25 November 2015

The UK contractual recognition of bail-in rules: partial delay to implementation

On 25 November 2015, the Prudential Regulation Authority (PRA) published a ‘waiver by consent’ in relation to the contractual recognition of bail-in requirements. To the extent that it would be impracticable for firms to comply in respect of liabilities other than certain debt instruments, the PRA will modify their rules on a firm by firm basis to allow implementation to be delayed until 30 June 2016 (or earlier, if the relevant rules are amended or revoked). We understand that the Financial Conduct Authority (FCA) is also likely to modify its rules in a similar manner.

Background

The absence of cross-border recognition of resolution remains a key barrier to resolution. To help resolve this barrier, Article 55 of the EU Bank Recovery and Resolution Directive (BRRD) requires the inclusion of a contractual term in any new liability of a relevant EU institution governed by a third country law whereby the counterparty agrees to have their liability written-down or converted. The UK implemented these requirements through regulatory rules which were published on 16 January 2015. The PRA’s rules are contained within the Contractual Recognition of Bail-in section of their Rulebook.

The PRA accelerated the effective date in relation to certain types of debt instruments that were issued, entered into or arose after 19 February 2015 (provided they were not issued by a mixed activity holding company). For all other liabilities (a phase 2 liability), the effective date was 1 January 2016 - the FCA’s rules for all liabilities also come into force on that date.

‘Waiver by consent’ – does this mean implementation is delayed?

Section 138B of the Financial Services and Markets Act 2000 (as amended by the Financial Services Act 2012) enables the PRA to offer a general waiver to firms in exceptional circumstances. In these cases, the PRA will inform the firms concerned that the waiver is available either by contacting them individually or by publishing details of the availability of the waiver on its website. To take advantage of any such waiver by consent, a firm is required to contact the PRA.

The modification of the PRA Contractual Recognition of Bail-in rules, published on 25 November 2015, disapplies the rules in circumstances where compliance with them in respect of a phase 2 liability is impracticable. As a result, firms will not be required to comply with the rules until 30 June 2016, or, if earlier, the point at which the relevant rules are amended or revoked.

The PRA intends to consult on amending their Contractual Recognition of Bail-in rules in order to ensure conformity with the final technical standards which are due to be published in the Official Journal by the European Commission.

Given 1 January 2016 deadline, firms are encouraged to approach their regulator as soon as possible specifying why implementation of the Article 55 BRRD requirements are impracticable at this stage.

Impact

Whilst this modification by consent will be welcome news to the industry, firms should not assume that the pressure of implementation has been removed. Unless the Level 1 text of the BRRD is amended, firms will be required to implement in line with the requirements during the course of next year. Lobbying efforts should continue to be focused on revising the scope of Article 55 BRRD requirements, as a result of the MREL Review, possibly in line with the Financial Stability Board’s suggestion – namely, that contractual recognition requirements should be limited to debt instruments.[1]

 

[1] FSB: Principles for Cross-border Effectiveness of Resolution Actions, 3 November 2015

Bob Penn +44 203 088 2582
Partner, London bob.penn@allenovery.com
Kate Sumpter +44 203 088 2054
Partner, London Kate.Sumpter@allenovery.com
Aatif Ahmad +44 2030884585
Senior Associate, London aatif.ahmad@allenovery.com
Kelesi Blundell +44 2030882089
Associate, London kelesi.blundell@allenovery.com

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