Vol 7 (2010) - Issue 3

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Dunfermline Building Society: The First Use of the New Resolution Powers under the Banking Act 2009

Background
The global credit crunch of 2007/2008 and a series of banking problems in the UK that stemmed from that – starting (arguably) with the run on Northern Rock in September 2007 – led the UK government to conclude that the tools they had to maintain financial stability were inadequate. The extant insolvency law was not considered to be sufficient, on its own, to enable those charged with implementing public policy to take decisive action at an early enough stage (i.e. before insolvency) and did not sit comfortably with the key objectives of stability, market confidence and protection of depositors.
The answer came in the form of the Banking Act 2009 and its associated delegated legislation, which created the Special Resolution Regime (SRR) for deposit takers (both banks and building societies), involving the Bank of England, HM Treasury (HMT), the Financial Services Authority (FSA) and the Financial Services Compensation Scheme (FSCS).
The Banking Act 2009 (the Act) came into effect on 21 February 2009. Within it were the provisions establishing the SRR and introducing two new specific insolvency procedures that could be initiated in respect of deposit takers: Bank Insolvency and Bank Administration, more catchily known as the BIP and the BAP. The Act applies to any authorised deposit-taker incorporated in the UK (i.e. banks and building societies) but excludes credit unions (with a power to include them if the Treasury thinks fit). The Act has been supported by new sets of Rules for bank insolvencies and administrations, each designed to focus the insolvency practitioner on the SRR process in priority to other tasks.
In 2009, the Dunfermline Building Society, then the largest building society in Scotland and twelfth largest in the UK, became the first entity to enter the new SRR, and led to the appointment of the first Building Society Special Administrators on 30 March 2009.

What happened?
In the lead-up to 30 March 2009, the FSA had been monitoring the Society as there were concerns as to its ability to continue to satisfy the FSA threshold requirements as a deposit taker. Approximately three weeks prior to the eventual Resolution we were engaged as part of the Bank of England’s contingency planning to prepare plans should it be necessary for the court to appoint administrators in connection with the Resolution.
In the circumstances, with the need to keep our engagement confidential due to the great sensitivity around depositors, our contingency planning could only be done at high-level, with no direct access to the Society or its management. Moreover, there was no way of knowing whether we would be appointed and if we were what we would be appointed over – would it be just the corporate shell (with the business and assets transferred in their entirety to a buyer) or the whole undertaking? Our planning had to consider all eventualities.