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HMRC SDLT: SDLTM29250 – Reliefs: Financial Institutions in Resolution: Supplemental reverse and onward transfers

Understanding the Supplemental Reverse and Onward Transfers in Resolution

When a bank or financial institution fails, the government has special rules in place to manage the situation. These rules are part of the Banking Act 2009 and focus on restoring the bank’s ability to operate. This process is known as the ‘resolution’ of a failed institution. In this article, we will explain the key concepts and processes involved in this resolution, particularly focusing on the supplemental reverse and onward transfers.

What Happens When a Bank Fails?

When a bank fails, the Banking Act 2009 provides several options to help stabilize the bank. The aim is to maintain essential services and protect the economy. Some of the main tools used in this process include:

• Mandatory Reduction Instrument: This can reduce the financial burden of the bank by eliminating certain debts.
• Resolution Instrument: This allows for quick action to address the problems that caused the bank to fail.
• Share Transfer Instrument: This transfers ownership of shares from the failed bank to another party.
• Property Transfer Instrument: This involves transferring ownership of physical assets, such as land, to another entity.

The transfers can occur either to a temporary holding bank set up by the Bank of England or to private buyers.

Supplemental Instruments Explained

In addition to the primary instruments mentioned above, sometimes more actions are needed. These are known as supplemental instruments. These can also include:

• Supplemental Resolution Instruments: Additional documents that help clarify the terms for transferring securities and land.
• Share Transfer Instruments/Orders: These further facilitate the transfer of shares from the failed institution.
• Property Transfer Instruments: Similar to supplemental resolution instruments, these focus specifically on land.

Onward Transfer Instrument

An onward transfer instrument is another important tool used during the resolution process. Once a bank is stabilized, its assets may need to be handed off to new owners. The onward transfer instrument allows this. Here are a few key points about it:

• The instrument facilitates the transfer of property (e.g., shares and land) from a temporary holding entity, like a bridge bank or asset management vehicle, to a private purchaser.
• It can also enable the transfer back to former creditors if the resolution involves a bail-in process.

Reverse Transfer Instrument

Sometimes during the resolution process, a reverse transfer instrument might be necessary. This allows for the return of property—whether shares or land—to the previous owner. Key considerations for the reverse transfer instrument include:

• It can be used when it is determined that more assets were transferred from the failed bank than are actually needed for the resolution process.
• For instance, if a failed bank had initially transferred too many shares or parcels of land to a bridge bank during the resolution, these excess assets can be returned.
• This return is subject to specific restrictions and conditions, ensuring that the resolution process remains effective.

Examples of Each Instrument

To better understand these concepts, let’s consider some examples:

Example of Onward Transfer Instrument:

Imagine a failed bank called ‘Bank X.’ After its resolution, a temporary holding bank manages its assets. A private company, ‘Company Y,’ wishes to buy some of the assets (e.g., certain properties and shares). A separate onward transfer instrument is created to legally transfer these assets from the temporary holding bank to Company Y.

Example of Reverse Transfer Instrument:

Continuing with the example of Bank X, after evaluation, the temporary holding bank realizes it has more shares from Bank X than it needs to stabilize the bank. Using a reverse transfer instrument, the holding bank can return these excess shares to Bank X’s previous owner, ensuring that only the necessary assets remain with the holding entity.

Regulations and Guidance

Understanding the supplemental reverse and onward transfer instruments is essential within the broader stabilisation options available during a bank’s resolution process. For more detailed information regarding how these processes are managed and the relevant legal framework, refer to relevant HMRC guidance and sections like SDLTM29240, which provides more insights into different stabilisation options available.

The Importance of These Instruments

The use of supplemental reverse and onward transfer instruments plays a critical role in managing the assets of a failed financial institution efficiently. By having structured processes in place:

• It helps to ensure that financial stability is restored swiftly.
• It safeguards creditors and other stakeholders’ interests.
• It enables a smooth transition of assets from public or temporary ownership to private ownership.

Final Thoughts on Resolution Instruments

In summary, the supplemental reverse and onward transfer instruments are vital in the resolution process for failed financial institutions. They provide the necessary mechanisms for transferring assets, ensuring that the resolution process is efficient and effective in maintaining stability in the financial system.