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Due to the enormous cost, both financial and reputational, of the increased need for public money to be used to support the largest too big to fail banks and others, the UK authorities have decided that they need to have better control over any possible future institution that falls upon hard times.
Contents
Introduction ............................................................................................................................... 3 So who will qualify as members of this elite club? ................................................................... 6 Where next? .............................................................................................................................. 6 Recovery Plans what is needed? ....................................................................................... 8 Resolution Planning what is needed? .......................................................................... 9 Bailing In .............................................................................................................................. 11 How to Choose a Compliance Consultant ........................................................................... 12
Full Text of the Feedback Statement Paper FS12/01 can be downloaded as a PDF document from here
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Following the demise of some of the most prestigious financial institutions in recent history, due to the recent financial crisis, issues concerning the recovery and resolution of banks and other significant financial institutions in the UK have been highlighted. Due to the enormous cost, both financial and reputational, of the increased need for public money to be used to support the largest too big to fail banks and others, the UK authorities have decided that they need to have better control over any possible future institution that falls upon hard times. On reviewing the level of control that the UK authorities hold, t his then spawned the realisation that there was a further need, an obvious hole in previous planning. Clearly they needed more effective tools and information to enable the orderly resolution of financial institutions without needing to resort to taxpayer support. Not only were the authorities keen see the potential plans that firms would use on the rocky road to the summit of breakdown and insolvency (predicted by many pundits in the press) but they were keen to see the firms identify and understand their own plans to recover from situations of severe stress. Following the Turner Review Conference in 2009 the UK authorities started a pilot RRP project initially involving four and ultimately involving six of the largest UK firms. RRPs have two aspects. The first, Recovery requires affected firms to identify options to recover their financial strength and viability should a firm come under severe stress. This is work that should be conducted in detail, providing a menu of options under differing situations and the likely solutions that may be available. Secondly, Resolution planning requires firms to submit detailed information about their business and operational structure in the form of a Resolution Pack. The authorities will then write their resolution plans for them, so that they know precisely what, how and when to instruct the Insolvency Practitioner (IP) to do if the time comes to wind down the firm. So essentially, the RRPs aim to ensure that financial institutions: assess and document the recovery options which they believe would normally be available to them in a range of severe stress situations; enable these recovery options to be identified and mobilised quickly and effectively; and supply the regulatory authorities with information and analysis on their businesses, organisation and structures to enable the authorities to ensure that an orderly resolution could be carried out by the authorities should it become necessary. In August 2011 the FSA published a Consultation and Discussion Paper on RRPs (CP 11/16). This document explains the progress made since that publication, summarises the responses received, reviews other UK and international initiatives that are relevant to recovery plans and resolution packs, and sets out the proposed next steps. The progress made so far in data gathering from firms that have started to produce recovery plans and resolution packs has been invaluable for the development of plans to resolve banks without a negative impact on financial stability or recourse to public funds. It has also helped to inform the debate on improving the resolvability of financial institutions. Given the various significant developments that are relevant to RRPs, teh FSA have decid ed to
delay the publication of the final rules. Accordingly, they are publishing their Feedback Statement (FS12/01), along with draft core rules, rather than a formal Policy Statement with final rules. They will make sure that the rules in the UK are, as far as possible, consistent with (i) the proposed European Recovery and Resolution Directive, and (ii) the Financial Stability Boards Key Attributes of Effective Resolution Regimes. They are publishing draft core rules, an updated draft of the Information Pack to show developments in current thinking, and their responses to some Frequently Asked Questions (FAQs), which will help firms understand their approach. The final rules will be published no later than autumn 2012. The FSA are confident that the development and submission of recovery plans and resolution packs will continue as planned. Large firms involved in the pilot exercise will submit their recovery plans and resolution packs by the end of June 2012, as agreed with their supervisors. They expec t firms to continue to work with the authorities on developing recovery plans and resolution packs, taking into account the draft core rules and updated Information Pack. Although principally intended for policymakers and a wider range of authorised firm s, such as insurers, the minimal limit is a 730K CAD firm however it may well become extended to other categories of firms over time, after consultation, as usual. Additionally this is likely to be of interest to policymakers and practitioners involved in the resolution of failed firms, as it discusses the existence and removal of barriers to resolution and the potential costs to taxpayers of a firms failure. New Legislation is planned to be enacted under which the FSA will be reformed into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). It is therefore expected that the bulk of the preparation of RRPs will have been implemented by the FSA before the PRA takes on responsibility for supervising the relevant firms. Other large firms are expected to provide sufficient information to their supervisors to meet the timetable set by the Financial Stability Board (FSB). For all other firms, supervisors will agree the timing and content of their materials bi-laterally. Although welcoming discussion, the formal consultation on rules for RRPs and for the CMA proposals found in the CASS Resolution Pack (CASS RP). There are a number of documents which have been published alongside this paper: The proposed Draft Core Rules for RRPs the CASS RP, (PS 12/06) an information Pack on how firms should complete their RRPs, and; The Financial Stability Board Key Attributes of Effective Resolution Regimes for Financial Institutions Oct 2011 Frequently Asked Questions (FAQs)
in an orderly fashion; to identify and consider ways of removing barriers which may prevent critical functions being resolved successfully; to allow a resolution that separates the identified critical economic functions from non-critical activities which could be allowed to fail; and to enhance international cooperation and crisis management planning between international regulators for G-SIFIs
With full analysis and the information supplied in the pack will allow the authorities to commit firms that fail to meet threshold conditions into resolution smoothly and swiftly with minimal impact on the financial system, regardless of the size or complexity of the firm.
Where next?
There are a number of recent and forthcoming national and international developments that are relevant to RRPs and which are likely to be reflected in the final rules. and the ECs Recovery and Resolution Directive is expected soon as the consultation finished in June 2012. Obviously the final rules will need to comply with the draft Directive. The FSB has published, and G20 leaders have agreed to implement, the Key Attributes of Effective Resolution Regimes. In particular, co-operation agreements, recovery and resolution
plans and resolvability assessments must be in place for all global systemically important financial institutions (G-SIFIs) by the end of 2012. Recovery and resolution planning significantly overlaps with some of the recommendations of the Independent Commission on Banking (ICB). HM Treasury proposes a white paper and consultation paper this summer detailing a proposed legislative response to the ICB. Again the rules should be consistent with the legislation brought forward in response t o the ICB report. The UK authorities have made significant progress with resolution planning involving international authorities, particularly with the US (including, for example, on information sharing with the US authorities and considering the application of resolution tools for G-SIFIs, such as bail-in). This work will be developed further and lessons should be incorporated in the final rules and information requests. Work with the G-SIFIs that were part of the pilot exercise will continue as planned i n order to meet FSB deadlines, with key deadlines for those firms remaining, as planned, this summer. This will be extended to G-SIFIs that were not part of the pilot exercise, in particular so that we can meet our obligations as a host regulator to certain G-SIFIs under the FSBs approach.
The information we will be collecting relates both to possible resolution plans where a group wide solution, perhaps based on bailing-in senior creditors, is appropriate and also to resolution or contingency plans in cases where even a large, complex group needs to be broken up or wound down in an orderly manner. For small- and medium-sized firms, there will be no uniform deadlines applying to all firms. However, we would like firms to progress their recovery and resolution planning arrangements; good practice would be to proceed on a best efforts basis and in accordance with the updated Information Pack. Supervisors will discuss individual deadlines with each firm ensuring that requests are on reasonable notice and are proportionate to each firms circumstances and the risks they pose.
The proposals cover the following key areas: governance framework for the Recovery Plan; key Recovery Plan options; criteria for assessing recovery options; and intervention conditions, i.e. a trigger framework. For a detailed explanation of the expected components of Recovery Plans, see the FSA announcement on May 2012 here.
Disposal options
For any Recovery Plan to be considered robust, it is likely to be necessary for firms to consider radical choices which change the structure of their businesses. These choices are likely to include, but are not limited to, disposal options for part of a firms business or even selling the firm itself. Although it may be difficult accurately to assess the value of such options, firms should be able to provide some broad estimates. Consideration of such options and how they might be executed will form an important part of most Recovery Plans, particularly those of the larger firms. When considering potential disposal options, consideration should be given to the long-term viability of the firm post-transaction. The Resolution Plan is prepared by the authorities based on the Resolution Pack containing extensive information and analysis provided by the firms. Modules 3 to 6 of the RRP Guide explain the work that firms must do. For the Handbook text on Resolution Packs see FINMAR 4.3. A key part of the firms work is a separation or wind -down plan for deposittaking and other critical economic functions. Firms will be expected to identify barriers to resolution and propose changes to remove those barriers. The Resolution Pack must be reviewed at least annually and the board will be responsible for ensuring there are processes in place to produce timely and accurate data. The Resolution Pack must be updated on an ongoing basis to reflect any material developments in a firms business.
necessary to make the appropriate decisions. They can only implement an effective action plan when resolution is imminent; which requires not only the provision of reasonably current information on the specific business operations, structures and critical economic functions, but also a detailed resolution analysis prepared by firms. Effectively the authorities need to be able to form opinions on the resolvability of each firm. To enable this, firms will need to provide a very significant level of detail and, in particular, the authorities will be asking firms to undertake a separability or wind -down analyses in relation to each of its critical economic functions. The information and analysis to be supplied by firms is called the Resolution Pack.
Economic functions
These refer to the services delivered by a firm and will not always necessarily correspond directly to legal entities within a firms group structure. It may also not be clearly mapped to the business units operated by the firm. What is required is that firms should explain how the economic functions they provide map to the business units through which the group may organise itself. Consequently a further mapping will be necessary to understand how these business units map to the legal entity structure of the group. Typical Economic Functions the financial services sector provides three high-level services to the real economy: payment services, to facilitate transactions between agents in the real economy; intermediation of credit and capital, to allow agents in the real economy to save, invest and borrow efficiently; and risk management products and services, to facilitate risk pooling and protect agents against adverse events. These high-level services can then be broken down into separate economic functions which firms perform. For example, (i) current accounts facilitate the provision of payment services; (ii) mortgage lending contributes to the intermediation of credit; and (iii) market-making activities contribute to the provision of risk management. Sometimes, an economic function may support the provision of more than one of the high-level services to the real economy. Examples of economic functions are as follows: retail current accounts including overdrafts; retail savings/time accounts; retail lending: mortgages/other
loans; retail lending: credit cards issuance and underwriting; corporate deposits; corporate lending; long-term capital investment; credit card merchant acquiring/services;
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equity and debt capital markets; asset management; brokerage; custody services; prime brokerage and related securities services; general insurance, re-insurance, underwriting and/or broking services; life, pensions, investments and annuities corporate advisory services; and research.
Bailing In
What is bail-in?
The term Bail-in is provided in this documentation and it usually refers to a process of internal recapitalisation that is triggered once a firm has reached the point of non-viability. There is an automatic Loss imposed on certain of a firms direct stakeholders of a firm by a process of bailing-in, either by writing down their claims or by converting them to equity. As a result, the firm is recapitalised from within and the need for new capital resources to be provided by the public sector (i.e. a bail-out) is avoided.
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Whilst it all seems a very straightforward arrangement, Bail-in will almost always need to be accompanied by changes in the firms senior management. Coupled with this would be the adoption of a new business plan that addresses the causes of the firms failure. A vital objective of the bail-in process is to secure the continued existence of at least a part or even the entire firm on a going concern basis. If this can be done then disruption of services to customers of the firm should be minimised, while its shareholders and uninsured creditors are subject to going concern losses rather than the much larger gone concern losses that they would suffer if the firm went into insolvency or liquidation. Full details of the Bail-In can be found in Chapter 11 of the FS12/01
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