Consultation outcome

Rules on ensuring the effective functioning of a financial market infrastructure special administration regime

Updated 10 July 2018

1. Introduction

Since the financial crisis, the government has made extensive reforms to financial regulation to address the problem of banks being “too big to fail”. In 2008, as an immediate response to the financial crisis, the government of the day introduced first the Banking (Special Provisions) Act 2008 and then the Banking Act 2009, establishing a special resolution regime for banks and building societies. This gave the Bank of England (“the Bank”) and the Treasury a set of tools that could be used to manage the failure of a bank or building society, in a way that protects wider financial stability and public funds. The Financial Services Act 2012 amended the Banking Act 2009 to extend the special resolution regime to cover investment firms, banking group companies and UK central counterparties (CCPs), after concluding that the failure of these firms could cause similar problems to bank failures.

In 2013, following a consultation, the Financial Services (Banking Reform) Act 2013 (‘the 2013 Act’) introduced a form of special administration for certain financial market infrastructure (FMI) companies operating payment and/or security settlement systems (but excluding recognised CCPs). That procedure is FMI administration. This consultation seeks views on the rules that are needed, including modifications of general insolvency rules, to ensure the effective functioning of an FMI administration. The draft rules for FMI administration have been published alongside this consultation.

Systemically important payment and securities settlement services are vital to the efficient operation of the financial system and any suspension of service provision is likely to cause a severe disruption to the functioning of the wider financial sector and the real economy. This is due to the volume and value of transactions processed by such systems on behalf of households and businesses (hundreds of billions of pounds a day ^{[footnote 1]}) and the absence of alternative means of effecting these transactions. FMI administration was introduced to mitigate the risk of such disruption occurring due to the insolvency of an FMI company.

The Bank supervises inter-bank payment systems and securities settlement systems with the aim of ensuring that the design and operation of the systems have sufficient regard to the management and reduction of risks that could be posed to the UK financial system. This includes the risks from a wide range of sources, such as IT failures or the governance of schemes.

The significant majority of these operators of payment and securities settlement systems do not take credit risk. In addition to ongoing Bank supervision the owners and members of the payment systems typically have a strong incentive to provide the financial resources needed to support the continued provision of critical payment services. For these reasons, it is unlikely that a systemically important FMI company of this nature would become insolvent. Nevertheless, it is possible.

In 2013 the government, in consultation with the Bank, decided that a special administration regime would be the most appropriate legal and policy framework for dealing with the failure of this kind of firm, where the continuity of the firm’s services is paramount. A special administration regime is a modified insolvency regime that provides an administrator with special objectives, such as the continuity of critical services, that take priority over the objectives in a normal administration. Absent such a regime, if an FMI company were to become insolvent, an administrator or liquidator working under the standard objectives, which include achieving a better result for creditors than a winding-up, would not necessarily have cause (apart from under that objective) to keep critical or systemically important payment and securities settlement services running.

The FMI administration regime is established in Part 6 of the 2013 Act. Part 6 has not yet come in to force. The government plans to commence Part 6 and bring the provisions relating to FMI administration into force at the same time as the FMI administration rules. This will follow the introduction of the Insolvency (England and Wales) Rules 2016, which are expected to commence in April 2017.

These FMI administration rules will apply to England and Wales, where all of the companies currently within the scope of this proposal are registered. Rules for Scotland and Northern Ireland will be made separately.

Chapter 2 of this document summarises the legislation establishing FMI administration. Chapter 3 sets out the government’s general approach to rules for FMI administration and Chapter 4 describes specific rules, including the application of the new corporate insolvency rules for England and Wales.

Who should read this consultation?

This consultation seeks views from insolvency practitioners and legal professionals, given the application of insolvency rules. The government also seeks views from the financial industry, in particular companies operating payment and settlement systems, creditors to these companies, service providers and members of the systems. The government welcomes views from any other interested parties.

How to respond to this consultation

This consultation will run from 11 November 2016 to 15 January 2017.

Please email enquiries and consultation responses to the following email address, specifying in the subject line whether your email is an enquiry or a formal consultation response: non-bank.resolution@hmtreasury.gsi.gov.uk

Alternatively, please address responses to:

FMI Administration Rules Consultation,
Financial Stability Group,
HM Treasury,
1 Horse Guards Road.
London,
SW1A 2HQ

Next steps

The draft rules will be updated in light of consultation responses. The government will then consult the Insolvency Rules Committee, ahead of the rules being laid in 2017 to come into force following the introduction of the Insolvency (England and Wales) Rules 2016 and the commencement of Part 6 of the 2013 Act.

2. FMI Administration under the Financial Services (Banking Reform) Act 2013

This section sets out the objective of FMI administration, and the main features of FMI administration as set out in the 2013 Act.

Under the 2013 Act the first two objectives of FMI administration are to ensure that the relevant payment or securities settlement system continues to operate as an efficient and effective system and that any protected activities as a clearing house continue to be carried on in the event that the company becomes insolvent. The FMI administration should not continue indefinitely, and the FMI administrator’s third objective is to ensure that it becomes unnecessary for the FMI administration order to remain in force for those purposes by either:

• rescuing the business as a going concern; or, failing that
• transferring so much of the business as is necessary to ensure that the relevant payment or settlement system continues to operate as a going concern to one or more different companies

The FMI administrator must, in so far as it is consistent with the objective of FMI administration, protect the interests of the company’s creditors as a whole, and subject to those interests, the interests of the company’s shareholders as a whole.

The main features of FMI administration are set out in Part 6 of the 2013 Act, including Schedules 6 and 7. These are:

• only the court can appoint FMI administrators, and only the Bank may apply for an FMI administration order and nominate an insolvency practitioner (or insolvency practitioners) to act as FMI administrator(s). The Bank may make an application for an FMI administration order if the company cannot pay its debts, or is likely to be unable to pay its debts
• the Bank has the power to direct the FMI administrator to take, or refrain from taking, specified actions. The power of direction may be used by the Bank with regard to the public interest in the protection and enhancement of stability and confidence in the financial system. For example, the Bank may want to direct the FMI administrator to prioritise the rescue or transfer of certain critical services, for example direct debit payments by Bacs, over others
• there are statutory provisions to ensure the continuity of certain essential supplies to the company (including IT services and staff) during the FMI administration, including a restriction on third parties terminating supplies in certain circumstances
• the FMI administrator’s proposals must be approved by the Bank
• should the FMI administrator intend to resign, he or she must give 28 days’ notice to the Bank, whether or not an application for the court’s permission to resign has also been made
• an application for the removal of an FMI administrator from office may only be made by or with the consent of the Bank. Only the Bank may apply for the administrator to be replaced
• as the company’s key stakeholders, its creditors retain a role in the FMI administration process. The 2013 Act enables creditors or shareholders of a company to apply to the court if it is felt that the FMI administrator’s conduct prevents the efficient achievement of the FMI administration objectives
• schedule 7 of the 2013 Act sets out the detail as to how transfer schemes to achieve the objective of FMI administration will operate. Transfer schemes must be approved by the Bank, which may only give approval after consultation with the Treasury

The FMI administration can come to an end once the FMI administrator has ensured, either as a result of rescuing the company as a going concern or completing a transfer, that it becomes unnecessary for the FMI administration order to remain in place.

Upon the discharge of the FMI administration order the company would, absent any other step, be returned to the control of its directors and shareholders. The appropriate next steps following the conclusion of the FMI administration will therefore depend on the particular circumstances of the case. For example:

• if the company has been rescued or otherwise remains viable after the completion of a transfer scheme, then it may continue as a going concern
• if the company has not been rescued, it may, with the consent of the Bank, move into an ordinary insolvency procedure, such as administration or voluntary or compulsory liquidation, subject to the normal statutory requirements for commencing those procedures
• if there are no more assets for distribution then the FMI administrator, separately, has the power to move the company directly from FMI administration to dissolution

Scope

FMI administration applies to UK companies which are:

1. operators of inter-bank payment systems recognised under Part 5 of the Banking Act 2009 and which are as such subject to the oversight of the Bank (excluding recognised CCPs)
2. operators of securities settlement systems approved under the Uncertificated Securities Regulations 2001
3. designated services providers to operators of payment and securities settlement systems covered by (1) and (2) above

In order for a service provider to be designated, the Treasury will have to be satisfied that an interruption in the provision of their services would have a serious adverse effect on the effective operation of the payment system or securities settlement system in question. Before designating a service provider, the Treasury is required to consult the company, the operator of the payment or settlement system to whom the company provides services, the Bank, and, if the company is authorised under the Financial Services and Markets Act 2000, the Financial Conduct Authority (FCA) and, if authorised as well by the Prudential Regulation Authority (PRA), the PRA. The Treasury will also consult the Payment Systems Regulator (PSR). No service providers have yet been designated.

3. The government’s general approach to rules for FMI administration

FMI administration is a modification of normal corporate administration. Rules are therefore required to set out a modified procedure for the conduct of FMI administration proceedings. This section explains the general approach the government proposes to take for the FMI administration rules, and in particular the roles of the Bank, creditors and other authorities.

The FMI administration rules will be based on the Insolvency (England and Wales) Rules 2016, which will replace the Insolvency Rules 1986. This follows a modernisation and consolidation of existing secondary legislation relating to insolvency in England and Wales. The FMI administration rules will differ in approach and substantive content to the Insolvency (England and Wales) Rules 2016 only to the extent necessary to ensure an FMI administration fulfils its objectives, with regard to the public interest, in order to protect and enhance stability and confidence in the financial system.

The FMI administration rules, reflecting the primary legislation underpinning FMI administration, provide for the Bank to play an important role in the conduct of the FMI administration, performing many of the functions that would be carried out by creditors and/or a creditors’ committee in a normal corporate administration. This reflects the importance of ensuring there is no disruption to services that are vital to the efficient operation of the financial system, and is consistent with both the Bank’s mission to maintain and enhance UK financial stability, and the Bank’s statutory responsibility for the supervision of recognised payment systems and the operators of securities settlement systems approved under the Uncertificated Securities Regulations 2001. As noted above, an FMI administration (and with it the Bank’s role) will come to an end once the FMI administrator has ensured, either as a result of rescuing the company as a going concern or completing a transfer, that it becomes unnecessary for the FMI administration order to remain in place.

Although other authorities such as the FCA and the PSR do not have a direct role in any FMI administration, they do have a wider interest in recognised payment and securities settlement systems and the markets they serve. FMI companies may also be authorised by the PRA in certain circumstances. The government proposes that the FMI administration rules provide for notification and copies of key documents and decisions to be sent to the FCA, to the PSR in the case of payment systems and designated service providers to payment systems, and to the PRA in the case of PRA authorised companies.

4. Rules for FMI administration

This section describes in detail the distinguishing features of the FMI administration rules and the most significant modifications to the position under normal corporate insolvency rules. The content of this section is broken down into two main parts: one) the application for an FMI administration order, and two) the application of the Insolvency (England and Wales) Rules 2016.

• part one rules are self-standing (in the sense that they govern the application procedure without applying corporate insolvency rules).

• part two applies the Insolvency (England and Wales) Rules 2016 with modifications. A full draft of the proposed rules for FMI administration has been published alongside this consultation. The government welcomes views on its proposals for rules as set out below and in the accompanying draft rules.

The application for an FMI administration order

The first part of the FMI administration rules will make provision about the contents of an application for an FMI administration order made by the Bank, the accompanying statement of the proposed FMI administrator, and the witness statement made on behalf of the Bank supporting its application. As noted above, only the Bank can apply to court for an FMI administration order under the 2013 Act.

The government proposes that the content of these applications and statements will be broadly in line with the requirements under normal corporate administration (i.e. the name of the company, address, name of the proposed FMI administrator(s), details of qualifications etc.). In addition the witness statement made on behalf of the Bank must (among other things):

• certify that the conditions for applying for an FMI administration order (as set out in the section 117(1) of the 2013 Act) have been met
• give details of the company’s current financial position
• give details of any FMI transfer scheme which the Bank intends to approve (as defined in Schedule 7 to the Banking Reform Act)
• specify details of any other insolvency proceedings that have been instituted
• in the case of service providers, give details of the payment or securities settlement systems for which the company provides services

The government proposes that the FCA, and where relevant, the PSR and PRA, receive notification of the application by the Bank, and receive a copy of any FMI administration order made by the court. This is in addition to those who are always served a copy of the application in a normal administration, such as the company and the administrator(s). Should the Bank apply to replace the FMI administrator, for example following their resignation or removal, notification must be also provided to the FCA and, where relevant, the PSR and PRA.

Corporate insolvency rules set out who may appear at the court hearing of an application (for example, the company or directors of the company). The government proposes that in addition, the FMI administration rules will provide that any of the authorities referred to above (in the case of the PRA and the PSR, where they have a regulating interest), and the Treasury, may appear or be represented at the court hearing of any FMI administration application. This reflects the interest of these authorities in payment and settlement systems and financial stability generally.

The government proposes that where the court makes an FMI administration order, the Bank’s costs of making the application, and any other costs allowed by the court, will be payable as an expense of the FMI administration. This is consistent with similar special insolvency regimes such as the Bank Administration Procedure.

The rules will include provisions allowing the Bank, the FCA, PRA, PSR to inspect court documents in addition to the FMI administrator, company directors or officers, shareholders and creditors. As in a normal administration, an interested party or the FMI administrator may ask the court to direct that the court file or a specific document (or documents) within it should be closed to inspection without the further permission of the court.

Question 1: Do you agree with the proposed content of the rules covering the application for an FMI administration order?

The application of insolvency rules

The second part of the rules will apply specific rules of the Insolvency (England and Wales) Rules 2016 with modifications necessary for the conduct of FMI administration. The following paragraphs set out the most significant functions that the FMI administrator would be required to perform by reference to those modernised rules.

Statement of affairs

The FMI administrator shall, as in a normal administration, require one or more relevant persons to provide a statement of affairs of the company. In addition to filing the statement of affairs with the registrar of companies, the FMI administrator should provide a copy of the statement of affairs to the Bank, given the responsibilities of the Bank for the supervision of payment and settlement systems. Under normal administration the administrator may apply to the court to limit disclosure of the statement of affairs if the administrator feels that disclosure may prejudice the conduct of the administration. The government proposes that under FMI administration, an order from the court for limited disclosure should not prevent the statement of affairs from being disclosed to the Bank.

FMI administrator’s remuneration

The government proposes that the FMI administrator’s remuneration should be fixed by the Bank. As in a normal administration, this may be fixed by reference:

• to time properly given in attending to matters arising in the FMI administration
• to a set amount
• to a percentage of the value of the property with which the FMI administrator has had to deal

Remuneration under a normal administration is fixed by the creditors’ committee. The government proposes to allocate this function to the Bank given the alignment of the Bank’s special objectives and the objectives of FMI administration, specifically the continuity of efficient and effective systems.

Given the interests of creditors in the outcome of the FMI administration, it is proposed that the rules will provide that creditors may, in certain circumstances, apply to the court for an order that remuneration of the FMI administrator, the basis fixed for the FMI administrator’s remuneration, or the expenses incurred by the FMI administrator are in all the circumstances excessive or inappropriate. The government welcomes views on the inclusion of this appeal mechanism for creditors.

Pre-administration costs

Similar to the provisions concerning remuneration, the government also proposes that the Bank should be empowered to determine whether and to what extent any pre-FMI administration costs that have been incurred may be paid as an expense of the FMI administration. This may include costs such as the FMI administrators’ costs charged or incurred prior to their appointment in preparing a witness statement to support the proposed FMI administration. If the Bank does not make a determination, or the FMI administrator considers the amount determined to be insufficient, the FMI administrator may apply to the court for a determination.

Decisions from creditors

The 2013 Act, applies paragraph 62 of Schedule B1 to the Insolvency Act 1986, which empowers the administrator to call a meeting of shareholders or to seek a decision on any matter from the creditors of the company. Although creditors do not have the same role as in a normal administration, there could be instances where the FMI administrator wishes to consult with or seeks a decision from creditors. The government proposes that the FMI administration rules should be aligned with the approach of the modernised insolvency rules to seeking decisions from creditors, including allowing for remote meetings, electronic voting and the deemed consent procedure to be used.

Progress reports

Under a normal administration, progress reports are prepared regularly by the administrator to inform creditors of developments in the administration. These reports include information such as a summary account of receipts and payments during the period of the report, information relating to remuneration and expenses during the period, and any other information of relevance to the creditors. In addition to the standard content of the reports as set out in company insolvency rules, the government proposes that the FMI administrator should also report on progress in relation to the objectives of FMI administration. A copy of the progress report must also be made available to the Bank, the FCA, and where relevant, the PSR and PRA.

Charged property

Under a normal administration, the administrator may apply to the court for authority to dispose of charged property other than property subject to a floating charge. The government proposes that in FMI administration, where an application is made by the FMI administrator, the Bank may appear at the hearing to make representations, given the Bank’s interest in the process of FMI administration.

Ending the FMI administration

Under the 2013 Act (application of paragraph 79 of Schedule B1 to the Insolvency Act 1986), only the Bank or the FMI administrator (with the Bank’s consent) can apply to end the FMI administration. The government proposes that creditors, the FCA, and where relevant, the PSR and PRA, should receive notification of an application to the court, in addition to a copy of the final progress report.

Question 2: Do you agree with the proposed application and modification of company insolvency rules?

Question 3: What other company insolvency rules, if any, should be applied with modifications for the effective conduct of FMI administration?

1. The Bank of England’s supervision of financial market infrastructures — annual report, March 2016 ↩