The administration of KSF was complex. The Transfer Order stated EY had six months to complete the migration of 170,000 internet depositors to ING Bank. Furthermore, the bank had another 3,000 depositor balances due to a range of individuals, charities, corporate customers, local authorities, building societies, banks, other KSF Group companies and others. In addition, there were loan books worth a total of around £3bn (US$4.5bn) across three distinct portfolios; private banking, property and corporate; plus, a range of different subsidiaries that needed to be addressed.
With so many organizations and people dependent on this money to remain solvent during the growing financial crisis, EY had to continually remain conscious of the potential wider impact on KSF’s creditors’ business ecosystem – something of which HMT and the BOE were also acutely aware.
Therefore, while acting fast to prevent panic in the heat of the financial crisis, both extreme attention to detail in addition to a longer-term perspective was required to overcome immediate operational concerns, maintain the confidence of the bank’s many depositors and maximize value for KSF’s creditors and other customers.
Addressing operational challenges to rebuild trust
In the run up to the collapse, as with most stressed businesses, KSF had been under intense operational pressure. In the early stages of the administration, there were a number of immediate IT, Legal and operational challenges that needed to be addressed. EY teams needed to rapidly bring together cross functional knowledge from multiple different competencies in order to help address these challenges and stabilize the business.
For example, the bank’s accounting system and banking platforms were in a period of transition, with access also available to other Khf group entities outside of the UK. KSF also had no centralized legal department, meaning that there was effectively no standard loan or facility documentation. Lastly, the CFO had only been in place for a week prior to the administration, so was also in learning mode with the EY team.
Within the first few days, EY helped ensure both the banking platforms and accounting systems were stabilized and brought under control. Using the breadth of experience available across EY member firms, EY initiated longer-term projects to implement new accounting and banking systems that could be controlled more efficiently during the remainder of the administration process.
EY was also able to provide stability and long-term leadership throughout the administration, supporting the bank’s loan management team, and providing continuity of support on a project that’s now run for 12 years.
In the early stages of the administration the EY team ensured they quickly understood the nature of the business and the complex operational challenges it faced. As a result, EY was able to implement a strategy that would start to provide reassurance and rebuild trust in the height of the crisis.
Establishing effective communications to maintain confidence
The Financial Services Compensation Scheme (FSCS) protects customers of failed regulated firms, including deposit-takers. Not only were the transfers of all internet-based deposits from KSF to ING Bank facilitated through FSCS, FSCS also protected the savings of any remaining depositor balances that were eligible.
However, although customers already knew they would get their money back in due course, it was essential that EY worked effectively with FSCS to ensure a seamless response and that all communications were clear, accurate and timely to maintain public confidence.
James Darbyshire, FSCS chief counsel explains, “It was crucial to the effective and efficient protection of deposit-holders that FSCS and EY, as administrators, worked collaboratively on the insolvency of KSF. Not only did this allow deposit-holders to be paid promptly and in full, but it also helped to maintain public confidence in the wider financial services system at a time of crisis – a key part of FSCS’s mission.”
As a result of successful teaming, the internet depositors were transferred to ING Bank via FSCS within only four months of EY’s appointment. The remaining deposits had to be thoroughly checked by both FSCS and EY to validate the eligibility of each depositor. This process took a number of months. Once complete the savings of a further 2,000 non internet-based retail and SME depositors were protected.
Although successful collaboration and communications enabled a favorable result in the case of the KSF administration, regulations introduced as a result of the 2008 crisis have now mitigated the risks of delays due to complex record keeping. All deposit-taking banks must now have a Single Customer View (“SCV”) database for their depositors to enable prompt repayment of eligible depositors in the event of the failure of a bank or other deposit takers. These SCVs are reviewed regularly by FSCS, which now aims to make payments to eligible depositors within seven days of a failure.