U.K. Asset Resolution Limited (UKAR)

In the years leading up to the crisis, the composition of Northern Rock’s liabilities shifted away from retail deposits to wholesale funding, with over two-thirds of its funding coming from wholesale sources. This made the lender much more vulnerable to tightening credit conditions. Bradford and Bingley found itself unable to find affordable financing in the wake of several credit rating downgrades (European Commission 2008b). Both Northern Rock and B&B were unable to recoup the losses they sustained as a result of these continued pressures and were nationalized on February 22, 2008, and September 29, 2008, respectively (Northern Rock Asset Mangement 2021; UKAR 2021a). Authority for the nationalizations came from the Banking (Special Provisions) Act 2008 (UK Parliament 2008).

NRAM was split from Northern Rock plc on January 1, 2010, as part of a governmental restructuring effort (National Audit Office 2012). It contained the corporation’s mortgage book and all of its unsecured loan accounts. As of July 2011, B&B and NRAM held approximately 771,000 mortgage loans (UKAR 2011a).^FB&B services approximately 231,000, and NRAM approximately 540,000.

Because NRAM and B&B had already been nationalized and given state aid, the creation of UKAR itself did not require approval from the European Commission, but the initial aid offered to Northern Rock and B&B did. The establishment of UKAR, however, required approval from the Financial Services Authority (FSA), which was the two firms’ primary regulator. The organization would be operated in accordance with state aid rules per EC guidelines, which are expanded upon below.^FSee section 25 of the European Commission’s Community guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty for more information.

Ordinarily, state aid is considered “incompatible” with the common market per Article 87 of the Treaty of the European Commission. However, ad-hoc measures that constitute state aid are allowed under Article 87, section 3(b) if they are to “remedy a serious disturbance in the economy of a member state…”, so long as such aid does not adversely affect trading conditions or the competitive environment of the common market (European Commission, n.d.).

The European Commission ruled that the initial aid offered to Northern Rock and B&B was permissible per Article 87(3)(b), despite the government of the UK not notifying the Commission prior to initiating it (European Commission 2007; 2008b). In its decision, the European Commission also cited its Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty as a primary tool to determine eligible state aid (European Commission 2007; 2008b).

UKAR did not possess any notable special powers to pursue its mandate.

In its framework agreement, UKAR’s overarching objective for disposing of its investments had three provisions:

• maximizing sustainable value for the taxpayer while keeping risk in mind
• monitoring the impact of disposal and restructuring transactions on financial stability
• promoting healthy competition that “operates to the benefit of consumers and respects the commercial decisions of the financial institutions” (UKAR 2018a)

UKAR released two financial statements a year, until transitioning to a single annual report in 2019. These financial statements included Key Performance Indicators which measured UKAR’s progress on its “Strategic priorities,” which were “financial performance, run down the Balance Sheet, minimise impairment, [and] restructure and realign the business” (UKAR 2011a).

UKAR took strong consideration of the customers that would be affected by the sale of assets. In all of its press releases that referenced a specific sale, the company stated that the “continued fair treatment of customers” was a key consideration in selecting a buyer for their assets (UKAR 2019a; n.d.). UKAR required its bidders to accept certain non-negotiable customer protections as a part of the process. MP John Glen explained that, “For past sales, these protections required that: the servicer of the mortgages is regulated by the Financial Conduct Authority (FCA); the terms and conditions of the mortgages are not changed; and purchasers abide by restrictions on how the Standard Variable Rate (SVR) can be set” (House of Commons 2019).

UKAR also referred struggling borrowers to a number of free debt advice providers, avenues that customers could contact if they were struggling to pay their mortgages (UKAR 2014a). UKAR referred customers to third-party free debt advice companies such as Payplan, the Consumer Credit Counselling Service, Citizens Advice Bureau, National Debt Line, and the Money Advice Service (UKAR 2012). These companies would then work to create a Debt Management Plan with the goal of reducing monthly payment stresses on the borrower (UKAR 2013).

Other, more minor initiatives, such as reimbursing customers for inappropriately sold Payment Protection Insurance (PPI) and waiving Early Redemption Charges (ERCs), were additional ways in which UKAR advocated for consumers (UKAR 2012). Payment Protection Insurance was something that a borrower could sign up for that would cover repayments if a borrower was unable to make them (FCA, n.d.). However, customers often bought PPI under false pretenses or were billed for it despite not knowing about it (Financial Ombudsman Service 2021). ERCs, which were commonplace at both NRAM and B&B prior to the crisis, were waived in the interest of encouraging borrowers to repay their loans without penalty (UKAR, n.d.).

UKAR was a state-owned holding company created to manage the closed mortgage portfolios of Bradford & Bingley and Northern Rock Asset Management. The two mortgage lenders were separate subsidiaries of the company and had been managed by UK Financial Investments (UKFI) subsequent to their respective nationalizations in 2008 (UKAR 2012). UKFI would retain a major role as the parent company and primary supervisor of UKAR until April of 2018 (UKAR 2018a).

Prior to March 31, 2018, UKFI, a crisis-era government corporation, was the primary manager and representative of HM Treasury’s 100% stake in UKAR. UKFI had a mandate to “develop and execute an orderly and active disposal of HM Treasury’s investments in financial institutions (including the UKAR subsidiaries) (UKAR 2017a). According to UKFI’s framework document, any Investee Company that was wholly owned, such as UKAR, acted “in a manner similar to that in which a financial sponsor would engage with a wholly-owned portfolio company” (UK Financial Investments Ltd 2009). UKFI acted on behalf of HM Treasury, and met with some of its members quarterly to discuss the implementation of UKFI’s investment strategies.

Under the governance agreement, UKFI would conduct the following activities:

• It appointed the Chairman of the Board of Directors and had the option to appoint additional Non-Executive directors.
• It approved or disapproved the appointment of other members of the Board, and had to be consulted on any appointments.
• It analyzed the performance of and enforced the objectives of the business plan that UKAR created.
• It evaluated and approved or declined any potential transactions that met certain criteria (UKAR 2018a).

Additionally, UKAR was required to regularly engage with UKFI (later UKGI) in monthly reviews about its performance, and to provide UKFI (later UKGI) with monthly “financial and business performance monitoring to assist this process.” Per its governance agreement, the company also was required to publish annual reports that would be given to the members of Parliament, who could request the Chairman and CEO of UKAR to attend any relevant meetings.

UKAR, NRAM, and B&B all shared the same Board of Directors. The Board was made up of a variety of ex-Board members from NRAM and B&B, as well as other individuals that had spent a great deal of time in the financial services industry or in government (UKAR 2012). Staffing levels peaked at 2,424 as of December 31, 2012, then declined over time (UKAR 2014a). However, all the employees that were providing support for the two banks were contracted and paid for by B&B (UKAR 2011a). NRAM and UKAR had no direct employees. NRAM, per the Northern Rock Transfer Order 2009, had all its employees transferred to Northern Rock plc, thus ensuring that the B&B-contracted employees would work for one of the two nationalized lenders (UKAR 2012).

Subsequent to March 31, 2018, UK Government Investments (UKGI) became UKAR’s manager after UKFI shut down (UKAR 2018a). No major changes to the governance framework occurred because of this switch.

The Financial Services Authority (FSA) regulated both NRAM and B&B from a prudential standpoint, since they were considered mortgage administration companies. Initially, B&B functioned as a regulated bank, but applied in 2010 to change its status to a mortgage administration company, which the FSA approved in August 2010 (UKAR 2011a). After the FSA split up into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority, the FCA assumed the role of regulating mortgage administration companies (UKAR 2018c).

At the time of the corporation’s inception, B&B and Northern Rock Asset Management had a combined £115.8 billion in assets that were transferred over to UKAR (UKAR 2018c).

When UKAR took over B&B and NRAM, it acquired their liabilities as well as their assets. Those liabilities included £48.7 billion in debt to the UK government. As of June 2019, this amount has been repaid in full (UKAR 2019b).

UKAR acquired a £21.7 billion loan, repayable on demand, from HM Treasury, originally made to NRAM. The interest on this loan was the Bank of England Base Rate plus 25 basis points. HM Treasury committed to continue funding NRAM until at least October 1, 2013, as well as convert £1.6 billion of its loan to NRAM to meet regulatory capital requirements if needed (UKAR 2012).

UKAR took on £18.4 billion in interest-free statutory debt held by B&B, with £15.7 billion owed to the Financial Services Compensation Scheme and the remainder owed to HM Treasury. This statutory debt replaced B&B’s savings-related assets and liabilities, which were transferred to Banco Santander Group on September 29, 2009 (UKAR 2012).

B&B additionally had an interest-bearing Working Capital Facility (WCF) provided by HM Treasury. Since August 1, 2011, the WCF charged a rate equal to the Bank Rate plus 500 basis points, an increase from the previous Bank Rate plus 150 basis points. B&B drew £8.4 billion in 2011 and £8.6 billion in 2012 from the WCF (UKAR 2012).

UKAR stated that these loans would be paid off using the cash flows generated by NRAM and B&B during their wind-down. However, the timing of such repayments was not estimated in the 2011 Annual Report due to the uncertainty of the redemption profiles of loans to customers (UKAR 2012).

During the early days of its lifespan, there was talk of potentially bringing parts of other financial institutions, such as the Royal Bank of Scotland (RBS), onto UKAR’s balance sheet (Thompson and Jenkins 2013). However, this did not happen, and the balance sheet never increased beyond what was initially brought on board from the initial acquisition of B&B and NRAM (UKAR 2019b).

Residential property loans accounted for 95 percent of UKAR’s loans and advances as of December 30, 2010, shortly after UKAR took over the government’s stake in the companies (UKAR 2012). No new loans were made by UKAR since they took these two institutions over (UKAR 2013). Roughly 75% of the assets that the company took were loans and advances. Other assets included mortgage-backed securities and related derivative products, which were primarily used for hedging purposes (UKAR 2019b).

Certain classes of assets, such as equity-release mortgages, were more difficult to sell due in no small part to the standard No Negative Equity Guarantees (NNEGs). These guarantees, which were important for protecting borrowers, negatively affected the sale price of equity-release portfolios (UKAR 2018d). Additionally, tens of thousands of loans that UKAR acquired were in arrears or impaired in some way (UKAR 2012).

B&B and NRAM were nationalized by HM Treasury on September 29, 2008, and February 22, 2008, respectively (Northern Rock Asset Mangement 2021; UKAR 2021a). Both the companies, as well as all of their remaining assets, were transferred under UKAR on October 1, 2010 (UKAR 2010b). The one-time acquisition of the two nationalized institutions kept them as separate legal entities and allowed them to continue to operate individually despite being managed by UKAR (UKAR 2019b). The company was the sole shareholder of the two lenders, which were managed under a singular management structure and Board.

The UK government nationalized B&B and Northern Rock rather than purchasing assets or conducting a recapitalization; therefore, there was no required pricing of assets in the operation. UKAR’s balance sheet reflected the book value of loans and advances, including any provisions for loan losses the closed companies had made prior to the transfer.

Asset sales followed a general process:

• UKAR would analyze market conditions and determine whether it was appropriate to sell a selection of assets.
• The company would then ensure that the potential sale would encourage enough competition amongst potential buyers that it would be reasonably compensated.
• “Reasonable compensation” was determined through a market-oriented valuation framework that included macroeconomic aggregates and potential cash flows to determine what a fair price would be (UKAR 2019b).

There were no restrictions on who was allowed to bid on the assets, although, in recent sales, UKAR would actively solicit bids from top “active” lenders, or institutions who were already engaged in lending. This was done because customers could, in theory, restructure or refinance with the new owner of the loan, if the owner was an active lender (UKAR 2019b).

Transactions that met the following criteria required approval from the supervising institution (initially UKFI, later UKGI):

• transactions with proceeds of 250 million pounds or more
• transactions with a net profit of 25 million pounds or more for UKAR or any of its subsidiaries
• transactions which involved assets being sold at a discount or premium that is “not in line” with those in the market for similar assets or liabilities (UKAR 2018a)

Borrowers repaying (redeeming) their loans also contributed to the gradual reduction in UKAR’s balance sheet (UKAR 2018c). Redemption rates varied depending on the level of house prices and mortgage refinancing.

As of March 2019, its £115.8 billion balance sheet has been reduced by £104.4 billion. Despite the types of assets UKAR had to manage, it managed to turn a profit every year since its inception. By June of 2019, UKAR had also paid off the entirety of the £48.7 billion in government loans, leaving approximately £11.4 billion on its balance sheet for disposal (UKAR 2019b).

These significant advances allowed UKAR to position itself to sell off what remains of B&B and NRAM in their entirety within the next year. In its 2019 annual report, the company stated that “We are now working with advisors in order to complete our objective of returning the UK taxpayers’ investment in NRAM and B&B to the private sector in full through the sale of the B&B and NRAM legal entities.” The company said that they believed they could broker a sale sometime during 2020, as they had already invited several potential bidders to tender as of April 2019 (UKAR 2019b).

UKAR completed its disposition of B&B and Northern Rock assets on February 26, 2021, when it sold its remaining assets for £5 billion to a consortium comprised of Citibank and Davidson Kempner Capital Management LP (UKAR 2021b).

Throughout its lifespan, the company avoided giving too many details on its wind-down procedures, but later communications indicated that its operations could cease as soon as 2020. UKAR ended its ownership of B&B and Northern Rock on February 26, 2021, with the sale of its remaining assets. While UKAR will continue to exist as a government-owned entity, it will have no employees, and any required activities will be performed by PricewaterhouseCoopers (UKAR 2021b).