UK: PRA and FCA consult on approach to ring-fencing transfer schemes

The PRA is consulting on a draft statement of policy setting out its approach to ring-fencing transfer schemes (RFTS), and the FCA on guidance.

Part VII of the Financial Services and Markets Act 2000 (FSMA) provides for transfers of insurance or banking business to be sanctioned by the Court and sets out the framework for the process leading to that approval.  The Financial Services (Banking Reform) Act 2013 made further provision for an additional process for transfer of business known as an RFTS.  The purpose is to enable firms to restructure their businesses in order to comply with the ring-fencing requirements that will apply from 1 January 2019.

PRA

The PRA consultation paper CP33/15 focuses on the PRA’s functions relating to this particular transfer of business.  It will be of interest to banks which will be required to ring-fence their activities, skilled persons commissioned to author the scheme report for submission to the court as part of the RFTS application, and other financial institutions and customers who have dealings with ring-fenced bodies.

The Financial Services (Banking Reform) Act 2013 gave the PRA new powers in respect of RFTS, giving the PRA responsibility for :

• nominating or approving the author of the scheme report - s109A(2) FSMA
• approving the form of the scheme report – s 109A(3) FSMA
• consenting to an application to the court for an order sanctioning an RFTS - s 107(2A – this is new requirement that does not apply for banking business transfers
• if the transferee is an EEA firm, certifying to the court that its home state regulator has been notified of the proposed scheme and that 3 months have elapsed since notification.

The purpose of the draft statement of policy is to set out the PRA's approach these matters.

Key stages of the initial process

• Initial dialogue between PRA and firm to understand scope, timetable, nature of transfer and the nominated skilled person
• Decision whether to approve form of scheme report, and nomination of skilled person, in consultation with FCA
• PRA to certify to court consent to the application if appropriate
• Directions hearing - timetable for notification to public and receipt of submissions
• PRA to issue certificate of financial resources to court if appropriate (for solo regulated transferees, FCA issues the certificate)
• If transferee is an EEA firm, PRA to certify re home state notification
• Court determines whether to sanction scheme and issue orders to effect the RFTS

The draft policy statement provides guidance on how the skilled person should approach to the statutory question, on other matters to be included in the scheme report, on qualification and appointment of the skilled person, and on other matters that PRA will take into account in confirming consent (or not) to the RFTS application to the court.

FCA guidance consultation

The FCA is also consulting on its approach to the implementation of ring-fencing and ring-fencing transfer schemes.  Unsurprisingly, key areas of focus will be consumer outcomes during and after implementation of the regime, and communications to customers.  The FCA will consider the potential implications of the proposed transfer on its objectives, as part of normal supervision of the transferor/transferee as well as when consulted by the PRA in relation to some of its statutory decisions on the RFTS.  This is a clear flag that the FCA will expect early notification in the context of the supervisory relationship.

Key points in the consultation include:

• When consulted by the PRA on the suitability of the proposed skilled person, the FCA will have regard to a number of general criteria, including skills and relevant specialised knowledge- suitability will depend on the nature of the scheme, the firms concerned, and the overall circumstances of the transfer.
• When consulted by the PRA in relation to approval of the scheme report, the FCA will provide feedback on matters it expects the scheme report to contain. From FCA's perspective, one of the key ‘persons’ who could be adversely affected by the RFTS are customers of the group, and consumers more generally. To enable it to assess whether outcomes might be negative for consumers, the FCA would expect the scheme report to contain information on a number of areas, including on:
  • consumers’ position before the transfer
  • their position subsequently.
• The FCA also expects the scheme report to include the skilled person’s opinion on other persons (i.e. other than the transferor or customers of the group or consumers more generally) who are likely to be adversely affected – including direct impact on competitors of the transferor or transferee, such as firms that are provided access to payment systems by the transferor or transferee.
• Although FCA has a right to heard in the Court proceedings, in practice, it will expect to have discussions with the transferor or transferee firms, or both, well before an application is made to the court. The FCA’s assessment of the ring-fencing transfer scheme is a continuing process and the FCA expects any concerns it may have are dealt with by firms before the court hearing.
• A key FCA concern will be the arrangements made to communicate the proposed scheme to consumers. As there is presently no statutory requirement on publishing notices in relation to a RFTS, FCA propose guidance to firms with regard to giving notice publicly and to affected consumers, in particular because of the limited right to be heard in court:
  • Requirement for notices will normally be required through
    • publication in the London, Edinburgh and Belfast Gazettes and national newspapers in the United Kingdom (normally 2 newspapers, but wider publication may be appropriate in some circumstances) and
    • individually sent to all consumers who are likely to be affected by the scheme
  • FCA expects there should normally be more than 6 weeks between sending notices to persons likely to be adversely affected and the date of the court hearing, and expects to be consulted on planned communications

Next steps

Both consultations close on Friday 30 October 2015.  A final statement of policy on the PRA’s approach to RFTS will then be issued. The ring-fencing requirements are due to apply from 1 January 2019.