Shearman & Sterling LLP | FinReg | Guidance Published on Financial Services Exclusions in the UK Corporate Insolvency and Governance Bill
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  • Guidance Published on Financial Services Exclusions in the UK Corporate Insolvency and Governance Bill
    06/01/2020
    Following the introduction of the Corporate Insolvency and Governance Bill into Parliament on May 20, 2020, the U.K. government has published a series of guidance notes on the measures proposed in the Bill. The proposed measures, first announced by Secretary of State for Business, Energy and Industrial Strategy on March 28, 2020, are intended to protect companies and businesses facing major funding and operational difficulties in the current COVID-19 pandemic. Once final, the Bill will amend current U.K. insolvency law by, among other things, introducing a new moratorium, establishing a new restructuring plan procedure for failing companies that includes a mechanism to bind a dissenting class of creditors to the plan, and banning termination clauses that would come into effect when a company enters into insolvency, begins a moratorium or starts the new restructuring plan procedure. The Bill will also temporarily remove the threat of personal liability from wrongful trading for directors of companies where they face financial difficulties as a result of COVID-19, which will apply retrospectively from March 1, 2020.

    Of significance to firms in the financial sector are the proposed financial services exclusions from some of these amendments to U.K. insolvency law. These exclusions aim to preserve the existing special U.K. insolvency rules for financial services firms. The exclusions will apply to U.K. banks, investment firms and investment banks (including managers or trustees/depositories of an Alternative Investment Fund or Undertakings for the Collective Investment in Transferable Securities), insurers, electronic money institutions, payment services firms, operators of payment systems, central securities depositories, recognized clearing houses, CCPs, exchanges, securitization companies, building societies and friendly societies and credit unions. The exclusions also apply to non-U.K. entities that undertake corresponding activities to the U.K. entities listed above.

    These entities will:
    • be excluded from the effect of the termination clauses provision, where the entity is in distress or where it is a supplier to another company in distress; and
    • not have access to the company moratorium when they are in distress, but will be subject to a moratorium of a company to which they are a creditor.

    In addition, the temporary suspension of the wrongful trading personal liability will not be available to directors of financial services firms.

    The Bill does not presently exclude the financial services sector from the restructuring plan provisions but does require, in the case of certain financial services entities, advance notice to be given to the relevant regulator of any application to the court to propose a plan. This will apply to authorized firms, recognized exchanges, e-money institutions, authorized and small payment institutions, registered account information service providers and appointed representatives. It will also apply to firms that carry on regulated activities without being authorized to do so. The regulator is also entitled to be heard and to make representations at any meeting held to approve the plan. The Bill also includes provisions under which subsequent regulations could exclude authorized firms from making use of the restructuring plan.

    Certain contracts are also excluded from the termination clauses and, to a certain extent, the moratorium provisions. These include:
    1. Financial contracts such as lending, financial leasing and guarantees and commitments, securities contracts, commodities contracts, a futures or forwards contract, swap agreements, inter-bank borrowing agreements where the term of the borrowing is three months or less and any master agreement for any of these contracts;
    2. Securities financing transactions;
    3. Derivatives and spot contracts;
    4. Capital market arrangements;
    5. Contracts forming part of a public-private partnership; and
    6. Contracts to accept and process card-based payment transactions.

    In addition, the Bill ensures that the following measures will remain unaffected:
    • Set-off and netting arrangements, as defined in the Banking Act 2009, are excluded from the effect of the termination clauses and a company moratorium;
    • The special protective regime for recognized investment exchanges, recognized clearing houses and CCPs (and equivalent recognized overseas entities) under Part VII of the Companies Act 1989 that ensures that any default management process and the contracts effected by such entities as part of default management or as part of its central clearing function are not touched by insolvency proceedings;
    • The protections in the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (S.I. 1999/2979) for designated securities and payment settlement systems that ensure that any multilateral netting provisions in the default rules of such systems are protected from invalidation on grounds of inconsistency with insolvency law rules; and
    • The provisions of the Financial Collateral Arrangements (No.2) Regulations 2003 (S.I. 2003/3226) that protect close-out netting provisions in financial collateral arrangements (it being noteworthy that this is a jurisdiction-neutral definition which third country collateral takers may take advantage of).

    View the Guidance notes to the Corporate Insolvency and Governance Bill 2020.

    View the Corporate Insolvency and Governance Bill 2020.

    You may like to view our client note, COVID-19 Changes Announced to UK Insolvency Law and for AGMs.

    Details of other regulatory responses to COVID-19 are available on our COVID-19 Research Center.

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    TOPIC: COVID-19