In Re Santander UK plc [2021] EWHC 1813 (Ch), Mr Justice Snowden sanctioned a banking business transfer scheme in accordance with Part VII of the Financial Services and Markets Act 2000. This case will be of interest to banks that need to make similar applications as it makes clear the principles the court will consider when exercising discretion under section 111.

In June 2021, Santander UK plc (“SanUK”) applied to court for sanction of a banking business transfer scheme (“the Scheme”) in accordance with Part VII of the Financial Services and Markets Act 2000 (“FSMA”). Santander was one of five large banking groups in the UK which were required to undertake ring-fencing transfer schemes in 2018, pursuant to section 106B of FSMA. As a consequence, SanUK’s Corporate and Investment Banking business in the UK (“SCIB UK”) was divided between SanUK and the London Branch (the “SLB”) of SanUK’s parent company Banco Santander, S.A. (“Banco”). The Scheme would simplify the structure of SCIB and allow it to be primarily conducted from the SLB. The SLB was authorised under the Brexit temporary permissions regime to operate in the UK for up to three years whilst Banco was seeking authorisation as a third country firm.

The provisions of section 111 of FSMA must be satisfied for the court to sanction the Scheme. The appropriate certificates must have been obtained, the transferee must have the authorisation required to enable the business which is to be transferred to be carried on in the place to which it is to be transferred, and in all circumstances it must be appropriate to sanction the scheme. Snowden J accepted that SanUK complied with the first two requirements before contemplating the exercise of the court’s discretion under section 111 (3).

The approach to the exercise of the court’s discretion under section 111(3) was considered by the Court of Appeal in the 2020 case of Re Prudential Assurance Company Ltd v Rothesay Life Plc [2020] EWCA Civ 1626. Whilst the transfer scheme applied for in that case related to an insurance business, Snowden J found that some of the more general observations were relevant to the SanUK case.

The Court considered the material adverse effect on affected parties. Where there is such an effect, sufficient measures must be put in place in relation to such adverse changes to make it appropriate to sanction the scheme (Re ING Direct NV [2013] EWHC 1697 (Ch)). The parties potentially affected include non-transferring customers of SanUK and Banco, transferring customers and employees of the transferring business.

The Court determined that the Scheme would not adversely affect non-transferring customers. SanUK submitted that the Scheme would not impact the overall financial position of SanUK and Banco and by extension their non-transferring customers. Snowden J accepted this but commented on the lack of “external verification” of SanUK’s supporting evidence, which included a witness statement of the CFO (prepared with the assistance of teams with relevant expertise). For insurance business transfers, an independent expert report is required under section 109. However, this does not apply to banking business transfers and such a report was not produced in this case. 

The regulators had not expressed concern. SanUK had consulted with UK and Spanish regulators and provided them with supporting evidence. It was held that the regulators’ decision not to attend the hearing could legitimately be taken as an indication that they had no material concerns about the Scheme that they felt they needed to raise. On that basis Snowden J was satisfied that the Scheme did not risk the interests of non-transferring customers. It was emphasised however that the attitude of regulators will not of itself persuade the court to sanction a scheme.   

Snowden J also considered whether experts or regulators should be involvedin determining whether there will be a material adverse effect on affected parties. The Judge said that in most cases the court could form opinions based on evidence and its own experience with financial and regulatory matters. It was mentioned for future reference that if a more specialist expertise is needed the court is entitled to ask for CPR-compliant expert evidence. Snowden J concluded that on the particular facts of this case, he could safely proceed without asking for further evidence or expert assistance. 

SanUK’s transferring customers were sophisticated entities. For all practical purposes there was no material adverse effect as SanUK’s customers could be expected to have formed their own views on whether the Scheme adversely affected their interests. The customers were not contractually or commercially bound to stay and if they felt disadvantaged by the Scheme, they could simply take their business elsewhere. Snowden J also noted that none of the customers had come forward to object to the Scheme. 

The Judge stated that some threat to jobs is inevitable in any business transfer. In the absence of any employees appearing to oppose the Scheme, the impact on employees was not given much weight.

This case provides helpful commentary on the court’s stance on Part VII schemes. It is a welcome development in the area of banking business transfers where there is a lack of notable precedents. Banks planning to make similar applications will be interested in this judgment.

Jenna Lee, Trainee Solicitor in London and Glenys Newall, Managing PSL in London

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