Lloyds Bank Plc, Re

This is the first hearing for directions in respect of a Part VIII application made by the transferors, Lloyds Bank plc and the Bank of Scotland plc and the transferee, Lloyds Bank Corporate Markets plc, under Part VII of the Financial Services and Markets Act 2000 (“FSMA”), under which they seek the sanction of the court, as is required, for a ring-fencing transfer scheme (which I shall call the “RFTS”). The directions sought relate principally to a proposed communications plan, the objective of which is to notify persons interested of the fact and nature of the RFTS proposed.

Unusually, since directions are only usually given in the context of an issued substantive application, this is not the first time on which the matter has come before the court, albeit that on the previous occasions the applications were necessarily provisional in nature because the Part VII application to which the directions sought relate had not yet been issued.

The first occasion that the matter came provisionally before the court was when it was heard in May, I think on 26^th May 2017, by the Chancellor and Snowden J, when the court gave indicative directions with respect to schemes proposed by each of four major English banks, and in particular gave guidelines as to the approach to be taken as to the notification of customers and others. The second occasion was when the matter came before me on 25^th September 2017 when, after further work had been undertaken to devise the details of a communications plan, the court was asked to approve, at least in principle, the fundamental features of what was proposed, especially as regards customers called “Category 2” and “Category 3” customers, being customers not expected to be adversely affected, leaving for further consideration on a future occasion what notification should be given to those more likely to be impacted or adversely affected, referred to as Category 1 customers.

The main matters for me to consider today then are (a) to review the previous proposals and assess whether there are any circumstances requiring their modification and (b) to assess the communications plan in its application to Category 1 customers. I am also asked to review proposed guidance for persons who may wish to exercise a statutorily-conferred right of objection.

It is not necessary for me to detail the terms of the proposed RFTS itself. The purpose of these ring-fencing schemes, put very summarily, is to segregate in a ring-fenced entity a bank’s ordinary retail banking activities, and to provide for other non-retail or investment activities to be conducted in a separate entity. Again put very broadly, the proposed RFTS in this case is intended to effect the transfer out of the transferors to a non-ring fenced bank (here, Lloyds Bank Corporate Markets plc, the third applicant), business which cannot, under the ring-fencing provisions which come into effect at the beginning, I think, of 2019, any longer be conducted by a ring-fenced bank (“RFB”) and to retain within the existing transferors the business which can be undertaken on a ring-fenced basis. Since the transferors are to be the RFBs, the result in this case will be that the vast bulk of the transferors’ customers will remain in situ, with only some 700, presently, customers, who are commercial customers with more sophisticated or mixed products, or investment products, going over to the non-ring-fenced entity, namely Lloyds Bank Corporate Markets plc. The model which is to be applied as regards the scheme itself has been referred to as the “Wide RFB” model, which, in addition to leaving in situ, as I put it, most of the existing banking business customers, will, nevertheless, have some ability for commercial banking customers to remain within the transferors if certain criteria are satisfied.

The RFTS itself has been or is being preceded by various other arrangements or reorganisations, all designed to ensure that the entire group will be reorganised in the best way, or the best way that the board conceive to be possible, to accommodate and give effect to the ring-fencing provisions and the changes which have been introduced pursuant to the Financial Services (Banking Reform) Act 2013, which amended Part VII of FSMA.

The scheme itself, and indeed the preceding reorganisations, although those take place ancillary, or as pre-steps to the scheme, are extremely complex. The complexities of the banking businesses concerned are very considerable and the very helpful witness statement provided in order to guide me through the details, by Mr Mark George Culmer, dated 24^th November 2017, exceeds some 200 fairly closely-typed pages. I am indebted to Counsel for the Applicants, Mr Martin Moore QC leading Ms Mary Stokes, and their teams for their careful and lucid explanation of the essential features of the businesses and what is proposed.

It is a particular feature of the relevant provisions of FSMA (introduced by amendment to enable such schemes) that any such application as is now before me can only formally come before the court if the regulator, in the form of the PRA, has, after consultation with the FCA, consented to its presentation, having approved (a) the appointment of a “Skilled Person” to report on the terms of the Scheme; and (b) the form of that report.

In this case, therefore, the first thing that I need to be satisfied about is that the application now made is regularly before the court. In that regard, Mr Robert Purves of counsel, appearing on behalf of both the PRA and the FCA, has explained to me both that the regulators did approve the appointment of the designated skilled person and have also approved the form of his report. The Skilled Person is Mr Michael Lloyd and he has provided for me both his main report and a summary of it, each being detailed and impressive pieces of work. The long and the short of it is that the PRA having given the approvals described above and having regard to the report, has consented to the present application. Thus, at last, after the preliminary outings, the matter can come before the court formally as an established application.

The preconditions for a regular application having been satisfied, as in my judgment they plainly have been, the main business of today is to approve the communications plan. In that regard, the weight of the business is less than it might otherwise have been, given that, as I have indicated previously, most of what is now proposed has already been dealt with provisionally on the previous occasions that I have mentioned. What is new now though is that the Court has the benefit of the Skilled Person’s report. The purpose then, more particularly, of today is to confirm or validate the directions previously given and to deal with those matters which could not, on the previous occasion, safely be dealt with because, on those occasions, the report of the skilled person, which is bound to impact and inform the court as to the appropriateness of any communications plan in light of the effect or likely effect of the scheme, was not then available.

Now that the report is available, and further to the continuing work done to ensure the comprehensiveness and appropriateness of the directions, I can immediately say that the directions previously given are, in my view, appropriately confirmed and validated. I accept that there have been no relevant changes to the scheme in their application to the only two categories of customers in effect dealt with on the previous occasion, that is to say, Categories 2 and 3, which I can broadly describe as customers who will not be transferring and in respect of whom it is considered it is unlikely that there will be any adverse effect worked by the scheme. The Skilled Person’s report has not upset the approach; on the contrary, the overall conclusions of the Skilled Person bring further confirmation of an important nature, in that he too is, having considered the matter carefully, persuaded by the adequacy of what is proposed. Thus, with the exception of a small amendment to be made to the 25^th September order under the slip rule, given an inconsistency of an inadvertent nature between the order so made and the previous directions given in May by the Chancellor and Snowden J, there is no need for any further directions in respect of categories 2 and 3 customers I have mentioned.

The active business, if I can put it that way, of the court now, therefore, is to satisfy itself with respect to what is proposed as regards category 1 customers, being those customers, few in number, but no doubt substantial in value, who are to be transferred.

The complexities of what is proposed are, as I have indicated, very considerable. It does not seem to me to be either essential or wise for me to go through each and every of the various steps which are to be taken to ensure that Category 1 customers are sufficiently informed of the scheme, just as it is even less necessary for me, once more, to travel over the arrangements with respect to the other two categories. I think it suffices to say that the communication plan is extremely helpfully summarised in a schedule which it is proposed to be annexed to the draft order which gives details and dates as to the method and timing of individual notifications with respect to Category 1 customers (and all other customers and other relevant persons), and also refers to the mode of public or general communications which is also to be adopted in parallel. Mr Moore has taken me carefully through that schedule, and responded to my questions on it to my satisfaction.

The direct forms of communication have been introduced to me by Mr Moore QC, who appeared, with Ms Mary Stokes of counsel, on behalf of the applicants. With one contingent caveat, I am content with the form, at least in general terms, whilst accepting that it may be that, before they are finally approved, there may emerge small drafting or other matters.

The plan provides not only for direct communication with Category 1 customers (as well as certain others, including commercial customers) but also for a developing process of public and media notification. As I mentioned on the previous occasion, and without in any way undermining the importance of direct communication with people who may be adversely affected, as indeed the Skilled Person does consider some are in this Category, or at least may be, nevertheless, the more general or amorphous process of public or general communication seems to me, if not equally, certainly almost as important. In my view, the programme or plan should ensure that awareness of what is proposed will gradually become the currency of financial life and, as the months roll on, it seems to me most unlikely that persons interested and affected will not become aware through both mediums of communication.

All in all the communications plan seems to me to be entirely appropriate in the circumstances. I should stress that in declining to go through either the particulars of the communications plan or the complexities of the scheme, I do not intend to signify in the least bit that I have not been very carefully taken through the salient features. Indeed, if I may say so, this matter, from beginning to end, as I say, in the manner that it has been provided or introduced to the court, and in the manner in which it has been presented, show both very admirable expertise and very considerable care in leaving no relevant stone unturned in this difficult and novel situation.

I have mentioned one small caveat which is this: it relates to the covering letter to be sent to Category 1 customers. Although I would accept that it is made clear in subsequent parts of that letter the relevant addressee’s entitlement, subject to statutory restrictions and some further guidelines which I shall come to, to make representations and subsequently to attend at court if that person believes that he is adversely affected by the scheme, a small box which came to be known as the “Johnson Box”, for reasons which I do not pretend to know, does not refer to that entitlement. It does refer to other important matters, and especially that any addressee who remains unclear is able to call their relationship team or to email at a given address and, secondly, is advised to pass on the letter to any other relevant stakeholder or legal entity within the group, which I think is intended also to capture third parties who may also be affected in right of some guarantee or other arrangement. But it does not refer to an important element of the statutory scheme, the right of reasonable and properly made objection to any adverse effect of the proposals on the addressee. It seemed to me, and I put to Mr Moore, that it might be of assistance, and certainly could do no harm, if the Johnson Box also included an express reference to the statutory right in respect of the court process. I think the upshot was, and this was evident from the reaction also of the regulator, that that was not thought to be essential, but equally was not thought to be damaging; and, for my own part, if it can be done without undue expense, that is to say if the font and print and the general presentation of the letter is not yet so cast in stone as to make it expensive to revise it, I should have thought that it would be an appropriate addition. In my view, the statutory entitlement is a very important part of the process and there is certainly no harm and, to my view, on balance, a benefit in drawing it to attention of those concerned on the very first page, even if it is subsequently repeated.

All in all, I commend the extremely impressive comprehensiveness, as best I can assess it, of the communications plan and the care with which it has been devised to meet the guidelines established at the preliminary hearing in May 2017. It seems to me that the dual process of appropriately targeted direct communication and the variety of public notification processes ought to ensure that the RFTS and its salient provisions and effects are brought to the attention of those interested.

Accordingly, as regards the past, I confirm, with the amendment requisite as indicated, the directions previously given, there being no reason in my view to review or add to them, and, as regards the future and in respect of, in particular, the Category 1 customers, I consider that the overall package is entirely appropriate and satisfactory.

That leaves, I think, for present purposes, though I shall have to come back to the details of the draft order itself, the question as to the guidance to be given with respect to representations as respects the proposals and, thereafter, if it should become appropriate, any attendances in court. In that regard, I have been greatly assisted by the fact that, in the context of a scheme proposed by Barclays which came before the Chancellor on 10^th November 2017, an appropriate form of guidance in crisp and clear terms was worked up. As it seems to me, that, with any necessary entirely minor changes to reflect the different constitution of the court and the difference in the applicants, is appropriate and I propose to approve it. That is not only because I would not depart from what the Chancellor had approved without extremely good reason, especially given that there is very great importance I think in establishing any appropriate uniformity as regards the various applications which will be made in due course by the four or more banks who will require to come to the court in light of the new regime; it is also because, looking at the proposed guidance afresh, the proposals seem to me clear, concise and entirely sensible.

That, I think, subject to agreeing the terms of the order, concludes the main business of the matter. I note that there will be a case management conference in early March before the main hearing on 27^th March. In the usual way, it may be that there will be i’s to dot and t’s to cross, or other matters which come out in the complex process, but I expressly refrain from further comment on matters which are not appropriately dealt with today. In that context, I should perhaps mention that there have been some negative responses, on the one hand, to the way the matter is presented, but only four out of 278 customers have felt it right to comment adversely, and, more substantively, there have been some negative responses to the substance of the scheme in terms of its effect on individual customers. One, in particular, has voiced considerable concern through solicitors. Again, that is not, as I see it, the business of today. It was fully right that it be mentioned before me, but I would hope that, by the next hearing, progress will have been made in resolving any resolvable difficulties, it always being the case that, in a scheme of this kind and complexity, ultimately, a balance has to be struck. There will always be persons who are adversely affected, whatever the design of the scheme, whatever the optionality granted and however careful may be the provisions to attenuate any adverse result.