Jersey Bank Depositors Compensation Board: Loan Agreement

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A decision made 15 December 2014:

Decision Reference: MD-TR-2014-0148
Decision Summary Title:	Loan Agreement: Jersey Bank Depositors Compensation Board		Date of Decision Summary:	10 December 2014
Decision Summary Author:	Director of Accounting Services		Decision Summary: Public or Exempt?	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:	N/A
Written Report Title:	Loan Agreement: Jersey Bank Depositors Compensation Board		Date of Written Report:	10 December 2014
Written Report Author:	Director of Accounting Services		Written Report : Public or Exempt?	Public
Subject: Loan Agreement: Jersey Bank Depositors Compensation Board (“the Board”).
Decision(s): The Treasury and Resources Minister approved the Loan Agreement (attached as SD1) and three associated Security Interest Agreements (attached as SD2-4) (collectively “the Agreements”) on behalf of the States of Jersey.
Reason(s) for Decision: In order for the Board to be able to pay compensation quickly to depositors, the States agreed in P84/2009 that provision should be made for the States to lend liquidity funding from the Strategic Reserve to the Board in the unlikely event of a Jersey bank failure. Existing versions of the Agreements provide the legal framework for such lending and were signed on 13 January 2011. As a result of the new Security Interests (Jersey) Law, and changes proposed to the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the “Regulations”) it is now an appropriate time for the States of Jersey to sign updated Agreements.
Resource Implications: The total financial amount that can be called upon from the States is unchanged by the updating of the agreements. The States of Jersey have clearer rights in relation to when they can recall the loan following the revised Loan Agreement, and in relation to their security interests under the drafting of new Security Interests documentation under the new Security Interests (Jersey) Law 2012. Accordingly there are no staffing implications and the financial implications for the States of Jersey should be beneficial as a result of updating the Agreements.
Action required: The Treasury and Resources Minister is to sign the Agreements on behalf of the States of Jersey.
Signature:		Position: Senator A.J.H. Maclean, Minister for Treasury and Resources
Date Signed:		Date of Decision:

Jersey Bank Depositors Compensation Board: Loan Agreement

Written Report

Loan Agreement

Jersey Bank Depositors Compensation Board (the “Board”)

THE ISSUE

In order for the Board to be able to pay compensation quickly to bank depositors in the unlikely event of a Jersey bank failure, the States agreed in P84/2009 that provision should be made for the States to lend liquidity funding from the Strategic Reserve to the Board.

The Board is a statutory body established under the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (“the Regulations”) to pay compensation to depositors in the unlikely event of a Jersey bank failure.

In order for the Board to be able to pay compensation to depositors as intended, the States of Jersey agreed that provision should be made for the States to lend liquidity funding from the Strategic Reserve to the Board in the unlikely event of a Jersey bank failure.

A Loan Agreement and three associated Security Interest Agreements were previously signed on 13 January 2011 by the Treasury and Resources Minister on behalf of the States of Jersey. The Agreements provide the legal framework for lending up to £100 million to the Board in order to pay compensation to depositors in the unlikely event of a failure of a Jersey registered bank.

As a result of the new Security Interests (Jersey) Law (the “SI Law”), and changes proposed to the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the “Regulations”), and a request from the Board, it would be an appropriate time to update the Agreements.

BACKGROUND

By Proposition 84/2009, the States agreed:

“(a) to vary that [the Strategic Reserve] policy to enable the Strategic Reserve Fund to also be used, if necessary, for the purposes of providing funding for the Bank Depositors Compensation Scheme to be established under the Banking Business (Depositors Compensation) (Jersey) Regulations 200-; and

(b) that monies from the Strategic Reserve Fund, up to a maximum combined total not exceeding £100 million, should be made available if required to meet the States contribution to the Bank Depositors Compensation Scheme and/or to meet any temporary cash flow funding requirements of the Scheme”.

A Loan Agreement and three associated Security Interest Agreements (collectively “the Agreements”) were signed on 13 January 2011 by the Economic Development Minister on behalf of the Board and the Treasury and Resources Minister on behalf of the States of Jersey. The Agreements provide the legal framework for lending up to £100 million to the Board in order to pay compensation to depositors in the unlikely event of a failure of a Jersey registered bank.

As a result of the new Security Interests (Jersey) Law (the “SI Law”), and changes proposed to the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the “Regulations”), and a request from the Board, it would be beneficial to update the Agreements.

THE NEW AGREEMENTS

The updated Loan Agreement (attached as SD1) and three associated updated Security Interest Agreements (attached as SD2-4) (collectively “the updated Agreements”) provide the framework for the States of Jersey to lend liquidity funding to the Jersey Bank Depositors Compensation Board (“the Board”) to enable it to pay out compensation to depositors quickly in the unlikely event of a Jersey bank failure.

The updated Agreements contain the following changes:

Now that responsibility for carrying out the functions of the Board has passed to the Chief Minister the address of the Deposit Compensation Scheme Board has been changed to reflect the new location of the administration of the Board.

As it is proposed that the Board will be able pay compensation by straight through payment in appropriate circumstances, such as where the bank data is sufficiently accurate and up to date, the terms have been changed to remove the requirement for a claim form changing the definition of claim form in the interpretation section and amending clause 7.1.2.

Clause 15.2 has been added to ensure that the States of Jersey can only revoke the agreement prior to the draw-down of liquidity funding by giving 90 days notice in order to give sufficient time for the Board to set up alternative facilities if required.

The Security Interest Agreements have been amended to give the States of Jersey the benefits of the new SI Law rather than simply being rights which were grandfathered in under the old Law’s transitional provisions. In particular the rights will be perfected after being signed and registered in the new Security Interests Register. This will give effective notice to all parties under Jersey law through registration that the States of Jersey has a security interest in relation to the Board’s loan account, the rights of the Board to recoveries in respect of the depositor’s rights, and to levies made upon the banking industry to contribute for the costs of paying compensation.

Under Clause 6.1 of the Loan Agreement in order to draw down a loan there must be an agreed signed legal opinion, a draw down notice and all related Agreements executed. The legal opinion by Carey Olsen has been substantially updated to state the remit and consequences of the new SI Law in relation to the security and this legal opinion is now in agreed form. It is important that this is accepted by all parties to the agreement so that there can be a fast process to draw down the required funds so that the Board can be effective in fulfilling its mandate.

The Security Interest agreements have been revised to meet the requirements of the new SI Law.

FINANCIAL RESOURCES, LEGAL ADVICE & SIGNING POWERS

The total financial amount that can be called upon from the States is unchanged by the updating of the agreements. They update an existing commitment by the States of Jersey under Proposition 84/2009 to pay £100 million to the Board in the unlikely event of a Jersey bank defaulting.

The States of Jersey have clearer rights in relation to when they can recall the loan following the revised Loan Agreement, and in relation to their security interests under the drafting of new Security Interests documentation under the new Security Interests (Jersey) Law 2012. Accordingly there are no manpower implications and the financial implications for the States of Jersey should be beneficial as a result of updating the Agreements.

The independent legal advisers to the Treasury & Resources Minister are Ogier. Ogier’s advice is attached as a supporting document and states that the documents are appropriate to be signed.

The Chief Minister (on behalf of the Board) and the Treasury & Resources Minister (on behalf of the States of Jersey) have received independent legal advice in relation to the Agreements and with respect to the respective parties’ rights and obligations.

RECOMMENDATION

It is recommended that the Treasury & Resources Minister signs the Agreements for and on behalf of the States of Jersey.

5 December 2014

Treasury and Resources