Santander UK Plc v Abbey National Treasury Services Plc

After a two-day hearing on 11 and 12 June 2018, I decided to sanction a ring-fencing transfer scheme under Part VII of FSMA (“the Santander Scheme” or “the Scheme”) proposed by Santander UK Plc and Abbey National Treasury Services Plc (“Santander UK” and “ANTS” respectively and together “the Companies”). The purpose of this judgment is to elaborate, at the request of the parties, on the short reasons I gave then for my decision.

A ring-fencing transfer scheme or “RFTS” is a statutorily-mandated process for the separation of the relevant banks’ retail banking business from their (potentially riskier) wholesale and investment banking activities. The process is governed by provisions also newly introduced into Part VII of the Financial Services and Markets Act 2000 (“FSMA”), and in particular by a new Part 9B which was introduced into FSMA by section 4(1) of the Financial Services (Banking Reform) Act 2013 (“FSBRA”).

FSBRA represents a multi-layered response to the financial crisis of 2008 and 2009. It is all part of a package designed to strengthen the UK’s larger high-street banks and to provide additional protection to their retail and small business customers. Ringfencing, which is mandated in respect of UK retail bank operations above a specified size, is an essential part of that response: it is mandatory and has to be effected by 1^st January 2019.

Sir Geoffrey Vos CHC has described ring-fencing as “a statutory project on an unprecedented scale.” As noted in the skeleton argument provided to me on behalf of the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”, and with the PRA together, “the Regulators”),

“Implementation is a highly complex project of national importance. It will be relevant to millions of retail banking customers in the UK.”

A ring-fencing scheme is inevitably highly detailed and complex. After detailed consideration by statutorily-designated persons, and especially the Regulators and the person appointed under section 109A FSMA to report on the RFTS Scheme (the

“Skilled Person”), an RFTS must ultimately be put before the Court for its sanction before it can be given effect.

The Santander Scheme is the fourth and last of a series of RFTSs presented to this Court for sanction, such schemes having already been sanctioned by this Court in the case of Barclays, Lloyds and HSBC. (Footnote: ¹)

In considering the detailed provisions governing the Santander Scheme and in reaching my decision, I have had the benefit of comprehensive submissions both written and oral from Mr Martin Moore QC, leading Mr Stephen Horan, who appeared for the Companies; from Mr Rory Phillips QC, leading Ms Sophie Mallinckrodt, who appeared for the Regulators; and from Ms Charlotte Eborall, who appeared for the Skilled Person.

I have also, of course, had the benefit of the judgments given by the Chancellor in two of the preceding RFTSs, as well as my own experience from the Lloyds Bank RFTS. An additional benefit of those earlier judgments is that I think it unnecessary to rehearse at length in this judgment the description there given of the details of the ring-fencing regime introduced as Part 9B of FSMA, and the requirements for the implementation of ring-fencing by a RFTS. Those earlier judgments go into those matters at some length. For example, in his judgment in the Barclays RFTS (Re Barclays Bank plc and others [2018] EWHC 472 (Ch)) the Chancellor described the legislation enacting the ring-fencing regime at paragraphs 10 to 11, and the legislation concerning applications for sanction of such schemes and the Court’s obligations and powers, at paragraphs 13 to 21. I addressed these matters in my judgment in Re Lloyds Bank plc and others [2018] EWHC 1034 (Ch)atparagraphs 11 to 15 and 16 to 33 respectively.

As also appears from those judgments, in each of the three RFTSs which have come before this Court previously there have been numerous statements of representation filed on behalf of persons who considered themselves to be potentially adversely affected by the scheme, and at least one objector appeared in person at the relevant sanction hearing, in each case pursuant to the rights expressly conferred by section 110 of FSMA. In this case, only one written representation was received, from a Mr Robert Brown who had lodged the same objection with all three of the preceding RFTSs in the English Courts, and also with the RBS RFTS in the Scottish Courts. On this occasion, Mr Brown confirmed that he did not wish to appear at the Sanction Hearing. I deal later with his written representations.

I propose to address the matters relevant to my decision under the following headings and in the following sequence:

The current structure of the Santander Group, so far as relevant, is as follows:

Cater Allen Limited (“CAL”) is also a wholly owned subsidiary of Santander UK. It is a private bank for high net-worth individuals and business customers and, like Santander UK, will become a ring-fenced body (“RFB”). No business will be transferred by or to CAL under the Scheme.

Santander UK, ANTS and CAL are UK banks that carry on a combination of retail, wholesale and markets business. In particular:

Santander UK, ANTS and CAL all have PRA permissions to carry on the regulated activity of accepting deposits and acting as a credit institution.

The Sanction Hearing was the culmination of a long process in which the Court had been involved at various stages.

Indeed, and (as I have noted in my previous judgments on RFTSs) exceptionally, the

The sequence was, in summary, as follows.

It is convenient to note here also that the PRA’s consent to and approval of the sanction application relating to the Santander Scheme (the “Sanction Application”) connotes that it has been satisfied that the London branch of Banco Santander (“SLB”, which is the transferee from ANTS of prohibited and certain specified permitted business and is registered in the United Kingdom as a UK establishment of Banco Santander and subject to regulation by the FCA and PRA), as well as Santander UK, has all regulatory authorisations and permissions required to conduct its business, including the business to be transferred to it under the Scheme: and see further below.

As emphasised by Sir Geoffrey Vos CHC and Snowden J in ReBarclays Bank plc and others [2017] EWHC 1482 (Ch), the necessity to notify persons who might be likely to be adversely affected by the relevant RFTS is an important feature of Part VII FSMA in its application to RFTSs, not least in the context of providing the information necessary to give vitality to the statutory right to object in written representations and in Court. I have described the Communications Plan proposed by the Companies (as varied from time to time) in my previous judgments in this matter further to hearings on 27 October 2017 and 5 February 2018: see paragraph [17] above. For the reasons stated I approved the plan and also a guidance note, to be made available on Santander’s ring-fencing microsite, to assist persons wishing to make representations at the Sanction Hearing.

The Companies also set up a number of processes to assist customers who wished to query or simply find out more about the proposed Scheme. In particular, they established both: (a) a dedicated customer support team using existing facilities at Santander UK’s corporate and commercial contact centre in Glasgow (“Glasgow Team”); and (b) a process for recording relevant communications (“Front Office Comms”) from customers and counterparties of the wholesale banking and markets business of Santander UK’s Global Corporate Banking division, and from relevant customers of the Retail Banking and Corporate and Commercial Banking divisions, made directly with relationship directors or other sales or trading personnel. (It has been operational since the Directions Hearing. Before that, staff at the centre had been trained to manage queries received about ring-fencing from September 2017.)

I was satisfied that the Companies have implemented the Communications Plan substantially in accordance with my February Order: any deviations have been minor and not such as adversely to affect persons concerned; and some additional communications and notifications have not cast doubt on nor detracted from the effectiveness of the Communications Plan. I was also satisfied that the Companies’ further processes to support customers and answer their questions were appropriate and satisfactory in design and outcome.

I was supported in this conclusion both by the Skilled Person and by the Regulators. In summary, the Skilled Person has confirmed that he has been satisfied that the processes, controls and team in the dedicated Glasgow contact centre “has worked effectively since its inception”, and that “all queries, concerns and ultimately objections from customers and other persons have been properly considered and have been or are being responded to.”

Having regard to the Skilled Person’s careful review and assessment (including, in particular, in his Supplementary Report), the Regulators have confirmed that they too have been satisfied that the implementation of the Companies’ RFTS Communication Plan meets the PRA’s expectations regarding communicating the RFTS as set out in its statement of policy on ring-fencing transfer schemes. (Footnote: ²) The Regulators, who maintained a dialogue with the Skilled Person, who had fortnightly calls with the Companies’ ring-fencing communications team to review management information detailing the volume and type of communications received, have also confirmed that they kept under review the Companies’ processes for responding to queries, complaints and Written Statements, and that these have not given them any cause for concern. I address certain queries, representations and the small number of objections in a subsequent section of this judgment.

Before a Court sanctions any RFTS it must be satisfied that certain requirements have been met, for their satisfaction is a pre-condition of the Court’s exercise of jurisdiction. In outline these are that:

Most of these requirements have already been touched on; but the remainder of this judgment addresses them each in turn and in more detail.

Section 106B FSMA defines a “ring-fencing transfer scheme” as follows:

“106B Ring-fencing transfer scheme

(1)

A scheme is a ring-fencing transfer scheme if it—

(a)

is one under which the whole or part of the business carried on—

(i)

by a UK authorised person, or

(ii)

by a qualifying body,

is to be transferred to another body (“the transferee”),

(b)

is to be made for one or more of the purposes mentioned in subsection (3), and

(c)

is not an excluded scheme or an insurance business transfer scheme.

(2)

“Qualifying body” means a body which—

(a)

is incorporated in the United Kingdom,

(b)

is a member of the group of a UK authorised person, and

(c)

is not itself an authorised person.

(3)

The purposes are—

(a)

enabling a UK authorised person to carry on core activities as a ringfenced body in compliance with the ring-fencing provisions;

(b)

enabling the transferee to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions;

(c)

making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the body corporate to whose business the scheme relates becoming a ring-fenced body while one or more other members of its group are not ring-fenced bodies;

(d)

making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the transferee becoming a ring-fenced body while one or more other members of the transferee's group are not ring-fenced bodies.

(4)

A scheme is an excluded scheme for the purpose of this section if-

(a)

the body to whose business the scheme relates is a building society or credit union, or

(b)

the scheme is a compromise or arrangement to which Part 27 of the Companies Act 2006 (mergers and divisions of public companies) applies.

(5)

For the purposes of subsection (1)(a) it is immaterial whether or not the business to be transferred is carried on in the United Kingdom.

(6)

‘UK authorised person’ has the same meaning as in section 105.

…

The Santander Scheme satisfies the definition of a ring-fencing transfer scheme within the meaning of section 106B FSMA. Part of the businesses carried on by the Companies, each of them a UK authorised person within the meaning of section 105, i.e. a body incorporated in the UK with Part 4A permissions to carry on one or more regulated activities, is to be transferred to SLB, and in the case of ANTS, also to Santander UK.

The Scheme is for the “Scheme Purposes”, being those set out in section 106B(3).

The Scheme is not an “excluded scheme” (within the meaning given to that term in section 106B(4)); nor is it an insurance business transfer scheme, so section 106B(1)(c) does not apply.

Section 107 FSMA provides the following:

“107 Application for an order sanctioning transfer scheme

(1)

An application may be made to the court for an order sanctioning an insurance business transfer scheme, a banking business transfer scheme a reclaim fund business transfer scheme or a ring-fencing transfer scheme.

(2)

An application may be made by–

(a)

the transferor concerned];

(b)

the transferee; or

(c)

both

(2A) An application relating to a ring-fencing transfer scheme may be made only with the consent of the PRA.

(2B) In deciding whether to give consent, the PRA must have regard to the scheme report prepared under section 109A in relation to the ringfencing transfer scheme.

(3)

The application must be made–

(a)

if the transferor concerned and the transferee are registered or have their head offices in the same jurisdiction, to the court in that jurisdiction;

(b)

if the transferor concerned and the transferee are registered or have their head offices in different jurisdictions, to the court in either jurisdiction;

(c)

if the transferee is not registered in the United Kingdom and does not have his head office there, to the court which has jurisdiction in relation to the transferor concerned.

(4)

“Court” means–

(a)

the High Court; or

(b)

in Scotland, the Court of Session.

The Sanction Application satisfies the various requirements of section 107 FSMA; it was:

The application was properly made to the High Court in accordance with s.107(3)(a) as the Companies are both registered in England and Wales.

Section 109A FSMA sets out the requirements concerning a scheme report for an RFTS. It provides:

“109A. Scheme reports: ring-fencing transfer schemes

(1)

An application under section 106B in respect of a ring-fencing transfer scheme must be accompanied by a report on the terms of the scheme (a

“scheme report”).

(2)

A scheme report may be made only by a person—

(a)

appearing to the PRA to have the skills necessary to enable the person to make a proper report, and

(b)

nominated or approved for the purpose by the PRA.

(3)

A scheme report must be made in a form approved by the PRA.

(4)

A scheme report must state—

(a)

whether persons other than the transferor concerned are likely to be adversely affected by the scheme, and

(b)

if so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve whichever of the purposes mentioned in section 106B(3) is relevant.

(5)

The PRA must consult the FCA before—

(a)

nominating or approving a person under subsection (2)(b), or (b) approving a form under subsection (3).

The requirement that a skilled person’s report must state: (a) whether persons other than the transferors concerned are likely to be adversely affected by the scheme; and (b) if so, whether the adverse effect is likely to be greater than is reasonably necessary to achieve the relevant ring-fencing purposes under section 106B(3) (i.e. the Statutory Question) is peculiar to RFTSs.

That requirement has been satisfied. However, I return later to the detail of the Skilled Person’s Scheme Report and his Supplementary Report.

Section 111 FSMA provides the Court with the power to sanction a ring-fencing transfer scheme. Insofar as material, that section provides as follows:

“(1)

This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning a… ringfencing transfer scheme

(2)

The Court must be satisfied that-

…

(ab) in the case of a ring-fencing transfer scheme, the appropriate certificates have been obtained (as to which see Part 2B of Schedule12])

(b)

the transferee has the authorisation required (if any) to enable the business, or part, which is to be transferred to be carried on in the place to which it is to be transferred (or will have it before the scheme takes effect).

(3)

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

Accordingly, before sanctioning the relevant RFTS, the Court must be satisfied that the appropriate certificates have been obtained for the purposes of section 111(2)(ab).

Paragraph 9B of Part IIB, Schedule 12 FSMA defines the “appropriate certificates” for the purposes of section 111(2)(ab) FSMA. Paragraph 9B provides as follows:

“(1)

For the purposes of section 111(2) the appropriate certificates, in relation to a ring-fencing transfer scheme, are—

(a)

a certificate given by the PRA certifying its approval of the application,

(b)

a certificate under paragraph 9C, and

(c)

if sub-paragraph 2 applies, a certificate under paragraph 9D

(2)

This sub-paragraph (2) applies if the transferee is an EEA firm falling within paragraph 5(a) or (b) of Schedule 3.”

Paragraph 9C of Part IIB, Schedule 12 provides for the provision by a “relevant authority” of a certificate as to financial resources (CFR) as follows:

“(1)

A certificate under this paragraph is one given by the relevant authority and certifying that, taking the proposed transfer into account, the transferee possesses, or will possess before the scheme takes effect, adequate financial resources.

(2)

“Relevant authority” means—

(a)

if the transferee is a PRA-authorised person with a Part 4A permission or with permission under Schedule 4, the PRA;

(b)

if the transferee is an EEA firm falling within paragraph 5(a) or (b) of Schedule 3, its home state regulator

…”

That CFR has been provided: see paragraph 17(9) above.

Paragraph 5(b) of Schedule 3 provides:

“‘EEA firm’ means any of the following if it does not have its relevant office [i.e. head office] in the United Kingdom-

(b)

a credit institution (as defined in Article 4(1)(1) of the capital requirements regulation) which is authorised (within the meaning of Article 8 of the capital requirements directive) by its home state regulator;”

Paragraph 9D provides for a certificate that the home state regulator of the transferee has been notified as follows:

“A certificate under this paragraph is one given by the appropriate regulator and certifying that the home state regulator of the transferee has been notified of the proposed scheme and that-

(a)

the home state regulator has responded to the notification, or

(b)

the period of 3 months beginning with the notification has elapsed.”

The “appropriate certificates” have been obtained by the Companies:

The Court must also be satisfied of a further condition, namely that the two transferees, Santander UK and SLB, have the authorisations required, or will have it before the Scheme takes effect, to enable the business which is to be transferred to each of them to be carried on in the place to which it is to be transferred: section 111(2)(b). As to this:

The passported permissions of SLB, as listed on the Financial Services Register, extend to a broad range of banking and investment services and activities covered by the Banking Consolidation Directive and Markets in Financial Instruments Directive. Santander’s ring-fencing programme has undertaken due diligence to validate that the passported permissions of SLB are sufficiently broad to encompass the business being transferred to it under the Scheme. Accordingly, SLB, as well as Santander UK, has all regulatory authorisations and permissions required to conduct its business, including the business to be transferred to it under the Scheme.

The Regulators have recognised this, as in effect they acknowledged this by their support for the sanction of the Scheme, appearing by counsel at the Sanction Hearing to do so. Further, and as previously noted, the PRA consented to the Sanction Application on 18 January 2018 and on 5 June 2018 certified its approval of the Sanction Application.

As will already be apparent, an RFTS can have no effect unless and until sanctioned by the Court. The Court must be satisfied that, in all the circumstances of the case, it is appropriate to sanction the scheme: section 111(1) and (3) FSMA.

The role of the Court, its power to sanction an RFTS, and its proper approach to the exercise of its discretion have been considered in detail in previous applications.

As I noted in my judgment in the Lloyds Scheme [2018] EWHC 1034 (Ch) at paragraphs 145 to 149, although they are all part of the same Part of FSMA and have certain features in common, there are important differences between an RFTS and other forms of scheme under Part VII FSMA. Mr Moore summarised these as follows:

In paragraphs 44 and 45 of his judgment in the Barclays Scheme [2018] EWHC 472 (Ch) Sir Geoffrey Vos CHC recognised these differences and identified the following matters that must be considered in assessing an RFTS:

At paragraph 100 of the same judgment, the Chancellor summarised the factors which, in addition to the above, he considered relevant to the exercise of the Court’s discretion:

“It seems to me, therefore, taking into account the authorities and the submissions that I have mentioned, that in exercising its discretion, the court must keep in mind, in addition to the contextual and other matters I have already mentioned the following:

i)

The court’s discretion is unfettered and genuine and is not exercised by way of a rubber stamp.

ii)

The design of a ring-fencing transfer scheme is a matter for the board of the bank concerned. There may be many possible approaches to the design of a statutorilycompliant ring-fencing transfer scheme that will affect stakeholders differently. The choice is for the directors of the bank concerned, acting properly in accordance with their duty under section 172(1) of the Companies Act 2006 (which is to act in the way they consider, in good faith, would be most likely to promote the success of the company having regard to matters, including those specified in that subsection).

iii)

The adverse effects of a ring-fencing transfer scheme must be viewed through the lens of the statutory question, so that the court must consider, with the aid of the Skilled Person, first whether persons other than the transferor are likely to be adversely affected by the scheme, and, if so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve the statutory purposes. In considering whether persons are likely to be adversely affected by the scheme, regard need only be had to those adverse effects

that are (i) possibilities that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case, (ii) a consequence of the scheme, and (iii) material in the sense that there is a prospect of real or significant, as opposed to fanciful or insignificant, risk to the position of the stakeholder concerned.

iv)

Even if the statutory question is answered negatively, it will not automatically follow that a proposed scheme will be rejected. The court’s approach will depend on all the circumstances, including the balance between the chosen design of the scheme, the benefits that will be achieved by the scheme, and the nature of the adverse effects identified, all viewed through the lens of the approach inherent in the statutory question itself.

v)

The court will give weight to the views expressed to it by the Skilled Person and by the Regulators, and will fairly evaluate the weight to be given to views expressed to it in statements of representation made by stakeholders.”

As I sought to emphasise in paragraph 231 of my judgment in the Lloyds Scheme the Court’s role is not to wonder about improvements to the Scheme, but to determine whether or not to sanction it, having regard to the answers to the Statutory Question, and the Court’s appreciation of the overall consistency and fairness of what is proposed:

“In guiding its approach, the Regulators’ input and appearance is of crucial assistance; yet if anything the ultimate guide or litmus test is to be provided by the Skilled Person, and the Court’s assessment of any particular objections put forward at the hearing.” (paragraph 233)

I also expanded on the Chancellor’s observations at paragraph 100(ii) of Barclays No 5 [2018] EWHC 472 (Ch), adding (at paragraph 156) that:

“…when the second part of the Statutory Question is being addressed, the question is not whether any adverse effect is greater than is reasonably necessary given the constraints of the particular scheme design, but whether that adverse effect is such as to be greater than reasonably necessary in order to achieve the statutory purpose. If the adverse effect appears material, and it appears likely that another scheme design would have avoided the adverse effect, that may call in question the scheme design chosen…”

There are two basic approaches to structuring a ring-fencing transfer scheme for banking groups that are required to ring-fence their core activities under Part 9B of FSMA. First, core activities can only be transferred to an RFB leaving the transferor to conduct all other activities, including excluded activities and prohibited business. Alternatively, the excluded activities and prohibited business can be transferred to another entity, leaving the transferor to carry on all other activities, including core activities as an RFB. (In theory, there are two further ways of structuring ring-fencing, but they are not practical: (i) a bank could run off its excluded activities and prohibited business to become an RFB; or (ii) two new banks could be created, an RFB and a NRFB.)

Broadly speaking, Santander has chosen the second of these approaches, sometimes referred to as a “wide RFB model” (as did the Lloyds Group, whereas Barclays and

Thus, the Scheme provides for three types of business transfers (Footnote: ³).

There are expected to be transactions, products and arrangements with up to 1,182 customers (although only about 697 customers with live transactions) that may be transferred under the Scheme, most of whom will be large corporate customers, financial institutions or market counterparties. The customers who are not counted as having live transactions are mostly customers with master agreements with ANTS under which there are no live trades.

In more detail:

The main feature of the design chosen is that Santander UK’s retail and small business customers will not transfer but will continue to be serviced out of the retail division of Santander UK. Santander UK will also, to the extent allowed by the ringfencing legislation, continue to conduct Santander’s corporate banking business in the UK.

Accordingly, the Santander Scheme involves the transfer to either SLB or Santander UK (as relevant) of only a relatively small number of up to about 697 corporate, and largely sophisticated, customers and market counterparties with live transactions, and a further 485 who have master agreements transferring under which there are no live trades. Thus, the scheme design should (and is expected to) bring only limited disruption to Santander UK customers, in particular the retail and smaller corporate customers.

In that respect, the overall design of the Santander Scheme is similar to the Lloyds RFTS: it also involves the transfer of excluded activities and prohibited business to permit a transferor (in this case Santander UK) to operate as an RFB.

However, there are important differences between the Santander Scheme and the Lloyds RFTS. In particular, whereas in the Lloyds RFTS, the transferee is a newly created English bank regulated in this jurisdiction, in the Santander Scheme, the transferee of the non-ring-fenced business (SLB) is the London branch of a non-UK entity. SLB is subject to regulation by the Regulators but its direct prudential supervisory regulation is also that of Banco Santander, which is a bank registered in Spain and is subject to prudential supervision by the joint supervisory team comprising the ECB and the Bank of Spain. SLB’s ability to offer certain products and services in the UK depends on ‘passporting’. Passporting enables an EEAauthorised firm such as Banco Santander to provide financial products or services, set up a base, or run its permitted activities in another country in the European Economic Area (EEA). This raised issues of some importance and concern in the context of Brexit, as I discuss later; but it is convenient first to explain how the scheme design was decided upon.

It appears from Roman 1, which was originally filed when the Companies sought directions in respect of this matter (“the Directions Hearing”), that the “wide RFB Model” was not Santander’s initial choice. It was initially decided, in early 2016, to adopt a narrow RFB/wide NRFB model, where as narrow a range of products and services as possible would be included in the RFB. Both the RFB and the NRFB would sit under UK HoldCo.

However, in late 2016 and following the UK vote to leave the European Union, it was decided to adopt the present design of a wide RFB, with a narrow portion of Santander UK’s business being transferred to SLB, with a long-term objective of establishing a NRFB in the UK.

The Companies’ rationale for ultimately selecting for implementation this Chosen Model is set out in paragraph 70 of Roman 1 as follows:

“The Chosen Model required relatively few changes to the Santander UK Group in the context of a programme of the scale of ring-fencing and will bring relatively limited disruption to Santander UK customers and, in particular, retail and smaller corporate customers. In particular, Santander UK expects that the Chosen Model will:

(a)

provide Santander UK’s retail and corporate customers with a banking service that is simple, personal and fair by building on the existing strengths of Santander UK’s retail, wealth management, business and corporate banking business lines;

(b)

minimise the impact on retail and corporate customers by keeping their products and services within Santander

As I elaborate later when dealing in more detail with his report, the Skilled Person has concluded that the present design provides the Santander UK Group with the most appropriate solution to achieve its objectives. Suffice it for the present to say that (as Ms Eborall put it in her oral submissions on behalf of the Skilled Person on day 2 of the Sanction Hearing) the Skilled Person was persuaded that the “original ringfencing plan was not going to fly”, principally because there were doubts over the viability of a UK NRFB: of insufficient size and capitalisation, it would not have had the benefit of the Santander UK cross-guarantee, and the cost of a replacement would have been prohibitive, and in consequence the NRBS’s credit rating would have been a source of real concern, and probably unsatisfactory.

It will already be apparent that the Skilled Person’s report is a key document in enabling a proper assessment of an RFTS.

Its primary purpose is to answer the Statutory Question. The Statutory Question is in two parts, and cast in terms that recognise that the compulsory regime may cause adverse effects, so that a skilled, independent assessment is therefore required as to whether such effects are greater than reasonably necessary for the purpose of achieving the statutory purpose.

Mr Cole’s Scheme Report is a detailed document running to over 400 pages (including Appendices). (Footnote: ⁴)

In his Scheme Report Mr Cole has:

Mr Cole also described his understanding and interpretation of the assessment criteria and terminology used in the statutory formulation of the Statutory Question as follows:

Further, in assessing part (b) of the Statutory Question and the issue of whether an adverse effect is likely to be no more than “reasonably necessary”, the Skilled Person has considered whether it would be possible to reduce such effects by: (1) Santander effecting mitigating actions; (2) to the extent that the effects arise at least partly as a consequence of the Scheme design, alternative design options or alternative solutions; and (3) the affected group of persons carrying out mitigating actions.

The Skilled Person’s approach in these respects is consistent with the Court’s earlier judgments in the Barclays Scheme (see paragraph 100(iii)) and the Lloyds Scheme (see paragraphs 162 to 164) even though there are certain differences between them. I accept that such differences are: (a) inevitable (as the Chancellor noted in the context of the HSBC Scheme [2018] EWHC 1385 (Ch) at paragraph 31); (b) permissible; and (c) not such as to undermine any of the earlier or this Skilled Person’s reports. I accept that although Mr Cole’s approach differs from that of the other skilled persons (and each of those from each other), it is no less rigorous or appropriate. I have been quite satisfied that he has addressed the Statutory Question in a meticulous manner that complies with the legislation and applicable principles.

The Scheme Report is split into seven parts, as follows:

Mr Cole has concluded that there are no changes for: the 24 million Santander UK Group Retail Banking Customers; the Santander UK Group SME Customers; nor the Santander UK Corporate Customers (non-SME) holding permitted products only.

ANTS SME Customers will be subject to two changes: to customer documentation and Standard Settlement Instructions, but neither should occasion any adverse effects.

There are a number of other changes, with no identified adverse effects, affecting certain ANTS corporate customers who hold permitted products only. As to other groups of persons, there are either no changes, or no changes with adverse effects, upon: retail and small business banking employees; landlords and suppliers; bondholders and debtholders; beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS; shareholders; and Government and other fiscal persons.

In his Scheme Report, Mr Cole identified the following cohorts of customers who are, or may be, adversely affected by the Santander Scheme:

In summary, the adverse effects identified in the Scheme Report were the following:

In this case, the Skilled Person has provided, in addition to a Scheme Report, a Supplemental Report, the purpose of which is to confirm his conclusions taking into account changes to the Scheme, any issues arising in the implementation of the RingFencing Plan, developments in the context of the UK’s decision to withdraw from the European Union, and other changes in circumstances. Unless otherwise stated or clear from the context, references in this judgment to the Scheme Report should be taken to be references to both the Scheme Report and the Supplemental Report.

Given the central importance of the Scheme Report, I return later to its detailed assessments, both when discussing the implications of Brexit and in a separate section, section [M] below. Further, I note certain conclusions of the Skilled Person in the more detailed description of the Santander Scheme which next follows.

I take the following description of the principal features of the Santander Scheme from the clear and useful summary contained in the skeleton argument of the Companies prepared by Mr Martin Moore QC and Mr Stephen Horan (which I confirm I have checked against the Scheme itself, using it as a guide, and with the assistance of Counsel’s further submissions at the various hearings).

Before addressing in turn each of the three business transfers provided for, and particular features or provisions of note, it is convenient to describe the architecture of the Santander Scheme by reference to its Clauses as follows:

I turn to elaborate on various particular matters incidental to the three sets of transfers.

Prohibited business and specified permitted business of Santander UK to SLB

There are expected to be 52 customers and counterparties (including market counterparties) of Santander UK who have products, transactions or arrangements expected to be transferred to SLB under the Scheme, unless they have terminated or transferred beforehand: paragraph 73 of Mr Roman’s 3^rd witness statement (“Roman 3”). The relevant Effective Date is 23 July 2018.

Santander UK will transfer to SLB, to the extent that it does not constitute Santander UK Retained Business, Santander UK’s business, assets and liabilities in respect of:

Prohibited business and specified permitted business of ANTS to SLB

There are approximately 222 customers and counterparties (including market counterparties) of ANTS who have live products, transactions or arrangements that are expected to be transferred to SLB under the RFTS, unless they have terminated or transferred beforehand. A further approximately 452 customers and counterparties with master agreements with ANTS under which there are no live trades will also transfer. The relevant Effective Dates are 9 July and 16 July 2018.

ANTS will transfer to SLB, to the extent it does not constitute ANTS Retained Business, ANTS’ business, assets and liabilities in respect of:

Permitted business of ANTS to Santander UK

There are approximately 451 customers and counterparties of ANTS who have products, transactions or arrangements that are expected to be transferred to Santander UK under the RFTS, unless they have terminated or transferred beforehand. A further approximately 33 customers with master agreements with ANTS under which there are no live trades will also transfer. The relevant Effective Date is 30 July 2018.

ANTS will transfer to Santander UK:

This broadly currently includes cash deposits and sterling and cash management services, loan, trade and asset finance facilities (other than with RFIs), structured notes and structured retail products, permitted derivatives with corporate customers of ANTS (other than the Specified Corporates) and derivatives, securities finance transactions and other positions that are linked to hedging or management of Santander UK’s balance sheet risks or liquidity or collateral requirements. There are certain exceptions which allow a loan facility with an RFI to be retained in the RFB (e.g. an exemption for infrastructure SPVs).

A small portfolio of RFB Prohibited Business will be retained by ANTS. Some of it will mature, be novated or terminated before 1 January 2019 and therefore have the benefit of the Downstream Guarantee described below until such maturity, novation or termination; some of it will be retained after that date. Schedule 5 of the Scheme sets out all the ANTS Retained Business. (Some of this business was not considered by Mr Cole in his Scheme Report. He does so in the Supplementary Report and concludes that there are no adverse effects in respect of the additional positions and arrangements as a consequence of the Scheme.)

Some further transactions, positions and arrangements have been identified as remaining in ANTS after 31 December 2018.

ANTS also has various foreign law governed transactions or instruments, or foreign law governed transaction documents associated with English law governed loans. There is little of this left as it is being novated. Any that are left after the Final Effective Date will be subject to the Scheme, and therefore subject to the trust and indemnity arrangements under the Scheme, described further below, until their transfer can be effected.

Santander UK and ANTS have each guaranteed all of the other’s unsubordinated obligations and liabilities under a series of deed poll guarantees (the “CrossGuarantees”), with the exception of any debt securities issued by Santander UK, and notes that were transferred from ANTS to Santander UK, after 25 April 2016.

As part of the Scheme, the Cross-Guarantees will be unwound and each of Santander UK and ANTS will be released from all liabilities under the Cross-Guarantees with effect from 23:59 on 31 December 2018: see Clause 4 of the Scheme.

As part of the Cross-Guarantees, Santander UK has guaranteed the unsubordinated liabilities of ANTS (“the Downstream Guarantee”). Creditors of ANTS, such as derivative counterparties, benefit from this Downstream Guarantee.

As ANTS will sit outside the RFB sub-group, the Downstream Guarantee will not be permitted under the ring-fencing rules. Art. 14(1) of the EAPO will prohibit Santander UK, as an RFB, from incurring exposures to RFIs (with certain exemptions). ANTS is an RFI under art 2(2) of the EAPO. Santander UK’s guarantee of ANTS’s unsecured liabilities is a direct exposure to ANTS.

It is intended that the creditors of the residual business of ANTS have the benefit of the Downstream Guarantee for as long as is permitted by the EAPO, particularly those creditors whose products, transactions and arrangements with ANTS mature or are transferred in the period after the final Effective Date and before 1 January 2019.

Most of the creditors of ANTS are being transferred either under the Scheme or by way of novation. Those with permitted business are largely being transferred to Santander UK and will therefore become direct creditors of Santander UK. Those with largely prohibited business will be transferred to SLB and become creditors of Banco Santander.

Although there are other products, transactions or arrangements that will remain with ANTS after 31 December 2018, there is only one creditor to a residual transaction who will do so. It is a market counterparty in relation to a Total Return Swap (“TRS”).

Under the TRS, ANTS pays the market counterparty the principal and interest it receives on a portfolio of securities it holds. The market counterparty pays ANTS amounts calculated by reference to a notional amount that reduces as principal is paid on the underlying securities. If the value of the securities exceeds the present value of the amounts the market counterparty must pay ANTS, the market counterparty will be exposed to ANTS.

The Skilled Person concluded that the market counterparty will be adversely affected by the removal of the Downstream Guarantee although this has been appropriately mitigated by ANTS as it has agreed with the market counterparty to accept a replacement collateral portfolio: I return to this later.

As part of the Cross-Guarantees, ANTS has guaranteed the unsubordinated liabilities of Santander UK (“the Upstream Guarantee”). Creditors of Santander UK such as depositors benefit from it.

The Upstream Guarantee is not prohibited by the ring-fencing rules. But the Companies have concluded that it makes no commercial sense for it to be continued, because its rationale depended on the existence of the Downstream Guarantee. The purpose of the Cross-Guarantees was to consolidate the credit positions of ANTS and Santander UK and thereby underpin a common credit rating.

Further, as explained at paragraph 22(A) of Roman 3, if the Upstream Guarantee remained in place, it would not be treated for regulatory purposes as an intra-group exposure with a 0% risk weight, but instead as an exposure to a third party. ANTS would therefore either breach the limit on large exposures under the Capital Requirements Regulation (“the CRR”) or be required to take a corresponding 100% deduction from eligible capital resources resulting in a breach of regulatory capital compliance.

In any event, ANTS’ gross asset base will be reduced from about £80 billion to about £1.1 billion. Many of the assets of ANTS to which Santander UK would have been permitted to have recourse under the Upstream Guarantee are being transferred to Santander UK. The other assets, which are being transferred to SLB or retained by ANTS, constitute prohibited business, and Santander UK as an RFB would not be permitted to have direct recourse to them.

Part of the implementation of the Chosen Model involves the transfer of business outside the Santander Scheme.

Where certain assets and liabilities mature before the relevant Effective Date under the Santander Scheme they have been, or will be, held until maturity in the entity in which they are booked. Where practicable, new business has been, or will be, booked in the relevant target entity, being either SLB or Santander UK. Some loan or credit facilities that the borrower elects to re-finance before maturity have been dealt with in this way.

The small amount of residual prohibited business being retained in ANTS includes certain transactions and arrangements that mature (or are expected to be transferred out of ANTS) before 1 January 2019. They are included in schedule 5 of the Scheme.

There has also been a programme of novation or assignment (or, where relevant, clearing) of some loan or credit facilities, derivative portfolios and securities finance transactions that mature after the relevant Effective Date under the Scheme.

Some of the novations have involved customers or counterparties with transactions subject to foreign law who have been targeted to be novated before their relevant Effective Date where they would be subject to further novation-related steps even if transferred under the Scheme, in order to ensure that the transfers are fully effective under local law.

The process of migration either by way of novation, or by way of clearing of transactions, to Santander UK or SLB commenced in the summer of 2017. This has been done with customers and counterparties who expressed a preference to do so in sufficient time. From the Directions Hearing until 31 May 2018, 1,167 transactions had been novated or cleared.

As at 23 May 2018, this process has thus far resulted in about 63% of total business on a trade volume basis having been migrated to Santander UK or SLB that would otherwise have transferred under the Scheme. This migrated business has a combined notional value of £772 billion.

The novation process will continue in respect of customers that have transactions that are governed by the laws of a jurisdiction outside of the UK and novation or clearing may also continue until the relevant Effective Date in respect of a small number of other corporate and financial institutions. In particular, there is continuing engagement with certain US or US-affiliated swap dealers who have interest rate swaps with ANTS that are subject to US mandatory clearing rules if transferred through the Scheme on the relevant Effective Date of 9 July 2018.

The engagement with these US or US-affiliated swap dealers began in the summer of 2017 and has already dealt with 554 transactions with 6 market counterparties, with an agreement to clear a further 10 trades with one of them after the date of the

As part of the broader migration strategy, ANTS has also taken steps to transfer market risk relating to its fixed income trading books ahead of the Scheme as a preparatory step for transfers under the Scheme. This is explained in further detail at paragraph 64 of Roman 3.

As an RFB, Santander UK will not be permitted to retain its branches in Jersey and the Isle of Man (“IoM”) (each also referred to as a “Crown Dependency”) after 31 December 2018, nor will any member of its RFB sub-group. This is because neither of the Crown Dependencies are EEA members, and article 20 of the EAPO prohibits an RFB from having a branch in a country or territory which is not an EEA member state.

The transfer of the business of these branches to branches or subsidiaries of the Santander Group, outside the RFB sub-group is to be implemented under local law transfer schemes; but as the customers and other connected persons of the Crown

The wider ring-fencing plan being implemented outside the Scheme includes the closure of ANTS to new business, the transfer of capital from Santander UK and ANTS to Banco Santander to reflect the transfers of business, and the change of ownership of ANTS from Santander UK to UKHoldCo.

As noted, Santander UK has non-EEA branches in Jersey and the Isle of Man. ANTS has a non-EEA branch in Connecticut, USA which is expected to close later in 2018 and, until October 2017 when it was closed, it had a non-EEA branch in the Cayman Islands.

In order to manage an orderly transfer of business under the Scheme, four main Effective Dates have been provided for upon which transfers will occur following sanction of the Scheme, the dates being successive Mondays in July 2018. The four dates are grouped according to the different transfers of business. There are:

The Santander Scheme has provided for a sweep-up date of 13 August 2018 for the transfer of any remaining business not already transferred. The Scheme also makes provision for the relevant transferor and transferee to agree a different date for any particular customer’s business, falling between the date the Scheme is sanctioned and 13 August 2018. Any transfer after 13 August 2018 will be a modification of the Scheme and will need to comply with clause 25 of the Scheme, which entails, amongst other things, notification to the Regulators.

At the Sanction Hearing there was, inevitably, considerable discussion of the effect of the impending departure of the UK from the EU (“Brexit”) and in particular, a unique feature of the Santander Scheme in terms of the other RFTSs that have come before the Courts, which is that the transferee is a non-UK entity, though it is also to be noted that SLB is registered in the United Kingdom as a UK establishment of Banco Santander and is subject to regulation by the FCA and PRA.

Banco Santander, an EU credit institution regulated by the ECB and Bank of Spain (as home state regulators), has validly exercised its right to establish SLB, as a UK branch, and to provide cross border banking and investment services in accordance with the passporting rights afforded by the EU CRDIV and MIFID II Directives. More particularly, SLB is established and authorised through the exercise of freedom of establishment rights under Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and Directive 2014/65/EU on markets in financial instruments, often referred to as "passporting" rights. SLB is therefore established and authorised pursuant to the passporting rights under section 31 and schedule 3 of FSMA, with the PRA and FCA as its host state regulators.

There is a risk that upon the UK ceasing to be a member of the European Union with no transitional or preservation arrangements in place for EEA passporting rights, SLB may not then have the relevant authorisations to do business here.

As Mr Moore acknowledged in his oral submissions, the Chosen Model does leave SLB as an entity that may be particularly and adversely affected according to the outcome of the Brexit negotiations. That is a particular risk not arising in the other RFTSs which have come before the Court. It is not at all an easy risk to assess: the risk of a ‘hard’ or ‘no deal’ Brexit was at the time of the Sanction hearing, and has remained, impossible to quantify, and in reality all that can be undertaken is an assessment of (a) what arrangements have been suggested to cover the position in the event of a ‘hard’ or ‘no deal’ Brexit; and (b) whether, having regard to those arrangements, the choice of the Chosen Model should be regarded as inappropriate, or perhaps more accurately in the context of Part VII FSMA and the statutory questions to be addressed, as having an “adverse effect likely to be greater than is reasonably necessary in order to achieve” the statutory purpose of ring-fencing.

As to (a) in the preceding paragraph [126], the ongoing permission to operate SLB as a branch of Banco Santander in the UK is central to the design of the Santander Scheme and to its medium-term viability. The question therefore as to the certainty and robustness of the arrangements intended and contemplated to enable that permission to continue, or for there to be put in place workable alternatives, is an important and difficult one. It necessitates consideration of the contingency planning, which was helpfully explained to me in some detail.

On 20 December 2017 (and thus after the publication of the Scheme Report), the Deputy Governor of the PRA issued a “Dear CEO” letter to firms such as Banco Santander that undertake cross-border activities between the UK and other European Union member states, which stated that (a) in the absence of continued passporting rights post-Brexit, firms currently exercising rights to establish a branch or provide services in the UK would need to seek PRA authorisation to carry out PRA-regulated activities in the UK; (b) the PRA recommended that such ‘inbound’ firms should engage with the PRA for pre-application discussions; and that (c) under the statutory deadlines that apply, the authorisation process may take up to 12 months from the point of application.

Then, on 28 March 2018, the PRA issued a further “Dear CEO” letter (alongside a Policy Statement (PS3/18) and Supervisory Statement (SS1/18)) on its approach to branch authorisation and supervision recognising: (a) the political agreement between the UK and the EU that there should be an implementation period until the end of 2020 as part of the withdrawal agreement; and that (b) the UK Government had committed to bringing forward legislation, if needed, to create temporary permissions for relevant firms to continue their activities in the UK should a withdrawal agreement not be made and ratified.

As a result, the PRA concluded that firms may plan on the assumption that PRA authorisation will only be needed by the end of the implementation period. The PRA’s conclusions were such as to provide SLB with reassurance that, even if the process of authorisation of SLB is not complete by 29 March 2019, it would not lose its authorisation to carry out regulated activities in the UK even if there are no transitional arrangements or other preservation of the relevant passporting rights presently available to and relied on by SLB.

Nevertheless, as a precaution and despite the reassurance offered, SLB started the process some time ago for seeking authorisation from the PRA as a "third country branch" of Banco Santander. That is consistent with the PRA’s approach to branch authorisation and supervision as outlined in PS3/18 and SS1/18.

Whilst there is still irreducible uncertainty as to how these matters will develop and as to which of the contingencies may arise, Mr Phillips QC confirmed on behalf of the Regulators that in view of the contingency plans and SLB’s application for authorisation in case of further difficulty, the PRA did not consider the uncertainties to be such as to cause it to object to the Chosen Model. In his oral submissions on Day 2 of the Sanction Hearing, Mr Phillips (after I had voiced some concern) provided on instructions the following careful, but important, statement:

“My Lord, in terms of the material and evidence that has been put before you, it may assist you to know, so far as the PRA is concerned, that it is content that the assumptions in respect of ongoing permission for the operation of SLB as a branch…are well founded. The various PRA publications referred to…have been accurately portrayed and are fairly and properly relied upon. Finally, the references in the evidence to which you have been taken to the application for authorisation in respect of SLB are also correct. In a little more detail about the PRA’s policy position…consultation paper CP29/17 and the PRA policy statement PS3/18…set out the PRA’s approach to the authorisation and supervision of branches, including those currently using passporting arrangements such as SLB and which are intending to apply for PRA authorisation in order to continue operating as a third country after the UK’s withdrawal. Given the PRA’s position set out in those documents, and in particular the presumption that there will continue to be a high degree of supervisory co-operation between the UK and the EU, it is reasonable in the PRA’s view for SLB to continue working on the assumption that the PRA will likely be prepared to authorise the firm as a third country branch. Obviously the PRA, in common with many institutions, organisations and individuals, will have to keep its policy under review in the next months and years to assess whether any changes will be required to the UK regulatory framework including those, of course, arising once any new arrangements with the EU take effect…”

The Skilled Person (in his Supplemental Report), having considered the contingency planning, likewise was reluctant to peer much into the future, but confirmed his view that the Chosen Model was appropriate and the best of the choices available (see further below); and Ms Eborall on his behalf confirmed expressly in the course of her oral submissions that any uncertainties were not such as to call the scheme design into question or likely to render it unviable in the foreseeable future.

In my judgment, the Court has no basis for gainsaying these nuanced but reasonably clear assessments as to the likely effect of Brexit in terms of the ability of SLB to continue its business in the UK. The outlook is certainly not risk-free; but contingency planning has reduced these risks: and, in any event, I accept that there is no risk-free solution. The question then is whether some other scheme model would be less of a risk overall.

As to (b) in paragraph [126] above, in the course of the hearing, I ventilated considerable concern as to the exposure incidental to the Chosen Model, including not only the issue of authorisation and passporting, but also the risks of having to enforce judgments against a foreign transferee if the present system of recognition and enforcement falls away (albeit these may be reduced by the fact that Mr Moore told me that "a lot of the contracts will be English law governed contracts").

I queried, for example, whether the risks might have been removed or reduced by a different model: for example, a design (such as indeed was originally contemplated) with as its centre a UK entity guaranteed by Banco Santander; or one for the ‘subsidiarisation’ of SLB with additional guarantees. Mr Moore helpfully took me through the various arguments; and I invited Ms Eborall, representing the Skilled Person, to elaborate on his views in this regard as already expanded in his Supplementary Report; and Mr Phillips, on behalf of the Regulators, also addressed me on these concerns, although he was careful to emphasise that

“The PRA cannot speculate on the future legislative regime in the United Kingdom in relation to Brexit or indeed in relation to any other changes in the law.”

Mr Moore stressed the careful process of assessment which had been undertaken, and the iterative discussions with the Regulators and the Skilled Person which had guided and developed the choice of structure. He took me through the evidence of Mr Roman (some of which I have quoted in paragraph [32] above), highlighting the balance of advantage, disadvantage and risk inherent in each available choice. Mr Moore accepted that the Chosen Model brought some risk; but his fundamental point was that the reality is that each alternative model has its own particular risks and benefits: there is no perfect or risk-free choice. Drawing especially from Roman 3 he stressed in particular that

Ms Eborall accepted this approach and its conclusion that the Chosen Model represented an entirely reasonable balance between advantage, disadvantage and risk, and probably the most appropriate of inevitably imperfect available solutions. She reminded me that in the Scheme Report the Skilled Person had concluded that the original ring-fencing plan, with ANTS as a non-ring fenced transferee would not have worked; and the alternative of a subsidiarised SLB would not have achieved the requisite size or financial strength either. She also emphasised that the Skilled Person had revisited the comparison of scheme structures and the impact of Brexit in his Supplementary Report, and she took me through relevant parts of that report to explain the basis of his confirmation in that report that

“the [Chosen Model] continues to be the best option available.”

Mr Phillips confirmed the PRA’s approval of the application for sanction, having taken (to quote from his oral submissions) “into consideration future scenarios which would have an impact on the firm’s business model, including, of course, in the light of the UK’s withdrawal from the UK”.

In the end, and given that ring-fencing is mandated, I accept that the choice is between solutions which according to the circumstances may each have different adverse effects. As will already be apparent, it is implicit in the statutory questions to be addressed that a scheme may be approved notwithstanding that it has material adverse effects, so long as those adverse effects are not likely to be greater than reasonably necessary in order to achieve the statutory purpose.

The view of the each of the applicant Company’s’ directors, supported by the Skilled Person, that the Santander Scheme, and the Chosen Model it is designed to implement in the round offer, the best option for achieving the statutory purpose has been fully explained and, again, in my judgment, there is no real basis for the Court to gainsay it. The PRA has approved the Santander Scheme and does not object to Santander’s chosen model for structural reform; and the Skilled Person has carefully assessed both the inherent Brexit-related risks and the Chosen Model in that context and is satisfied that the Chosen Model is the best option in that context also.

These considerations also guided the choice of the Chosen Model and in particular, the decision not to have SLB incorporated as a new legal entity as a UK NRFB. Put shortly, the decision taken was that this could have entailed risk in that SLB would on that basis no longer be part of Banco Santander's balance sheet, and the new entity, with a smaller balance sheet, would in all likelihood have had a lower credit rating than Santander UK and Banco Santander. Nor would it have given as much flexibility on managing Brexit risk, given the possibility that SLB's EEA business may have to be re-located to an EEA establishment.

Thus, though for the reasons I sought to explain in paragraphs 154 to 157 of my judgment in the Lloyds Scheme [2018] EWHC 1034 (Ch) and which I have summarised at paragraph [25] above, I have been concerned to test whether any material adverse effect of the Chosen Model might have been avoided by another scheme design having no other greater adverse effect, I am satisfied that there is no sufficient reason to displace the views of the Skilled Person and the directors who have the primary responsibility, in the exercise of their commercial judgement, of scheme selection, without demur on the part of the PRA, that the Chosen Model is, overall, the best choice. It follows also that I am satisfied that the adverse effect of the Chosen Model is not greater than reasonably necessary in order to achieve the statutory purpose.

The main themes arising from specific queries or concerns in the Front Office Comms were summarised in Roman 2, and briefly were as follows:

The Companies also established a process for managing formal objections to the Scheme by way of written representations under section 110(5) of FSMA. Section 110(5) introduces a condition to the right to be heard in an RFTS. A person who alleges that he or she will be adversely affected by the carrying out of the RFTS and wishes to be heard by the court must file with the court, a written statement of the representations that he or she wishes the court to consider and serve copies of the statement on the PRA and the transferor concerned.

Mr Roman explained this process in Roman 2. In summary:

There was has been only one written representation; and this has been treated as an objection to the Santander Scheme.

On 20 February 2018, Mr Robert Brown, a Jersey resident, filed an objection to the

The substance of Mr Brown’s objection was that, as a Jersey resident, he cannot have a relationship with an RFB and must, instead, have a relationship with a NRFB, thus exposing him to an increased risk of financial loss should the NRFB fail. Mr Brown also believes that a failure of a non-RFB would reduce the already limited providers of retail banking services in Jersey.

Mr Brown has confirmed that he has no direct connection with Santander UK or ANTS: he did not suggest that he had any transactions, products or arrangements with Santander UK’s Jersey branch or Santander UK or ANTS.

That did not in itself preclude him from having the right to allege that he would be adversely affected by the Scheme. However, Mr Brown’s objections were not really to the Santander Scheme as such, any more than to the other RFTSs where he exercised his right to attend to make objection. The fact is that as Jersey is not an EEA member state, the RFBs of the five big UK banks will be prohibited from having branches there, and likewise will not be able to have any subsidiaries incorporated in those jurisdictions within their RFB sub-groups.

In any event, I am satisfied, for the same reasons as I sought to set out in my judgment on the Lloyds Scheme [2018] EWHC 1034 (Ch) at paragraphs 208 to 216, that Mr Brown’s representations did not provide any basis for the court to refuse to sanction the Scheme: see also paragraphs 111 and 114 of Barclays No 5 [2018] EWHC 472 (Ch) and paragraphs 50 to 53 of HSBC No 3 [2018] EWHC 1385 (Ch).

The Companies proposed some minor and clarificatory amendments to the Santander Scheme, summarised at paragraph 47 of Roman 3.

Clause 25.1 of the Santander Scheme provides that the Companies and Banco Santander may consent jointly for and on behalf of themselves and all other persons concerned to make any modification of or addition to the Scheme which, prior to its sanction, the Court may approve or impose. The Regulators were notified of these amendments and raised no objections. The Skilled Person, having considered them, concluded that they gave rise to no adverse effect.

I was satisfied that the amendments had been properly considered and approved in accordance with Clause 25.1 of the Santander Scheme, and were unobjectionable, so that the Scheme should be considered and sanctioned as so amended.

After the publication of the Scheme Report, new information became available to Mr Cole which he considered and analysed in his Supplementary Report dated 31 May 2018 (as well as addressing queries and concerns as well as the one formal objection from Mr Brown, and the implementation of the Communications Plan).

Mr Cole recorded the following changes since the publication of his Scheme Report:

In his Supplementary Report, Mr Cole also addressed three points I had raised at the 5 February 2018 Directions Hearing, as follows:

Lastly, beyond recording that Mr Cole was satisfied (as previously confirmed) I do not think it is necessary to address further the Communications Plan and its effectiveness, since I have already substantively dealt with this under that earlier heading.

In all the circumstances, Mr Cole confirmed in his Supplementary Report that he remained:

“satisfied that the adverse effects identified are not likely to be greater than reasonably necessary in order to achieve the Scheme’s Purposes.”

As I said of the reports in the Lloyds Scheme, Mr Cole’s reports seemed to me to be exemplary: meticulous and comprehensive, clear and candid.

The same observations as I made in that earlier scheme (at paragraph 237 of my judgment) apply just as much to Mr Cole’s reports:

“He has adopted a clear and transparent approach, identified adverse effects, explored whether they are more than necessary, worked with the Applicants to mitigate them, and explained in detail his conclusion that they are no greater than reasonably necessary to achieve the statutory purpose. I have detected no material inconsistency, illogicality or discordance in his assessments, nor any reason to doubt or qualify the overall conclusions he has reached.”

In such circumstances, and in line with the answers given by the Skilled Person to the Statutory Question, and the assessment of the Regulators, I saw no reason to refuse sanction of this Santander Scheme.

At the conclusion of the Sanction Hearing I approved the proposed Order accordingly.

As in all the other RFTSs, and as is standard in the context of other Part VII schemes, that Order contains provisions for the terms of the Scheme to take effect under section 112 FSMA without further act or instrument and as if each were separately set out in the Order.

Section 112 FSMA gives the Court power to make orders ancillary to a sanction order under s.111(1):

“(1)

If the court makes an order under section 111(1), it may by that or any subsequent order make such provision (if any) as it thinks fit—

(a)

for the transfer to the transferee of the whole or any part of the undertaking concerned and of any property or liabilities of the authorised person concerned;

(b)

for the allotment or appropriation by the transferee of any shares, debentures, policies or other similar interests in the transferee which under the scheme are to be allotted or appropriated to or for any other person;

(c)

for the continuation by (or against) the transferee of any pending legal proceedings by (or against) the authorised person concerned;

(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.

(2)

An order under subsection (1)(a) may—

(a)

transfer property or liabilities whether or not the authorised person concerned otherwise has the capacity to effect the transfer in question;

(b)

make provision in relation to property which was held by the authorised person concerned as trustee;

(c)

make provision as to future or contingent rights or liabilities of the authorised person concerned, including provision as to the construction of instruments (including wills) under which such rights or liabilities may arise;

(d)

make provision as to the consequences of the transfer in relation to any occupational pension scheme (within the meaning of section 150(5) of the Finance Act 2004) operated by or on behalf of the authorised person concerned.

(2A) Subsection (2)(a) is to be taken to include power to make provision in an order—

(a)

for the transfer of property or liabilities which would not otherwise be capable of being transferred or assigned;

(b)

for a transfer of property or liabilities to take effect as if there were—

(i)

no such requirement to obtain a person’s consent or concurrence, and

(ii)

no such contravention, liability or interference with any interest or right,

as there would otherwise be (in the case of a transfer apart from this section) by reason of any provision falling within subsection (2B).

(2B) A provision falls within this subsection to the extent that it has effect (whether under an enactment or agreement or otherwise) in relation to the terms on which the authorised person concerned is entitled to the property or subject to the liabilities in question.

(2C) Nothing in subsection (2A) or (2B) is to be read as limiting the scope of subsection (1).”

These powers are further bolstered by s112A:

“(1)

Subsection (2) applies where (apart from that subsection) a person would be entitled, in consequence of anything done or likely to be done by or under this Part with an insurance business transfer scheme, a banking business transfer scheme or a ringfencing transfer scheme-

(a)

to terminate, modify or acquire or claim an interest or right; or (b)to treat an interest or right as terminated or modified.

(2)

The entitlement-

(a)

is not enforceable in relation to that interest or right until after an order has been made under section 112(1) in relation to the scheme; and

(b)

is then enforceable in relation to that interest or right only insofar as the order contains provisions to that effect.

(3)

Nothing in subsection (1) or (2) is to be read as limiting the scope of section 112(1).

Authorities decided in the context of other species of Part VII schemes have confirmed that the Court’s jurisdiction to make ancillary orders under s.112 is thus very broad. I referred to these more particularly in my judgment in the Lloyds Scheme at paragraphs 246 to 247. As I also there recorded, the Chancellor has expressly endorsed the application of the dicta in these cases to RFTSs; I entirely agree and I have adopted that approach.

In that connection, I confirm that I was satisfied that the powers conferred in sections 112 and 112A FSMA extended to enable the unwinding of the Cross- Guarantees. I was satisfied in particular that the continued existence of the Cross-Guarantees is wholly inconsistent with the RFTS and the wider ring-fencing provisions, and that it is practically impossible to maintain a commercially coherent cross guarantee arrangement and at the same time comply with the ring-fencing provisions.

I was reassured in that context both by Snowden J’s approach in In re Copenhagen Reinsurance Co (UK) Ltd [2016] EWHC 944 (Ch), where he held that the Court had the power to modify the terms of certain guarantees given in respect of insurance policies which were to be transferred pursuant to an insurance business transfer scheme under section 105 FSMA, and by the Chancellor’s observations and approval in the Barclays Scheme and the HSBC Scheme. In the Barclays Scheme, the Chancellor noted that:

“I have little doubt that they are “incidental, consequential and supplementary” matters that are “necessary to secure that the [Scheme] is fully and effectively carried out”, within section 112(1)(d) of FSMA. It is not necessary to reach a final conclusion on whether they also fall within section 112(2)(c) of

FSMA.”

Lastly, I should note one point of departure from the practice hitherto in insurance and banking schemes. As I noted in paragraph 250 of my judgment in the Lloyds Scheme, in relation to insurance business transfer schemes and ordinary banking business transfers it has been the practice for the order sanctioning the scheme to set out a large number of matters in respect of which an order under section 112 is made. These range from the transfer of the assets and liabilities from the transferor to the transferee (see s.112(1)(a)), the continuation of legal proceedings (see s.112(1)(c)), to other provisions in the Scheme overriding contractual rights, splitting security, amending references to terms in contracts and other documents and providing for the transfer of customer data, confidentiality etc. (under s.112(1)(d)).

That approach was not followed in the Barclays RFTS nor, to a large extent, in the Lloyds or HSBC RFTSs. In the Lloyds Scheme, I suggested a middle way, as explained in more detail in my judgment in that case at paragraphs 251 to 256. In this case, a form of order was proposed which was modelled on that middle way and I was content to approve it accordingly.

The Companies also sought the Court’s approval for attaching the Summary of the Scheme to the final order. This has also been done in the Barclays, Lloyds and HSBC RTFS sanction orders. The order makes clear (as the Summary does on its face) that the Summary should not be relied on in place of the Scheme itself. The Summary attached to the order has had some slight modifications made to it to reflect the fact that it speaks as at the date the Scheme has been sanctioned.