Barclays Bank Plc, Re, Court of Appeal - Chancery Division, October 29, 2018,  EWHC 2868 (Ch)
|Resolution Date:||October 29, 2018|
|Issuing Organization:||Chancery Division|
|Actores:||Barclays Bank Plc, Re|
Neutral Citation Number:  EWHC 2868 (Ch)
Case No: CR-2018-008846
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (Ch D)
Royal Courts of Justice
Rolls Building, Fetter Lane
London EC4A 1 NL
The Honourable Mr Justice Zacaroli
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Martin Moore QC and Stephen Horan (instructed by Clifford Chance LLP for the Applicants
Hearing date: 23 October 2018
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Mr Justice Zacaroli:
This is an application by Barclays Bank Plc (``BB'') and Barclays Bank Ireland Plc (``BBI'') for directions in connection with an application pursuant to Part VII of the Financial Services and Markets Act 2000 (``FSMA'') for the sanction of a banking business transfer scheme (the ``Scheme'').
It is proposed that pursuant, or ancillary, to the Scheme, two wholly owned subsidiaries within the Barclays group will transfer a part of their business to BBI. Those entities are BB and Barclays Capital Securities Ltd (``BCSL'').
The Scheme forms part of Barclays' planning for the continuity of service provision to its clients in the European Economic Area (``EEA'') following the withdrawal of the UK from the European Union (``Brexit'').
BB is an English incorporated public limited company. It is authorised in the UK by the PRA and regulated in the UK by the PRA and the FCA to accept deposits and conduct a wide range of other regulated activities. It currently conducts business through branches in the EEA on a freedom of establishment basis and freedom of services basis under the Capital Requirements Directive (2013/36/EU) and the Markets in Financial Instruments Directive (2014/65/EU) (``MiFID2'').
Following the sanction and completion earlier this year of the Barclays ring-fencing scheme pursuant to Part VII of FSMA (sanctioned by the Chancellor on 9 March 2018:  EWHC 472 (Ch)), products and services are offered to Barclays' larger corporate, wholesale and international banking and wealth management clients, by BB and its subsidiaries which include BCSL and BBI.
BCSL is an English incorporated private limited company. It is not licensed to accept deposits. It is, however, authorised to conduct a variety of investment business in the UK and it currently has permission under MiFID2 to carry out business on the basis of freedom of services in all the member states of the EEA.
While the terms of the UK's withdrawal from the EU, if any, are presently unknown, this application is premised upon the assumption that, post-Brexit, BB and BCSL will no longer be authorised to conduct business in the EEA. The purpose of the Scheme, therefore, is to transfer the relevant parts of their businesses relating to EEA clients to BBI which, being an Irish incorporated company, will continue to be authorised to conduct business in the EEA post-Brexit.
The only orders that are sought from me on this application are directions as to notification of the proposed Scheme and for the adjournment of the application to a hearing before a judge of the Companies Court in January 2019 for the purposes of sanctioning the Scheme.
Ordinarily, such directions would be sought from an Insolvency and Companies Court Judge. The application has been brought before a judge of the High Court because it raises one particular, and arguably novel, issue going to the court's jurisdiction to sanction the Scheme. The issue concerns an order, which the applicants propose to seek at the sanction hearing, that the business of BCSL be transferred to BBI pursuant to the provisions of section 112(1)(d) of FSMA. The applicants seek a view from the court as to whether the court will have jurisdiction to make that order, albeit recognising that any such view expressed on this application is without prejudice to any submissions to the contrary by any person claiming to be adversely affected by the Scheme at the sanction hearing.
The procedure for seeking the court's prospective guidance in relation to a proposed Scheme was held to be well within the inherent jurisdiction of the Court to regulate its own procedure in Re Barclays Bank plc & ors  EWHC 1482 (Ch), at .
If I were to conclude that there is no jurisdiction within section 112(1)(d) to effect a transfer of BCSL's business, then the applicants will need to begin work immediately in seeking to effect agreements with a very large number of clients of BCSL, in order to replicate so far as possible, on a bilateral basis, the effect of the proposed Scheme. It is envisaged that this work will take many months and, even if commenced now, would be unlikely to be completed by 29 March 2019, the date currently envisaged for the UK's withdrawal from the European Union. If the applicants had to wait for an answer to the jurisdiction issue until January 2019 (at the time the application to sanction the Scheme is heard) then it would be far too late to take such alternative steps. In these circumstances, I am satisfied that it is an appropriate case to give prospective guidance.
Since I am not, at this stage, concerned with whether the conditions in section 111(2) of FSMA have been satisfied or whether, in accordance with section 111(3) of FSMA, in all the circumstances of the case, it would be appropriate to sanction the Scheme, I can address the design of the Scheme very shortly. The business to be transferred pursuant to the Scheme comprises:
i) BB's deposit taking business, involving approximately 1,290 transferring clients, with deposits in aggregate of approximately 4.1 billion and £1.4 billion; and
ii) Certain other corporate banking, investment banking and private banking products undertaken by the Corporate Banking division, the Investment Banking division and the Private Banking and Overseas Services division.
Transferring under the Scheme are approximately 1,100 Corporate Banking EEA clients, 4,600 Investment Banking EEA clients, and 730 Private Banking and Overseas Services clients. The total number of transferring clients is, at 5,550, slightly less than the sum of these three business lines, because some clients overlap.
The relationship between BB and BCSL
According to the witness statement of Steven John Ewart, the chief financial officer of BB, there is a high degree of interconnectedness between BB's and BCSL's investment banking products and services that are provided to clients. In broad terms, there is one overall business, operated out of both BB and BCSL; BCSL does not operate as a standalone business but is being used as an entity through which certain transactions, managed by BB employees, are executed. In particular:
i) At the commencement of an investment banking client relationship, clients are provided with one set of terms of business, which apply to products and services across both BB and BCSL;
ii) BCSL operates as the Barclays group's primary interface with the European and Asian equity markets, and hedges its exposure using derivatives, executed through BB;
iii) BB and BCSL together serve as the external interface to the OTC derivatives market for the Barclays group. Approximately 25% of the clients whose investment banking business is transferring with BB have live transactions at the present time with both BB and BCSL (but many more will do so on an ongoing basis pursuant to long term umbrella agreements);
iv) An example is given in relation to equity derivatives: a client will typically use BB to provide it with an equity derivative trade, but look to BCSL to provide the hedge for that trade. As far as the client is concerned, these are all parts of the same service and it would be significantly impacted if any part of the service was not available concomitantly;
v) A further example relates to clients who have an advisory and underwriting relationship with BB, but look to BCSL as their contractual counterparty for the purposes of transacting in the market with investors in the public offering: these activities, though provided by different entities, are part of the same indivisible service from the perspective of the client;
vi) A still further example relates to agency lending, where the agent lender's clients will typically look to lend out a portfolio of fixed income and equity assets. Barclays will seek to borrow these assets for the purposes of risk management across its investment banking business, using BB for fixed income assets but BCSL for equity assets. The agent lender will only choose Barclays as a counterparty if both BB and BCSL are signed up to terms with it on behalf of its clients.
The value of that part of BCSL's business which it is proposed is transferred to BBI is approximately £2.3 billion of external assets, which is a small fraction of the approximately 190 billion of external assets being transferred to BBI under the Scheme and wider reorganisation.
It is theoretically possible for each separate relationship between a client and BCSL to be novated to BBI but, in addition to the time, complexity and cost of such a process (requiring additional negotiations with 770 clients in respect of approximately 2,300 contracts), there is potential for serious detriment to clients through timing mis-matches (leading to clients' business being split between the UK and Ireland). Moreover, clients would be subjected to a heightened administrative burden at a time when they would no doubt be required to undergo similar complex processes with any other investment bank with whom they transact business that was unable to take advantage of the Part VII transfer procedure. In short, the evidence indicates that there would be serious disruption to the ongoing business of BB, BCSL and their common clients if it is impossible to take advantage of section 112(1)(d) to effect a parallel transfer of BCSL's business insofar as it relates to transferring clients of BB.
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