Review of Insolvency Law for Investment Banks

Insolvency law will be reformed to address a serious concern over the safety of money held with London investment banks which has sprung up in the wake of the collapse of Lehman Brothers, the Financial Times reported yesterday. The government will take a special power in the banking bill that is going through parliament to bolster the protection for client money and assets held in investment companies. A review of the insolvency regime for investment banks will be conducted by next summer, ahead of a full formal consultation on the draft legislation. The collapse of Lehman has raised fears about the safety of assets held in London by any other investment bank that goes under. The problem stems from a quirk in a notoriously complex area of legislation, which came to light only with the collapse of Lehman. Investors in the failed investment bank’s UK subsidiary were alarmed to discover that there is no guarantee that all of their funds will be returned, despite being held in segregated client accounts. The British insolvency regime allows administrators to raid client accounts to cover their costs, should other sources of funding prove insufficient. PwC, administrators of Lehman’s European arm, warned this month that creditors were unlikely to get all their money back and that the process would probably take years to resolve. Read more.