LeapRate Exclusive… LeapRate has learned that Alpari UK bankruptcy administrator KPMG is unable to make final distributions to former clients of the failed retail forex broker without further court consent, due to a gap in UK bankruptcy rules.
FCA-regulated Alpari UK went belly up immediately following the surprise Swiss Franc spike of January 15, 2015 – more than 20 months ago. Virtually all of the $98 million in client funds held at Alpari UK were indeed accounted for and in place in segregated client bank accounts. However so far, KPMG has been able to distribute just 55 cents on the dollar to claims against the Client Money Pool. Note that ex Alpari UK clients who made their claim directly with the UK’s FSCS (Financial Services Compensation Scheme) were already paid in full, up to the £50,000 per client maximum.
KPMG has made a filing to the UK bankruptcy High Court for a hearing to take place on September 29, asking it to be allowed to pay out (most of) the rest of the available client money to former Alpari UK clients, as well as to repay monies to the FSCS for those clients already refunded by the FSCS.
So what’s the problem?
As with many other things in bankruptcy law, it is complicated. But it is based mainly on the fact that current FCA and UK bankruptcy rules don’t allow for final distributions until ALL claims against a Client Money Pool (where all client money is aggregated following a bankruptcy of this sort) are agreed to. And, the rules do not allow the administrator to set a cutoff date for clients to agree their balances.
As one can imagine, with tens of thousands of clients at Alpari UK there are still a small number of clients which have not agreed their final balances. Some are due to disputes with the administrator, but most are simply due to being unable to locate former clients, or clients who aren’t responding or just don’t care because their individual amounts owed are small.
KPMG helped explain the issue as follows:
Unfortunately it is the case that there is a gap in the law such that there is no way to finalise the claim against the Client Money Pool in the existing rules. The position is as follows:
- The FCA’s Client Asset Sourcebook rules (CASS rules) do not allow for a bar date, so that a client money pool can be closed. The CASS rules assume that the client money pool will remain in place until the final client has received their distribution, no matter how long that takes.
- In a special administration, it is not practical to keep the client money pool open indefinitely. This would impose unreasonable cost on other clients and would prevent a final distribution of client money to those other clients.
- The Special Administration Regime prescribes a distribution and bar date mechanism for custody assets, but not for client money. In addition, the Special Administration Regime does not provide us with a mechanism for agreeing or rejecting client money claims.
- In order to be able to close the client money pool, we therefore need to be able to set a bar date for client money claims. After the bar date has passed, no more claims against the client money pool are allowed, which means that we can calculate the final value of claims which will share in the client money pool and make a final distribution. This requires us to be able formally to accept or reject claims, and to have an appeal process for rejected claims. (Clients retain the right to FSCS compensation, where eligible.)
- The only way to ensure that we have a valid process is to seek directions from the Court to put in place a mechanism for setting a bar date, the process for agreeing/rejecting claims, and an appeal process for rejected claims. Every Special Administration has had to do this because of the gap in the law.
KPMG expects the High Court decision to be given within a week following the September 29 hearing. The application follows the precedents of MF Global and WorldSpreads. KPMG does not expect its filing to be contentious, and the regulator has made no objections to the application.
After the decision of the court, the timing on final distributions to clients will depend on two main factors:
- The length of time that the court imposes upon KPMG to give notice to all clients about the bar date. KPMG has asked for a period of no less than 21 days’ notice, but the court may amend this.
- Whether any clients whose claims have been rejected (in whole or in part) disagree with that decision and appeal it. KPMG cannot predict the length of time that would take as it depends on court capacity. KPMG would try to expedite any hearing, but that is ultimately in the hands of the Court.
Regarding this overall flaw in UK bankruptcy rules, we understand that some recent UK Government consultations were held earlier this year that suggest that they are looking to bring in a proper bar date mechanism for client money. Which, would be to the benefit of future cases. But not to existing cases such as that of Alpari UK.
We will continue to follow this story as it develops. Stay tuned to LeapRate…