Government Position on Bank Recovery and Resolution Directive after Brexit

The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (the ‘BRR Regulation’) came into force on 20 December 2018. The Explanatory Memorandum explains that the BRR Regulation was brought into force by the grant of powers by The European Union (Withdrawal) Act 2018 (‘EUWA’) to make statutory instruments to facilitate the provision of ‘a functioning financial services regulatory regime in all scenarios’ – even if a implementation period is not secured. Following Parliament’s vote last night rejecting the Prime Minister’s Brexit deal, and the consequential rejection of the proposed implementation period, the BRR Regulation in its current terms will likely become relevant as from 29 March 2019.

By way of reminder, the BRRD grants powers to designated regulators (referred to as ‘resolution authorities’) in EU Member States in respect of banks and certain other investment firms in their jurisdiction. These powers grant regulators power to intervene at an early stage of a failing institution, reflecting the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for financial institutions (including to use controversial ‘bail in’ powers on creditors so as to shift the burden of a failing institution from the tax payer to the stakeholders of the institution in accordance with an order of priority of imposition of loss). The BRRD provides oversight powers by the umbrella ‘single resolution board’ and imposes a common framework of the resolution authorities’ powers, as well as cooperation and mutual recognition and enforcement across all EU Member States of their exercise. [Click here to see MoFo’s articles relating to the BRRD].

This alert is relevant to funds and institutions that invest in the capital of UK and European banks.

BRRD: continuation of policy objective

In the Explanatory Memorandum to the BRR Regulation, HM Treasury makes no suggestion of an intention to amend or repeal the domestic legislation that implemented the BRRD. On the contrary, it expressly states that the ‘policy aims of the BRRD will remain a core element’ of the UK once it has left the EU.

EEA Member States to be designated as ‘third countries’

The Explanatory Memorandum states that the approach to other EEA Member States, in the ‘unlikely scenario’ that the UK leaves the EU with no withdrawal agreement, is that the UK would treat EEA member states as it does other third countries. In principle, this means that a resolution by an EEA Member State would be recognised and enforced in the UK unless doing so would be contrary to a statutory safeguard set out in s.89H(4) of the Banking Act 2009. These statutory safeguards are as follows:

  1. if the recognition would have an adverse effect on financial stability in the UK;
  2. if, in order to achieve one or more of the special resolution objectives, it is necessary for UK authorities to take action in respect of a branch of the bank located in the UK;
  3. if the third-country resolution action treats creditors located in the UK less favourably than creditors located in the third country;
  4. if the recognition would have material fiscal implications for the UK; and
  5. if the recognition would be unlawful under section 6 of the Human Rights Act 1998.

Obligation of UK regulators to cooperate with other EEA authorities

In addition, the existing requirement of UK resolution authorities to follow operational and procedural mechanisms set out in the BRRD to cooperate with other EEA authorities (including with the European Banking Authority (‘EBA’)) will come to an end. This means the UK will no longer be required to participate in European resolution colleges and join assessment and decision-making processes between the UK and EU regulators. Nor will the UK resolution authorities be required to consult with and inform the EBA and other EEA competent authorities when making its own resolution decisions.

The Explanatory Memorandum, however, is at pains to explain that this ‘does not prevent UK regulators from cooperating with their EEA counterparts after exit’ for resolution purposes in a manner consistent with the current approach taken with (and subject to the statutory restrictions regarding the disclosure of confidential information to) third-country head-quartered Global Systemically Important Banks.

Reciprocity: how will EU Member States treat the UK regulators’ resolution tools once the UK leaves the EU?

Once the UK leaves the EU, it of course remains to be seen what the stance of the EU Member States will be as regards recognising resolution action taken by UK resolution authorities in respect of UK financial institutions with a presence or assets in an EU Member State. It is anticipated that the approach will be the same as that provided in the BRR Regulation – to treat the resolution action in the same way as it does with respect to third countries.