This month the Bank of England and the Prudential Regulation Authority issued significant measures aimed at addressing the hazards and risks revealed by the recent financial crisis. The Bank of England published its approach to resolving a failed bank, building society or investment firm. The approach document sets out three key stages of resolution which firms would go through. These are: (1) the stabilization phase - once a firm has entered resolution, the Bank of England must decide on the most appropriate method to stabilize the firm which may include transferring some of its business to a third party or recapitalization; (2) the restructuring phase - once the firm has been stabilized, it will need to restructure to address the causes of failure and restore confidence; and (3) exit from resolution - either the firm will cease to exist or it will be restructured and no longer require liquidity support.
Earlier this month, the Prudential Regulation Authority (“PRA”) published four proposals to enhance customer protections if a deposit-taking bank or an insurer fails. The proposals implement the Banking Reform Act of 2013 which requires the adoption of measures to “ring-fence” core banking services in the U.K. from activities associated with trading and financial interconnectedness. The four proposals are:
“The implementation of ring -fencing: consultation on legal structure, governance and the continuity of services and facilities,” which sets forth the PRA’s proposed expectations. All banks that expect to be subject to ring-fencing requirements by 2019 must submit a preliminary plan of their anticipated legal and operating structures to the PRA by December 31, 2014.
“Depositor Protection,” which would implement the European Deposit Guarantee Schemes Directive and proposes new rules that would allow customers to continuously access the deposits covered by the Financial Services Compensation Scheme (“FSCS”) if their deposit-taker fails. The proposal includes a mechanism to transfer accounts to another financial institution in the event of a deposit-taker’s failure or enable faster pay-out of compensation. The proposal also introduces additional FSCS coverage for deposits that are temporarily higher than the £85,000 compensation limit.
“Policyholder Protection,” in which the PRA consults on changes to the insurance limits for FSCS compensation to increase protection for policyholders in the event of an insurer failing.
A discussion paper on operational continuity in resolution. The discussion paper presents the PRA’s preliminary views on the principles that firms’ operational arrangements must satisfy in order to facilitate recovery actions, resolution or post resolution restructuring of firms. The paper’s proposals are meant to help ensure deposit-takers make the appropriate changes to enable critical functions to operate effectively at all times, even if the deposit-taker fails.
Comments on any of the consultations should be submitted by January 6, 2015. Bank of England Press Release. Other recent regulatory developments in the U.K. include:
The PRA’s publication of a financial stability paper on the safety of central counterparties.
The Bank of England’s publication of a working paper on variations in liquidity provision in real-time payment systems. The paper describes methods for measuring liquidity provision that can be applied to real-time gross settlement payment systems.
The Financial Conduct Authority’s confirmation of the definition of “platform service” as an online administration service with a single point of contact to the investment market for consumers or their advisers.
The Financial Conduct Authority’s publication of Policy Statement 14/13, which amends the FCA’s rules and guidance for the Retail Mediation Activities Return and the product sales data reporting requirements. The amendments are designed to provide greater clarity around what firms should report and ease the reporting obligation placed on firms. The amendments will take effect for data reported from December 31, 2014.