore QC and Mr Stephen Horan, who appear on behalf of the claimants, and what I say is largely based upon that summary.

The present position is that Alliance & Leicester is a wholly-owned subsidiary of Santander, having first been acquired by Santander’s Spanish parent company, Banco Santander SA, which I will call “Banco Santander”, on 10 October 2008. Subsequently, on 9 January 2009, all of the issued ordinary shares of Alliance & Leicester were transferred by Banco Santander to Santander. I should add, by way of footnote, that a scheme of arrangement was sanctioned by this court on 27 April 2010 which involved the cancellation of all of Alliance & Leicester’s preference shares. As a result of that scheme, the entire issued share capital of Alliance & Leicester is now owned by Santander.

As at the end of December 2009, Alliance & Leicester had over 1.2 million borrowers with aggregate debts amounting to approximately £40.3 billion and over 3.5 million depositors with aggregate deposits of approximately £19.5 billion.

Santander will still be better known to many people in this country as Abbey National Plc, the name which it bore until a rebranding exercise which took place in January of this year. The Abbey National business was originally acquired by Banco Santander as long ago as November 2004 but, at that stage, there was no change in the name of the business in this country. In September 2008, the Abbey National acquired the retail deposit taking business and branch network of Bradford & Bingley, and then, in January 2010, the retail deposit business brands and the branches of both Abbey and Bradford & Bingley were rebranded as Santander.

As at the end of December 2009, Santander had over 3.5 million borrowers with aggregate debts of approximately £140 billion and over 9 million depositors with aggregate deposits of approximately £106 billion.

It will be apparent from these figures that both Alliance & Leicester and Santander carry on, by any normal standards, very large businesses indeed in this country. It will also be apparent that, in rough terms, the existing business of Santander is approximately three times the size of the business of Alliance & Leicester.

An important point to note is that there are already cross guarantees in place between Santander and Alliance & Leicester in respect of their senior debt, including all customer deposits. It follows from this, as Mr Moore submitted, that the proposed transfer of the Alliance & Leicester business will not, in economic terms, change the liability profile of Santander in relation to the depositors of Alliance & Leicester. Indeed, from a financial perspective it might perhaps be said that the merger between the two businesses has already taken place, and that what is now sought is a formal transfer so that the reality on the ground matches what has already taken place in economic terms as a result of the cross guarantees.

Santander operates in this country in accordance with the operating model of its parent, Banco Santander, which requires it to be autonomous from its parent, both for its regulatory capital obligations and for its liquidity requirements. The evidence also shows that Banco Santander’s wider group operates a so-called “firewall approach” whereby each subsidiary or group of subsidiaries within a jurisdiction borrows and lends in the markets in which it operates. It follows from this that Santander does not rely on its parent company for any regulatory capital or liquidity support. Looking at matters the other way round, the only funds which go out to the parent company from Santander go out by way of dividend, and the amounts of the dividends are subject to careful scrutiny by the regulatory authorities both in this country and in Spain.

The purpose of the scheme, as I have already indicated, is to consolidate the Alliance & Leicester business within Santander so that it can be conducted under the Santander brand and can thereby be integrated with the former Abbey and Bradford & Bingley banking businesses which have already been united. The effect of the transfer will be to allow access for Alliance & Leicester customers to over 1,300 branches in the United Kingdom, which is about four times the present number. From Santander’s point of view, there will be benefits of simplification and economies of scale and synergies together with other simplifications and improvements in regulatory structure and in its risk management processes.

As a matter of funding, the present position is that both companies already operate through the treasury company in the group, Abbey National Treasury Services plc (“ANTS”). So there will be no need for any substantial transfers of cash in order to give effect to the proposed transfer. All that will be needed is suitable book entry adjustments made by ANTS by way of debits and credits to the appropriate inter-company bank accounts.

The proposals have been the subject of very extensive publicity the details of which are set out in the evidence before me. In summary, Santander and Alliance & Leicester sent out approximately 2.9 million mailings to customers about the scheme, and electronic versions of the relevant customer statements were sent to about 1.2 million email addresses. In addition, there was widespread advertisement in a number of national newspapers and other journals where it was likely to come to the attention of interested professionals. A dedicated telephone help line was also set up, which has been operating since 26 February and by 10 May it had received 5,660 calls. The result of all this publicity, and I have only referred to some of the more significant aspects of it, was to generate a number (but in view of the very large number of communications sent, not a large number) of inquiries and objections relating to the scheme. Most of these were oral, but some were made in writing, and the written objections have been collected together and are included in the court bundle. I have gone through them all and taken them into account.

The nature of the business which is to be transferred comprises, as one would expect, a mixture of deposit taking, secured and unsecured lending, including mortgage lending, and financial activities for both personal and commercial customers. For various reasons, certain assets and liabilities cannot conveniently be transferred under the scheme either because of the governing law of the relevant contractual documentation or because of non-recognition of the order of the court in certain jurisdictions. Those assets and liabilities will therefore be transferred outside the scheme, and there are also certain other individual assets related to specialist finance businesses of Alliance & Leicester which it is more convenient to transfer in that way.

The evidence also describes three complex securitisation structures which Alliance & Leicester has entered into for part of its mortgage book. The net worth of those structures on 4 May 2010 was just under £22 billion. They are known as the Fosse, Langton and Bracken securisations, and details of them are given in the first witness statement of Mr Munoz in support of the claim. There are some continuing roles under these programmes which will be transferred to Santander under the scheme, and some consequential contractual amendments are also required. Only one of those programmes, the Fosse programme, concerns external investors or parties, the other two being internal to the existing group. The relevant further documentation for the Fosse programme was signed off in March, and the major ratings agencies have all confirmed that it will have no adverse impact on the ratings of the notes issued under that programme.

A further aspect of the proposals relates to the transfer of consents to the use of personal data and marketing consents as between Alliance & Leicester and Santander. Broadly speaking, what is proposed is that the relevant consents will be transferred over, and where the customer has expressed conflicting preferences about the receipt of marketing data from each of the two companies, the preference expressed to Santander, as the recipient of the transfer, will prevail.

Arrangements have also been made relating to the Pension Scheme of Alliance & Leicester involving an apportionment of liabilities. Those arrangements were cleared by the Pensions Regulator in March. The trustees of Santander’s Pension Schemes have also been consulted on the transfer and have stated that they have no objection to the scheme.

I come now to two more important parts of the scheme for present purposes. The first relates to what one might call, for short, neutralisation of enlarged rights. This is explained by Mr Moore in the following way. The scheme contains provisions designed to ensure that what would otherwise be enlarged rights in relation to set off, cross default, all monies contractual obligations, and consolidation rights, which would be brought about by the scheme, are not to have effect in relation to existing agreements. The guiding principle is that the scheme is not to give Santander rights over agreements with either Alliance & Leicester or Santander which did not exist before the transfer. That is undoubtedly true in relation to cross default, all monies and consolidation rights, where the relevant provisions written into the scheme will have effect in perpetuity.

However, in relation to set off the position is less straightforward. What, in fact, the scheme provides is that, after the expiry of a three-month period, Santander, the merged entity, will be able to exercise rights of set off which would not have been available before the merger. In that respect, it would be more accurate to describe the proposal as one where the enlarged rights will take effect, but only after the expiry of a period within which customers will be able, should they wish to do so, to make alternative arrangements. The three-month period will run from the effective date, which is proposed to be 28 May, but in cases where the relevant accounts are for a fixed term, or where there are accounts which have special introductory rates, the period will not begin to run until the expiry of the fixed term or of the initial period, as the case may be. The purpose of the period, as I have said, is to give customers who would otherwise be adversely affected time to make arrangements to move their deposits if they wish to do so.

The second significant matter which I need to address at this point is the availability of compensation under the Financial Services Compensation Scheme. As is well known, that scheme provides protection for customers who are either private individuals or small companies in the event of the insolvency of a deposit-taking institution. The protection is provided for individual deposits of up to £50,000, or £100,000 in the case of joint deposits. Protection is afforded to any business carried on under a separate banking licence in this country, and at the moment both Alliance & Leicester and Santander have separate banking licences for that purpose, even though they are members of the same wider group.

The effect of the scheme is that customers who currently have deposits at both banks will thereafter have protection in respect of only one account, and this will therefore entail a corresponding reduction in FSCS cover. The number of customers who may be adversely affected is, however, relatively small. As at 31 December 2009, there were approximately 6,100 customers out of a total of several million who had aggregate deposits in excess of £50,000 split between the two banks. Mr Moore told me that this figure has now increased to something in the region of 11,000, but it is still, in percentage terms, a very small proportion of the total number of customers affected by the transfer. Arrangements have been made permitting such customers to transfer up to £50,000 from their accounts with either Alliance & Leicester or Santander to a different bank without any penalty, provided that the transfer does not reduce the customer’s total deposit to less than £50,000 in all. These provisions should, therefore, cater for the large majority of cases by enabling customers, should they wish to do so, to reduce their exposure to the joint business to a level of £50,000 and to transfer any excess over that amount elsewhere. The provision that there is to be no penalty means that they will be able to do this even if they hold their funds currently, for example, in the form of a bond which requires a certain amount of notice before withdrawals can be made.

However, there is a further point to note here which is that some existing products, particularly bonds taken out over one year ago, may provide a rate of interest which cannot now be matched readily or at all in the outside market. Accordingly, without further provision, a person taking advantage of this facility to withdraw funds without penalty and invest them elsewhere might end up with a less advantageous rate of interest than that which he currently enjoys. This possibility has been catered for, at least to some extent, by arrangements made with Cater Allen Ltd, a further company within the Santander group, which holds a separate banking licence and is therefore eligible for separate cover under the compensation scheme.

The arrangement is that Cater Allen will make available a range of financial products for depositors who wish to obtain a comparable rate of interest which they would not be able to obtain elsewhere if they were to move a portion of their deposit to another bank. I was told that Cater Allen operates as a postal bank only, and therefore does not have the advantage of a branch structure, which may make this a less attractive option for some investors. On the other hand, only fairly sophisticated investors are likely to be affected by this problem, so I think it is reasonable to assume that most, if not all, of them will be able to take advantage of this offer and obtain from Cater Allen a product which returns a rate of interest either the same as or slightly better than that which they currently enjoy.

Mr Moore told me that this was the purpose and effect of the proposals which have been put in place, and this is borne out by the experience of Mr and Mrs Bridges, who are the only parties who have taken advantage of the opportunity to appear in court this morning. Mr Bridges explained to me, as he has already done in correspondence, that he and his wife are in a position where they each wish to move approximately £50,000, and having recently been put in touch with Cater Allen they are now able, or should now be able when the necessary arrangements have been put in place, to obtain a rate of interest which is somewhat higher than that which they were previously enjoying at either of the two banks.

I interpose to note that Mr Bridges also said there had been some problems in communication which had caused him some considerable inconvenience and delay in confirming the necessary arrangements. Due note, I am sure, will be taken of those comments by the representatives of the claimants who are in court, and I hope that steps will be taken to improve the working of the relevant machinery. In substance, however, it seems to me that these arrangements do provide reasonable alternative possibilities for the very small number of customers who might otherwise be adversely affected.

I have already explained how the ISA management role of Alliance & Leicester is proposed to be taken over by SIM, and this aspect of the proposals appears to me to give rise to no difficulties.

It is also unnecessary for me to set out the detailed provisions of the scheme. I have been taken through them by Mr Moore, and they are summarised in his skeleton argument.

As a matter of jurisdiction, the starting point is section 106 of the 2000 Act

which defines a banking business transfer scheme as follows:

“A scheme is a banking business transfer scheme if it:

(a)

satisfies one of the conditions set out in subsection (2);

(b)

is one under which the whole of part of the business to be transferred includes the accepting of deposits; and

(c)

is not an excluded scheme.”

The relevant conditions in subsection (2) require, to put it shortly, that the relevant businesses should be carried on by authorised persons in the UK.

It is clear on the basis of the evidence that all the requirements of section 106 are satisfied, and there is no further point on the section to which I need to draw attention except perhaps to note that the provisions of the Act apply even where only part of the business to be transferred is the acceptance of deposits. That is, of course, the position in the present case, but the acceptance of deposits is a very substantial part of the business of Alliance & Leicester, and there is therefore no question but that the transfer falls within the scope of the Act.

Section 111 then sets out the conditions which must be satisfied before the court may make an order sanctioning the transfer. These include, by virtue of subsection (2), that the appropriate certificates have been obtained (as to which see parts I and II of schedule 12) and that the transferee, that is to say Santander, has the authorisation required to enable the transferred business to be carried on in the place to which it is to be transferred.

Pausing there, the relevant certificates and authorisation have been duly provided by the FSA in a letter which is in evidence before the court dated 10 May 2010, so those conditions are duly satisfied. However, there remains the important condition set out in subsection (3) of section 111, which provides as follows:

“The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.”

Section 112 then says that, if the court makes an order under section 111(1), it may, by that or any subsequent order, make various further provisions, including by virtue of subsection (1)(d):

“with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out.”

There has been some judicial debate about the force of the word “necessary” in this last provision. It appears by now to be fairly well settled, and certainly it is my own view, that the word “necessary” in this context does not mean “indispensable”, but rather means something falling between indispensable and desirable. In addition, the word has to be read in the context of the phrase as a whole, so that if a step is necessary in order to implement the scheme in an effective and commercially sensible way, it will be perfectly proper to make an order under section 112 for that purpose.

I have not referred to various other regulatory requirements dealing with the placing of notices in official gazettes and other publications and so forth. It is enough to say that those requirements have been more than satisfied, because Alliance & Leicester and Santander, sensibly as it seems to me, went a good deal further than the regulations actually required.

By virtue of section 110 of the 2000 Act, the persons entitled to be heard on an application for court approval of a banking business transfer scheme are the FSA and also any person who alleges that he would be adversely affected by the carrying out of the scheme. The FSA has been duly notified of this application and has elected not to attend. The evidence makes it clear, and Mr Moore confirmed, that the FSA has been closely involved in the preparation of the proposals. I am therefore entitled to assume that the FSA has given them careful consideration and has found nothing in them about which it wishes to make submissions or to which it wishes to object. That, in itself, is a very material factor for the court to take into account in deciding whether to sanction the proposal.

It appeared from the written objections that a small number of individual investors in Alliance & Leicester might wish to appear personally at the hearing today. In the event, only two of those persons have appeared, namely the Mr and Mrs Bridges to whom I have already referred. Although I think they were originally planning to oppose the application, by the time of today’s hearing they had modified their position, since they have now been put in touch with Cater Allen and been satisfied that they should be able to obtain a suitable home for the part of their savings which will no longer be protected by the compensation scheme. Thus they no longer oppose the scheme, and Mr Bridges, in his clear and helpful submissions to me, confined his complaints to a few well-taken points about the nature of the administrative machinery which is currently not working as well as it should do, at any rate in relation to his own personal affairs. I am in no position to judge whether others are experiencing similar problems. So, in the event, nobody has actually appeared to oppose the application.

On the other hand, there is, as I have already said, a small number of letters of objection, which I have gone through; and, quite apart from that, it would be wrong to assume that, merely because only a few people have objected, the court is somehow thereby relieved of any obligation to scrutinise the scheme. On the contrary, in cases of this nature individual investors are entitled to assume that the court will discharge its duty, and that the FSA will do likewise. For the most part, they are unlikely to have the resources or the time to instruct lawyers themselves. So the mere fact that there have not been many written objections is not necessarily to be taken as an indication that all is well. The court must still look at the matter very carefully.

The great majority of the written objections relate to the position which I have already outlined under the compensation scheme. As I have already said, it seems to me that the procedures which have been put in place are reasonably adequate to deal with what is anyway a limited problem. I say it is a limited problem because, in practical terms, it is hard to think of any circumstances, short of a global meltdown in the world financial markets, whereby depositors in Santander, the merged business, would be left without protection for their deposits whether or not they exceeded £50,000 in amount. It will be recalled that, when Northern Rock was on the point of collapse in September 2007, the government stepped in to guarantee deposits of any size with that institution, and I find it difficult to envisage circumstances where similar steps would not be taken in the future. However, nothing in this world is 100 per cent certain, and there remains a possibility, albeit a very remote one, that Santander itself could collapse.

That brings me on to the next point, which is that the real issue here, it seems to me, is one of solvency, rather than the availability of compensation; and the issue of solvency is satisfactorily addressed by the certificate which has been given by the FSA. There is no reason, on the evidence before me, to doubt the solvency of Santander, either before or after the proposed transfer. On the contrary, the very large size and international nature of the group may be thought to provide additional reassurance on that front.

A further point which I think it relevant to make is that the purpose of the compensation scheme is simply to provide compensation for customers of individual banking businesses which operate under a separate licence. It is no part of the function of the scheme to prevent the amalgamation of businesses for good commercial reasons. It would, in my judgment, be allowing the tail to wag the dog if the consequences in relation to the availability of compensation were to be taken as a compelling reason for refusing consent to a transfer which was otherwise appropriate and one to which the court would give its blessing. However, that does not mean that the availability of compensation after the transfer is an irrelevant consideration. Far from it, and it is with that in mind that the arrangements to which I have referred have been put in place allowing for the penalty-free removal of sums in excess of £50,000 and providing an alternative home through Cater Allen for those investors who wish to match an existing rate of interest which they would be unable to obtain elsewhere. It seems to me that those arrangements in the context of this application are more than adequate to deal with any problems which may arise, and I do not therefore think it appropriate to withhold consent for that reason.

The majority of the complaints related to that aspect of the proposals. A substantial number, although a much smaller number, related to the issue of set off to which I have also already adverted. I can see, from the point of view of individual investors, that the ideal solution would be for Santander to undertake in perpetuity not to operate any enhanced rights of set off in relation to accounts which were transferred. However, the fact that this would be the ideal solution does not mean that the proposal which is now made is unacceptable. It appears to me that the proposed three-month transitional period is an adequate response to this particular problem which will not, in any event, affect more than a very small proportion of investors. They will have the opportunity to make alternative arrangements and the point has been clearly explained to them in the explanatory material that was circulated. So, on balance, I do not think that this is an aspect which should cause me any undue concern, although it is certainly a matter which I need to have in mind.

I should perhaps also mention that one complaint related to the maintenance of dual standard variable rates in relation to mortgages which were going to be taken over. Mr Moore has satisfied me that there is no real substance in that complaint, because these rates will be subject to market forces in the usual way and there is no reason to suppose that affected mortgagors with variable rates will be left with a so-called legacy rate which is disadvantageous to them. In my view the combination of market forces and oversight by the FSA should ensure that this does not occur.

I come finally to the exercise of the court’s discretion. There is apparently no reported authority on the approach that the court should adopt in relation to the transfer of a banking business. However, there is plenty of authority in relation to the long-established jurisdiction of the court to approve transfers of long-term insurance business under Schedule C to the Insurance Companies Act 1982. The passages which are usually cited in that connection are from the unreported judgment of Hoffmann J, as he then was, in Re London Life Association Limited, 21 February 1989, and the subsequent decision of Evans-Lombe J in Re AXA Equity & Law Life Assurance Society and AXA Sun Life Plc [2001] 1 All ER (Comm) 1010.

In the first of those passages, Hoffmann J emphasised that the court does not need to be satisfied that no better scheme could have been devised. The court is rather concerned to approve, or not approve, the particular scheme which is placed before it. In the AXA case, that decision was applied by Evans-Lombe J and he derived from it eight principles governing the approach which the court should adopt to applications for the sanction of transfers of long-term business. Those eight principles can only be applied by analogy in the present context, but I agree with Mr Moore that this is the appropriate approach to adopt.

The principles which can, and it seems to me should, be applied by way of analogy are briefly as follows. First, the relevant Act (in the present context, the 2000 Act) confers an absolute discretion on the court whether or not to sanction the scheme, but the discretion is one which must be exercised by giving due recognition to the commercial judgment entrusted by the constitution of the relevant company to its directors.

Secondly, the court is concerned whether an interested person or any group of interested persons will be adversely affected by the scheme. That, it seems to me, must be right, and is reflected in section 110 of the 2000 Act to which I have already referred. Indeed, this is the aspect of the matter to which I have been directing most of this judgment.

Thirdly, the FSA, by reason of its regulatory powers, can also be expected to have the necessary material and expertise to express an informed opinion on whether, in the present case, investors or other persons holding products with Alliance & Leicester are likely to be adversely affected, and the court will pay close attention to any views which the FSA may express. I have already explained that the FSA has been closely involved in these proposals and is plainly content with them because it has granted the necessary certificates and has not exercised its right to be represented at the hearing.

Fourthly, and this is, I think, an important point, individual investors or holders of products may be adversely affected, but that does not necessarily mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme, as a whole, is fair as between the interests of the different classes of persons affected.

Also of importance is the following principle. It is not the function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, it is for the directors of the company to choose which one to pursue; and, by the same token, the details of the scheme are not a matter for the court, provided that the scheme as a whole is found to be fair. The court will not, therefore, amend the scheme merely because it thinks that individual provisions could be improved upon.

Those, I think, are the relevant principles which can and should be applied by way of analogy in considering whether an application of this sort should be approved. Mr Moore submits, and I agree, that the present scheme should be approved in exercise of the discretion conferred upon the court. He submits that the scheme gives effect to a reasonable commercial objective, namely the integration of the banking business of what is already Santander’s wholly-owned subsidiary, Alliance & Leicester, into its wider business as part of a rebranding and consolidation of Santander’s banking business in the United Kingdom under the Santander name. In addition, it will provide a much larger network of branches for individual customers, and from that point of view alone can be expected to increase customer convenience for a very large number of people.

The FSA has been involved throughout and does not oppose the proposals. The scheme has been fully explained in the documents and in the publicity exercise which I have summarised. The complaints which have been received are few in number and, as I have sought to explain, I do not think that any of them is of sufficient substance to give the court reason to refuse approval to the scheme. The relevant statutory requirements have all been complied with. The ancillary orders which are sought are within the court’s jurisdiction under section 112.

In short, to revert to the statutory language in section 111(3), I am satisfied that in all the circumstances of the case it is appropriate to sanction the scheme, and I will therefore do so.