Lloyd's Maritime and Commercial Law Quarterly
CLIENT MONEY RULES AND LEHMAN BROTHERS
Harry McVea*
This article analyses the Court of Appeal’s recent decision in Lehman Brothers International (Europe) (in Administration) v. CRC Credit Fund Ltd. The case helps to illustrate some of the difficulties associated with the collapse of a financial behemoth such as Lehman, and sheds light on the interpretation and effect of the FSA’s client money rules, and various deficiencies in how some of those rules operate in practice.
1. Introduction
The collapse of Lehman Brothers in September 2008—until then one of the world’s most famous and successful investment banks—is widely seen as the event which sparked the wave of financial panic that, in turn, brought global financial markets to the brink of disaster. The full legal fallout from the Lehman’s episode is still to be felt, but the Court of Appeal’s recent decision in Lehman Brothers International (Europe) (in Administration) v. CRC Credit Fund Ltd
1 (hereinafter “LBIE”) helps to illustrate some of the difficulties associated with the collapse of a financial behemoth such as Lehman, and helps shed light on some of the more arcane, yet important, aspects of the UK’s regulatory scheme, in particular the interpretation and effect of the FSA’s client money rules, and various deficiencies in how some of those rules operate in practice.2
2. The client money rules
The Financial Services Authority (FSA), as the UK’s unified regulatory responsible for regulating the financial services industry,3 has a wide discretion to make legally binding
* Reader in Law, University of Bristol, and Visiting Fellow, Institute of Advanced Legal Studies, London.
1. [2010] EWCA Civ 917.
2. As explained (see infra, n 7 and accompanying text), the LBIE case was based on the client money rules which applied prior to the current version of the rules, which was introduced in January 2009. These changes were, however, merely designed to simplify the organisational arrangement of the rules in the wake of the Markets in Financial Instruments Directive (MiFID) 2004/39/EC and the MiFID Implementing Directive 2006/73/EC, rather than to effect substantive improvements to them. As a result, many of the particular defects and deficiencies identified by the courts in the LBIE remain present in the current version of the rules.
3. The FSA has five objectives under the Financial Services and Markets Act 2000 (as amended): maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
LLOYD’S MARITIME AND COMMERCIAL LAW QUARTERLY
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