CASS is clearly useful in safeguarding clients’ money and instruments. However, the entry into administration of the American investment bank Lehman Brothers – which did a great deal of business from its UK hub – demonstrated that CASS was deficient in a number of key respects.
Despite the hope that clients would regain their money and instruments quickly and efficiently, the Lehman Brothers court cases demonstrated that the process had the potential in complex cases to be protracted and costly. The CASS regime assumes compliance with the rules and Lehman Brothers had not complied in a number of ways, including through failures to segregate for all its clients in accordance with the rules and unsatisfactory records having been kept while the firm was a going concern. As a result, there were difficult legal arguments about a number of complex questions, including, most significantly, what money comprised the client money trust and which clients were entitled to it.
The consensus following the collapse of Lehman Brothers was that administration under Part II of the Insolvency Act 1986 was not fit for purpose for financial services firms. To cure these defects, the Treasury enacted the Investment Bank Special Administration Regulations 2011 (‘the SAR’) pursuant to its rule-making powers under the Banking Act 2009. The SAR works alongside and interacts with CASS.
The SAR created a bespoke administration regime for investment firms. Despite the use of the phrase ‘investment bank’ in the SAR, the SAR spreads its net wide, encompassing most firms that allow clients to trade instruments or that hold instruments for clients. So, for instance, an online trading platform that meets the definition of an investment bank will be covered (although deposit-taking by banks is not).
The SAR implemented several changes to a standard administration under Part II of the Insolvency Act 1986 (which incorporates by reference Schedule B1 to the Act). It has different statutory objectives, namely:
- return of client money and instruments as soon as is reasonably practicable;
- engagement with market infrastructure bodies and regulators in a timely fashion; and
- rescue of the firm or liquidation.
The SAR administrators also have special powers, such as more sophisticated bar dates for the return of client instruments (or their value), and powers to disclaim onerous property (which is normally a power reserved to liquidators).
There have been several SAR administrations, such as those for MF Global and Worldspreads. While the SAR and CASS have been useful, there is still room for improvement. Below we explain the problems, and the proposed solutions set out in the above-mentioned publications, proposed CASS amendments and amended SAR.