On 31 October 2011, MF Global UK Limited, an insolvent investment broker, became the first investment firm to enter the special administration regime (the “SAR”) created by the Investment Bank Special Administration Regulations 2011 (SI 2011/245).

The SAR was adopted in February 2011 following the collapse of Lehman Brothers and has the advantage over ordinary corporate administration in that it sets special objectives for the administrator and this is the first time the SAR has been used. The SAR sets three objectives for a special administrator:

In this DechertOnPoint, we summarise HM Treasury’s work to establish effective resolution arrangements for investment banks and firms, which resulted in the introduction of a special administration regime (“SAR”) earlier this year.

Summary

FSA is consulting on the need for certain financial services firms to prepare and maintain Recovery and Resolution Plans (RRPs) and in addition for some of these firms, and others, to make further preparations for their investment client money and custody assets (CMA) holdings.

Why now?

Treasury has published the 12 responses it received to its consultation on a special administration regime for investment firms resolution and draft legislation that takes into account its views on the responses. One Order clarifies that the definition of “client assets” includes money, but not money held in respect of insurance mediation. The other sets out the new regime. Respondents broadly supported the proposals and favoured an approach that would require the return of all client money and assets, not just segregated ones.

On 16 September 2010 the UK Treasury published a consultation paper seeking views on its proposals for a new Special Administration Regime (SAR) for investment firms. The Consultation included draft regulations that will implement the SAR (the Draft Regulations).

The Consultation was prompted by the failure of Lehman Brothers in 2008 which posed (and continues to pose) serious challenges for insolvency regimes around the world.

Following proposals Treasury made at the end of 2009, it has now published for consultation draft regulations setting up a special resolution regime for investment banks. The regime will apply to firms that meet all of the following three conditions:

Yesterday, the United Kingdom’s Commercial Secretary to the Treasury launched a consultation on a new special-resolution regime, Special administration regime for investment firms, to strengthen the government’s ability to handle future insolvencies of failing investment banks to minimize cost and disruption of the overall national financial system.

The U.K. Court of Appeal (the “Court of Appeal”) on Aug. 2, 2010, handed down a long-awaited decision regarding an appeal related to the scope of, and eligibility to receive distributions from, the Lehman Brothers Europe (International) (“LBIE”) pool of client money. Lehman Bros. Int. (Europe) (In Administration) v CRC Credit Fund Ltd. & Ors, [2010] EWCA Civ 917 (appeal taken from the Chancery Division) (U.K.).

Protecting clients’ money and assets has been a pillar of the UK financial regulatory regime. The obligation on regulated entities to “…arrange adequate protection for clients’ assets when it is responsible for them” is enshrined in Principle 10 of the Principles of Business Sourcebook of the Financial Services Authority (FSA) Handbook. The FSA has made rules to protect client money by requiring FSA regulated entities to hold such money in trust accounts (the Client Money Rules).

In May 2009, the Treasury published a discussion paper entitled Developing effective resolution arrangements for investment banks. In this discussion paper the Treasury set out its initial thinking on the steps necessary to improve the regime around the failure of investment firms.