On Friday March 10, 2023, the Bank of England moved to put the UK arm of Silicon Valley Bank into insolvency after it applied for £1.8bn of liquidity as its parent company was collapsing. The situation remains fluid, and the following Q&A reflects our understanding as of Sunday, March 12.
UK resolution authority and powers
On March 10, 2023, the Bank of England published the following statement regarding Silicon Valley Bank UK Limited (SVB UK):
“The Bank of England, absent any meaningful further information, intends to apply to the Court to place Silicon Valley Bank UK Limited (‘SVBUK’) into a Bank Insolvency Procedure. A Bank Insolvency Procedure would mean that eligible depositors are paid out by the FSCS as quickly as possible up to the protected limit of £85,000 or up to £170,000 for joint accounts. SVBUK’s other assets and liabilities would be managed in the insolvency by the bank liquidators and recoveries distributed to its creditors. SVBUK has a limited presence in the UK and no critical functions supporting the financial system. In the interim, the firm will stop making payments or accepting deposits.”
What course of action has the Bank of England indicated?
The Bank of England (BoE) is the UK’s resolution authority. In the event of a UK-authorized bank facing financial difficulties, the BoE will determine against Banking Act 2009 (BA 2009) criteria including public interest considerations, whether to apply resolution tools or a modified insolvency procedure. Resolution powers could be used to effect a sale or transfer to a ‘bridge bank’ or asset manager, or a bail-in or transfer to temporary public ownership. The BoE, in cooperation with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), have developed resolution plans with respect to each bank it supervises. The BoE will be in the process of applying this plan to SVB UK.
The BoE’s March 10 statement implies that it does not intend to adopt resolution tools and will apply to the court for SVB UK to enter into the insolvency process. This situation is however developing: on March 12, the Chancellor issued a statement noting that the government is treating the issue as a high priority, with discussions ongoing to avoid or minimize damage to the UK tech sector. As a result of these emergency discussions, it may be that SVB UK is put into resolution rather than insolvency, or that a solution outside of the BA 2009 framework is proposed.
What is the bank insolvency process?
Part 2 of the BA 2009 establishes a modified insolvency procedure for banks. Bank insolvency proceedings are started by a court order appointing a bank liquidator; press reports as at March 11 suggest that financial advisory firm Interpath has been identified as a potential appointee. The application to court may be made on three grounds:
- The bank is unable, or likely to become unable, to pay its debts.
- The winding up of the bank would be in the public interest (in other words, the bank may not be technically insolvent, but its winding up would protect its customers and the public).
- The winding up of the bank would be “fair”, which the BA 2009 clarifies as meaning “just and equitable”.
Before the BoE can apply for a bank insolvency order, the PRA must have informed it that the bank is failing or likely to fail. Further, the BoE must be satisfied that it is not reasonably likely that action will be taken by or in respect of the bank to reverse this position.
What action will a liquidator take?
The BA 2009 establishes two statutory objectives for the bank liquidator:
- To work with the FSCS to ensure that, as soon as reasonably practicable, each eligible depositor has either their account(s) transferred to another financial institution, or receives compensation from or on behalf of the FSCS.
- To wind up the affairs of the bank to achieve the best result for the bank’s creditors as a whole.
The first objective takes priority, but the bank liquidator must work towards both. The bank liquidator must report any apparent regulatory contraventions by the failed bank to the FCA and the PRA.
In practical terms, once the primary objective of working with the FSCS to compensate or otherwise protect eligible depositors is achieved, the bank insolvency process is similar to the standard insolvency process under the Insolvency Act 1986. As it stands, there can be no certainty that the procedure will deliver short-term solutions for deposits outside of the FSCS and we anticipate that SVB UK’s depositors will rank as general unsecured creditors in the insolvency (with only limited exceptions). While we expect that the liquidators will come under significant political pressure to move quickly, there may be a lengthy delay until the liquidators issue any guidance as regards expected creditor recoveries and the quantum and timing of interim distributions to creditors (if any).
Are my deposits protected under the UK’s FSCS?
As SVB UK is authorized as a bank by the PRA, deposit holders will receive compensation from the Financial Services Compensation Scheme (FSCS) up to the prescribed limit. The compensation limit is £85,000 in total per eligible person (£170,000 in the case of jointly held accounts). This limit applies at an aggregate level across all deposits accounts that a deposit holder holds with SVB UK, so for example a single £85,000 limit will apply to the aggregate of a firm’s fixed term deposit account as well its current accounts with SVB UK. A business does not need to be UK incorporated or have an establishment in the UK in order to benefit under the FSCS regarding deposits it holds with SVB UK.
Can all types of business claim under FSCS?
Certain specific categories of businesses are not eligible to claim under the FSCS such as businesses that are regulated as investment firms, insurance undertakings or financial institutions or that are collective investment undertakings (funds) or pension or retirement funds, other than personal pension schemes or stakeholder or occupational pension schemes of SMEs.
Are there specific considerations where a business holds funds with SVB UK on trust for customers?
Where your business holds funds with SVB UK on bare trust in client accounts or is a personal pension scheme it may be possible to apply the compensation limit per underlying beneficiary. Please contact us for further information.
What is the process for FSCS payment?
In the case of failed banks, the FSCS will make a compensation payment automatically rather than require claimants to apply. The FSCS has stated publicly that it will look to make payments within 7 days of a bank failing, but recognizes that more complex cases could take longer.
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