Prudential Regulation Authority Rulebook

5.1

A scheme report must accompany an application to the court to approve an RFTS. This report must be made in a form approved by the PRA, following consultation with the FCA.

5.2

Where one RFTS application will cover multiple transfers, the PRA would expect only one scheme report to be commissioned to cover all of the transfers within the application. This scheme report must address the statutory question for each transfer.

5.3

The legislation requires that the scheme report address the statutory question of ‘(a) whether persons other than the transferor concerned are likely to be adversely affected by the scheme, and (b) if so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve whichever of the purposes mentioned in section 106B(3) is relevant’.

5.4

The purposes outlined in section 106B(3) are as follows:

1. (i) enabling a UK authorised person to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions;
2. (ii) enabling the transferee to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions;
3. (iii) making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the body corporate to whose business the scheme relates becoming a ring-fenced body while one or more other members of its group are not ring-fenced bodies; and
4. (iv) making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the transferee becoming a ring-fenced body while one or more other members of the transferee’s group are not ring-fenced bodies.

5.5

The ring-fencing provisions are defined as the ring-fencing rules and the duty imposed as a result of section 142G. This encompasses the primary and secondary legislation as well as PRA rules and supervisory statements that relate to structural reform.

5.6

By ‘persons other than the transferor’, the PRA would expect the skilled person to consider at least the implications for depositors, customers and counterparties of the transferor, irrespective of whether their relationships are being transferred. These persons should include legal persons such as other companies in the transferor’s group, whether or not they are ring-fenced bodies. We consider the skilled person can, therefore, bring the interests of group companies into account when answering the question in s 109A(4) FSMA. More generally, the skilled person should also consider whether there are other persons who could be affected adversely by the scheme, the impact on whom may need to be assessed too. Given the size and complexity of the banks expected to make use of RFTS, the skilled person may wish to consider the effects of the scheme on material groups of persons where it would be impractical otherwise to assess the effects on all individual persons.

5.7

In addressing part (a) of the statutory question, if the skilled person does not identify that any material groups of persons other than the transferor are likely to be adversely affected then the skilled person does not need to address part (b) of the question in relation to these persons.

5.8

In order for the skilled person to judge whether material groups of persons other than the transferor are likely to be adversely affected, the PRA would expect the skilled person to consider at least the prudential conditions of the transferee relative to the transferor. This is to assess whether those groups of persons being transferred are affected adversely as a result of becoming connected to a riskier entity than they were connected to prior to the transfer. In making this judgement, the skilled person may consider whether the transfer results in a material deterioration in:

1. (i) the quality of the operational continuity arrangements of the entities to which those persons are exposed or connected and the ability of the entities to continue to provide core services to those persons;
2. (ii) the capital position of the entities to which those persons are exposed or connected on a risk weighted and leveraged basis;
3. (iii) the liquidity and funding position of the entities to which those persons are exposed or connected;
4. (iv) the business-model viability and sustainability of the entities to which those persons are exposed or connected;
5. (v) the quality of the governance arrangements of the entities to which those persons are exposed or connected;
6. (vi) the ability of the group to be resolved and the strength of resolution planning in place;
7. (vii) the quality of the risk management and the systems and controls of the entities to which those persons are exposed or connected;
8. (viii) the robustness of recovery planning; and
9. (ix) the position of persons other than the transferor in the creditor hierarchy.

5.9

In addressing part (b) of the question and assessing whether the adverse effects identified in part (a) are reasonably necessary, the skilled person should consider whether there are alternative group arrangements that would still meet the purposes specified in s106(B) but that would have materially fewer adverse effect on groups of persons other than the transferor. This would help the skilled person then to assess whether the effects of the scheme on those persons are greater than is reasonably necessary.

5.10

There are other points that the skilled person should consider when authoring the scheme report:

1. (i) The skilled person should assess the scheme in its entirety including those elements of the transfer that are mandatory to meet the ring-fencing purposes.
2. (ii) Given the breadth of the statutory question, the skilled person may wish to consider only material adverse effects.
3. (iii) The skilled person should consider the ability of persons other than the transferor to bear or mitigate adverse effects.
4. (iv) The examination of adverse effects should not be limited to a point in time but instead should be considered from the point the scheme is implemented.
5. (v) The skilled person should consider to what extent it is appropriate to rely on the firm’s data and what data testing may need to be undertaken.

5.11

It should be noted that this is only a guide to approaching the statutory question and the skilled person may determine, upon consideration, that not all of these topics are applicable to a specific RFTS.

5.12

The PRA recognises the list of topics in paragraph 5.8 may not be relevant for every transfer. As such the skilled person may wish to consider particular matters relating either to the scheme or persons connected to the transfer not listed above

5.13

The skilled person may also need to examine the conduct implications of the transfer for persons other than the transferor and should hence consider any equivalent guidance provided by the FCA in this area.

5.14

The PRA expects that there are some common elements that should be included in any scheme report:

1. (a) who appointed the skilled person and who is bearing the costs of that appointment;
2. (b) confirmation that the skilled person has been approved or nominated by the PRA;
3. (c) a statement of the skilled person's professional qualifications and descriptions of the experience that makes them appropriate for the role;
4. (d) whether the skilled person, or their employer, has, or has had, direct or indirect interest in any of the parties which might reasonably be thought to influence his independence, and details of any such interest as well as steps taken to mitigate this;
5. (e) the scope of the report;
6. (f) the purpose of the scheme;
7. (g) a summary of the terms of the scheme in so far as they are relevant to the report;
8. (h) what documents, reports and other material information the skilled person has considered in preparing the report and whether any information that they requested has not been provided; and
9. (i) the extent to which the skilled person has relied on:
   1. i. information provided by others;
   2. ii. the judgment of others; and
   3. iii. why, in their opinion, such reliance is reasonable.

5.15

The purpose of the scheme report is to aid the court in reaching a decision as to whether to sanction the transfer. The skilled person therefore has a duty to the court. However reliance will also be placed on the scheme report by persons other than the transferor including the regulators. The amount of detail that is appropriate to include will depend on the complexity of the scheme, the materiality of the details themselves and the circumstances.

5.16

Where the transfer forms part of a wider corporate restructuring, it may not be appropriate to consider the transfer in isolation and the skilled person should seek sufficient explanations on corporate plans to enable them to understand the wider picture. Similarly, the skilled person will also need information on the operational plans of the transferee and, if only part of the business of the transferor is transferred, of the transferor. These will need to have sufficient detail to allow them to understand in broad terms how the business will be run.

5.17

When the PRA has approved the form of a scheme report, it will provide confirmation of this to the approved skilled person and the firm.