Guidance

Financial services exclusions

Updated 5 June 2020

This guidance was withdrawn on 22 February 2023

This bill became law on 25 June 2020. See the Corporate Insolvency and Governance Act 2020.

What are we going to do?

This Bill will help companies to maximise their chances of survival, protect jobs and support the country’s economic recovery. It consists of a number of insolvency and corporate governance measures.

The UK has a number of special insolvency regimes which apply to certain financial services firms. Under these regimes, and other financial services legislation, the UK’s financial regulators have bespoke powers to intervene in relation to the insolvency of financial services firms. This is important to mitigate the risks to financial stability and ensure consumer protection when these firms are at risk of failing. In addition, the way that goods and services are traded in the financial sector is often different to the rest of the economy.

It is therefore necessary to have specific provisions in the Bill which exclude certain financial sector firms and contracts from the effect of the Bill’s measures. These specific provisions will ensure that the UK’s existing special insolvency regimes for financial sector firms are unaffected, and that financial market participants have the legal certainty needed to facilitate the efficient functioning of financial markets.

How are we going to do it?

The Bill provides that the following measures will not apply to the financial services sector, in certain cases:

• Company moratorium
• Ipso facto (Termination) clauses
• Suspension of Wrongful Trading

In addition, the new Restructuring Plan will be available to financial services firms, but with appropriate safeguards including a role for the financial services regulators.

There are no exemptions or special provisions for financial services for the remaining provisions of the Bill.

What does this mean in practice?

Certain financial services firms will not have access to the moratorium measure when they are in distress. These firms will therefore not be able to use a moratorium to obtain protection from their creditors. However, these firms are not excluded when they are a creditor to another firm in distress which itself is using a moratorium. This means financial services firms cannot take action against a firm using a moratorium, just like any other creditor.

The ipso facto (termination) clauses provision will also not apply to financial services firms, both when they are in distress and when they are a creditor to a firm in distress. This means that these firms and their creditors can continue to terminate contracts if necessary. This is essential to ensure the efficient functioning of financial markets.

Certain financial contracts are also excluded from the ipso facto (termination) clauses provision and some of the effects of the moratorium, in order to mitigate risks to financial stability.

The wrongful trading suspension will not apply to the directors of financial services firms, in order to protect client assets.

However, the new Restructuring Plan will be available to financial services firms, with appropriate safeguards including a role for the financial services regulators.

Who does it apply to?

This table summarises the proposed exclusions for financial services firms. Please see the Background section for further detail.

Category	Moratorium and suspension of wrongful trading	Moratorium and suspension of wrongful trading	Prohibition of ipso facto (termination) clauses	Prohibition of ipso facto (termination) clauses	Restructuring plan
	FS firm as debtor (i.e. in distress)	FS firm as creditor (to real-economy firm in distress)	FS firm as debtor (i.e. in distress)	FS firm as creditor (to real economy firm in distress)
Insurers	Excluded	Not excluded	Excluded	Excluded	Not excluded
Banks	Excluded	Not excluded	Excluded	Excluded	Not excluded
Investment banks and investment firms	Excluded	Not excluded	Excluded	Excluded	Not excluded
Electronic money institutions	Excluded	Not excluded	Excluded	Excluded	Not excluded
Payment institutions	Excluded	Not excluded	Excluded	Excluded	Not excluded
Operators of payment systems, infrastructure providers, etc	Excluded	Not excluded	Excluded	Excluded	Not excluded
Recognised investment exchanges etc	Excluded	Not excluded	Excluded	Excluded	Not excluded
Securitisation companies	Excluded	Not excluded	Excluded	Excluded	Not excluded
Building societies	Excluded	Not excluded	Excluded	Excluded	Not excluded
Friendly societies	Excluded	Not excluded	Excluded	Excluded	Not excluded
Credit unions	Excluded	Not excluded	Excluded	Excluded	Not excluded
Corresponding overseas entities	Excluded	Not excluded	Excluded	Excluded	Not excluded
Certain financial contracts (please see Background section)	Excluded	Excluded	Excluded	Excluded	N/A

Background: Detail of exclusions for the financial services sector

1. Excluded entities

The Bill provides for the following entities to be excluded from the effect of the ipso facto (termination) clauses provision. This exclusion will apply both in the scenario where one of these entities is itself in distress, and in the scenario where one of these entities is a supplier to another firm in distress. In addition, where these entities are themselves in distress, they will not have access to the company moratorium, and the suspension of Wrongful Trading will not apply. However there will be no exclusion for these entities where they are a supplier to another (non-excluded) firm in distress which is using a company moratorium, though the exclusions in Section 2, below, will apply:

Insurers, where the entity carries on the regulated activity of effecting or carrying out contracts of insurance but is not an exempt person within the meaning given by section 417 of the Financial Services and Markets Act 2000.

Banks, where the entity:

• (a) has permission under Part 4A of the Financial Services and Markets Act 2000 to carry on the regulated activity of accepting deposits, where “regulated activity” has the meaning given by section 22 of the Financial Services and Markets Act 2000, taken with Schedule 2 to that Act and any order under that section.
• (b) is a banking group company within the meaning of Part 1 of the Banking Act 2009 (see section 81D of that Act), or
• (c) has a liability in respect of a deposit which it accepted in accordance with the Banking Act 1979 or the Banking Act 1987.

Investment banks and investment firms, where:

• “investment bank” means a company or other entity that has permission under Part 4A of the Financial Services and Markets Act 2000 to carry on the regulated activity of—
  • (a) safeguarding and administering investments,
  • (b) managing an AIF or a UCITS,
  • (c) acting as trustee or depositary of an AIF or a UCITS,
  • (d) dealing in investments as principal, or
  • (e) dealing in investments as agent;
  • But, only for the company moratorium and suspension of wrongful trading, does not include a company that has permission to arrange for one or more others to carry on the activity mentioned in (a) if it does not otherwise have permission to carry on any of the activities mentioned in (a) to (e);
• “investment firm” has the same meaning as in the Banking Act 2009 (see section 258A of that Act), disregarding any order made under section 258A(2)(b) of that Act;
• “regulated activity” has the meaning given by section 22 of the Financial Services and Markets Act 2000, taken with Schedule 2 to that Act and any order under that section.

Electronic money institutions, where the entity is an electronic money institution within the meaning of the Electronic Money Regulations 2011 (S.I. 2011/99) (see regulation 2 of those Regulations).

Payment institutions, where the entity is an authorised payment institution, a small payment institution or a registered account information service provider within the meaning of the Payment Services Regulations 2017 (S.I. 2017/752) (see regulation 2 of those Regulations).

Operators of payment systems, infrastructure providers etc, where the entity;

• is (a) the operator of a payment system or an infrastructure provider within the meaning of Part 5 of the Financial Services (Banking Reform) Act 2013 (see section 42 of that Act), or
• (b) an infrastructure company within the meaning of Part 6 of that Act (see section 112 of that Act).

Recognised investment exchanges etc, where the entity is a recognised investment exchange, a recognised clearing house or a recognised CSD within the meaning of the Financial Services and Markets Act 2000 (see section 285 of that Act).

Securitisation companies, where the entity is a securitisation company within the meaning of the Taxation of Securitisation Companies Regulations 2006 (S.I. 2006/3296) (see regulation 4 of those Regulations)

Any overseas entities, whose functions correspond with the above list of entities.

In addition, a company which has permission under Part 4A of FSMA to carry on a regulated activity, and which is not subject to a requirement to refrain from holding money for clients, will also be specifically excluded from being eligible for the company moratorium with temporary modifications and from the wrongful trading suspension.

The new provisions relating to the company moratorium, ipso facto (termination) clauses and wrongful trading suspension will also not apply to building societies (under the Building Societies Act 1986), friendly societies (under the Friendly Societies Acts 1974 or 1992) and credit unions (under the Credit Unions Act 1979).

2. Excluded contracts

The Bill provides for the following financial contracts to be excluded from the ipso facto (termination) clauses provisions and some of the effects of the company moratorium:

Financial contracts, meaning:

• a contract for the provision of financial services consisting of (i) lending (including the factoring and financing of commercial transactions), (ii) financial leasing, or (iii) providing guarantees or commitments;
• a securities contract, including (i) a contract for the purchase, sale or loan of a security, a group or index of securities; (ii) an option on a security or group or index of securities; (iii) a repurchase or reverse repurchase transaction on any such security, group or index;
• a commodities contract, including (i) a contract for the purchase, sale or loan of a commodity or group or index of commodities for future delivery; (ii) an option on a commodity or group or index of commodities; (iii) a repurchase or reverse repurchase transaction on any such commodity, group or index;
  • For the purposes of this exclusion “commodities” includes (a) units recognised for compliance with the requirements of EU Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading; (b) allowances under paragraph 5 of Schedule 2 to the Climate Change Act 2008 relating to a trading scheme dealt with under Part 1 of that Schedule (schemes limiting activities relating to emissions of greenhouse gas); and (c) renewable energy certificates (ROCs) issued i.) by the Gas and Electricity Markets Authority under an order made under section 32B of the Electricity Act 1989, ii.) by the Northern Ireland Authority for Utility Regulation under the Energy (Northern Ireland) Order 2003 (S.I. 2003/419 (N.I. 6)) and pursuant to an order made under Articles 52 to 55F of that Order.
• a futures or forwards contract, including a contract (other than a commodities contract) for the purchase, sale or transfer of a commodity or property of any other description, service, right or interest for a specified price at a future date;
• a swap agreement, including (i) a swap or option relating to interest rates, spot or other foreign exchange agreements, currency, an equity index or equity, a debt index or debt, commodity indexes or commodities, weather, emissions or inflation; (ii) a total return, credit spread or credit swap; (iii) any agreement or transaction that is similar to an agreement referred to in sub-paragraph (i) or (ii) which is the subject of recurrent dealing in the swaps or derivatives markets;
• an inter-bank borrowing agreement where the term of the borrowing is three months or less;
• a master agreement for any of the contracts or agreements referred to above

Securities financing transactions, within the meaning given by Article 3(11) of Regulation (EU) 2015/2365 on the transparency of securities financing transactions (but for the purposes of that Article, references to “commodities” in that Regulation are to be taken as including the units and allowances referred to above).

Derivatives, within the meaning given by Article 2(5) of Regulation (EU) No. 648/2012.

Spot contracts, within the meaning given by Article 7(2) or 10(2) of Commission Delegated Regulation of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

Capital market arrangements, broadly following the exclusion for capital market arrangements from the existing small companies’ moratorium in Schedule A1 to the Insolvency Act 1986, which will be replicated in the new moratorium.

Contracts forming part of a public-private partnership, broadly following the exclusion for public-private partnerships from the existing small companies’ moratorium in Schedule A1 to the Insolvency Act 1986, which will be replicated in the new moratorium.

Contracts to accept and process card-based payment transactions, within the meaning given by Regulation (EU) 2015/751 of the European Parliament and of the Council of 29th April 2015 on interchange fees for card-based payment transactions, specifically from the company moratorium.

In addition, the Bill ensures that the protections provided by the following arrangements and legislation are unaffected by the new provisions:

• Set-off and netting arrangements (within the meanings given by section 48(1)(c) and (d) of the Banking Act 2009). These arrangements are excluded from the effect of the ipso facto (termination) clauses provisions. The company moratorium will not affect the operation of set-off or netting.
• Part 7 of the Companies Act 1989 (financial markets and insolvency),
• The Financial Markets and Insolvency Regulations 1996 (S.I. 1996/1469),
• The Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (S.I. 1999/2979)
• The Financial Collateral Arrangements (No.2) Regulations 2003 (S.I. 2003/3226).