FSA Updates Recovery and Resolution Plan

Jack Humphrey, Regulatory journalist
May 11, 2012 /

The Financial Services Authority (FSA) has published a feedback statement setting out the approach being taken by the FSA to ensure firms develop appropriate recovery plans and resolution packs.

The feedback statement provides firms with clarity regarding what they are expected to do while final rules are being adjusted to take into account developments in the international arena. A draft of the core rules has been published with today’s feedback statement, and final rules will be published in the autumn.

The decision to delay the final rules is due to the various significant international developments which are relevant to RRP, notably the expected proposal by the EU Commission for a directive on recovery and resolution. Accordingly, the FSA is publishing today’s feedback statement, along with draft ‘core’ rules and an updated information pack.

The development and submission of recovery plans and resolution packs will continue as planned and the delay in final rules will not result in a loss of momentum. Large firms involved in the pilot exercise will submit recovery plans and resolution packs by the end of June, as agreed with their supervisors. 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.  The FSA is also publishing some frequently asked questions with more information on the implementation timetable.

The 2008 banking crisis highlighted that firms failed to have effective plans in place to deal with financial stresses and potential failure. If firms had put plans in place prior to the advent of the crisis, they may well have been able to cope better with the stresses that developed and those failures might have been avoided.

The feedback statement is relevant to all UK incorporated deposit-takers and significant UK investment firms with assets exceeding £15 billion. In addition, the FSA intends to consult at a later date, on applying RRP rules to the UK branches of non-EEA firms without UK subsidiaries.

It sets out what will be expected of firms with regards to planning for a stressed situation which will require a firm to take action to recover or undertake resolution in an orderly manner without the need for public funded support. The announcement builds on work published by the FSB and the Special Resolution Regime (SRR) put in place under the Banking Act 2009.

Firms will be required to put in place recovery plans and provide information for the authorities to develop resolution plans.

Recovery plans aim to reduce the likelihood of failure by requiring firms to identify options to achieve recovery, to be implemented when a crisis occurs. The plans must be developed and maintained by the firm, in coordination with the FSA, but they should all have the following features:

  • sufficient number of material and credible options to cope with a range of scenarios including both firm-specific and market wide stresses;
  • options which address capital shortfalls, liquidity pressures and profitability issues and should aim to return the firm to a stable and sustainable position;
  • options that the firm would consider in more severe circumstances such as: disposals of the whole business, parts of the businesses or group entities; raising equity capital which has not been planned for in the firm’s business plan; complete elimination of dividends and variable remuneration; and debt exchanges and other liability management actions;

Resolution packs will assist the authorities to wind-down a firm if it fails for whatever reason.  The resolution data and analysis to be provided by firms is intended to identify significant barriers to resolution, to facilitate the effective use of the powers under the SRR and so reduce the risk that taxpayers’ funds will be required to support the resolution of the firm. The information provided to the authorities will help to prepare a resolution plan with the following aims:

  • ensure that resolution can be carried out without public solvency support exposing taxpayers to the risk of loss;
  • seek to minimise the impact on financial stability;
  • seek to minimise the effect on UK depositors and consumers;
  • allow decisions and actions to be taken and executed in a short space of time (or the ‘resolution weekend’);
  • identify those economic functions which will need to be continued because the availability of those functions is critical to the UK economy or financial system, or would need to be wound up in an orderly fashion so as to avoid financial instability (critical economic functions);
  • identify and consider ways of removing barriers which may prevent critical economic functions being resolved successfully;
  • isolate and identify critical economic functions from non-critical activities which could be allowed to fail; and
  • enhance cooperation and crisis management planning for global systemically important financial institutions (G-SIFIs) with international regulators.

Andrew Bailey, FSA director of banks and building societies, said: “The financial crisis laid bare a complete failure in banks globally to think seriously about how they could and would deal with the risk of major instability and even failure. The result has been that taxpayers around the world have had to foot the bill in order to support our banking sectors.

“Major reforms have been taken forward both nationally and internationally to increase the strength and resilience of our banking sectors but we need to maintain the momentum. Recovery and Resolution Plans require firms to think ahead and plan for the worst. We will be building on what has been put in place since last year and firms must continue to develop their plans.”


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