Recovery Plans Required of Financial Institutions

Jack Humphrey, Regulatory journalist
August 09, 2011 /

The Financial Services Authority (FSA) has published a Consultation Paper (CP) and Discussion Paper (DP) on its proposals to require financial institutions to prepare Recovery and Resolution Plans (RRP), in a move aimed at coping with “stressed situation.”

The CP covers the requirement for certain financial institutions to prepare and maintain RRPs, while the DP explores matters relevant to the resolution of financial services firms.. The Financial Services Act 2010 obliges the FSA to make RRP rules for UK incorporated deposit-takers having regard to international standards relating to RRPs.

The Bank of England and the Treasury assisted the FSA in preparing the paper as the latter is required to consult with the former in developing those rules. The G20 (through the Financial Stability Board) has committed to requiring RRPs from all global systemically important firms (G-SIFIs) and issued a consultative document in late July 2011 titled: ‘Making Resolution a Viable Option for SIFIs’.

The EU Commission has also consulted on RRPs.

The publication also covers policy proposals aimed at reducing the impact of firms’ failure in relation to their investment business client money and custody assets holdings.

Thomas Huertas, member of the FSA’s Executive Committee, said: “The financial crisis highlighted that firms failed to consider what they would need to do when faced with a potential failure of their business models. The result meant that billions of pounds of public money was required to support financial institutions around the globe and that financial stability was put at risk.

“This consultation will play an important role in helping authorities develop their policy in this complex area. By putting in place clear plans to recover from a crisis, or wind-down in an orderly manner, firms can take the necessary action to reduce the impact on financial stability and reduce taxpayer support.”

“Had firms had such plans in place prior to the advent of the crisis, they might well have been able to cope better with the stresses that developed and failures might have been avoided,” regulators said.

“Since the crisis the G20 has called for the rapid development of internationally consistent, firm-specific recovery and resolution plans and tools by the end of 2010 and the Financial Stability Board (FSB) has set out a timetable for RRPs of systemically important firms to be completed by the end of 2012.”

The aim of the document is to set out the FSA’s proposals on what is expected of firms with regards to planning for a stressed situation, which will require a firm to take action to recover in an orderly manner without putting taxpayers at risk of loss.

The paper builds on the recent work published by the FSB and the Special Resolution Regime (SRR) put in place under the Banking Act 2009.

The consultation will be open for a period of 3 months, closing on 9 November 2011.


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