Client Money Update - Client Money Entitlement Determination - 24/5/2012

The Joint Administrators’ Seventh Progress Report to clients described the provisional strategy and short term next steps to facilitate the determination of client money entitlements and the return of client money. This update, which is the first step in the implementation of that strategy:

• summarises LBIE’s assessment of the Supreme Court judgment;
• describes the principles that will be applied by the trustee to determine whether an entitlement to client money arises:
• sets out the details of the client money calculation; and
• describes the process that will be implemented to agree client money claims.

Clients should consider taking legal advice on client money matters relevant to them.

Assessment of the Supreme Court Judgment

The Joint Administrators have reviewed the judgment carefully and assessed its implications for LBIE’s clients.

Whilst certain parts of the judgment are capable of more than one interpretation, the Joint Administrators consider that the court judgments handed down, together with the Joint Administrators’ knowledge of the total and type of unsecured creditor and client money claims received by LBIE, gives LBIE, on the whole, sufficient clarity to determine which of LBIE’s financial contracts (“Financial Contracts”) give rise to a client money claim and which do not.

Principles applied to determine a client money entitlement 

LBIE has prepared a document (the “Client Money Entitlement Principles”) for each of the Financial Contracts which govern the large majority of LBIE’s financial transactions. These documents each describe the form of contract to which the assessment applies and LBIE’s determination as to whether the contract type gives rise to a client money entitlement.

To view the Client Money Entitlement Principles click here. Before viewing, please ensure that you first consider which Financial Contract(s) govern your transactions and assess whether other arrangements or considerations overlay your course of dealing with LBIE, and may therefore alter the application of Client Money Entitlement Principles. Clients who wish to raise objections to the Client Money Entitlement Principles should do so at the earliest opportunity.

Where LBIE had segregated monies as client money on behalf of a client prior to 07.56am on 15 September, 2008 (the “Administration Time”), and such monies remained segregated at the Administration Time, the Joint Administrators have determined that a client money entitlement exists. There may, however, be some limited instances where notwithstanding segregation of monies, the Joint Administrators determine that no entitlement to client money protection arises. In such cases, the relevant clients will be contacted directly by LBIE to explain the rationale for such a determination.

Calculation of client money entitlement

If LBIE determines that the Financial Contract gives rise to a client money entitlement, that entitlement will be calculated in accordance with the FSA’s client money rules that were in force at 15 September 2008. To view the relevant extracts which LBIE will apply when calculating individual client money claims, and to view examples of client money calculations, click here.

Agreeing client money claims

The Joint Administrators, acting in their capacity as administrators of LBIE, which is the statutory trustee for the client money beneficiaries, will make the determination as to which clients have a client money claim.

The Joint Administrators will, having first reviewed the Financial Contracts which govern a client’s contractual relationship with LBIE and determined whether or not the legal terms of those Financial Contracts materially differ from the standard documentation to which the Client Money Entitlement Principles relate, apply these principles (with such adjustments as they may consider necessary to reflect differences from such standard documentation) on a case-by-case basis to determine whether a client money entitlement exists.

Following such determination, the Joint Administrators will communicate a client money claim amount (the “Client Money Claim Amount”) to each client money claimant who has been identified as having a Client Money Claim Amount based on these principles and on the financial and transactional information relevant to such client money claimant. Clients will be afforded the opportunity either (i) to confirm that they agree with the Client Money Claim Amount (the “Client Money Claim Acceptance”) or (ii) to indicate their disagreement with the Client Money Claim Amount.

For those client money claimants who register a Client Money Claim Acceptance with LBIE, the Joint Administrators will forward a claims determination deed (the “Claims Determination Deed”) which, when executed, will formally specify the Client Money Claim Amount.  For those clients who have already executed a Claims Determination Deed which specified only one combined agreed claim amount without specifying the proportion of unsecured claim and Client Money Claim Amount, ancillary documentation will be forwarded which will allow the Client Money Claim Amount to be formally agreed.

Objecting to client money claims

For those clients who have filed an objection to the Client Money Entitlement Principles or disagreed with the Client Money Claim Amount (each an “Objection”), the Joint Administrators will consider the basis for such Objection and will engage in dialogue with the relevant client to seek to resolve the Objection.

Client money claimants’ eligibility to participate in a distribution from the Client Money Pool 

Upon execution by LBIE and the client money claimant of the documentation which formally agrees the Client Money Claim Amount, the client money claimant will rank for distribution from the client money pool. The Client Money Claim Amount will be the amount by reference to which the client money claimant’s pro rata share of the Client Money Pool will be calculated for this purpose, and will be binding notwithstanding other developments which may arise (for example, in the event that Objections are filed by other clients).

The Joint Administrators will continue to keep client money claimants informed as to the likely timing and the expected level of client money distribution as this exercise progresses.

Client money claimants should note that the aggregate of the distributions from the Client Money Pool may be less than the Client Money Claim Amount. In such circumstances, client money claimants may be able to make an unsecured claim as a general creditor against LBIE’s general estate in respect of any deficit in their recovery from the client money pool. In order to preserve all rights to participate in the general estate as an unsecured creditor, client money claimants must, to the extent that they have not already done so, file a proof of debt by 31 July, 2012. For further guidance as to submitting a proof of debt click here.

Client money claimants should note that:

• the distribution(s) which they will receive from the client money pool may take a prolonged period of time to be paid, due to the large number of positions which must be assessed for a client money entitlement in accordance with the Client Money Entitlement Principles and the exercise to recover all amounts which constitute the client money pool; and
• it is possible that one or more clients may disagree with the Joint Administrators’ Client Money Entitlement Principles, refuse to give a Client Money Claim Acceptance or fail to execute documentation to agree the Client Money Claim Amount. Such action may lead to further litigation and attendant delay to a return to client money claimants.

Further Information

Should you have any questions regarding this update or regarding the Client Money Entitlement Principles, or should you have a Financial Contract with LBIE for which a Client Money Entitlement Principles document has not been published or a Financial Contract which is not of the standard form contemplated by the Client Money Entitlement Principles, or should you require any other assistance with respect to this communication or wish to make an Objection, please contact the Communications and Counterparty Management team at clientpositionresponses@lbia-eu.com