The British government will urge investment banks to prepare plans to hand back money to investors in the event of collapse, an effort to overhaul insolvency law after the demise of Lehman Brothers Holdings Inc.
Treasury Minister Paul Myners today will call for data on counterparties to deals to be stored in a readily accessible way so that investors have easy access to their cash, according to a Treasury official.
The U.K. has already overhauled bank-rescue rules and is seeking to restructure financial supervision after the global credit crunch forced the government to nationalize Northern Rock Plc and take control of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.
Lehman filed the biggest bankruptcy in history in September 2008, roiling financial markets and sparking lawsuits by former clients whose assets were frozen in insolvency proceedings around the world. Estimates show the bankruptcy cost creditors as much as $75 billion.
The government wants insolvency laws to have special provisions for investment banks after the collapse of Lehman revealed the rules aren’t well adapted to that scenario. The U.K. will shun adoption of U.S.-style Chapter 11 protection from creditors because it isn’t suited to English law, the Treasury said in May.
The official said the measures aim to prevent the confusion that followed the collapse of the U.S. bank.
Under the proposals, the UKCIG will require banks to set aside money to pay staff for a limited period in the event of a collapse, the official said. The Treasury will suggest insolvency-proof contracts and that people involved in deals are kept on for a set period.
The proposals follow talks among investment banks, lawyers, insolvency experts, the Financial Services Authority, the Bank of England and the Treasury. The markets regulator in April put financial companies on notice about the need to research and “ring-fence” client assets in the wake of Lehman’s failure.
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