Lloyds Bank Plc, Re

This is an application on behalf of Lloyds Bank Plc and Bank of Scotland Plc (together "the transferors") which are both members of the Lloyds Banking Group ("the Lloyds Group").

The application is made in the context of a proposed Ring Fencing Transfer Scheme, which when the requisite prior consent of the Prudential Regulation Authority (“the “PRA”) has been obtained, is to be put before, and ultimately considered by, the court in the course of 2018. This is one of four Ring Fencing Transfer Schemes likely to come before the Court (and another is to be heard in the Court of Sessions). All require the prior written consent of the PRA, and the PRA cannot give their consent unless and until they have considered a report on the scheme by a suitable Skilled Person under section 109A of the Financial Services and Markets Act 2000 (“FSMA”). Accordingly, but somewhat exceptionally, this matter comes before the Court as a preliminary to a proposed application which is to be, but cannot yet be, issued.

The scheme in question has, with various other schemes, already come before the Court for procedural guidance. On 26^th May 2017, the Chancellor of the High Court sitting with Snowden J, on an application made by Barclays Bank Plc, Woolwich Plan Managers Limited, Lloyds Bank Plc, Bank of Scotland Plc, HSBC Plc, Santander UK Plc and Abbey National Treasury Services Plc, made, at the instance of those parties and in the unusual circumstances of there not yet being before the Court an application for approval of a scheme, various directions in order to clarify the processes which would be required by the court as preliminaries to its determining the matter.

An important element of the clarification then sought was the question of what communication should be made or notice given, and in what form, to the customers of the various entities, and indeed “any person (P) (including an employee of the transferor concerned or of the transferee) who alleges that P would be adversely affected by the carrying out of the scheme” (since any such person is entitled to be heard when ultimately the scheme is considered). FSMA itself has provided the architecture and requirements for schemes of this nature, but very limited procedural guidance.

The purpose and effect of these Ring Fencing Transfer Schemes must always be borne in mind in determining what correspondence or communication is required. The purpose and effect of such schemes in broad terms is to ensure, after the difficulties in 2008 that afflicted (in particular) the banking sector, that retail banking will, hereafter, be separated from other parts of a banking business with higher levels of risk, such as investment banking. Thus, and as may be apparent from that very brief description, the purpose of the legislation and of the requirement for a scheme is to protect, in particular, retail customers of a bank from the difficulties and risks of other forms of business in which the bank is engaged .

There are pressing time constraints in respect of the schemes in that the relevant legislation expressly provides that ring-fencing is required to be in place and to have become effective by 1^st January 2019. And whereas 2019 may, in certain contexts, be thought some way off, the detailed planning and preparation required in order both to construct appropriate schemes and notify them appropriately or sufficiently are very considerable. Mere mention of the fact that in this particular case some 38 million customers are, to a greater or lesser extent, affected, does give a flavour of the very considerable difficulties inherent in the process.

The matter which I have to consider today arises further to considerable and constructive thought given on behalf of the applicants to the issue of a viable and appropriate communication scheme. That consideration has followed the clarification given by the Chancellor and Snowden J on 26^th May 2017, where they made clear that the exercise should be guided, not by the applicants’ (a) own subjective judgment as to which persons might be affected by the scheme; and (b) decision in that context whether someone was so unlikely to be adversely affected by the scheme as to make communication with them unnecessary, but should, rather, be guided and determined according to objective factors. Among these factors (and obviously at the centre of things) would, when available, be the Skilled Person’s report on the scheme and its effect, which FSMA requires.

However, since no such report is yet available (though I understand that early drafts have been considered by the applicants), any assessment and objective test as to the effect on the various constituencies within the customer base and any others potentially adversely affected is presently missing an important component. It is, for that reason, amongst others, that Mr Moore QC, appearing together with Miss Mary Stokes, have at all times emphasised that any order today will be subject to emendation or change at a hearing which has been set for final approval of the communications programme, which is due to be heard on 4^th December 2017.

The necessarily provisional nature of any assessment made now is bound to beg the question: well why, given that anything the court says now may be subject to later change, is it necessary for the matter to be raised before the court at all as a preliminary matter and during the vacation? The answer to that is twofold: first, the identification and application of suitable objective criteria is not entirely scientific and is certainly not without complexity: and it is (I readily understand) of considerable utility to the applicants, and indeed probably essential in terms of gearing up for the timetable, to establish at least a provisional view of the likely lie of the land and the Court’s more particular attitude as soon as possible: even a provisional indication of its approach by the court is of great utility to the Applicant in formulating and developing its approach as, indeed, the clarification given on 26^th May has, to a large extent, demonstrated.

The second is this, that whilst it is accepted that the directions sought from the Court now are subject to change in the future, nevertheless, the matter has been very carefully explained, and also vetted by the Regulators, who appeared through Mr Purves, of counsel. A hearing such as this enables both the Applicant and the Regulators to explain and (they would naturally hope) justify their provisional approach; and it is also both salutary and appropriate that the court should, in giving its direction, accept that the expectation held and comfort sought is that the court will not suddenly change its mind in the absence of some materially different appreciation of the matter in the Skilled Person's report (when it becomes available in final form) than is presently anticipated, or some other change of circumstance of sufficient materiality as reasonably to affect the balance which any communication programme involves. An analogy, inexact as ever, with schemes of arrangement, where the court gives preliminary indications as to class constitution whilst reserving the right to change if some additional factor arises, springs to mind.

Because of the importance of the matter and the provisional reliance that is to be placed on the provisional directions sought, even at this preliminary stage, the court must also be persuaded in accordance with the guidance given by the Chancellor and Snowden J that the fact of this hearing has also been sufficiently notified to persons who may be interested at the end of the day. In that context I am naturally satisfied that the Regulators have been properly and sufficiently notified given the attendance of their counsel, and the very helpful skeleton argument which they have provided in commenting on the communications programme. So far as the 'wider world', if I can put it that way, is concerned, Mr Moore has taken me to the evidence confirming that the fact of this application has been put on multiple websites and that this has been done some 14 days ago giving, in my estimation, a sufficient general notification to persons, who might wish to make their views felt, the time and place at which they could do so. As it happens, there are a number of persons in this quite large court, there is no way of me telling how many are generally curious or intrigued and how many more specifically interested in the matter, but suffice it to say that the matter was called on and I have invited contributions from anyone who wished to offer them (though in the event none has).

Concluding on this part of the matter, I am satisfied both that this is a useful exercise, that it is appropriate for the matter to have been heard, even in advance of the 4^th December hearing, and that adequate notification of the fact of it has been given.

Turning now to the nuts and bolts of what is proposed, the directions now sought are presented as being calibrated according to various groupings which have been identified after consideration of their entire customer base by the Applicants further to the 26^th May hearing.

Put summarily, but I hope not inaccurately, there are three main customer groupings and another grouping of new customers who are in a rather different position. The first category is, in a sense, the most important in terms of what will be required to bring to their notice the nature and content of the scheme so that they may make any submissions that they think appropriate when the matter ultimately comes before the court. They are referred to as 'Category 1 customers' and they are, in brief, customers:

Therefore, Category 1 customers are persons capable of being directly affected by the scheme because they are transferring over to a new entity.

As I have indicated, appropriate and adequate communication with Category 1 customers is a matter of the most important concern, and it is with some relief that I clarify that on this occasion I am not asked to approve the communication programme as it relates to them save in one respect. It is a respect which also affects other categories as I shall explain.

What is sought, in a nutshell, is that, in lieu of individual notifications to customers within a larger corporate group, nominated persons, or single addressees of group companies, should be the only persons circulated leaving it for that nominated person to make known the details to the extent necessary to others with a like concern or interest within the same group. The proposal for this is put forward, notwithstanding the importance of notification to this particular Category 1, both as being an appropriate and proportionate solution where, otherwise, the transferor might be confronted with the task of multiple addressees

I raised the question with Mr Moore QC as to what I term the problem of anachronism, that is to say some group reorganisation which has changed the name of the group entity, or some individual change of role or departure such that the nominated individual addressee no longer has the recognition which it was assumed he/she would have, when first nominated. Mr Moore took instructions in this regard particularly, and at my request, as to the frequency with which this mode of communication had been adopted, and whilst what he told me was, in the circumstances, understandably fairly general, I understand that it has been used in the past year and that, furthermore, there is a further protection in that the persons concerned will also be approached by their relationship manager on an individual basis which should secure the communication of the relevant information or at least such information as is necessary for them to make further inquiry.

In those circumstances and whilst very conscious of the general point made in the 26^th May judgment that it is important not, as it were, to assume too early that some lesser form of communication is sufficient, I am prepared in the circumstances, to adopt the solution which has been suggested. If anachronisms as I have called them, were to emerge as a real issue and to have some material effect, or generate some specific complaint, that might occasion a further exercise pursuant to directions to be subsequently given in December. But, as Mr Moore explained to me, that would be an altogether more discrete and defined task, and one which he was confident on instructions should be well capable of being achieved within even the tight timetables. Put shortly, the possibility of having to undertake some further but more confined exercise was a risk which they appreciated but were content to run, not least perhaps because the applicant has, as I understand it, seen a fairly advanced version of the draft Skilled Person’s report, and the alarm bells have not rung so far. That suffices I think for the purposes of today in relation to Category 1. It was a mechanistic task to some extent; the more specific tasks will await December.

Category 2 customers are customers of the retail, including consumer, finance and commercial divisions, including the customers of the German and Dutch branches of Bank of Scotland Plc, within the Applicants' customer base. For the sake of reasonable confinement of this judgment I have not set out the various categorisations of the four principal business areas organised within three divisions in the Lloyds Bank Group, but in case it is subsequently thought necessary in order to give comprehension and cohesion to these judgments I note that these are briefly set out in para. 9 of Mr Purves' skeleton argument on behalf of the Regulators and described in more detail in the witness statement in support of this Application of Mr. Mark Culmer.

The salient or most important point in relation to Category 2 customers is that they are customers who will, if I can put it this way, stay put within the existing entity. They are not being transferred under their scheme: and the existing entity of which they are presently retail customers will become the ring-fenced entity. I note, in parenthesis, that in this respect this proposed scheme differs from some of the others which were before the Chancellor and Snowden J on 26^th May.

The characteristics of Category 2 customers again are very clearly set out both in the skeleton argument on behalf of the Regulator, and in the Applicants' skeleton argument. In the latter they are identified as being:

So far as the first sub-group of retail and consumer finance customers is concerned, notification is intended to be given by way of a short paragraph communicated within the context of a hard copy 'business as usual' mailing, or by way of a message prompt, the format of which has been recently revised and which was appended to the Applicants' skeleton argument. The common factor, in other words, is the fact that it is envisaged, and in many cases this has already happened, that ‘business as usual’ correspondence has been entered into, on to which the fact of this requirement and intended scheme has been added under an appropriate heading.

There is a gap in this which is implicit in the fact of its dependence on the necessity for some “business as usual” correspondence, this is that there has been identified, at least in numerical terms, a fairly significant percentage – I think some 6.3 per cent – of customers falling within the category with whom it would not be proposed to enter into any ‘business as usual’ correspondence. That 6.3 per cent amounts to some 2.24 million customers, and that is a matter carefully to be considered since that is a very significant number by anybody's standards. Two ways of justifying this were suggested. The first, and this was the argument most stressed by Mr Moore, and also adopted on behalf of the Regulators, is that whilst it would be odd if you are entering into correspondence with customers not to include some reference to this proposed scheme, it was not required for the simple reason that Category 2 customers are not perceived, as best presently can be identified, to be materially affected by what is proposed, thus the inclusion of a statement would not be inappropriate but it would not be necessary.

The second argument more faintly advanced, was that although 6.3 per cent and 2.24 million may appear big figures, nevertheless in the context they are not out of line with the ordinary proportion or numerical amount which, in other contexts such as insurance company transfer schemes, are accepted to be people who it is unlikely will be capable of being contacted because of some deficiency in the mailing records or some problems in the post. I find that a less convincing argument because in an insurance company transfer scheme context, for example, it is not choice but necessity which leads to the expedient. Where there is a choice I think it must be justified on a more substantive basis.

This is an area which is, obviously, especially susceptible to the risk that if the assessment presently made of the Skilled Person's likely assessment turns out to be wrong then a considerable exercise of identifying either the 2.24 million or having to recirculate all the rest would follow. But, Mr Moore, and those with him, are well aware of that risk and are prepared to run it, so that the question only becomes – on the premise that there is no adverse material effect presently envisaged or identified and on the premise that that is what the Skilled Person will ultimately say in his report – 'Is it nevertheless necessary for this remaining cohort to be corresponded with?' Mr Moore, as I say, emphasised both his point of principle but also latterly told me, though there wasn't evidence to this effect, that the process would be a lot more difficult than it might sound because it was, on the way the computer system is presently set up, impossible to identify the actual names of the 2.24 million in question, so that the simplest solution would be here and now to recirculate all Category 2 customers.

I have concluded that I should accept, on the premises that I have described, that it is not necessary for the relevant Category 2 customers to be circulated individually, even though that relevant cohort is being treated differently from the others who will be communicated with in the ordinary course. Again, I have reached that conclusion with some equivocation and diffidence, given the overriding objective which the Chancellor has identified. But two considerations have primarily weighed with me.

First, as it seems to me, there must be some consequence of the premise that it does not affect this relevant cohort, and it is consistent with further clarification given by the Chancellor when he dealt with a not dissimilar application right at the end of last term on an application made by Barclays and Woolwich Plan Managers Limited, where, at least in one context the fact that no adverse effect had been, or was presently identified, did carry the day in terms of releasing any necessity to communicate.

Secondly, and most importantly, and perhaps overriding my entire response to the questions put, I agree with the Regulators and with the Applicants that it is not right to look at the hard copy communication as if it were the only means of alerting persons interested to what is proposed. The reality is that though more indirect, the gathering waves of public advertisement, and especially electronic communication, may well be the most potent form of notice.

The fact of the matter is that there is also proposed is a very comprehensive programme of public communication of the scheme: branch notification in leaflets and web page and online material; printing on the back of ATM receipts for those who both ask for such a receipt and carefully read them; formal notice in legal gazettes and national newspapers; the programme of advertisement in national newspapers, and branch notification by way of specific notice, as well as a dedicated microsite and sophisticated monitoring of social media. These seemed to me to provide both an impressive general communication package, but also should, as I think, bring to the general notice, particularly of customers of such banks, of the imminence and fact of schemes of this kind.

In short, it seems to me overwhelmingly likely, in light of the public importance of the matter and the communication programme which I have described, that the fact of these schemes will become common knowledge and common currency and that the court should not assume that those methods will not result in the matters coming sufficiently to the attention of anyone minded even to think of participating in a hearing and sufficient directions to give them the means of making at least further inquiry.

Accordingly, I am prepared to approve the method which has been devised, with much careful thought as I say, in respect of that category of Category 2 customers. In point of detail I should perhaps note that the ‘business as usual’ mailings for many of the Category 2 retail customers will not be a single one, but is more likely to be two. I should also have noted that the Regulators, having considered the matter very carefully, also do not object to the proposed method. The last point I need make – I think I may already have made – which is I have had a look at the format of what is proposed and I am, for my part, content that it effects a reasonable balance.

I turn to the other group of Category 2 customers, comprising customers of the Consumer Finance Division. These are the subject of rather different proposals. It is proposed that each will receive notice of ring-fencing and the proposed scheme through a combination of bespoke and “business as usual” mailings that together cover all the consumer finance customers falling within Category 2. I think it follows from my acceptance of what is proposed, with respect to the first group, that the more extensive communications programme with regard to this identified group appears to me to be satisfactory.

The third group of Category 2 are the customers of the commercial division. Again, by parity of reasoning, what seems to me to be proposed generally suffices, but there is the additional wrinkle which I have discussed in the context of Category 1: it is at heart a matter of mechanics. The means by which it is proposed to bring the relevant communications to the attention of those concerned is via the nominated group recipients process which I have previously described. On the footing, as I understand it to be, that this is the process which has recently been used in this context too, and for the reasons which I previously sought to adumbrate, that seems to me to be an appropriate method, bearing in mind also the more general point that Category 2 customers are not transferring customers in any of their sub-groupings.

That brings me to the Category 3 customers, the identified characteristic of which are customers who: (i) do not in respect of the product in question have a contractual relationship with either transferor, or (ii) if they do have such a relationship with either transferor are nevertheless accustomed to dealing with another entity and not the transferors in respect of the product in question; or (iii) have their relationship with an overseas branch in a product governed by foreign law.

Dealing first with (iii) it is proposed, with respect to those Category 3 customers, that the process required will require either individual or what are called 'manual novations', or some scheme under some different law which will carry its own requirements. Plainly, as it seems to me, the court will, on 4^th December, wish to have more detail as to what is proposed, especially as regards foreign schemes, and as regards to any additional or overlapping requirements that they may entail, but that is a matter for that day and not this. So far as the individual novations are concerned, of course, communication will be only the start of the process of engagement.

As to Category 3 customers who do not have a contractual relationship with the transferors or either of them, I think that these have been identified in effect as being (i) insurance customers, (ii) entities in which a subsidiary of a transferor has made an equity investment, (iii) customers of group entities incorporated outside the UK, (iv) customers who have a contractual relationship with MBNA Limited (v) customers, about 131,000 in total, who have a contractual relationship with Lex Autolease Limited which, as its name implies, is a vehicle finance operation.

The direction sought is that the applicants are not required to give individual notice of the scheme to Category 3 customers. What is proposed is set out in the draft order as being that no individual notice should be required to be given to Category 3 customers of a large group as defined in Schedule A, notwithstanding certain identified paragraphs of the May order.

So far as these customers are concerned, again the working premise on which the proposed direction is put forward is that there is no reasonable basis for supposing that they will be adversely affected by what is proposed since they will not transfer. The Regulators have also considered this aspect of what is proposed and they do not object to the direction proposed.

On that premise, and with the comfort of the non-objection of the Regulators and the additional if more amorphous process of general advertisement, electronic and otherwise, and, on the same premises as I have previously described, unless and until those premises are shown to have been inappropriate, it seems to me in broad terms that what is proposed is sufficient.

I should mention also that there is a further sub-group of people who, though they may have a contractual relationship, are nevertheless unaccustomed to dealing with either transferor. In that case, it seems to me to be adequate rationale in support of what is proposed that though the scheme is an important one it is not the occasion for changing the basis on which they are ordinarily conducting their arrangements with the group.

Lastly, the question of new customers has been raised. It arises because of the very broad definition of 'consumers' in FSMA. The short point is the obvious one, which is that they cannot be identified until they become actual customers. They will, nevertheless, have available, and it will, as I suggest, in my estimation become the common currency that the scheme is to take place as it is with other retail banks, and it seems to me that that is both sufficient and the most that can presently be done. Of course, future customers who would be within Category 1 will have to be treated differently but, again that is a matter, as I have explained, for another day.

That brings me, I think, to the end of the proposed directions. I consider that these demonstrate an assiduous attention to compliance with the 26^th May 2017 judgment, whilst also taking into account in a measured way the balance required between on the one hand appropriate communication of matters of importance and on the other hand the danger of arousing concerns that would be misplaced on any reasonable assessment.

The only other matter I am presently aware of having briefly to note, is that there was some discussion – helpful as I conceive it to be – as to the means by which any written representations are to be filed by persons who wish at least to keep open the entitlement to be heard at the sanction hearing, Mr Moore made clear that he spoke without instructions from the Applicants nor indeed any other of the banks undergoing the process. I think it suffices to say that, as I would expect, the Applicants are considering very carefully how best to address this and are willing to discuss the proposal, which I think commanded some support from the Regulators, that rather than rely on CE file, or any process available within this building or the court generally, that a dedicated platform be made available with a specific email address so that, as Mr Moore put it, an unidentified person, say, the solicitors for the Applicants, should house that system and receive documents in effect as agent for the court. Again, this is a solution which is proposed, it is embryonic for the present, it will have to be worked out and developed, and it will have to be considered in December, but I am glad to be able to record what I perceive to be a measure of constructive consensus as to how this, in rather odd circumstances, may be achieved.

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